Kosmos Energy Ltd
NYSE:KOS
Earnings Call Analysis
Q4-2023 Analysis
Kosmos Energy Ltd
The company has maintained a strong safety record, with injury rates significantly below industry averages, while achieving a 12% year-on-year growth in fourth-quarter production to 66,000 barrels of oil equivalent per day in 2023. Key development projects are progressing well, signalling promising production prospects ahead.
For the full year, production was in line with previously updated guidance, though fourth-quarter production was on the lower end, mainly due to resolved water injection issues. The guidance for Jubilee and TEN fields indicates 116,500 barrels of oil per day gross, with a net of around 46,000 barrels of oil equivalent per day to the company, demonstrating incoming growth potential. In addition, Gulf of Mexico activities suggest another busy year with a production guidance between 15,500 to 17,000 barrels of oil equivalent per day net.
The company achieved an earnings per share beat versus consensus, thanks to lower-than-guidance costs in G&A and tax, despite higher operation expenditures. They also successfully reduced leverage from 1.9x in 2023 and aim for a long-term target of 1.5x or below at mid-cycle oil prices, reflecting strong financial prudence and resilience.
Exciting development opportunities loom ahead with the Tiberius ILX prospects discovery, growing interest in the Yakaar-Teranga asset, and Tortue Phase 1 approaching first gas in the third quarter of 2024. The company is assessing new rig options after safety-concerned terminations and estimates a net share of up to $160 million in potential recoverable damages from a prior subsea contractor claim, marking strong governance and emphasis on both safety and financial performance.
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Good day, everyone. Welcome to Kosmos Energy's Fourth Quarter and Full Year 2023 Conference Call. As a reminder, today's call is being recorded.
At this time, let me turn the call over to Jamie Buckland, Vice President of Investor Relations at Kosmos Energy.
Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our fourth quarter and full year 2023 earnings release. This release and the slide presentation to accompany today's call are available on the Investors page of our website.
Joining me on the call today to go through the materials are Andy Inglis, Chairman and CEO; and Neal Shah, CFO.
During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors that we note in this presentation and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website.
At this time, I will turn the call over to Andy.
Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our fourth quarter and full year results call.
I'd like to begin today's call talking about our purpose as a company, which defines our strategy, and the characteristics that made Kosmos unique. We'll then provide an update on our operational and financial progress in 2023 before looking forward to a catalyst-rich year ahead.
Starting on Slide 3. At Kosmos, our purpose is clear. We are a leading deepwater independent E&P company, focused on meeting the world's growing demand for cleaner energy. With oil production from our low-cost, lower carbon oil assets in Ghana, the U.S. Gulf of Mexico and Equatorial Guinea, we are providing the world with the energy it needs today. At the same time, we're developing cleaner sources of energy for the future to world-scale gas projects offshore Mauritania and Senegal.
And finally, as we deliver the energy the world needs, we strive to be a force for good in the countries we operate in, accelerating economic and social progress across our host nations. We do this through growing production, which leads to increased revenues and royalties for the countries.
We are also providing natural gas for domestic use in power generation, enhancing access to more affordable and more reliable electricity while also investing in important social programs in our countries of operation.
Turning to Slide 4. Kosmos has a unique investment case with a world-class portfolio, differentiated growth in the write-outs, and strong free cash flow outlook. Taking those 3 in turn. First, we have a diversified portfolio of world-class assets. This portfolio is comprised of advantaged oil assets today, characterized by production, with low cost and top quartile carbon intensity.
Alongside our all assets, we're building out our advantaged gas position, which will lower the overall intensity of the products we sell. Importantly, the portfolio has longevity, with a 2P reserve to production ratio of over 20 years, with a deep hopper of discovered resource that can further extend the reserve line.
Second, we have meaningful growth. We are targeting production rising to around 90,000 barrels of oil equivalent per day by the end of the year in line with our 50% growth target from the second half of 2022. As part of our targeted growth, gas is anticipated to increase from around 10% of our overall production to around 25% over that period.
Beyond that, we have a hopper of value [indiscernible] growth opportunities such as Tiberius, Yakaar-Teranga and Akeng Deep that support future growth, albeit at a more measured rate as we look to prioritize free cash flow and debt reduction.
And finally, we expect to see significant improvement in free cash flow as we move out of the current development phase, with CapEx expected to fall with the startup of both Winterfell and Tortue this year.
