Shares of oil and gas exploration company Kosmos Energy (NYSE:KOS) rose 54% in the first half of 2019, according to data provided by S&P Global Market Intelligence. But that impressive-seeming number is thanks to a bit of good timing: Kosmos' shares bottomed out around the first of the year. If we look at the nine months ending June 30, 2019, shares are down 32.9%.
Deepwater specialist Kosmos has had a string of exploration misses lately. In December 2017 it failed to discover commercial hydrocarbons in offshore Mauritania. In February 2018 it announced that it had also come up empty-handed in nearby Senegal, and as a result was sending its drillship to Suriname in South America, near where ExxonMobil has had some offshore success.
But in October, Kosmos reported that it had once again struck out, and that its Pontoenoe-1 exploration well in Suriname had found "high-quality reservoir" but no commercially viable hydrocarbons. That came on the heels of the company's acquisition of Deep Gulf Energy in September; it was mostly debt financed, but Kosmos also handed over $300 million in shares. And that coincided neatly with a major slide in oil prices, which sent investors running for the exits.
However, oil prices have since recovered. For its part, Kosmos managed to impress investors when it reported Q4 earnings in late February. It announced that it had used the $250 million it generated in free cash flow to repurchase some of those shares issued during the transaction. It announced it was paying a dividend. And it announced it would be selling off some assets that would help it reduce capital expenses while still growing production. Best of all, Kosmos said it could generate enough free cash flow at $35 a barrel to fund this shareholder-friendly strategy. Considering Brent crude is now trading at about $65 a barrel, that cheered the market, which began bidding up shares again.
Oil exploration -- particularly deepwater exploration, in which Kosmos specializes -- is a risky business. Oil prices have fallen significantly over the last five years, and Kosmos' shares have largely followed suit:
If you're interested in buying into a speculative oil and gas exploration and production company, Kosmos isn't necessarily a bad pick, but you should be aware of the risks. Most investors will likely want to steer clear.