Earnings Call Transcript - KOS Q4 2020

Operator, Operator

Good day, everyone. Welcome to Kosmos Energy's Fourth Quarter 2020 Conference Call. Just a reminder, today's call is being recorded. At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos Energy.

Jamie Buckland, Vice President of Investor Relations

Good day, and thanks to everyone for joining us today. This morning, we issued our fourth quarter earnings release. And this release and the slide presentation to accompany today's call are available on the Investors page of our website. Joining me on the call today to go through the materials are Andy Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note in this presentation and in our UK and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. At this time, I will turn the call over to Andy.

Andy Inglis, Chairman and CEO

Thanks, Jamie, and good morning and afternoon to everyone. I'll start today's presentation with a reminder of our strategy and the characteristics that differentiate Kosmos. I'll then look back at 2020 and the strategic steps we made during the year, despite the COVID-related challenges, before Neal walks through the quarterly numbers and the financial progress we made in 2020. I'll then wrap up the presentation with a look forward into 2021 and the increased momentum we expect to see in an active year ahead. Turning to Slide 2, which looks at our portfolio and unique characteristics that define the company, Kosmos has a high-quality portfolio of world-class conventional oil and gas assets with strong ESG credentials. Our focus on offshore exploration, development, and production along the Atlantic Margin has not changed. We have three oil production hubs in Ghana, the Gulf of Mexico, and Equatorial Guinea, as well as a world-scale LNG development in Mauritania and Senegal. These advantaged assets have low decline rates, Brent or HLS price benchmarks, and an overall carbon intensity that is significantly lower than the industry average. As our recent Climate Risk and Resilience Report showed, we are making portfolio decisions and capital choices to deliver shareholder value consistent with a lower carbon world. Safety and sustainability are two core values that are critical to the delivery of our strategy. And I'll talk about both subjects in more detail later in the presentation. Alongside the producing assets and our LNG development, we continue to enhance our exploration portfolio with a focus on returns. This means prioritizing proven basins where we have a deep technical understanding, a large resource portfolio, and can leverage existing infrastructure. Our acquisitions in Equatorial Guinea and the Gulf of Mexico targeted opportunities that created value through optimizing the existing production base and through infrastructure-led exploration, or ILX, and we’ve built a diverse hopper of ILX opportunities across the three basins. Given their low cost and low decline rates, these assets produce significant free cash flow, even at low oil prices. Through the 2020 cost reduction initiatives, Neal will talk about later, we have materially lowered our corporate free cash flow break-even and we expect our base business to generate a healthy level of free cash flow at current oil prices this quarter. On the gas side, the phased development of Tortue is expected to generate a long-term free cash flow stream to complement the cash-generative oil assets in the portfolio today. First gas at Tortue Phase 1 is expected in the first half of 2023. And finally, the business is underpinned by a solid balance sheet that enables us to execute our plans. We came through 2020 with ample liquidity, a staggered debt maturity schedule with nothing maturing this year, and the business that is expected to generate cash and reduce leverage. Turning to Slide 3, where I'd like to focus on our strategic progress last year. The environment for most of 2020 was extremely challenging for the sector and for society as a whole. However, against that backdrop, Kosmos delivered on its key strategic priorities. Our production assets delivered robust performance in 2020, producing around 61,000 barrels of oil equivalent per day. This is only an 8% decline year-on-year, despite a reduction in CapEx around 40% over the same period. Tortue Phase 1 was around 50% completed year-end with the project back on track despite COVID-related impacts. We published our first-ever TCFD-aligned Climate Risk and Resilience Report during the year, followed this with our Sustainability Report, and set a goal to be carbon-neutral for Scope 1 and Scope 2 emissions by 2030 or sooner. This climate risk analysis supported our decision to monetize a portfolio of exploration assets, bringing in around $100 million of proceeds in the fourth quarter, with further upside potential on future success with no more capital exposed. Following that transaction, we now have an exploration portfolio focused on high-return, fast payback opportunities in the proven basins we know well, where we restarted drilling in the fourth quarter with a successful Winterfell ILX well. On cash, we reached a cash flow inflection point in the second half of the year, with positive free cash flow in the fourth quarter, driven by higher prices, as well as significant and sustainable cost reductions, which have lowered our corporate break-even. And we established a financing path for Tortue Phase 1, which should enable us to fund our current interest through to first gas. Working closely with BP as the operator, we have also optimized Phase 2, significantly lowering CapEx, which we expect to enhance future returns and cash flow. And finally, on the balance sheet, we diversified our available sources of capital with the Gulf of Mexico term loan and we maintained healthy liquidity through the year with around $570 million available at year end. Turning to Slide 4, which looks at our reserves, a sustainable E&P business requires low-cost, lower-carbon assets and a strong reserve base. Kosmos has both. We total 2P reserves around 480 million barrels of oil equivalent, a 2P reserves to production ratio over 20 years. As you can see on the top chart on this slide, our 2P reserves are split evenly between the oil-producing assets in Ghana, Equatorial Guinea, and the Gulf of Mexico, and the Tortue gas assets, which we expect to come online in 2023. Year-on-year changes to 2P reserves largely reflect 2020 production and the optimized second phase of the Tortue development, which should increase project capacity to 5 million tonnes per annum. Our 1P SEC reserve base of 140 million barrels largely reflects the impact from 2020 production and the lower SEC price deck, that is around $20 per barrel lower than 2019 prices, which impacted the economic limit for some assets later in life. At current prices, we would expect those price-related reserve changes to reverse in 2021. Looking forward, we have significant additional discovered resources that should increase our reserves when booked. On 1P, future adds are expected to come primarily from Tortue Phase 1, which would add an additional 100 million barrels oil equivalent at current prices, while Asam and Winterfell are expected to further increase our 2P reserve base. Turning to Slide 5, as I said in my opening remarks, safety is a core value at Kosmos, and nothing is more important than the safety of our employees and contractors. The slide shows our safety metrics over the last five years benchmarked against the industry. Our One Team, One Goal initiative to deliver HSE excellence has recently become even more important in the wake of a tragic incident in the Gulf of Mexico this January, in which a subcontractor working on a Kosmos contracted drill ship was fatally injured. The incident is a stark and tragic reminder that the journey to zero incidents and accidents is more than a set of HSE metrics. As a company, we are determined to learn and prevent anything like this from happening again. The incident is still being investigated and we have already begun to share the initial learnings with our peer companies, engaging with more than 20 operators in the Gulf of Mexico. Looking at the right-hand side of the slide, our commitment to health and safety extends beyond our direct operations and informs how we engage with our communities. In each of our countries, our teams were quick to support the COVID-19 response effort, with critical medical equipment, testing kits, and other supplies. We also set up a hunger relief program to address food insecurity that has been made worse by the pandemic. I'm proud of the way our people rose to the challenge of supporting each other and our communities through the year. On Slide 6, the operational performance for the quarter, in Ghana, cargos and sales are in line with our guidance, while entitlement production was sequentially lower due to the lack of drilling activity in the second half of the year. Uptime and reliability numbers were strong in the quarter as they have been throughout 2020, and we continue to work closely with the operator to ensure this performance is sustained. In Equatorial Guinea, performance was in line with expectations, and we look forward to our first drilling campaign starting later this year. In the Gulf of Mexico, production was in line with guidance. The production number on the slide does include the benefit of contractual royalty relief, which we received due to lower realized oil prices in 2020. In December, we spudded the successful Winterfell ILX well, which I'll talk about later. In Mauritania/Senegal, Phase 1 of the Tortue project ended the year around 50% complete, with a first Mauritania/Senegal well resolved in October finalizing the 11-month delay. Overall, most of 2020 saw a slowdown in operational activity across the company due to the pandemic and ability to execute safely. However, in the fourth quarter, activity started to return and we expect momentum to continue building as we move through 2021. More on that in a few minutes. Now I'd like to hand over to Neal to take you through the financials.