With those projects online, we forecast quarterly free cash flow of around $100 million to $150 million at mid-cycle oil prices. We plan to prioritize the use of our future free cash flow towards debt paydown until we achieve our leverage target, after which we'll consider shareholder returns.
Turning to Slide 5, which looks at the first of the 3 characteristics that made Kosmos unique, the quality of our portfolio. We have a diverse portfolio of exploration, development and production assets across 5 countries in the Atlantic Basin, balance between short cycle oil and longer-dated gas opportunities.
The chart on the top right of the slide breaks out our reserve space. Our 1P reserves of around 280 million barrels of oil equivalent, provides a 1P reserve to production ratio of around 12 years, weighted more towards oil. The quality of the portfolio is highlighted by the 1P reserve replacement ratio in 2023 of over 100%, which reflects the strong reserve additions at Jubilee as we draw forward Jubilee Southeast onstream.
On a 2P basis, we have a reserve to production ratio of over 20 years, which is slightly more to gas and oil, demonstrating the direction of travel over the coming years, with gas set to play a growing role in the outlook for the company.
The chart at the bottom right of the slide shows the importance of the diversity in the asset base with all business units playing an important role in the delivery of the company's future. The 2C resource base, which includes some contribution from the Yakaar-Teranga as well as upside in Jubilee and Winterfell gives the company a 2C reserves to production ratio of over 30 years, with additional discovered resource beyond that such as Tiberius expected to extend the production line.
Turning to Slide 6, which looks at our growth this year and beyond in more detail. The chart at the top shows the progress we're making towards our 50% production growth target. The Jubilee ramp-up is already contributing a meaningful step up following the Jubilee Southeast startup last summer. This ramp-up is planned to continue with 5 additional wells expected online at Jubilee in the first half of this year. First, oil at Winterfell is expected early next quarter, an important milestone for our Gulf of Mexico business. After that, we're looking forward to the start-up of Tortue, which is expected to take company production to above 90,000 barrels of oil equivalent per day.
On the bottom half of the slide is our opportunity set beyond 2024. We have a balance of high-quality short cycle oil opportunities such as Tiberius, and longer-dated gas and LNG opportunities like Yakaar-Teranga and Tortue Phase 2.
Turning to Slide 7. As we deliver our current phase of development projects and then pursue selected investment opportunities, we expect more measured growth and our free cash flow profile to improve significantly. With a targeted 50% increase in production by year-end 2024, as measured against the first half of 2022, we expect our free cash flow to grow materially at mid-cycle oil prices. As these projects deliver, CapEx is expected to fall sharply. With Tortue and Winterfell online, we expect annual CapEx to return to a more steady state number in 2025 and beyond of around $550 million, including maintenance and some further growth.
With growing production and falling CapEx, we're reaching an important inflection point, with quarterly free cash flow expected to be in the $100 million to $150 million range once the current phase of development is delivered.
Turning to Slide 8. Supporting our strategic and operational progress is a continued focus on our ESG activities. Supplying the energy the world needs today and meeting growing future demand must be done in a responsible way that not only provides affordable and reliable energy, but also provide sustainable growth and benefits to our host countries.
I'm proud of our progress in 2023. Starting with environment, we continue to maintain carbon neutrality for our operated Scope 1 and 2 emissions. In 2023, we announced a new term target to reduce by 25% our equity Scope 1 emissions in 2026 from a 2022 baseline, and are making good progress towards that goal.
Turning our attention to social. We aim to be a trusted partner and good corporate citizen in our host countries and here in the U.S. We continue to invest in our people and the communities we work in, supporting a just energy transition that provides greater access to power in Africa. We continue to have 100% local employment in all of our overseas offices, and we're again named the top workplace in both Houston and Dallas in 2023. We care deeply about the people who work for and with Kosmos, and this is an important part of our success as a company.
And lastly, governance. Kosmos has a very experienced and diverse Board with a wide range of backgrounds. This was further enhanced in 2023 with the addition of 3 new Board members that bring unique perspectives and new ideas that help continue to support Kosmos' growth.
In summary, ESG credentials are a core part of our strategy. This commitment was once again recognized by MSCI, one of the leading ESG rating agencies, which ranked Kosmos AAA, the highest possible rating, which puts us in the top 20% of companies in our sector for the second year. Similarly, Newsweek and Statista named Kosmos one of America's most responsible companies for the fourth consecutive year.
