Kosmos Energy Ltd and BP Announce Partnership in Mauritania and Senegal M&A Call

Jan 04, 2017 AM EST
BP.L - BP PLC
Kosmos Energy Ltd and BP Announce Partnership in Mauritania and Senegal M&A Call
Jan 04, 2017 / 03:00PM GMT 

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Corporate Participants
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   *  Neal Shah
      Kosmos Energy Ltd. - VP of Finance & Treasurer
   *  Andy Inglis
      Kosmos Energy Ltd. - Chairman & CEO
   *  Brian Maxted
      Kosmos Energy Ltd. - Chief Exploration Officer

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Conference Call Participants
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   *  Brendan Warn
      BMO Capital Markets - Analyst
   *  John Herrlin
      Societe Generale - Analyst
   *  Anish Kapadia
      Tudor, Pickering, Holt & Co. Securities - Analyst
   *  Al Stanton
      RBC Capital Markets - Analyst
   *  Pavel Molchanov
      Raymond James & Associates, Inc. - Analyst
   *  Monroe Helm
      Barrow, Hanley, Mewhinney & Strauss - Analyst

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Presentation
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Operator   [1]
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 Good day, everyone. Welcome to Kosmos Energy's Mauritania and Senegal farm-out conference call. Just a reminder, today's call is being recorded. At this time, let me turn the call over to Neal Shah, Vice President of Finance and Treasurer at Kosmos Energy.

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 Neal Shah,  Kosmos Energy Ltd. - VP of Finance & Treasurer   [2]
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 Thank you, operator. Good morning, everyone. We're glad you could join us today. Before we get started, I'd like to remind you that a slide deck summarizing the highlights of the Mauritania and Senegal transaction has been posted to the Investor Relations section of our website, and we will be talking through those slides today.

 Today I'm joined by Andy Inglis, Chairman and Chief Executive Officer, and Brian Maxted, Chief Exploration Officer. Following our prepared comments, we will have a question-and-answer session. Given we have limited time, and this call is focused on Mauritania and Senegal, we request that participants only ask one primary question and one follow-up related to this transaction. This will help ensure we get to all who are on the call today. If there are questions that we aren't able to get to within our one-hour time frame, please contact me later today.

 Lastly, during today's call and Q&A we will be making a number of forward-looking statements and reference certain non-GAAP financial measures. A number of factors could cause future results to differ from what we discuss, and I encourage you to read our full disclosure on forward-looking statements and the GAAP reconciliation located on our website and in the slide deck. At this time, I'll turn the call over to Andy.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [3]
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 Thank you, Neal, and good morning. Before the holidays, we announced an important strategic transaction for the Company when we entered into a partnership with BP to work together in Mauritania and Senegal. Despite a volatile environment, Kosmos was able to secure a super major partner in BP that has the strategic alignment, financial capability, deepwater experience, and LNG expertise necessary to maximize the value of our assets and position Kosmos for continued success.

 Today I'd like to review the five key impacts for Kosmos that flow from this transaction. First, this deal is a further demonstration that our strategy and business model works, and that significant value can be created through exploration. Our strategy of opening up frontier basins with good fiscal terms and finding large resources with a high success rate delivers attractive returns on investment when executed well. The fixed consideration alone of over $900 million is about 2.5 times our proportional invested capital in Mauritania and Senegal. And we continue to have significant upside exposure through our circa 30% retained working interest and potential liquids bonus.

 Second, this deal demonstrates that quality assets always win out, no matter the location or basin. And our position in Mauritania and Senegal certainly fits this criteria. Our competitive farm-out process provided industry endorsement, in our view, of not just a discovered resource but also the derisked exploration upside. We continue to believe now more than ever that we potentially opened one of the largest petroleum systems along the Atlantic margin.

 Third, the deal provides Kosmos with defined funded growth as a result of developing the Tortue gas project. One of the reasons we decided to partner with BP was our strategic alignment on the pace of development for the Tortue discovery. We both have committed to a work program in 2017 that should allow FID by 2018 and first gas by 2021. As a result of the terms we agreed, our proportion of the development costs are expected to be largely carried until first gas, unlocking value and providing visible production growth for Kosmos beyond Ghana.

 Fourth, BP and Kosmos have entered into an exploration partnership which is committed to a program starting in the second quarter with three firm wells this year. We will be targeting some of the largest undrilled prospects identified in Atlantic margins, and plan to drill up to four high-impact exploration prospects with a gross unrisked resource potential of 10 to 15 billion barrels of oil equivalent. With a material working interest of around 30% and the potential liquids bonus, success here could be another transformational move for Kosmos.