Neal Shah, CFO

Thanks, Andy. Good morning and good afternoon to everyone on the call. Just as Andy talked about the strategic progress Kosmos made in 2020, I'd like to start off with the financial progress we made during the year. Specifically, the decisive actions we took to reduce costs early in 2020, which have materially lowered the company's cash breakeven. As you can see on the charts on Page 7, we made significant reductions to operating expenses, cash G&A, exploration expense, and based business CapEx, resulting in Kosmos being a much leaner and fitter business today. We expect most of these cost savings to be sustainable as we move forward with fewer people working on a more concentrated set of high-graded objectives, which we believe positions the company to create the most shareholder value. In a higher price environment, this lower cost base should significantly enhance future returns and cash generation. However, one point to note is that due to the pandemic, we underinvested in our base production assets compared to our typical maintenance CapEx levels. In 2020, we are planning to normalize our spend, which should allow production to grow back to 2020 levels by the year end, with further upside potential in 2022. Turning now to Slide 8, this is a slide many of you will have seen before, which looks at the key line items for the quarter. I don't plan to spend time on each item other than to say the results for the quarter were consistent with our expectations with significant progress both sequentially and against the same period last year. While production and realized price were lower, we were successful on our cost initiatives I noted on the previous slide. We made progress on OpEx in 2020. However, we didn't deliver everything we wanted to, and therefore per barrel metrics are a bit higher than expected in the fourth quarter. This is a scenario we will continue to work with our respective operators through 2021. Turning now to Slide 9, which looks at the balance sheet and our liquidity position. Despite the volatility in record low oil prices in 2020, Kosmos maintained a solid balance sheet with healthy liquidity levels through the year, as can be seen on the chart. In the fourth quarter, we closed the Shell transaction, receiving around $100 million of proceeds. It's also up to $100 million of additional continuous consideration, payable on future drilling success. We maintained tight control of CapEx during the year with around $147 million of total CapEx, which takes into account the Shell proceeds and is in line with company guidance. Hedging remains an important part of our financial strategy, and we've hedged around 60% of this year's production and have started to hedge our 2022 production. With that, I'll hand it back to Andy.