Our ability to effectively execute our strategy relies on our commitment and focus on operating responsibly. That commitment starts at the top with our Board of Directors, down through leadership and to all of our employees and supports our ability to deliver long-term value to all of our stakeholders.
Turning to Slide 10, a recap of our achievements in 2023. 2023 was another year of continued delivery. We continue to operate safely, with lost time injury rates and total recordable injury rates significantly below industry averages, a trend we have maintained for several years.
As discussed earlier in the materials, production is growing, with fourth quarter production of 66,000 barrels of oil equivalent per day, up 12% year-on-year.
Our development projects are progressing, with Jubilee Southeast online and ramping up, Winterfell due online shortly, and Tortue Phase 1 making good progress with startup expected later this year.
We continue to build out our future growth opportunities with the discovery of the operated Tiberius ILX prospects and by increasing our working interest in Yakaar-Teranga and assuming operatorship.
And as discussed on the previous slide, our continued ESG focus was recognized by MSCI as we maintained our AAA rating.
I'll now let Neal run through the financial results for the quarter and the year.
Thanks, Andy. Turning to Slide 11. Production for the year was in line with the updated guidance we provided last quarter, with 4Q production at the lower end of the range due to the water injection issues that Jubilee flagged earlier. These issues have now been resolved, and Andy will give an update on current operations in Ghana shortly.
OpEx for the quarter was higher than anticipated due to higher workover costs for the initial rig activity in Equatorial Guinea before the operator terminated the rig contract for safety issues, which we'll also talk about in more detail shortly.
Other costs including [indiscernible], G&A and tax all came in below guidance. helping to drive today's EPS beat versus consensus. We did record an impairment to TEN, reducing the carrying value down to 0, reflecting an anticipated reduced activity set together with well performance.
Positive 1P reserve additions at Jubilee more than offset the downward revision to TEN 1P reserves during the period. While we still see future potential value at TEN, both in oil and gas, the realization of that value is contingent on the approval of the plan of development and the activity set has to compete for capital with other opportunities we have in the Kosmos portfolio.
CapEx for the quarter was higher than expected, largely due to the timing of inventory related to the EG drilling program. Inventory arrived earlier than expected and therefore, was recognized as CapEx in the fourth quarter.
I'll now hand it back to Andy to go through the outlook for the year ahead.
Thanks, Neal. Let's turn to Slide 13. 2023 was a pivotal year in Ghana, with the start of our Jubilee Southeast with more to come in 2024. Full year guidance from the operator for Jubilee in TEN is around 116,500 barrels of oil per day gross, which equates to around 40,000 barrels of oil per day net to Kosmos, with a further 6,000 barrels of oil equivalent per day net of gas. At Jubilee, operator guidance is for 100,000 barrels of oil per day gross for the year, with production expected to grow through the year as new wells come online. So far, 1 were injector and 1 producer have been brought online in 2024. A second producer well is expected online imminently, and that should take Jubilee production back above 100,000 barrels of oil per day gross, with 2 additional wells due online thereafter.
In addition to the infill drilling program, our focus with the operator this year is our management of the production base, targeting 100% voidage replacement. We've had a good start to the year injecting record levels of water into the field and plan to continue to optimize injection support this year.
As production rises, the reduction in OpEx per barrel we saw last year should be maintained as the partnership continues to drive through efficiencies and fixed costs are spread over more barrels.
On gas, the interim gas sales agreement for Jubilee has been extended through the end of May at around $3 per MMBtu.
On TEN, operated guidance is around 16,500 barrels of oil per day gross through 2024. On the TEN plan of development, we are awaiting government approval, and therefore, not planned any major activity on the field this year.
Turning to Slide 14. In the Gulf of Mexico, 2024 is expected to be another busy year. Full year guidance is 15,500 to 17,000 barrels of oil equivalent per day net, and includes our estimate of hurricane downtime in the same half of this year.
Starting with our production optimization activities, the Odd Job subsea pump project is on track to start up mid-year, with the Kodiak workover planned around the same time. Both of these are high-return projects, which should accelerate future production.
On Winterfell, first oil from the first phase of development is expected in early 2Q, with 2 wells expected online in the second quarter, and the third expected later in the year. The project has gone well so far with the first 2 well tests in line with expectations, and we remain excited about the future potential of the greater Winterfell area.
