Kosmos IPO Leaves Ghana in the cold

By J. Ato Kobbie, Managing Editor

Just a couple of months after shrugging off attempts by the Ghana National Petroleum Corporation (GNPC), alongside two oil giants, to acquire its holdings in Ghana, the shareholders of Kosmos Energy are poised to sell some of their stakes through an initial public offer (IPO) on the New York Stock Exchange (NYSE).

The IPO had the consent of the Minister for Energy of Ghana, following a slap on the wrist of the US Company by the government of Ghana under a Settlement Agreement that allowed Kosmos to walk, in spite of clear violations of the petroleum agreement governing their operations in Ghana, and investigations into possible corrupt practices during their entry into the country dropped. In what appeared like payback time for Kosmos Energy, whose earlier attempt at selling its holdings in Ghana to ExxonMobil was vetoed by GNPC, the US Company is reported to have quoted in its negotiations, an amount in excess of one billion dollars of what market analysts assess its holdings to be worth.

VETO

GNPC had vetoed the initial deal with ExxonMobil, citing breach of Section 8 of Ghana’s Petroleum Exploration and Production Law (PNDC Law 84), subtitled Non-Assignment of Petroleum Agreement, which states that ‘a petroleum agreement entered into under this law shall not directly or indirectly be assigned, in whole or in part, by the holder of such agreement to another person without the prior consent in writing of the Secretary,’ where the Secretary refers to the Minister for Energy. The national oil company cited also a breach of its data rights by Kosmos Energy at the time.

Kosmos, which was, in addition to charges of data rights breaching, also facing a multi-million-dollar penalty for toxic mud spillage offshore, in clear violation of its petroleum agreement and the country’s environmental laws, was treated with kid gloves, with the expectation that it would sell to Ghana. But that was not to be.

GAINERS AND LOSERS

Whereas the outing has the potential of leaving shareholders of the US independent company smiling all the way to the bank, it, at the same time, exposes the future development and production of Ghana’s West Cape Three points (WCTP) and Deepwater Tano (DT) oil fields to a higher degree of uncertainty, if the present shareholders decide to indirectly sell their remaining holdings in Ghana and elsewhere through the NYSE.

Faced with the options of monetizing its investments, mainly in Ghana, through a trade sale or sale through the stock exchange, Kosmos opted for the more attractive stock exchange option, which has the potential of yielding a windfall profit.

As far as the future development and production of the fields are concerned however, a trade sale (which means selling stakes to another company within the same ‘trade’, in this case to an oil company which has the same expertise in assessing the likely costs, earnings and risks associated with running a business based on the assets available for sale and the likely returns on such investment over the lifespan of the fields, i.e. 20 to 30 years), would be a better choice.

With current crude oil prices hovering above US$100.00 per barrel, the Kosmos offer comes with a greater attraction for speculators who may not necessarily have oil in focus and therefore unwilling to commit funding to, for example, the development of four pending fields that requires a total of close to 16-billion US dollars in investments.

Even though Kosmos is said to be targeting 7 to 8 Billion US Dollars for its WCTP/DT (including the Jubilee Field), that is way off values suggested by recent trade offers, which average 4.2 Billion US Dollars from industry players.

These offers have come from ExxonMobil and BP – huge companies with unquestionable expertise in valuing oil assets, China National Offshore Oil Company (CNOOC), one of the most aggressive acquisition companies in recent years, as well as GNPC.

It also includes an offer from Tullow, which, as Operator of the Jubilee field, knows these assets thoroughly and is said to be far advanced in negotiations to buy out the EO Group.

It follows therefore that as far as the oil and gas industry is concerned, Kosmos’ assets in Ghana are not worth more than 4.5 billion US Dollars. However, since a stock market sale is essentially an auction to the general public, which in most cases is not well-informed or lack the expertise to evaluate information when it is available, some analysts believe that it is possible for Kosmos to cross the 6-billion dollar mark.

RED FLAGS With the International Finance Corporation (IFC), still hoisting red flags over the Jubilee project financing, which situation has stalled a Multilateral Investment Guarantee Agency (MIGA) insurance for investments by a consortium of which it is part, it is not clear how that will impact on an IPO involving the same project.

As far as Kosmos is concerned, with increasing oil prices due to conflicts in the Middle East and fears about nuclear power heightened-because of Japan’s Fukushima Daiichi nuclear disaster- and with its shareholders and Management being formidable salesmen, there is no turning back to the prospects the IPO offers, having invested less than one-billion dollars in Ghana.

Ghanaians, however, would recall the euphoria with which they greeted the Ashanti Goldfields IPO in the 1990s and forked out $20 dollars per share only to realize with dismay that the real value of Ashanti shares was around $3 dollars (and also that mining companies have very conservative dividend policies - something which trade investors, of course knew all along.)

A successful trade sale to the GNPC/BP/CNOOC consortium would have resulted in GNPC increasing its stake in the Jubilee Field and other fields in WCTP/DT by at least 3%, giving it a greater voice in the partnership. With BP on board, management of the oil fields, at least WCTP, would have improved for a more efficient production. Even a trade sale that did not involve the national oil company would have improved Operatorship of WCTP/DT and increased their value.

For now, once the current majority shareholders have exited Kosmos, as they have made it abundantly clear they would, there is no guarantee that the thousands of individual and institutional investors that replace them will have the capacity or desire to pour more money into the company to meet future investments required to optimize production.

Worse still, if the Kosmos management group decides to cash in on the stock exchange, the partners could even lose the limited expertise within Kosmos – with no guarantee that it will be suitably replaced.

CONSENT Ghana’s petroleum laws give the government rights of consent over any transaction that transfers more than 5% of a Contractor’s interest in a petroleum agreement to someone else.

The relevant provision, captured under Article 23 (16) of PNDC Law 84 reads: ‘A contractor or sub-contractor shall not transfer any share or shares in its incorporated company in Ghana to a third party either directly or indirectly without the written approval of the Secretary if the effect of such transfer would be either to give such third party control of such company or to enable such third party take over the interests of a shareholder who owns five per centum or more of the shares in such company.’

This right allows the Minister for Energy to ensure that the incoming investor has the requisite financial and technical resources to manage and optimize the country’s resources.

It allows Minister for Energy to ensure that control over strategic resources does not fall into hostile or unacceptable hands (e.g. war lords or drug barons). It ensures also that the departing investor does not leave unpaid liabilities or other obligations unsettled before it exits and that suitable tax arrangements are in place.

Sources with insight into the settlement agreement that gave Kosmos a new lease of life to file for the IPO, said it was executed with a ‘gentleman’s agreement’ that Kosmos would accept a fair market price for its holdings in Ghana. It however thumbed Ghana in the face, by rejecting an offer that leading international assessors say was fair.

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