Andy Inglis, Chairman and CEO

Thanks, Neal. I mentioned earlier in the presentation that operational momentum slowed in 2020 due to reduced activity and the focused efforts on protecting our people and operations across the portfolio. At the end of the fourth quarter and into the start of this year, activity levels have picked up in all areas. As the slide shows, infill drilling activity on our base business was curtailed in 2020. In 2021, we expect to triple the amount of activity, with a total of nine wells spread across Ghana, Equatorial Guinea, and the Gulf of Mexico. This increased activity is expected to reverse declines and drive up production, with year-end exit rates materially higher than those seen at the start of the year. At Tortue, we are already seeing significant momentum after last year's pause and expect Phase 1 to be around 80% complete by year-end. We're also returning to exploration with two or three wells planned this year. We have already seen success with Winterfell in January, and we aim to drill Zora in the second half of the year. Success of Zora would open additional opportunities that we would evaluate later in 2021. Turning to Slide 11, to look at that activity set in more detail. In Ghana, we've seen a successful installation of the CALM buoy, with a first offloading earlier this month. The start of the CALM buoy removes the need for shuttle tankers to move oil from the FPSO to the tanker, so it should result in lower operating costs for the partnership going forward. As the operators communicated to the market, the drilling rig has been contracted and is expected to arrive in the second quarter. We plan to drill two producer wells and one injector on Jubilee in 2021, as well as the gas injector well in TEN. The rig has a contract length of up to four years, given the amounts of high-quality infill targets available in Ghana. And the partnership is also evaluating having a second rig to accelerate that production growth. We also continue to work with the operator on optimizing projects that can deliver incremental production. We plan to start the developments at Jubilee South East this year with drilling activity targeted for 2022 and 2023. In Equatorial Guinea, Phase 2 of our ESP program began this month and we've started an infrastructure enhancement campaign to increase operational uptime on the assets. In the second and third quarters, we expect to drill three infill wells with the aim of keeping production growing through 2021. In the Gulf of Mexico, the Kodiak completion is underway and is expected to be online next month. We also plan to drill the Tornado-5 well mid-year, which is expected to be online in the third quarter. With this increase in activity, we expect production to grow with a year-end exit rate around 60,000 barrels of oil equivalent per day with further momentum into 2022. Turning to Slide 12. 2021 is a year of significant delivery for Tortue. Phase 1 was around 50% complete at the end of last year, and we expect to be around 80% complete at year-end 2021. The two images on the slides show the areas where we expect the most progress, namely the subsea and the concrete breakwater. The top image shows one of the subsea marine structures being fabricated in the yard in Indonesia. The fabrication of the subsea equipment is expected to be complete by year-end with the manifolds and flow lines installed by early 2022. The bottom image shows one of the concrete caissons forming the breakwater for the hub terminal. The concrete pour for two of the 21 caissons is now complete, with a production line ramping up. The floating dock arrived in Dakar in mid-January, and it started preparations for caisson offloading in early summer. There's a great video online from Eiffage cupped in the footnotes on the slide showing the forward steps to complete the breakwater. As we outlined at our third quarter results in November, our funding path has been established with the sale and lease back of the FPSO making good progress. Earlier this month, we signed an MOU with BP outlining the terms and conditions around the sale. As previously communicated, the FPSO will be sold for back cost to an SPV controlled by BP and leased back to the partnership. The joint venture will utilize the FPSO proceeds upon group cash cost. We expect the net proceeds to cover $250 million of our capital requirements in 2021 and we are targeting close within the second quarter. We expect the further savings to be rolled over into 2022, reducing our overall future capital obligations by $320 million in total. While advancing Phase 1 financing, we've also moved Phase 2 forward, and we are still targeting FID around the end of 2022. We anticipate the capital requirements for the optimized Phase 2 to be largely funded on Phase 1 cash flows. We see this as a very important value driver for the company, which gives us greater flexibility around future gas sales and pricing with significant value potential in LNG markets that are already showing signs of tightness. Turning to Slide 13, which shows the recent signals of that tightening market. 2020 had the lowest LNG supply growth since 2014 with only 5 million tonnes of new supply entering the market. In addition, there was only one new project FID. Against that tightening supply picture, LNG demand continued to rise, up 3% in 2020 versus 2019, despite the impact of COVID-19 on global energy demand. We believe that there's strong demand for LNG set to continue. The top chart is a Wood Mackenzie analysis we showed in November, which forecasts significant supply-demand gap opening up in the middle of the decade. Even incorporating the recently FID North Field expansion project in Qatar, Wood Mackenzie still forecasts a supply gap around 50 million tonnes to the end of the decade and around 175 million tonnes for 2035. The bottom chart on this slide shows a significant increase in gas prices we've seen in the last few months. The dashed line is the JKM future stripped from May this year with the solid blue line showing the future strip today, which reflects a strong rally we've seen as the markets have tightened. Average NBP and JKM futures for the next three years both average above $6 per MMBtu. Tortue Phase 1 is contracted at an oil index price, which at current prices should generate significant cash flow. Phase 2 would not be contracted to the gas, so we retain the option of pricing it against oil, gas, or a combination of both, with both looking like attractive options at today’s prices. Given its low breakeven, we expect significant value creation from this phase of the project. Turning to Slide 14, I talked about our ramp-up in infill drilling in 2021. Now, I'd like to look at our exploration activities for the year. Kosmos has a diverse and deep inventory of ILX and play extension opportunities across three proven basins. We expect to increase our activity in 2021. In January, we had early success with Winterfell. We discovered and de-risked around 100 million barrels of gross resource across Kosmos’ acreage. The partners are now working on the appraisal and development plans and we'll update the market as we have more information. Winterfell is a great example of why Kosmos made the DGE acquisition in late 2018, accessing low-cost hydrocarbons which can be tied into existing infrastructure with quick payback and high returns. What’s more, the development solution is expected to have a carbon intensity significantly below sector averages because of the natural advantage of the deepwater Gulf of Mexico. More on that shortly. We anticipate the next ILX well will be Zora, which we plan to drill in the second half of the year. Like Winterfell, this has the potential to be a meaningful hub-scale development in the case of success. One advantage of our diverse exploration portfolio is the flexibility to invest our capital across multiple basins. If drilling plans are shifted in the Gulf of Mexico, we will look to invest in equally high-return opportunities in Equatorial Guinea or Ghana. I'll now hand back to Neal to talk about guidance for the year.