On the Tiberius discovery, where Kosmos is operator, we have received the lab analysis of the rock and fluid samples, which supports the production potential of the development wells and is in line with analog wells in the [indiscernible]. We're now progressing a phased development solution with a subsea tieback plan to the Lucius platform 6 miles away.
Lucius is operated by Oxy, a partner in Tiberius. FID of Tiberius is expected later this year with a development time line of 18 to 24 months, similar to Winterfell.
On the map on the bottom right of the slide, in [indiscernible] sale [ 261 ], Kosmos and Oxy added the block to the west of Tiberius, and 2 blocks to the Southeast, which contain the [ Logan ] discovery. These adjacent and nearby blocks provide additional near-field upside beyond the Tiberius discovery and can support the phased development of the Greater Tiberius area.
It's an exciting time for our Gulf of Mexico business with expected near-term production increases from Winterfell and our production optimization activity to be followed by an operated Tiberius development providing the next leg of growth.
Please turn to Slide 15. In Equatorial Guinea, base production continues to be steady, with full year production guidance of approximately 8,000 barrels of oil per day net. This guidance does not contain any contribution from the planned infill drilling campaign, which is being deferred after the operator terminated the rig contract due to safety concerns. Kosmos fully supports the operator's decision and will not compromise the safety of operations.
The partnership is now evaluating alternative rig options that would allow for the infill drilling campaign to recommence later in the year, followed by the Akeng Deep infrastructure exploration well. We'll update the market with news on a replacement rig when appropriate, and have included potential CapEx assuming the resumption of the EG drilling program in the high end of our CapEx range.
Turning to Slide 16. On Tortue Phase 1, the key work streams continue to progress. The hub terminal is complete and has been handed over to operations. The floating LNG vessel has arrived on location, the mooring is now complete and connection to the hub terminal is now ongoing. Golar continues to work with the operator to advance commissioning.
Subsea work scope is progressing in line with expectations, with completion expected by the end of the second quarter.
And finally, the FPSO is currently in [indiscernible] for the planned inspection and repair of the fairleads. Following completion of this work, the vessel will then move to its location at the field early in the second quarter, and begin final hookup and commissioning activities. The FPSO remains on the critical path for first gas which is expected in the third quarter of 2024.
Elsewhere on Tortue, we expect to have a ruling on the arbitration regarding future cargo optimization around the middle of the year. In addition, BP, on behalf of the partner group, has served the previous subsea contractor with a claim notice, initiated the process under its agreement to recover the losses incurred. We estimate our net share of the potential recoverable damages to be up to $160 million.
As Tortue progresses towards first gas as we look to bring in a partner on Yakaar-Teranga, industry interest in the assets has risen. This may provide an opportunity in the future to crystallize some value from our gas portfolio and accelerate our financial resilience.
With that, I'll hand back to Neal to take you through the financial outlook.
Thanks, Andy. Turning to Slide 17. As Andy mentioned, we remain focused on enhancing the financial resilience of the company as production rises over the coming months and CapEx falls. In 2023, we repaid the Gulf of Mexico term loan, which means we have no debt maturities this year. On the RBL, represented by the dark blue blocks on the chart, the refinancing process with our bank group is doing well, with completion expected in the first half of the year. The aim is to push out maturities by approximately 3 years, which would push the final maturity to almost 2030.
On leverage, we exited 2023 at 1.9x, and have a long-term target of 1.5x or below at mid-cycle oil prices. With CapEx anticipated to be higher in the first half of this year, the cash generation we expect once production is ramped up should come back in half of 2024 and would be used for debt paydown. Leverage should then start to fall quickly towards our target.
Turning to Slide 18, our capital allocation priorities for the year. CapEx for full year 2024 is expected to be $700 million to $750 million, just over 1/3 of which is maintenance CapEx. Growth CapEx is anticipated to be around 60% to 65% of 2024 total, primarily related to completing Winterfell and Phase 1 of GTA, which does include some duplicative subsea costs incurred as a result of the switch in subsea contractors made last year. We hope to recoup this through the recovery of damages from the process mentioned earlier.
Looking beyond 2024, we expect normalized annual CapEx to be around $550 million, with around $300 million to $350 million of maintenance CapEx, and $200 million to $250 million of growth CapEx.
As CapEx falls and free cash [indiscernible], we have 3 clear priorities. First, enhance our financial resilience. As noted on the previous slide, we want to get absolute debt and leverage down sharply, and this will be the first call on free cash flow generation.