 Lastly, this transaction strengthens our balance sheet by materially reducing our capital expenditure requirements, effectively funding our Mauritania/Senegal work program for the next several years. The enhanced free cash flow generation will enable us to continue to pursue other growth opportunities in our portfolio with discipline.

 Turning to slide 4, which is an overview of the transaction, as we previously disclosed, BP's paying a fixed consideration of approximately $1 billion in the form of cash and carry to access a 62% working interest in Mauritania and a 32.49% interest in Senegal. The consideration comes in three forms: $162 million cash upfront; $221 million carry on exploration and appraisal, including a drill stem test on Tortue; and a $533 million maximum carry on the Tortue project development cost.

 Importantly, if the E&A carry is not spent by the end of 2022, the remaining carry is paid in cash to Kosmos. Also, the carry on Tortue could be transferred to another development if that development proceeds ahead of Tortue. So we regard all of this consideration as firm, and will benefit Kosmos over the next several years.

 Kosmos has upside exposure to the exploration program through its retention of the working interest and the variable consideration BP will pay to Kosmos in the form of a production royalty if liquids are discovered on the blocks. The royalty is payable on up to 1 billion barrels of gross liquids with a per-barrel fee based on a sliding scale of Brent oil prices.

 In Mauritania, the fee is determined by multiplying the Brent oil price at the time of production by 0.0167, which is $60 per barrel Brent, equates to $1 per barrel of royalty, and is capped at $2 per barrel at a Brent price of $120 per barrel. In Senegal, since BP farmed in to roughly half of the working interest, the fee is roughly half, around $0.50 to $1 per barrel at $60 or $120 per barrel Brent, respectively.

 When we started the farm-out process, we were very clear in our minds on the strategic elements of the transaction, and I believe this partnership encompasses all of the objectives we were hoping to achieve. It creates a simple, aligned partnership. Kosmos will continue as exploration operator, responsible for prospect selection, while BP will take development operatorship, allowing them to utilize their deepwater and LNG development and marketing expertise. The partnership is also aligned on the pace of development at Tortue and aligned on the pace and scale of the exploration program.

 BP's strategic alignment was an important differentiator not just for us but also the governments of both Mauritania and Senegal. As a result of our strong working relationship with the governments and our future commitments, we have already received approval for the transaction from the Mauritania government. And the farm-out of Blocks C6, C8, C12, and C13 is now complete. We are working closely with the Senegal government to complete the farm-out of the Cayar/Saint Louis blocks on a similar expedited basis.

 Moving on to the value created by this transaction, slide 5 shows that Kosmos's conventional deepwater exploration program still has a very important place in the world, and in fact, the industry places substantial value on quality, conventional deepwater resources. Furthermore, when executed correctly, deepwater exploration delivers superior returns that create long-term value for shareholders.

 While many companies and investors have shifted their focus to unconventionals, the industry recognizes that both unconventional and conventional resources will be needed to meet future demand. Indeed, this transaction is one of several deals announced recently that show that quality conventional assets remain a necessary and valued source of supply.

 Our fundamental strategy of being a first mover, capturing large acreage positions with high working interest, and finding large resource volumes with good fiscal terms, which worked so successfully in Ghana, continues to work today when executed with a disciplined business model. In just two years since we commenced drilling in the Mauritania/Senegal basin, we've already created value of approximately 2.5 times our invested capital, based only on the fixed consideration received from BP. In addition, we expect the return on our investment to continue to increase as we execute our carried exploration program through both our retained interest of around 30%, as well as a liquids bonus structured into this transaction.

 Slide 6 is a chart we've shown before. It displays the creaming curve for the Mauritania/Senegal basin based on the discoveries to date and the unrisked prospect inventory. It's important as it demonstrates the potential scale of this petroleum system relative to other Atlantic and African margin provinces.

 The highly selective and competitive farm-out process we conducted, coupled with the multiple offers and value of the BP transaction, validates the world-class quality of this opportunity and its strategic fit for the largest industry players. In particular, invited companies were attracted by the combination of a large discovered resource, shown by the solid dark blue line, currently around 25 Tcf, as well as the significant derisked exploration potential, including for liquids, as depicted by the dashed line.

 In total, the defined resource potential is greater than 25 billion barrels oil equivalent. And recall, we have 100% exploration success rate to date.

