Climb The Rig Higher At Kosmos Energy (NYSE:KOS)

In June ’22, Kosmos Energy Ltd (NYSE:KOS) hit the 52-week high share price we forecast in our article last April. Energy prices are ascending, taking Kosmos Energy shares along for the ride. We are holding to our bullish position at the present time.

We expect the average price target over the next 12 months to claw its way up to around $10 per share. That is about a 40% increase from its current $7.23. Kosmos Energy shares will ride the tail of higher energy prices and the beneficiaries will be KOS shareholders.

Higher Energy Prices

The Invesco S&P 500 Equal Weight Energy ETF portrays the effect on stocks of recent rising energy prices.

In typical fashion, energy prices eased in the summer of 2022. Production and consumption moved into greater balance. But there are extrinsic costs that will last a long time:

• The Asia-Pacific economies slowed affected by repeated lockdowns in China and its lower demands for oil. That is changing.
• Supply delivery issues intensified from port workers strikes, higher tanker freight costs and demands for more environmentally friendly and safer tankers are driving oil prices
• Sanctions against Russia, Iran, and Venezuela stand in place and add to higher costs.

Amelioration of oil prices is spotty and temporary. For instance, prices fell when U.S. crude oil production hit near record highs. We expect current oil fields in the U.S. to produce quantities even higher in 2023. The downturn in Kosmos Energy share prices this summer, we believe, links to the release of 1 billion barrels a day of crude from the U.S. Strategic Petroleum Reserve.

Paul Sankey, on Bloomberg, charges, “If it weren’t for the SPR release, we (energy) would be a lot higher.” The humongous release of cruse will not keep prices down. OPEC sees global oil demand significantly outpacing supply. Sankey, on Bloomberg, predicts $100 a barrel for oil “on an ongoing basis starting in 2023.”

The European Union is warning its members of higher utility bills due to “unstable energy prices continuing for the coming years, which will drive inflation, impact households, and increase costs for business.” The U. S. Energy Information Administration “expects a variety of US energy prices to remain historically high through 2023., including oil, natural gas, coal, and electricity…”

Kosmos has Energy

Kosmos Energy shares are up 234.72% for the year. They are almost 90% higher for the first eight months of ’22. Kosmos Energy conducts deepwater exploration and production. It has assets in proven basins offshore from Ghana, Equatorial Guinea, and the U.S. Gulf of Mexico. The company has gas developments offshore from Mauritania and Senegal. Kosmos Energy is headquartered in Dallas, Texas.

The company announced Q2 results on August 8. Seeking Alpha’s Quant Rating is a “hold” but drifts more to the “buy” side. The SA Factor Grades are stabler or stronger.

Here is a snapshot of the second quarter earnings report: the second-quarter adjusted net income was $132M, compared to a reported loss in the same period a year earlier. On a per-share basis, the company said it had (diluted) net income of 25 cents per share compared to last year’s EPS of -$0.11. Earnings, adjusted for one-time gains and costs, came to 28 cents per share. Revenue of $620M is up and it generated a free cash flow of ~$67M. statements and balance sheets are available here.

Earnings have been more elusive but came in at +$188.69M. Our opinion is the company will outperform expectations. The company holds high debt (over $2.3B) and far less equity (~$662M). That is a debt-to-equity ratio over 315%. Debt and interest payments are well-covered by operating cash flow and EBIT, respectively. Short interest is a moderate 5.8%.

25 hedge funds took positions in Kosmos Energy in 2022 from 15 in 2021. There is no trend to report on recent corporate insider trading. After the August earnings report, 11 analysts upped their positions to buy and strong buy from 6 who held those positions since the spring.

Risk and Reward

The risks for retail value investors owning Kosmos Energy shares are two-fold. First, the company has, at best, a spotty record of consistently producing healthy earnings. The company incurs a lot of expense to locate, retrieve, and get its oil and gas to market. The debt is covered, but debt persists and limits growth. Second, the company must in a timely manner meet production, sales, and delivery predictions for projects underway that others have identified in some detail. It uses a great deal of capital to store oil and gas. It faces other challenges as well.

As one commentator on our previous article anxiously put it, “First gas in 2023 from Tortue can’t get here soon enough!!” Management is singularly focused on producing products from its sites. Their rifle shot business plan and execution keeps current risks ephemeral in the near term. World events, including this month’s warnings and attacks by and against Iran, will contribute to driving future oil and gas prices higher. Oil prices might give investors existential angst. The facts about Kosmos Energy ought to help investors rest easy.