Neal Shah, CFO

Thanks, Andy. On Slide 15, we've included our usual detailed guidance for the year, including our detailed guidance for the year and the appendix. On this slide, I'd like to focus on the key outcomes. As Andy outlined earlier in 2021, we are resetting the dial with production expected to rise through the year as activity increases. Our guidance of 53,000 to 57,000 barrels of oil equivalent per day reflects today's production of around 53,000, rising to an exit rate of around 60,000 barrels equivalent per day at year-end. We expect to spend around $225 to $275 million in 2021 on the base business with an 80:20 split between sustaining and growth CapEx. The capital is being directed to the infill drilling and ILX opportunities with the highest returns. At $55 Brent, we expect that base business, excluding Mauritania and Senegal to generate around $100 million to $200 million of free cash flow, which we plan to use to deleverage the balance sheet. In Mauritania and Senegal, CapEx for the year is expected to be around $350 million. As previously communicated, we expect this to be funded primarily through the sale of the FPSO and the refinancing of the National Oil Company loans in 2021, providing a $100 million benefit to Kosmos. As Andy mentioned, we are planning to close the FPSO sale within the second quarter, at which point we expect the benefit to be $250 million net to Kosmos in 2021, with the residual proceeds from the FPSO sale benefiting 2022.

Andy Inglis, Chairman and CEO

Turning to Slide 16, Kosmos plans on deploying this capital towards the most compelling opportunities in our portfolio both in terms of returns and fitness for the future. As I mentioned on the earlier ILX slide, the deepwater Gulf of Mexico has one of the lowest carbon intensities of any oil basin in the world. This is due to the natural aquifer drive in the Gulf of Mexico pipeline network that limits flaring and the ability to utilize existing infrastructure. This was highlighted in the recent Wood Mackenzie report which can be seen on Slide 16, which shows the deepwater Gulf of Mexico to have the second-lowest emission intensity of the major U.S. crude oil suppliers. Once more, on the analysis of the players in the Gulf of Mexico, Kosmos has the assets with the lowest carbon intensity. This can be seen on the second chart on the slide. It is for these reasons that we believe Kosmos can play its role in the energy transition. Kosmos supports the Paris agreement, and we welcome the U.S. returning to it. We've tested the resilience of the company against the Paris agreement scenarios, adjusted our portfolio accordingly and believe we are well positioned. The U.S. administration's recent executive orders have not affected our Gulf of Mexico production operations. We have a deep inventory of more than 20 high-grade ILX prospects on existing acreage. Like other companies in the sector, we're watching the developments carefully to understand how new policies will be implemented on a practical basis. As the new U.S. administration shapes these policies, we are both ready to engage and open to working with policymakers to develop creative solutions to deliver the energy the world needs with fewer carbon emissions. With its abundant infrastructure, the deepwater Gulf of Mexico is an important source of supply in the world, delivering advantageous oil that is both low-cost and lower carbon intensity. Turning now to Slide 17. Sustainability is a core value for Kosmos, and we are a company with strong ESG credentials across all categories; managing through the pandemic, our focus on sustainability has not changed. Looking at the three categories on the environment, Kosmos performed detailed scenario analysis found in the value of our assets under various climate scenarios. We published the results in our Climate Risk and Resilience Report. The conclusion of this analysis within a transition to a Paris 2-degree world, the value of long-cycle exploration was most at risk because of the long timeframes needed to enter a new country, drill, discover a price, and develop. The risk of investing capital over that period increases significantly. For that reason, we decided in early 2020 not to pursue long-cycle frontier exploration opportunities in new basins. Following that decision, we monetized a portfolio of frontier exploration assets to focus on our shorter cycle, infrastructure-led opportunities in proven basins. Earlier this year, we set a target to become carbon neutral in Scope 1 and Scope 2 emissions by 2030 or sooner, and we're making progress to measure, reduce, and mitigate emissions across the business in line with that target. One of our flagship social investments is the Kosmos Innovation Center, an award-winning program in West Africa that invests in young entrepreneurs and small businesses. We empower these entrepreneurs to turn their ideas into viable self-sustaining businesses. We work alongside promising small businesses to help them scale up and reach their full potential. This program started in Ghana in 2016 and subsequently expanded into Mauritania and Senegal. On governance, Kosmos has an industry-leading position on transparency. We believe we remain the only U.S. oil and gas company that publishes all of its contracts with host governments on its website, which is a clear differentiator from the rest of the industry. We continue to challenge ourselves to be better in all of these areas. We strive to be a leader in the industry both in terms of financial performance and our ESG credentials. Kosmos was recognized this year as one of America's Most Responsible Companies by Newsweek and Statista, and we retained an AA rating in our ESG ranking from MSCI, which puts us in the top quartile among our peers. Finally, turning to Slide 18 to wrap up today's presentation. In conclusion, I want to reiterate the characteristics that make Kosmos unique before opening up to Q&A. We have a portfolio of world-class advantage assets with strong ESG credentials. We have a diverse proven base and exploration portfolio of high-graded ILX opportunities that are focused on short paybacks and high returns. Our assets generate cash, and with last year's cost-cutting initiatives, we are a leaner company with a lower cost base in a much more constructive commodity price environment. And we have a solid balance sheet and healthy liquidity that will support the operational momentum we expect to build through 2021 and into the future. Thank you. And I’d now like to hand the call over to the operator to open the session for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Charles Meade with Johnson Rice. Please proceed with your question.

