Is Kosmos Energy a Good Oil & Gas Stock to Own?

Kosmos Energy Ltd. (KOS)  in Hamilton, Bermuda, operates as an independent oil and gas exploration and production company, focused along the Atlantic Margins. The company's primary assets include production offshore Ghana, Equatorial Guinea, the U.S. Gulf of Mexico, and gas development offshore Mauritania and Senegal.

Due to rising crude oil and natural gas prices amid a prolonged supply squeeze, the oil & gas industry has gained impressively over the past year. Shares of KOS have gained 217.5% in price over the past year and 19.4% over the past five days. Also, KOS’ shares returned 7.3% in their last trading session to close at $3.81. Moreover, the stock is trading above its 50-day and 200-day moving averages of $2.74 and $2.80, respectively.

The company has been benefiting primarily from rising energy prices. Since analysts expect oil prices to hit $200 per barrel, KOS should keep thriving. According to Goldman Sachs, “the possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months.”

Also, Brent's scarcity premium widened the most last week since 2013, indicating a tight market, which could push prices higher. On the other hand, natural gas prices have also doubled since May. So, KOS should gain significantly from this uptrend.

Last week, KOS announced its acquisition of an additional 18.0% interest in the Jubilee field and an additional 11.0% interest in the TEN fields in Ghana from Occidental Petroleum (OXY) for $550 million. The company expects this additional Ghana interest to generate approximately $1 billion of incremental free cash flow by the end of 2026. It also expects the acquisition to accelerate its deleveraging. So, this growth-oriented acquisition should be beneficial for KOS eventually.

Here’s what could shape KOS’s performance in the near term:

Weak Bottom-Line

KOS’ total revenues increased 201.7% year-over-year to $384.12 million in its fiscal second quarter, ended June 30. However, its net loss stood at $57.19 million, down 71.3% from the same period last year. The company’s net loss per share declined 71.4% year-over-year to $0.14. In addition, KOS’ trailing-12-months net income and operating income came in at negative $177.38 million and $197.56 million, respectively.

Equity Offering

On October 15, KOS priced a registered underwritten public offering of 37,500,000 shares of common stock at $3.30. The offering is expected to close on October 19, 2021. KOS plans to use the net proceeds to repay its outstanding borrowings under a commercial debt facility, including borrowings incurred to finance a portion of its acquisition of Anadarko WCTP Company. The equity offering could lead to the dilution of its share capital, however.

Mixed Valuations

In terms of forward Price/Book, KOS is currently trading at 5.52x, which is 203.7% higher than the 1.82x industry average. Also, its 3.61 trailing-12-months EV/Sales ratio  is 19.2% higher than the 3.03 industry average.

However, KOS’ forward EV/EBITDA is 44.8% lower than the 8.15 industry average, and its forward Price/Cash Flow is 51% lower than the 6.03 industry average.

POWR Ratings Reflect Uncertainty

KOS has an overall C rating, translating to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a C grade for Value, which is consistent with its mixed valuation.

KOS has an A grade for Momentum. This is justified because the stock is trading above its 50-day and 200-day moving averages.

Of the 49 stocks in the A-rated Foreign Oil & Gas industry, KOS is ranked #48.

Beyond what I have stated above, one can also view KOS’ grades for Quality, Growth, Sentiment, and Stability here.

View the top-rated stocks in the Foreign Oil & Gas industry here.

Bottom Line

Since the beginning of the year, an oil and gas price rally has helped the energy sector garner significant investor attention. We think KOS should keep benefiting from commodities’ relentless rally. However, its mixed valuations and weak bottom-line make it less attractive now compared to its peers. So, it could be wise to wait for a better entry point in the stock.

How Does Kosmos Energy Ltd. (KOS) Stack Up Against its Peers?

While KOS has an overall POWR Rating of C, one  might want to consider taking a look at its industry peers LUKOIL PJSC (LUKOY), Ampol Limited (CTXAY), and Parex Resources Inc.( PARXF), which each have an A (Strong Buy) rating.

KOS shares were trading at $4.01 per share on Monday morning, up $0.20 (+5.25%). Year-to-date, KOS has gained 70.64%, versus a 20.20% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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