 As calibration, we believe the Mauritania/Senegal basin will be comparable in scale to Mozambique but with liquids potential. This significant potential is the main reason we've entered into an exclusive exploration partnership with BP covering the entirety of the basin. While we have a significant footprint in this area, as we drill additional wells and gain additional knowledge of the basin, we have an aligned view that the resource potential will continue to grow and there will be new opportunities we can access together to create value.

 The new licenses required Kosmos to remain exploration operator, whereas BP will become development operator. Defining the partnership today for the future gives us the strategic alignment to take advantage of our respective skill sets to maximize the value of our position in the basin.

 Slide 7 shows the future plan for Tortue, which provides Kosmos line of sight to production growth that is both funded and in the hands of an experienced and capable LNG developer and marketer. With BP as the development operator, we have committed to a full set of activity on the Tortue project in 2017, including engineering and a drill stem test which should allow final investment decision by 2018. This should allow us to target first gas for approximately 2021, which would essentially make the Tortue project one of the fastest LNG projects from discovery to first gas.

 BP and Kosmos share a common technical position, as well as the same view on the pace of development of the Tortue project. We both see this as a low-cost competitive LNG project that can be scalable as LNG demand grows. We regard BP's LNG marketing expertise and global LNG portfolio as a key enabler of the project, and BP has made a non-binding offer to buy all the LNG volumes produced from the initial phase at a competitive price. While we and our partners have not attempted it yet, we and our partners will compare this offer to others over the course of 2017 and make a decision by FID.

 Turning to slide 8, a second-phase exploration program is in process with a focus on finding significant volumes of liquids through maturing and testing up to four giant prospects on each of the basin floor fan fairways in Mauritania and Senegal. With drilling planned to start in 2Q of this year, it provides a consecutive series of well catalysts through early 2018.

 Multiple 3D seismic surveys are in various stages of progress, with 3D seismic processing outboard Senegal nearing completion, and acquisition and early processing under way outboard Mauritania. With this data, the prospect inventory is being further matured and ranked, and we expect to finalize the exploration program, including the ordering of wells, later this year.

 We are initially planning up to four exploration wells targeting liquids starting in 2Q 2017 through early 2018, including two in Mauritania, currently Lamantin and Requin, and two in Senegal, currently Requin-Tigre and Teranga West. These four wells will test between 10 and 15 billion barrels of oil equivalent of unrisked gross potential. Not surprisingly, these are some of the largest prospects to be drilled by the industry anywhere in the world this year.

 The 2017 drilling program will be executed with the Atwood Achiever while it remains on contract with Kosmos, although it would be charged to the Partnership at prevailing market rates, with Kosmos absorbing the difference. We expect that with the proceeds from this transaction, combined with growing cash flow from Ghana, Kosmos is uniquely positioned to generate the free cash flow that enables the Company to grow organically in the years ahead. We became free cash flow positive in the fourth quarter last year, and we expect our free cash flow generation to continue to grow in 2017.

 At $50 per barrel Brent, we expect to generate free cash flow of approximately $250 million, with the ability to generate approximately $75 million more for every $10 per barrel increase in the price of Brent. This assumes 10 cargoes from Ghana, which would include 6 or 7 from Jubilee and 3 to 4 from TEN. This also assumes a $175 million CapEx budget for 2017, which is more than a 75% reduction from our total CapEx in 2015. This CapEx budget is comprised of approximately $75 million Ghana CapEx, including Jubilee turret remediation costs, which we expect to be recovered from insurance, and approximately $100 million of exploration CapEx, including seismic and new venture costs.

 Additionally, in 2017, we expect one-time costs of approximately $200 million related to rig stacking and subsidy costs, and costs related to the cancellation of the previous Atwood Achiever extension which will be offset by the proceeds of the Mauritania and Senegal farm-out. After November 2017, we will no longer have any rig obligations, freeing up Kosmos to pick up rigs as needed at current market rates, including potentially the Atwood Achiever.

 We expect the free cash flow generated in 2017 to be used to repay debt, enhancing Kosmos's balance sheet ahead of continued exploration success, allowing Kosmos to be one of the few companies able to organically improve its balance sheet and grow.

 So, in summary, I'm very pleased with this transaction and for the positive impact on Kosmos's future. In the last three years since this Management team reorganized, we've opened possibly one of the largest petroleum systems ever unlocked along the Atlantic margins. We've now secured the right strategic partner for this basin, with strategic alignment and funding for the future exploration and development program.

 This Company's now better positioned than ever to grow shareholder value. We have growing cash flow in Ghana, which has reached an inflection point and is expected to deliver EBITDAX of approximately $500 million through the end of the decade at $50 per barrel Brent. We have a defined path to deliver production from Tortue that is funded and being developed by an operator with deepwater skills, and LNG development and marketing expertise.