Charles Meade, Analyst

Good morning, Andy and Neal. Appreciate all your comments this morning. I wonder if you could give a little bit of sense on the FPSO sale leaseback. You guys say that it's – I guess there's two parts to the question. It's targeted for a second-quarter close. Can you talk about what, to the extent you can, what are the steps between now and closing? And I guess the second piece, Neal, I wanted to make sure I understood the - will the CapEx be on your ledger up until the close and then after that it's going to be gone? So, it'll essentially be kind of a first-half CapEx?

Andy Inglis, Chairman and CEO

Yes. Hi, Charles. It’s Andy. Well, I'll take the first part of the question and then Neal can follow up with the detail on the CapEx. Yes. As we talked about in November, we laid out a funding path to first gas. I think we're absolutely executing on that plan, and we made a lot of progress in the first part of this quarter. That obviously involved the signing of the MOU with BP, which contained all the key terms for the sale and leaseback. Yes, the structure – the same structure we articulated in November, we have an SPV purchasing the FPSO from the Tortue JV. The SPV will be a BP-controlled entity that raises the debt and has a BP guarantee associated with it. So actually, the most important point is that this is a very straightforward process involving BP and Kosmos. And clearly, we've gone through the work to set up the structure and the terms. So, in terms of steps forward, we've got to take the MOU and convert that into the detailed agreements, and we're working hard on that. Then it's a matter of going out and raising the external debt. So, we're well on track to get all of that done by the second quarter.

Neal Shah, CFO

And then to your second question, Charles, yes. From a CapEx perspective, the $350 million for the year is spread pretty readily throughout the year. And so, we are currently funding sort of the cash calls and we'll recognize CapEx related to that. But as you noted, post the FPSO sale, you would net the proceeds essentially against the CapEx for the project, thereby offsetting each other via post-close.

Charles Meade, Analyst

Got it. That's helpful detail. I appreciate it. And then a second question on the EG assets. I noticed that you're going to have three infill wells. But on your slide, I think it’s 14, where you show some exploration targets. It doesn't look like any of those ILX wells are going to have an exploration tail or exploration element to them. Is that the right read?

Andy Inglis, Chairman and CEO

Yes, I think that's the right read. Charles, to sort of step back, there's a lot of opportunity in the acreage. When we went into EG, it was all about looking at both the production enhancement opportunities that we could see in Ceiba and Okume. They hadn't been the focus for the prior owner, and we're continuing to work through those. We've obviously had a campaign for increasing lift with ESPs, and we're continuing with our second campaign of ESPs that's underway as we speak. We did the work to enhance the seismic imaging in the existing fields in Ceiba and Okume, to identify the infill targets, and we're getting on with those. The next phase of activity is going to be the exploration targets. So, we're drilling the infill targets first, because those are the things that we believe have the shortest payback, and we'll then come to the ILX program with drilling targets for 2022. The opportunity set is rich, and the most important part is to ensure that we execute effectively and efficiently deploy the capital in the right way to bring forward that opportunity set. We’re doing okay. We clearly had an interregnum in the back end of last year with COVID. But we're back with the activity ramping up now, both in terms of the production optimization and the ESP program and then the rig, which will start next quarter.

Charles Meade, Analyst

Got it. That's helpful detail. Thank you, Andy.

Operator, Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta, Analyst

Good morning, guys, and thank you for all this great detail here today. The first question is around leverage levels, net debt around $2 billion. Is there a level, Andy or Neal, that you want to target in absolute levels, either debt or net debt that you want to aim towards, and just talk about the path to getting there?

Andy Inglis, Chairman and CEO

Yes. Why don’t I throw that to Neal.

