Moody’s Investors Service (“Moody’s”) changed Kosmos Energy Ltd.’s (Kosmos Energy) rating outlook to stable from positive while concurrently affirming the company’s B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating (PDR) and B3 senior unsecured notes.
The outlook change was triggered by the ratings downgrade of the Government of Ghana (Ghana, Caa1 stable), where the majority of Kosmos Energy’s production and cash flow are concentrated today.
On February 4, 2022, Moody’s downgraded Ghana on concerns over the country’s heightened fiscal, refinancing and debt challenges. Moody’s lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to B1 and B2, respectively from Ba3 and B1. For additional information on the Ghana rating action, please refer to the related announcement: https://www.moodys.com/research/Moodys-downgrades-Ghanas-rating-to-Caa1-outlook-stable–PR_461698.
“Kosmos Energy’s stable outlook balances its inherent credit strength with Ghana’s heightened sovereign risk,” said Sajjad Alam, Moody’s Vice President.
“Kosmos will have a 38.3% interest in the Jubilee field and a 19.8% interest in the TEN field (assuming partners’ pre-emption rights are exercised), representing roughly 55% of the company’s projected 2022 production.
These Ghana fields are operated by Tullow Oil plc (B3 stable), which has even greater production concentration in Ghana.
Despite facing elevated sovereign risk, Kosmos Energy’s standalone credit fundamentals will continue to improve through 2023.
High energy prices and incremental production from the late-2021 Ghana acquisition will enable the company to achieve significantly higher operating cash flow and production relative to 2021 levels. This will provide enhanced financial flexibility to reduce debt and fund growth spending.
Additionally, once the Tortue Phase I LNG project begins production in the second half of 2023, the company’s Ghana exposure will moderate further and LNG production will start to grow rapidly.
Kosmos Energy’s B2 CFR reflects its majority production in offshore Ghana, high but improving financial leverage, substantial ongoing capital spending requirements involving the phased Tortue LNG development project, significant debt amortization obligations starting in 2024, and somewhat complex corporate and capital structure. The rating also considers the risks of the company’s non-operating interest in key assets, deepwater focus and the attendant physical and operational risks.
The credit profile is supported by Kosmos Energy’s high-quality and oil-focused producing assets that have low break-even costs and relatively low base decline rates, geographic diversification across several West African countries and the US Gulf of Mexico, strong growth prospect involving the large natural gas and LNG assets in Mauritania and Senegal, a solid track record of organic and acquisition-driven growth and a visible pipeline of low-risk development projects.
Moody’s expects financial leverage to decline and free cash flow to increase materially through 2023 as the company benefits from increased volumes, higher oil and gas prices and the completion of Tortue Phase 1 in the second half of 2023.The stable outlook reflects Moody’s view that Kosmos Energy’s operating cash flow, liquidity and leverage metrics will steadily improve through 2023 backed by favorable global oil and natural gas prices.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The CFR is unlikely to be upgraded in the near term unless Ghana’s sovereign rating was also upgraded. Longer term, the CFR could be upgraded if the company can reduce debt and substantially increase production and cash flow from its non-Ghana assets.
In terms of specific credit metrics, Moody’s would look for the company to lower the debt/average daily production below $30,000/boe and the RCF/debt ratio above 25% before considering an upgrade. The CFR could be downgraded if the company produces significant negative free cash flow, the RCF/debt ratio declines towards 15%, capital expenditures rise sharply, or liquidity becomes weak.
Downward pressure could also develop in the event of further downgrade of Ghana’s sovereign rating, which Moody’s does not anticipate through 2023.
Kosmos Energy Ltd. is a Dallas, Texas based publicly traded exploration and production company with assets in offshore West Africa and the US Gulf of Mexico.
The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1284973. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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