 We have exploration catalysts across the portfolio, with a well-defined carried exploration program in Mauritania and Senegal, starting in the second quarter, in addition to high-quality oil tests in Suriname and Sao Tome that are being matured. And finally, we have a strong balance sheet that enables the execution of our strategy, and allows us to create value throughout the cycle. Thank you. I'll now open up the call to questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions)

 Our first question comes from the line of Brendan Warn with BMO Capital Markets. Please proceed with your question.

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 Brendan Warn,  BMO Capital Markets - Analyst   [2]
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 Yes, thank you. It's Brendan Warn from BMO. Happy new year, guys.

 The primary question -- I think Brian was flagged to be there -- just in terms of the additionally named prospects, if you can just talk. Obviously you've said you're testing 10 to 15 billion barrels of gross unrisked potential.

 Could you perhaps just talk and zero in on, and let's start with Lamantin to the north, just what you know in terms of well control? Can you just talk through some of the seismic indicational evidence for that prospect and just what risking or, call it, risked potential, perhaps, that prospect has. And then I'll have a follow-up.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [3]
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 Brian?

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [4]
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 Thanks, Brendan. Thanks for the question. Let's just stand back a moment.

 As you know, with the drilling pause we took last year, we're in the process of enhancing the prospect inventory, fully define it, mature it and ranking it. That process continues. It's continuing probably through to the end of the first quarter when we'll be able to provide the market with a clear direction on the ordering of the wells and obviously a lot more granularity around the different prospects.

 The thing we should remember, firstly, is the 29 billion, 30 billion barrels of prospectivity in this basin that is currently defined, is defined on an incomplete database. We are incredibly prospect rich and each of the four deepwater basin floor fan fairways that we've recognized, outboard of the channel systems we've explored and have a 100% exploration success rate on. So, what you see today is a moment in time with respect to how the prospect inventory is set up.

 We've talked previously about Requin-Tigre and, to some extent, Teranga West which is the outboard prospects of Teranga and Tortue. And the reason for that is that the 3D seismic is shot there. It's in various stages of processing and we've been able to fully define that prospectivity on the available data. And that was a key driver in the data room for the prospective partners to evaluate.

 In Mauritania, we're in the process of shooting 3D, as we speak. Some of that 3D is complete and is now being processed. Other parts, particularly over Lamantin and C6, C12, are still being acquired.

 We've talked about the Senegal prospects before. The prospects in Mauritania are defined in 2D as we look out today, but we are very calibrated on that 2D because of the 3D that we have overlapping that 2D in the inboard areas. So we're very confident. And we have some good confidence in the extrapolation of our interpretation into the outboard.

 Both Requin and Lamantin that Andy referenced, which are the outboard prospects in southern Mauritania and northern Mauritania, are both basically essentially base and floor fan systems in combination structural stratigraphic traps, similar to Requin-Tigre and Teranga, as defined on 3D for the south. As I said, they're defined on 2D. Our experience is when we see them on 2D with the various attributes, including good conformance between seismic ABO attributes and structure and depositional closure, they tend to mature nicely on the 3D. That's what we saw in Senegal, that's what we expect to see in Mauritania.

 So, Lamantin is very much a classic basin floor fan combination track. It's defined on 2D seismic today which is calibrated with offsetting well data, one of which was a key well that had oil shows up-dip of the prospect in an adjacent block.

 Of course, what's attractive about Lamantin is it sits in that source kitchen in northern Mauritania that contains both mature sedimentary Turonian and Albian source rocks, which we know have been proven successful in that area. So, obviously northern Mauritania is an important area for us.

 The 3D may yield some additional prospects. Some of them are already defined on existing 3D. So, we're going to have a nice problem to have, I think, as we go through the quarter in defining and ranking these prospects and formulating the drilling program.

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 Brendan Warn,  BMO Capital Markets - Analyst   [5]
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 Okay. On my follow-up question, just probably back to Andy, relating to the carry related to Tortue, the $533 million, I know you have a strong relationship to start with, with BP, but can you just talk through -- obviously they've got development and production operatorship, you've got exploration operatorship -- just how it's structured in terms of either [marston] payments, is there any, call it, pre-emption rights on any of this acreage, if you decide to further farm down Can you just talk through some of the details that relate to this farm-down that you may not have yet disclosed?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [6]
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 In terms of the structure of the payments, we've got the fixed sums upfront, which is simply a payment of past costs. We're getting $162 million of that on day one and then $221 million comes through the E&A program. If not fully spent it will be repaid in 2022. As Brian has described, I think we will fully utilize that money through the program. So we have a fully carried E&A program.