Neal Shah, CFO

Hey, good morning, Neil. Yes, in terms of - we were on a path to sort of deleveraging pre-COVID. And post COVID, we still remain on the same path. We've stated that our target is to get to 1 to 1.5 times net leverage that is, net debt about $500 or $1 billion less than what we have today, combined with rising EBITDAX. The good thing about our exposure is that we have high-margin oil. Therefore, as prices are in a sort of $60-plus range, the leverage comes down relatively quickly. The EBITDAX will naturally rise as both production and price improve from sort of COVID levels. At the same time, we will redirect sort of the free cash flow out of the business to continue that pay down. So that's a long-winded way of answering the question, but we're on that same path. And especially given sort of the constructive commodity price environment, we can get there pretty quickly.

Neil Mehta, Analyst

Yes. That's helpful. And then the second question is just around Gulf of Mexico. There has been a lot of investor feedback and questions about your exposure there. If the counterpoint would be, as Tortue comes on, this becomes a smaller part of the portfolio. Just how are you sizing risk in the Gulf of Mexico? Help us walk through the difference between bans on federal leasing versus your ability to drill, and how do you see this asset fitting into the long-term story for Kosmos?

Andy Inglis, Chairman and CEO

Yes, Neil, I'll pick that up. As I said in my remarks, actually, Kosmos has supported the Paris agreement, and we're pleased that the U.S. is back in. We see the Gulf of Mexico as being an important contributor long-term to the world's oil supply. It’s naturally advantaged and is lower carbon. Therefore, we look forward to working with the new administration on the right practical steps forward to enable that resource to be appropriately developed. The long-term remains an advantageous basin, and I believe nothing has changed in that regard. So how does it practically unfold? From a leasing perspective, I think Kosmos is relatively unaffected. We've got a deep hopper of opportunities on existing acreage. We've got around 20 high-graded prospects ready to drill. So, if there were a longer-term impact from not leasing, that won't affect our business. I think we just have to wait and see what will happen when it comes to drilling permits, but I'm hopeful that the practical steps will enable that to move forward. I remain optimistic about the basin, and about the conversations we’ll have with the administration as a result.

Neil Mehta, Analyst

Great guys, thank you.

Operator, Operator

Our next question comes from the line of Bob Brackett with Bernstein Research. Please proceed with your question.

Bob Brackett, Analyst

Good morning. Thank you. I had a question on the sustaining CapEx program. I think you're guiding to around $200 million, and that holds you say around 60,000 barrels of oil equivalent a day, at what sort of the internal decline rate?

Andy Inglis, Chairman and CEO

Yes. Bob, I think if you're looking at the sustaining campaigns, you're right. It's in that sort of $200 million level, a little more, maybe $200 to $225 million levels. So, we're sort of ramping up in 2021 that gets you to that level. But that sort of range can hold production flat. Yes. So, that's the level of CapEx to sustain production across Ghana, Gulf of Mexico, and Equatorial Guinea.

Bob Brackett, Analyst

Against what sort of decline rate?

Andy Inglis, Chairman and CEO

Underlying decline rate. It's probably, you've got to split it out between infill drilling and the production optimization that we do. So, there are some activities, Bob, that require expense as opposed to capital. But if you look at the overall decline rates, it's probably around 10%, and then you're offsetting that with the production optimization and the infill drilling.

Bob Brackett, Analyst

Great, thanks. Quick follow-up on the Tortue Phase 2 FID, so the front-running concept is this lean sort of concept that you've laid out before, are you bringing a single concept to FID or are you carrying several concepts that could potentially be FID?

Andy Inglis, Chairman and CEO

Yes, well, clearly the point of optimizing the concept. So yes. Work is being done to optimize the detail. But the fundamental concept in terms of maximizing the use of the existing infrastructure is the way forward that we've agreed with BP. So, what does that mean? It means that you're fully utilizing the subsidy infrastructure, you're fully utilizing the available gas processing capacity on the FPSO. You're fully utilizing the pipeline from the FPSO to the near shore. Yes. So that remains unchanged. There are some opportunities around the number of additional wells that you can fit into those subsidy manifolds. You can do some additional sort of extensions, et cetera. But ultimately, what you're trying to do is to say what's the best configuration for the reservoir subsidy that fully optimizes the facilities infrastructure that we have in place. So, the concept has not changed; the issue is how do you get the most out of it.

Bob Brackett, Analyst

Yes, clear. So, there's no stalking horse concept of say a 4 million tonne per annum concept.

Andy Inglis, Chairman and CEO

No, No. There's no stalking horse. No. In fact, it's almost the reverse Bob; it's sort of saying, let's make sure we've absolutely optimized this to get the most throughput. Yes. It's quite the reverse.

Bob Brackett, Analyst

Yes. That's clear. Thank you.

Andy Inglis, Chairman and CEO

All right, thanks.

Operator, Operator

Our next question comes from the line of James Carmichael with Berenberg. Please proceed with your question.

James Carmichael, Analyst

All right, afternoon guys. Just a couple, firstly on Equatorial Guinea, I guess I'm just looking at the transaction there recently and the incoming partner sort of outlined an ambition to get to 55,000 barrels a day. I think of the next two or three years, just wondering if that's in line with your ambitions there as well, or your understanding of the upside potential. And then maybe if you could just remind us around the options of the $300 million direct investments to get you to first gas at Tortue and I guess sort of expectations around timing and your preference for how that's structured. Thanks.

