2020 has been a terrible year for oil and gas companies. Kosmos Energy (NYSE:KOS) has been no exception. KOS stock is down 80% year-to-date and now sells for just slightly over a dollar. From that backdrop, it might seem like Kosmos is heading toward bankruptcy, as has happened with many other oil and gas companies in recent months.
However, there’s more to the Kosmos story than you find at much of the competition. The company isn’t tied to declining U.S. shale assets, for one. Instead, it has a robust portfolio of offshore oil projects around the world. The projects, while having risks of their own, are reasonably low-cost assets. Thus, there’s a path to survival for Kosmos at $40/barrel oil. And, on the upside, oil really needs to only get back to $50 or $60 for Kosmos to make significant profits. That’s more than you can say for most of the energy sector nowadays.
Don’t Let the Share Price Fool You
Just judging from the $1.15 stock price, you might think Kosmos was a tiny outfit. That’s often the case for penny stock oil and gas companies. But Kosmos is actually a rather sizable firm. The company’s market capitalization is almost $500 million, and it has operations in North America, South America, and Africa.
At this time, Kosmos has active production wells in Ghana, Equatorial Guinea, and the Gulf of Mexico. It has development projects going in another two jurisdictions, and four more exploration areas.
This gives the company some options, as you’ll see in a moment, to make it through the current energy bust.
Viable Financial Situation
The most pressing issue for oil and gas companies now is simply remaining in business. Given the drastic drop in oil prices, many energy companies have gone bankrupt or are teetering on the edge. However, it appears, Kosmos is in a better position than many of its rivals to ride out the storm.
For one thing, consider that Kosmos was not actually in terrible shape. Prior to the pandemic, Kosmos was profitable most of the time. The company generated an operating profit all four quarters of 2019, for example, and produced a net profit (after interest and taxes) two of those four quarters. We aren’t talking huge profits by any means. But in both Q2 and Q3, Kosmos earned 4 cents per share. On a $1.15 share price, that’s not a bad number at all.
Those 2019 number came with a better oil price environment than now, to be sure, but 2019 wasn’t exactly a golden era for the energy industry either. The fact that Kosmos could grind out profits in 2019 shows that it has a workable business plan in even modest oil price environments.
To that end, Kosmos slashed costs even more in 2020. Further to that, it re-oriented its capital spending to only prioritize the best and fastest-developing projects.
Solid Asset Sale
Last month, Kosmos agreed to sell a position in some of its offshore exploration assets. Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) will be acquiring the assets. It will pay Kosmos $100 million up-front, and potentially another $100 million in the near future dependent on whether exploratory wells end up hitting their targets.
While it’s never pleasant to have to sell exciting exploration assets, this looks like a good move for Kosmos. It is getting $100 million (equal to a fifth of the company’s market capitalization) now, and potentially another $100 million in 2021. The company, by reducing its exploration focus to only its most promising areas, anticipates reducing its exploration budget by $125 million in coming years as a result of this transaction.
KOS Stock Verdict
If Kosmos can keep the lights on during this brutal oil downturn, it could be a fascinating recovery play on the other side.
So many of the exploration and production companies are a dime a dozen, with similar fracking-based assets in Texas or other continental basins. Kosmos, by contrast, has a diverse and highly-differentiated asset base. Its exposure to less picked-over offshore assets has allowed it to maintain a reasonable cost profile, even in these trying times. Being cash flow positive at $40/barrel is a luxury Kosmos has that most of its rivals do not.
Due to generating so much production out of politically unstable areas of the world, Kosmos will always be a volatile stock. However, the risk here is quite different from what you’d get with the typical North American oil and gas company. That makes it worth monitoring KOS stock as a rebound play whenever crude oil mounts a recovery.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.