 In terms of the development, it's a development carry on the expenditure of Tortue. No milestone payments with it. As soon as Tortue starts, we will be carried. The important point I think in terms of adding further color is that if we have a success that's even better than Tortue and we decide to develop that first, then the development carry moves across to that. So, in essence, we're carried for the first development.

 And in terms of where we stand on the process in terms of closing the deal, as I said we received of government approval from Mauritania and so that deal is now complete and the monies will be forthcoming from BP for that element. And we're working closely with the government of Senegal to close out on a similar expedited basis.

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 Brendan Warn,  BMO Capital Markets - Analyst   [7]
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 Okay. Thanks. And again, congratulations.

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Operator   [8]
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 Our next question comes from the line of John Herrlin with Societe Generale. Please proceed with your question.

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 John Herrlin,  Societe Generale - Analyst   [9]
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 I'll try this one another way in terms of which area you start first. Given the fact that you're further along in Senegal, would that be where you'd start going outboard? Or you're really agnostic until you have the data from Mauritania?

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [10]
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 I think in a perfect world, John -- it's Brian here -- I think we would be agnostic, other than the objective of the program is to find liquids, liquids-rich gas or black oil. So, we're driven by a combination of, one, the quality of the prospect itself, the robustness of the prospect, the size of the prospects; and, obviously, two, the phase risk. And it's that combination which drives the overall exploration risk which really is going to rank the prospects and, therefore, the drilling order.

 We're not in a perfect world because, as I mentioned, as you reiterated, we've got more process data in Senegal than we have in Mauritania. So, I think that will be, to some extent, a driver of the ordering of the wells. That said, the data acquisition in Mauritania has gone extremely well, and the data processing is already under way. Because of this being calibrated, on the early data sets that we receive we can get a very good indication early on to the prospectivity of the different opportunities.

 I think by the end of the first quarter we'll have a very good idea of what the prospect inventory looks like, where the priorities are going to lie. But as we look at it today, it's more likely to start in the south than in the north because that's the way the seismic program is set up.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [11]
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 All I'll add, John, is I think we see we've got four independent tests of the outboard prospectivity with different source kitchens that will provide different opportunities to access the liquids and the black oil that Brian described earlier. So, I think you should see it as a four-well program. The great news is I think we've got four independent tests and we'll probably have multiple prospects against each of those tests.

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [12]
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 I think Andy makes a great point there, John. You know what exploration is like. You think you know what the best prospect is, so you put that first, then the third well comes in and that's the big discovery. So, we've got to look at it in terms of the portfolio, in terms of a program.

 And as we start to embark on these programs, my sense, my instinct is driven by the quality of the overall portfolio and the overall program and will that over the course of its execution deliver. And in this case, based on what we've seen so far, whether it's Requin-Tigre or whether it's Lamantin, one or more of these is going to deliver, and the key uncertainty is going to be the phase risk and are we going to find black oil or rich gas versus the dryer gas that we find in the inboard fairways.

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 John Herrlin,  Societe Generale - Analyst   [13]
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 Next one from me, if you find liquids that you just mentioned, Brian, is it something that the partners collectively would be willing to accelerate delineation on? Say you make a good discovery. Would you accelerate or are you going to be going systematically, as you described, with the current program?

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [14]
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 The other driver to the program, of course, in here is the time line on the contracts. Now, we're blessed with long contract terms, into the next decade. But that's competing against the fact that we've got a massive prospect inventory. Again, one of the reasons we selected BP was that strategic alignment with not just the exploration program but the follow-on of delineation and development intent.

 I would be very surprised if we made a potentially commercial discovery, whether it's black oil or rich liquids, that we wouldn't follow on as quickly as was realistically possible without introducing further risk into the program. So, yes, I think if we make a good discovery and it comes in as we expect, therefore the seismic calibration is good, then I would anticipate that we would follow it on relatively quickly.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [15]
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 Yes, John, what I'd add is, you ask a very good question which is have we found the right partner, in essence. And I think one of the things that we were very clear about upfront as we went through the process was around how could we get a good overlap between the strategy of Kosmos and actually the strategy of the super major. I think in BP we have that right overlap. They're looking to explore, they're looking to develop. And actually, if you look at our portfolio versus their portfolio, if we had a big liquids success, it would certainly be something that BP would want to move along with at pace.