Andy Inglis, Chairman and CEO

Yes, hi James. I'll take the first question. And then Neal can handle the second one. Yes, it's great to have a new partner and actually it's great to have a partner that sees the potential in the asset. They've clearly invested in EG on that basis. The fundamental potential that we both see is very similar. We, as I said earlier in the comments, Charles, that the EG assets have a layer cake of opportunities; there's a layer cake from production optimization, which we've done very successfully in the second round of that. There's a layer cake now that we're building in from the infill drilling, and then there's a layer cake from the ILX opportunities that sit around the asset. I think we see a similar view of the opportunity set, and it's good to have a partner there who wants to invest alongside us. I don't think we have a different view. I'm not going to comment ultimately about the production, because that's for them to talk about. And clearly, we're not giving guidance today that far out. But the most important part of the story is the scale of the opportunity set. And that sense, this is a third-party verification as a story that we talked about when we first went into Equatorial Guinea; we talked about exactly those layers in play last year was a bit of a challenge in terms of having to hold back on the pace at which we pursued that. But we're back in action now. There remains a lot of oil to be produced from Ceiba and Okume and the surrounding ILX opportunities, and this will have a long-term role in our portfolio.

Neal Shah, CFO

And then James, just to answer your question on the direct investment in Mauritania and Senegal. Yes, it is the last piece of the financing puzzle that we'll put in place that we're focused on putting the FPSO in place within the second quarter and then the NSE financing, and then as for the direct investment, we're looking at a number of options, a couple of them, including, the partial sale of our non-Tortue gas assets as part of the funding solution. We can place it within the RBL, and lastly, we can fund it from excess cash or higher oil prices. Yes, there's a number of different solutions, and I think we're keeping the optionality open for the best ultimate solution. But we'll do that last within the sequence of Mauritania and Senegal financing.

James Carmichael, Analyst

All right, thanks. Just another one if I actually can, just on the emission zero targets; does that sort of – does that include your non-op assets as well? And can you just give us a sort of sense of how the West African portfolio stacks up against the Ghana on those intensity metrics that you outlined? Thanks.

Andy Inglis, Chairman and CEO

Yes. A good question, Mark. Scope 1 and Scope 2, the definition is around your growth operated. Yes. So, the play that's in the Gulf of Mexico, and we've got about sort of 50,000 barrels a day of gross operated production in Ghana. Yes, so clearly, with that scope one and scope two target, we would be focusing on the things that we can control, and therefore that covers that operated activity. Of course, it benefits from being having a lower carbon intensity. It's at around, as we showed on that slide, around 10 kilograms per tonne. So, you look around the world across all basins, that is differentiated here. As you start to look more broadly at the non-operated activities, those are probably closest to sort of the industry average, which is around 20. Yes, that said, the assets in Ghana, for instance, have that advantage because you do have the ability to export gas. Yes. So, we are connected to the gas grid, the gas goes to power. In fact, the need for gas is increasing over time. We've probably doubled the amount of gas exported over the last couple of years from around 60 to close to averaging 100 to 120 currently. So, the demand for gas is there. The ability to drive down the carbon intensity of the Ghana assets is high. From a higher starting point, the operator has clear plans, and we're fully supported in moving the Ghana assets down the carbon intensity route. So, Scope 1 and Scope 2 is about things you operate, and that's the Gulf of Mexico for us. We’ve got a significant growth-operated footprint there, and we're targeting the delivery of that alongside our other ESG commitments through that 2030 timeframe.

James Carmichael, Analyst

Great, thanks.

Andy Inglis, Chairman and CEO

Great, thanks.

Operator, Operator

Our next question comes from the line of Mark Wilson with Jefferies. Please proceed with your question.

Mark Wilson, Analyst

Hi, good afternoon. I'd like to ask about the bigger picture for Mauritania and Senegal. I think it's – this presentation last year had a last slide on the Greater Tortue resource base 100 TCF gas in place across the three hubs, Tortue, Yakaar, and Bir Allah, and 10 million tonnes per annum potentially across each one of those. Obviously, Tortue is now five million tonnes proposed for the two drains. Could you give us a view on the bigger picture across all those assets? And also, what are your current marketing plans for a potential sell-down there Neal just mentioned a possible sale of non-Tortue gas assets regarding the direct investment. Thank you.

Andy Inglis, Chairman and CEO

Yes Mark, I think the same gas space and actually the different character of assets. I think the instinct for Tortue itself Phase 2 get to five million tonnes per annum fully utilizes available infrastructure; it’s the most capital-efficient project; therefore, it's the right thing as the next building block. Beyond that, there is significant resource that would support a 10 million tonne per annum scheme that would require additional infrastructure, so that remains upside for the future. I think Yakaar-Teranga is interesting because it's actually closer to the Dakar peninsula and the concept work that BP is pursuing would have a domestic gas scheme first, followed by an LNG export scheme. This is an important component of the energy plans for Senegal to be able to replace diesel burning power with gas, thereby enabling a lower carbon future for Senegal with that gas-powered generation. A significant population in Senegal has a desire to grow their power-generating capacity, but they want to do that in a carbon-friendly way. So, the concepts are only for Teranga to sort out how you stage the right infrastructure that enables that domestic scheme to be the bedrock of development and then supplement it with gas exports. For Bir Allah, it is again different; it is a smaller population in Mauritania, but still a need for gas. But it is not the scale of gas that would enable full development of Bir Allah. In terms of the thinking around the development concepts, there's probably more work to be done to come up with the optimized development scheme for Bir Allah. However, in terms of its cost, as you look at it across the world today, it's as competitive as Tortue, with very similar reservoir density and similar economics and cost of supply. The resource is significant. As you rightly say Mark, our focus has been on getting the cash flow from the first project optimizing it with Phase 2. Then I think it's about conversations with both countries, which are around how the resource can be developed optimally to fit their plans and the resource description.

