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The Kosmos Energy Opportunity with LNG in West Africa

December 5, 2018 / Gregory Laurent Josi

Kosmos Energy (NYSE: KOS) is an oil and gas exploration (O&G) company headquartered in Dallas, Texas and holds operations in Ghana, Senegal, Mauritania, and Suriname. There are several driving factors/catalysts that could propel this stock upwards after an incredibly disappointing October-November where it plunged just under 45% to $5.38/share. However, the main drivers are without a doubt the Liquefied Natural Gas (LNG) capacity that is about to go online in West Africa and the incoming investment from Norway’s Sovereign Wealth Fund.

LNG Capacity about to surge in West Africa

New LNG capacity in West Africa (specifically in Senegal and Mauritania) is set to come online in December, and Kosmos Energy operates all of these specific projects. A lot of these projects are now using floating LNG, which can cut costs as well as lead times relative to fixed onshore facilities. Due to this many foreign firms are increasing their investment into Africa to use floating LNG. In fact, Lucas Schmitt, a senior gas analyst at Wood Mackenzie Ltd said “Africa is the hot spot for floating LNG”, and Bloomberg stated that “confidence in floating facilities is firming up”.

Royal Dutch Shell is one of the pioneers in floating LNG with the biggest platform ever constructed with their Prelude FLNG vessel. Prelude FLNG cost RDS upwards of $10bn and measures an astounding 488m in length. Calling this vessel a ‘powerhouse’ would be understating it when according to RDS it could satisfy as much as 117% of Hong Kong’s annual natural gas demand.

In terms of the market, the demand for natural gas is expected to grow at 2% per year from now to 2035; twice the rate of total global energy demand. And demand for LNG is expected to grow at an average of 4% a year in that same period. This could squeeze prices of LNG high as many countries are almost finished upgrading their infrastructure in order to accommodate for it (and some countries needed to augment their import capacity such as Pakistan).

In terms of LNG in West Africa, it was Kosmos Energy that discovered the Tortue site off the coasts of Senegal and Mauritania. The company sold off 60% to BP and is now in a joint venture with BP. The Tortue site could be expanded from 2.5m tonnes to 10m tonnes per year by the “middle part of the decade or sooner,” according to Inglis (CEO of Kosmos Energy).

Kosmos Energy struggled to recover from the massive oil slump in 2016, and their share price halved in 2 months. The company is set to report a net income loss of $177m for 2018, however, thanks to their joint-venture with BP in the Tortue site their net income is set to surge to $242m for 2019 and $343m for 2020. By using a DCF model it is clear that the market is underpricing this enormously when the market cap sits at $2.33bn, which would mean it has a PE of under 10 when earnings are discounted to present-time. On top of that, the Enterprise Value (EV) sits at $3.95bn alone. When we compare this data to the O&G industry, which has an average PE of 19.9 it is clear that with projected earnings generated by Kosmos Energy in 2019 it should have a share price of $10.8. Moreover, if we added uncertainty and less optimistic results from the Tortue/BP joint-venture the share price should still be in the range of $8.1-$9.3. This presents us with an opportunity of 50.6% in share price appreciation on the lower end, and just above 2x (100%) on the higher end.

The production capacity of African LNG is seen almost doubling over the next decade, and most of that increase will be thanks to Mozambique, Mauritania, and Senegal. Their CEO said that Kosmos is “aiming to grow the gas delivered from Tortue in the early 2020s when leading forecasters expect LNG demand to outpace supply given the low inventory of world scale greenfield projects ready for sanction”.

The Norway Sovereign Wealth Fund – Incoming investment
Norway’s Sovereign Wealth Fund has just lifted its ban of investment on Kosmos Energy. It was excluded from their portfolio in 2016 after they found “an unacceptable risk related to petroleum off the coast of Western Sahara”. This should create an influx of funds flowing into Kosmos Energy stock from this month onwards as Norway’s Sovereign Wealth Fund owns shares in 9,100 companies or 1.4% of the world’s listed equity. Thus, it’s no doubt that this could reinstate confidence in Kosmos Energy.

On another note, the Goldman Sachs analyst covering Kosmos Energy upgraded it to a buy rating earlier in November. And Warburg Pincus recently helped Kosmos Energy conduct a secondary public offering to raise a fresh amount of capital ($81.45m) at the same time of buying back $188m of common stock.