 That's what I think is the real value of what we're describing today over and beyond the simple dollar numbers we've talked about, is that it's very much a partnership where we have the same outcome. That's actually what was attractive to both governments, the government of Mauritania and the government of Senegal, is we have a partnership that wants to get on with it, to put it simply. And I think that's been very powerful. So you asked the right question. We've debated this at length with each of the partners we could have taken, and the ability to move forward with the developments was a key issue.

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [16]
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 I think Andy makes a great point there, John. The market is obviously quite rightly focusing on the value of the commercial proposal as it's presented today, which is obviously very encouraging and reflective of the quality and the potential of the opportunity that we presented to the industry. But for us, internally, the most important part of this partnership is actually the strategic alignment around the exploration and the development of the potential resource basin that we have there, which is a longer-term alignment, whether it's a follow-on appraisal, whether it's timely development, and in BP we've got that, we believe.

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 John Herrlin,  Societe Generale - Analyst   [17]
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 Great. Thank you.

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Operator   [18]
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 Our next question comes from the line of Anish Kapadia with TPH. Please proceed with your question.

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 Anish Kapadia,  Tudor, Pickering, Holt & Co. Securities - Analyst   [19]
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 Hi. First question in terms of the balance sheet following this transaction. You already got a pretty comfortable balance sheet and you're talking about $250 million of free cash flow this year. So I was just wondering, rather than paying down debt would it not make sense for you to use that cash to accelerate exploration or look at further new venture activity, given the attractive state of the market?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [20]
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 Yes, hi, Anish. Look, it's all about discipline, all right? In terms of accelerating exploration, as Brian has said, I think the success of Kosmos is because we explore in a very disciplined way. We're not going to change that and we're not going to get into feeling as though we've got money in our pockets and we need to spend it. We're going to do it at the right pace. It's not going to be slow but it's going to be at the right pace.

 We have a great program in front of us now that's well synced up in terms of the seismic upfront, both in Mauritania and Senegal. It enables a very full drilling program there. We're finishing the shooting of the seismic in Surinam, as we speak, to be followed by Sao Tome in the first part of this year, which will enable us to build inventory for 2018. So, we've got a very full program now, going over multiple years now, I think, of really good quality prospects. So that will drive that.

 And in terms of new ventures, we're constantly looking. The other good part about Kosmos is that it has to be quality in terms of what comes into the portfolio. The Company was founded on the premises you drill things that are of scale with good fiscal terms that actually deliver long-term value. And we're constantly looking, I think, to bring new things in. But they have to compete against the portfolio that we've got.

 So, I think this is about, yes, we have an opportunity to ensure that we can execute. We'll do it at the right pace. And if we can find things that have quality, we bring them in today. But we're certainly not going to lose any of the discipline that we've had, that have run the Company, from a balance sheet perspective in a very conservative way. And I think it's proven us really well through the current cycle and we haven't lost any opportunity as a result. So, take your point but I think it is all about, at the end of the day, continuing with the discipline and ensuring that quality counts.

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 Anish Kapadia,  Tudor, Pickering, Holt & Co. Securities - Analyst   [21]
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 That's definitely understandable. Second question relates to the development of Tortue. Firstly, just a clarification. The $5 per Mcf breakeven, does that include the impact for the carry? And then if you could just run you through your current development planning thoughts and why you're going for LNG versus onshore and initial expectations on costs.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [22]
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 Yes, okay. Just to be clear, the $5 per Mcf breakeven is gross. It doesn't include the carry at all.

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [23]
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 Yes. It's a full cycle. NPD zero project breakeven. Our economics are clearly being enhanced by the carry.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [24]
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 Significantly enhanced by the carry. First point.

 I think in terms of the path forward is we're establishing Mauritania/Senegal basin as a new exporter of LNG. FLNG allows us to bring a cost competitive. And I genuinely believe today that FLNG, if executed in the right way, has a lower cost start than a large onshore development. It comes with lower execution risk, as well, and, therefore, it is the right way to start this project and start the export opportunity for gas.

 We have sufficient gas appraised today in Tortue to drive both -- we're talking about potentially two vessels, a 4 million to 5 million ton per annum scheme. We have sufficient gas to drive that in terms of what has been appraised today.

 So it's, quote, about getting started. And I think we have the right scheme with an FLNG approach, which enables both pace, cost competitiveness, and low execution risk. And that's clearly the right way to start. We also benefit from market access through less volume coming through in chunks. It's a more gradual build.