Mark Wilson, Analyst

Do you see yourself going back to the active sort of sales process you had compared to a year ago on those assets?

Andy Inglis, Chairman and CEO

On that, I think this is about – it's one of the options that Neal has discussed. It's about finding the right fit for the project. We're clear about what the concept is, and as you look to the energy transition, more companies are looking to find a gas resource to be able to be a long-term source for their own portfolios. That's what we have in Mauritania and Senegal. So, when we're having those conversations with interested parties, the conversation is not about a formal bid process, but it's about bringing on board the right people that can support the long-term vision for both the development concept and with the government.

Operator, Operator

Our next question comes from the line of Nick Stefanou with Renaissance Capital. Please proceed with your question.

Nick Stefanou, Analyst

Hi guys, thank you for taking my question. It’s Nick from Ren Capital. On the Asam discovery you made a couple of years ago in EG, you spoke about infill drilling and oil export opportunities, but what is the latest from that? Is this signal being considered as a step up to the target?

Andy Inglis, Chairman and CEO

Okay, yes, thanks Nick. Asam was an important sort of discovery for us. We are now doing the work to properly appraise the opportunity and figuring out the best way to integrate it into the infrastructure. There’s more work to be done this year to position that for a development plan that fully optimizes all those Ceiba and Okume infrastructure. I think for us it was just a demonstration of the additional resource there is there. We need to ensure that we've got a development plan which can optimize the reservoir, in particular, the reservoir development of our Asam for the future. For 2021, we're focusing on the infill opportunities. They are platform-drilled opportunities; therefore, they are easy to tie back and get into production quickly. Asam will require some subsea infrastructure to be put in place, and so, as we look at it, we need to make sure we have optimized that correctly.

Neal Shah, CFO

Yes. And then, Nick, just on your question on the RBL, we do have a redetermination planned for the end of the first quarter, and we've just started discussions with those banks, and they're going well so far. The last redetermination was done in a much lower oil price environment. Having sort of more constructive oil prices will help that process. As part of that process, we will speak to the banks around less of a refinancing, but more of an extension of the existing facility. That unlocks additional borrowing capacity, as well, as we've done in the past. The banks have been very supportive, and we plan to continue our regular process. As part of that, we will continue to extend the maturities and increase the capacity on the available funds on the RBL.

Nick Stefanou, Analyst

Okay, got it. And just to clarify on the free cash flow range, it's $100 to $200 million; that's quite large. Is that delta solely due to the upper and lower end of the production guidance? Are there other parameters behind those deltas, basically?

Neal Shah, CFO

Yes, I mean, a large piece of that is production, and then it's just the timing of some of the expenses. But I think, because one cargo even at $55 world is $55 million, right? So, it is sensitive to that work, which is why we've left the range intentionally pretty vague.

Operator, Operator

Our next question comes from the line of Richard Tullis with Capital One Securities. Please proceed with your question.

Richard Tullis, Analyst

Thanks. So good morning, Andy and Neal. Two quick ones. Sorry, if I missed this, what's the rough break out of the 60,000 a day 2020 exit rate by major area?

Andy Inglis, Chairman and CEO

So just off the top of my head, Richard, it will be pretty close to historic knowns with Ghana at 40% to 45%, Equatorial Guinea around 20%, and then the Gulf of Mexico around 30% to 35%.

Richard Tullis, Analyst

Okay. And then a follow-up, looking at the Gulf of Mexico guidance for the first quarter that 20,000 to 25,000 a day, when you compare that to where it was a year ago, somewhere in the neighborhood of 28,000 a day, what are the main drivers of the reduced production there? Is it mainly the lack of drilling in 2020 due to pricing, or are there any other contributing factors, maybe planned downtime issues bringing production back on from the storm season, etc?

Andy Inglis, Chairman and CEO

Yes, Richard, you are right. If you look at it, we only had one infill well in 2020, which was the Tornado injector. Of course, that will lead to an increase in production due to a rise in reservoir pressure. There was a natural decline, which is where we're seeing the current raise, and additional production from the COD. Moreover, in 2021, the well will be back online by the end of the month. Lastly, the unplanned downtime on the Kodiak-1 well has had a differential impact over the first quarter; so, if you look at the yearly basis, the lowering of production guidance in 2021 versus the historical average 28,000 a day can be mostly attributed to the unplanned downtime and natural decline.

Richard Tullis, Analyst

Okay. Well, thanks very much.

Andy Inglis, Chairman and CEO

Okay, thanks Richard.

Operator, Operator

Thank you. Since there are no further questions at this time, I would like to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time. And thank you for your participation.