Oil prices are back in focus again in Wall Street, with crude futures (CLV23) spiking to 10-month highs earlier this week on reports that Saudi Arabia and Russia would extend production cuts through the end of the year.
After a sluggish start to 2023, pressured by high interest rates and expectations for an imminent recession, it seems the energy sector is now back in the driver's seat. Over the past three months, the S&P 500 Energy Sector SPDR (XLE) is up more than 12%, while the broader S&P 500 Index ($SPX) is just 4% higher.
Within the group, little-known Kosmos Energy (KOS) stands out as a potentially undervalued name with significant upside potential ahead. Here's a closer look at this hot energy stock under $10.
Inside Kosmos Energy's Operations
Valued at a market cap of $3.45 billion, Kosmos is an oil and gas exploration and production company focused on the Atlantic Margins. Its key assets include offshore production in Ghana, the U.S. Gulf of Mexico, and Equatorial Guinea, in addition to offshore development in Mauritania and Senegal.
Kosmos aims to create shareholder value by adding new resources via infrastructure-led exploration in the basins where it operates. Here, discoveries can be tied to existing production facilities at a lower cost and with a lower carbon intensity.
Management continues to search for organic opportunities to increase production and expand cash flows. The company’s phased production approach helps it minimize upfront capital costs, reduce execution risks through smaller infrastructure requirements, and use cash flows from initial production phases to fund a portion of future capital costs.
After energy prices fell off a cliff amid COVID-19, Kosmos increased revenue from $804 million in 2020 to $2.24 billion in 2022. It reported an operating income of $1.1 billion last year, compared to a loss of $190 million in 2020.
In Q2 of 2023, Kosmos produced an average of 58,000 barrels of oil equivalent per day (boepd) and sold 45,200 boepd. Its sales stood at $273 million, or $66.38 per boe, while production expense was much lower at $64 million or $15.45 boe. Kosmos reported capital expenditures of $170 million in the June quarter.
What's Next for Kosmos Energy?
Kosmos commenced production from the Jubilee South East development in July. These three development projects are crucial for the energy company, and are an important step to realize an inflection point to deliver consistent free cash flows as production rises at a faster pace than capital spending. The additional production from Jubilee will contribute to the company’s 50% production growth targets this year.
At the end of Q2, Kosmos had $2.4 billion of long-term debt and $2.3 billion of net debt with available liquidity of $700 million. Its operating cash flow stood at $18 million - but due to capital investments, it reported a free cash outflow of $175 million. Kosmos forecasts capital expenditures to range between $700 million and $750 million, which should drive future cash flows higher.
What Do Analysts Expect for KOS?
Wall Street expects Kosmos to increase sales from $1.81 billion in 2023 to $2.29 billion in 2024. Adjusted earnings are forecast to expand from $0.81 per share to $1.06 per share in this period. Priced at 7.1x 2024 earnings, Kosmos is quite cheap, given earnings are forecast to rise by 23.8% annually in the next five years.
Kosmos Energy stock has trailed the broader markets by a wide margin in the last decade, having slumped 24% since September 2013 - but more recently, the shares are outperforming. KOS is now up 17.3% in 2023 to edge past the S&P 500's return of 15.9%, and has outpaced the index by more than 5 percentage points in the last three months.
Out of the five analysts covering KOS, four recommend a “strong buy,” and one recommends a “hold”. The average target price for Kosmos Energy stock is $8.93, which is 19.7% higher than current levels - suggesting analysts predict almost 20% more upside from this under-$10 energy stock.