 Longer term, I think there will be different options available. I believe that the prospectivity could well drive fundamentally the opportunity for a larger scheme potentially onshore that could follow. But that will depend on the future exploration program.

 But in terms of the thinking behind Tortue, that's why we're doing it. It's fundamentally about getting started. It's fundamentally about pace, which is important to both the governments of Senegal and Mauritania, and it's about ensuring that you have a cost competitive scheme which has low execution risk. If you look at the history of the big LNG developments over the last 10 years, it's cost and execution risk that have been the fundamental issues.

 So, that's the development approach. BP are very much aligned with that. And I feel good about it.

 I think we've got the right way to get started. And we have the engineering program to complete in 2017 to underpin that, demonstrate that we have got the costs in the right place and it is cost competitive. And that will enable then the feed process to start followed by FID in 2018.

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 Anish Kapadia,  Tudor, Pickering, Holt & Co. Securities - Analyst   [25]
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 Thanks very much.

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Operator   [26]
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 Our next question comes from the line of Al Stanton with RBC. Please proceed with your question.

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 Al Stanton,  RBC Capital Markets - Analyst   [27]
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 Yes. Good morning, guys. Just a simple one to start. In terms of the 10 to 15 billion BOE, is there a rough split between the four prospects?

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [28]
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 Good morning, Al, or afternoon. Based on what we've shown before, and talked about before, obviously the seismic are in various stages of maturation so the numbers are going to move around a bit. But as it currently stands, Requin-Tigre is the standout prospect in terms of size, out of Tortue, which is not a surprise because the biggest arm of the Senegal river is the arm that drives the reservoir density in the Tortue field. Requin-Tigre is the basin floor fan on the Tortue slope channel system.

 But it's a relative thing. Requin-Tigre is a 5 billion to 10 billion barrel oil-equivalent prospect. The others are all multi-billion barrel opportunities.

 So, in terms of the ranking, it's a question of combination of size and prospect risk, and a big driver of the prospect risk is the phase risk. Each of these prospects will have their own pluses and minuses. But overall, given the richness of the prospect inventory, we absolutely believe at this point despite the incomplete dataset, that we'll be looking at 10 billion to 15 billion barrels of drill out this year into the first part of 2018.

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 Al Stanton,  RBC Capital Markets - Analyst   [29]
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 Okay. And then on the production royalty, who came up with that? Is that a Kosmos idea or a BP idea?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [30]
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 It was a joint idea, Al.

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 Al Stanton,  RBC Capital Markets - Analyst   [31]
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 Because the reason I ask is whether you think there's oil and you'll get a royalty, and BP think there's no oil and they'll pay no royalty. It makes quite a difference as to whether you gave up anything else to secure the royalty.

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 Brian Maxted,  Kosmos Energy Ltd. - Chief Exploration Officer   [32]
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 Interesting. We didn't give up anything else to secure the royalty. Our view, as you know, our view is we believe there is a significant opportunity to discover liquids in the basin. We wanted to ensure that we had value for that and this was a way, jointly, actually, between both BP and Kosmos, to say this is a fair way to represent the significant upside that there is in the drill-out for the liquids. So, a joint approach.

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [33]
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 I would add to that, Al, just to give some color from a technical perspective, I would say there was good alignment in the data room between the farm-in candidates and ourselves with respect to the charge story overall. And whilst I think the downside case in this basin is that it's 150 to 200 Tcf, that's not what BP got in for, that's not what the other companies made strong bids for. They got in because of the high value gas that we found, and the likelihood we're going to find a lot more gas on those trends, and the prospect of finding liquids and potentially black oil outboard. And that potential is clearly shared by all of the attendees, but in particular BP.

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 Al Stanton,  RBC Capital Markets - Analyst   [34]
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 Thank you.

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Operator   [35]
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 Our next question comes from the line of Pavel Molchanov with Raymond James.

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 Pavel Molchanov,  Raymond James & Associates, Inc. - Analyst   [36]
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 Thanks for taking the question, guys. Going back to the $5 breakeven, obviously there are some underlying assumptions about development CapEx and so forth. Given that there has never been an LNG project on this portion of the African continent before, what gives you the confidence that those CapEx estimates are accurate? And, in particular, are there any comps elsewhere in the world that you're looking at to arrive at those baselines?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [37]
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 Pavel, I think that what I would talk about is, from an engineering perspective, it's a relatively simple concept. We have a field in Tortue that has concentrated reserves, so therefore it's a few number of wells.

