Oil and natural gas exploration and production company Kosmos Energy (NYSE:KOS) has many of the same problems that other offshore energy drillers have had in 2020. It’s tempting to view KOS stock as being cheap now, but perhaps it’s cheap for a good reason.
Plus, I’m concerned that some folks will be tempted to take a long position in KOS stock in order to collect the dividend distributions. And I’ll grant that the yield on this stock is considerable.
Bear in mind, however, that the dividend payments won’t be of much help if the KOS stock price keeps declining. Besides, if Kosmos Energy continues to have financial problems, it might cut its dividend yield.
The bulls might argue that the company is taking steps to firm up its capital position. Be that as it may, Kosmos Energy faces a tough uphill battle. As an informed investor, you can choose not to get involved in that battle.
A Closer Look at KOS Stock
Back in May of 2011, KOS stock was trading above $19 per share. Undoubtedly, at that time it was hard to imagine that KOS would eventually become a penny stock (defined by the U.S. Securities and Exchange Commission (SEC) as a stock that trades under $5 per share).
Yet, that’s exactly what happened. In 2014 KOS stock fell below $10, and in 2018 it declined below $5. But that’s not even the worst of it. With the onset of the novel coronavirus this year, KOS dropped below the $1 and touched a 52-week low of 50 cents.
On Oct. 23, KOS stock was back up to $1.33. Still, that won’t provide much consolation to long-term shareholders. KOS has a lot of catching up to do, and while the forward annual dividend yield of 16.14% is impressive, it’s not enough to make up for the share-price loss.
Moreover, prospective investors should be aware that KOS stock has trailing 12-month earnings per share of approximately -$1. For a stock that trades at $1 and change, that’s an unsettling statistic.
Firming Up by Farming Down
In order to help firm up Kosmos Energy’s cash position, the company recently “farmed down” some of its exploration assets. That’s a euphemistic way of saying that Kosmos is selling part of its asset portfolio.
More specifically, Kosmos Energy is selling a “participating interest in blocks offshore São Tomé & Príncipe, Suriname, Namibia, and South Africa” to a subsidiary of Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B).
In return, Kosmos is set to receive around $100 million up front, along with future contingent payments of up to $100 million.
Chairman and CEO Andrew G. Inglis claims that the proceeds from this “farming down” will “enable Kosmos to accelerate high graded exploration opportunities while strengthening the balance sheet, positioning Kosmos to create additional shareholder value.”
Changing the Terms
Another action that Kosmos Energy is taking involves the restructuring of a Gulf of Mexico-based prepayment facility into a loan set at $200 million with a five-year term, secured by the company’s Gulf of Mexico assets.
It’s a complex restructuring arrangement. The gist of it is that Kosmos will have a more favorable interest rate for repayment. Moreover, the company’s borrowing capacity will be increased.
With all of the foregoing in mind, investors must decide whether the “farming down” and the loan restructuring will be enough to save this fiscally troubled energy company.
It’s all a matter of interpretation, really. To me at least, Kosmos Energy’s balance sheet firming actions seem desperate. Fiscally sound companies usually don’t need to sell off assets and restructure loans.’
Overall, you can view Kosmos Energy’s recent activity as proactive, or as a Hail Mary pass. In a tough environment for the energy market where only the strong survive, I’m having a difficult time seeing a lucrative future for Kosmos.
The Bottom Line
KOS stock offers a sizable dividend yield, for now at least. However, it might not be enough to offset the future losses in the KOS share price.
Kosmos Energy is taking steps to firm up its capital position. Yet, those actions seem desperate, like a last-ditch attempt to stay solvent. The best policy, then, is probably just to avoid KOS stock altogether.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
