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Why Kosmos Energy Stock Jumped 26% at the Open Today

By Reuben Gregg Brewer – Oct 5, 2020 at 10:12AM

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The exploration and production company gave investors a bit of good news, but the story still isn't great.

What happened

Shares of offshore energy driller Kosmos Energy (KOS -0.37%) rose sharply at the start of trading today, advancing as much as 26% in early action. The price advance lost steam pretty quickly, however, with the stock up a still significant, but far lower, 13% by around 10 a.m. EDT.

So what

The driver here is really a two-part story. The first piece of the tale is that Kosmos announced a fairly complex financing agreement. According to the company, it restructured an existing Gulf of Mexico prepayment facility into a $200 million term loan with a five-year term. The loan is secured by Kosmos' U.S. Gulf of Mexico assets. The loan carries an interest rate of about 6% and increases the company's borrowing capacity by $50 million. It can be increased to $300 million, as well. All in, Kosmos has given itself some additional financial breathing room.  

An offshore drilling rig

Image source: Getty Images.

The second piece of the story is the company's balance sheet. At the start of the year, Kosmos had a financial debt-to-equity ratio of around one. At the end of the second quarter that number was 3.2. While that's not as bad as some peers, it's still a concerning number given the weak oil price backdrop today. So, while today's news is positive, Kosmos really needed to increase its financial breathing room.   

Now what

Obviously, investors were pleased with the news from Kosmos today. However, the swift decay here suggests that Wall Street is still very cognizant that the driller is facing material headwinds. That includes both energy prices and its leveraged financial position. This is not a great option for conservative types, who would likely be better off focusing on larger and financially stronger names like Chevron.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Kosmos Energy Ltd. Stock Quote
Kosmos Energy Ltd.
KOS
$5.35 (-0.37%) $0.02
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Chevron Corporation
CVX
$144.77 (-0.69%) $-1.01

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