 We've talked in the past about the high productivity from the wells, 200 million standard cubic feet per day. Therefore, the numbers of wells is relatively low. We know what it cost to drill those wells. We've drilled them, and therefore we've got a very tight bandwidth on the drilling cost.

 You then go to the subsea architecture -- again, relatively simple. BP and ourselves have deep experience on the cost of that subsea architecture in terms of manifolds, flow lines, pipeline and shore. So, again, tight envelope around those costs.

 And then we build a break water. If there's anything novel about the scheme, it building a breakwater. But, again, it's a relatively simple piece of civil engineering.

 If you put all of that together and you've got quite a constrained view of what it costs. Again, as I said, it's not the engineering complexity, it's the execution complexity which has been the nemesis of LNG projects.

 And we're operating offshore. We're operating where the construction will predominantly be offshore. We can utilize local content in building the breakwater but essentially it's being done offshore and that reduces the execution risk.

 And then we have a midstream tariff from the midstream solution. You put all that together and you get the breakeven number.

 We've done a lot of work on this, Pavel, and I don't believe there are many moving parts in it. And, actually, I think there's an opportunity genuinely to deliver that less than $5 an Mcf breakeven, potentially do better than that.

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 Pavel Molchanov,  Raymond James & Associates, Inc. - Analyst   [38]
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 If I can just follow up with a question about the resource estimates. The sell-down was predicated on 15 -- one, five -- Tcf, but you're talking about a 50 -- five, zero -- Tcf potential upside number. Where is the gray area, in other words? Why was BP so much more conservative in what they were willing to pay for?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [39]
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 I think here, Pavel, what we're talking about is we've got two elements here from Kosmos' perspective. We're getting fair value for the discovered resource and I think the numbers that we've talked about absolutely demonstrate that. And then we have a partner now which is able strategically to ensure that we drill out the full potential of this.

 I think that's the key point in understanding the value of this partnership, is that we could have waited and tried to do it ourselves, and what happens if you do that is you run out of road -- time and balance sheet. You never get there.

 What we've done is preempted that process by bringing the right person in, retained their working interest, significant working interest, of around 30%. We have the upside from the liquids bonus that Al talked about which gives additional upside. And, therefore, the combination of those in terms of the retained working interest, the alignment around the program, the ability to seek further upside if we have liquids creates, I think, a very attractive proposal for us. So, I think it's fair value for what we've got today and I think we've aligned ourselves around much better access to the value upside in this basin than we have pre the deal.

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 Pavel Molchanov,  Raymond James & Associates, Inc. - Analyst   [40]
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 Appreciate it, guys.

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Operator   [41]
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 Our next question comes from the line of Monroe Helm with Barrow Hanley. Please proceed with your question.

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 Monroe Helm,  Barrow, Hanley, Mewhinney & Strauss - Analyst   [42]
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 Congratulations on putting together a deal that looks like a win-win for both parties. I was just curious as to the process you went through in picking BP. How many other major oil companies took a look at this deal, and over what period of times was it evaluated?

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 Andy Inglis,  Kosmos Energy Ltd. - Chairman & CEO   [43]
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 Hi, Monroe. We narrowed the list down to four. So, we started with four. We only had four companies involved.

 We in essence had offers, four offers from four companies. We started the process middle of the year. We had offers in at the end of the third quarter and then we spent, whatever it was, a couple of months, in essence, through the negotiation process.

 I think the point that I really want to emphasize is that a lot of time was spent on ensuring that we had alignment around the understanding of the exploration potential and alignment around how to pursue the development concepts for the discovered resource. And the reason we spent a lot of time on that was because it was important for the government of both countries that we brought the right partner in that shared our views, and clearly important for the Kosmos shareholders that we didn't end up just being a part of one of the super majors' inventory that was decades away from getting done.

 So, we spent a lot of time on ensuring that we had strong alignment around that. So when you went through that process of high-grading the offers, that strategic element around the activity set was a key differentiator.

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 Monroe Helm,  Barrow, Hanley, Mewhinney & Strauss - Analyst   [44]
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 Okay. Terrific. Thank you very much.

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Operator   [45]
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 Thank you. We have reached the end of the question-and-answer session. I would now like to turn the floor back over to Neal Shah for closing comments.

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 Neal Shah,  Kosmos Energy Ltd. - VP of Finance & Treasurer   [46]
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 Thank you, operator. We appreciate all of you joining us on the call today and your interest in Kosmos. If we didn't get to you on the call today or if you have any further questions, please don't hesitate to contact me. Thank you very much.

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Operator   [47]
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 Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time and thank you for your participation.




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