Second, we want to invest selectively in compelling opportunities. We support the continuing growth of the company, albeit at a lower rate than what we expect in 2023 and 2024.
And third, when leverage is in the right place, we will look at shareholder returns.
I'll now hand back to Andy to conclude today's presentation.
Thanks, Neal. Turning now to Slide 19.
2023 was a year of continued delivery for Kosmos. We achieved a lot, with production growing through the second half of the year as the first of our major development projects came online at Jubilee Southeast, and we remain on track to achieve our production growth target by the end of this year. We made a Tiberius discovery, and we took over operatorship of Yakaar-Teranga.
2024 is a catalyst-rich year with the Jubilee ramp-up and Winterfell first oil both expected in the coming months. Later in the year, first gas from Tortue will be a major milestone for both the company and the countries of Mauritania and Senegal.
Rising production and falling CapEx drives strong cash generation through year-end into 2025, with rapid deleveraging towards our target debt levels.
The Kosmos team is excited about the year ahead and energized to deliver on our strategic objectives.
Thank you. I'd now like to turn the call over to the operator to open the session for questions. Operator?
[Operator Instructions] Our first questions come from the line of David Round with Stifel.
I've got a couple, please. The first one, Andy, you mentioned, you made a comment there about potentially crystallizing value from the gas portfolio. Could you elaborate on what you meant by that, please? And whether it's something you're actively looking at or whether that's just in relation to potential income in on Yakaar.
The second question, we've obviously seen the pause in U.S. LNG export approvals recently. Has that changed any conversations you're having or at least impacted any of your assumptions going forward? Or is it too early?
Yes. Well, look, it [indiscernible] time for Kosmos in Mauritania and Senegal as we progress our broader agenda. As I said on my comments, Tortue first gas is now in sight. We're making real progress with PETROSEN on the concept for Yakaar-Teranga. And I'm also pleased that we're making progress with the NOCs and BP on a concept to accelerate Phase 2 ahead of the BP's previous timeline. So you put all that together and we're building a material LNG business that is coming at the right time. It's coming at a time when the long-term value of gas is being recognized and its role in the energy transition.
And as you say, the external context is changing. There is a pause in U.S. LNG. And I think that is one of the drivers why new sources of gas are being more highly valued. And today, you've seen [indiscernible] step forward with its own announcement about building a larger business.
So there's probably pluses and minuses on the supply side. But I think one thing that's clear is that the supply -- the future supply is getting very concentrated, and therefore, new sources of supply that add diversification for customers are going to be valued.
So you put all of that together, and we've had interest in anything Yakaar-Teranga, as you mentioned. As we stated in our third quarter results, we're looking to bring in a partner with the right skills and balance sheet to help us progress. And that is a priority.
But whilst it's apparent from the conversations on Yakaar-Teranga, there are parties that are interested in potentially a larger stake than just YT in our other assets in Mauritania and Senegal.
So that's something that we will consider as part of the sell-down process in Yakaar-Teranga. And why would we do that? Ultimately, it allows us to accelerate our strategic agenda. We can look forward to growth, and we've got a very rich hopper, but what's like the working interest for that and can we find alternative ways to accelerate the delivery of a more resilient balance sheet that enables shareholder returns. So we see it as being another point, another way to access and accelerate that outcome.
So it's sort of early days. The conversation is primarily around Yakaar-Teranga, where we're going to finish the pre-feed, and then start that process. But if there is an auction of a larger deal in [indiscernible], then that is something we would consider for the reasons that I laid out.
Our next questions come from the line of Neil Mehta with Goldman Sachs.
The first question is just about the free cash flow inflection. You talked about $100 million to $150 million a quarter once we get to run rate. Can you talk about what pricing set that's under? And just as you think about going into 2025, as you get to this major free cash flow inflection with the priorities for cash are in terms of where we go from here?
Let me -- Neal will take up the question and just in terms of the metrics that drive it. But I think it's an important -- '24 is an important year. We're completing the 2 major projects, Winterfell and Tortue, and that enables us then to get to that free cash flow inflection point.
And the delivery of the projects is an important point in the journey for the company. It allows us to strengthen the balance sheet, pay down the debt, and at that point, then move forward to shareholder returns. But it also enables us to continue growth. But it's important it's at a much more measured pace than we've obviously delivered over the past 2 years.
So I think as we go through '24, '25, it's about that dual agenda, the prioritization of free cash flow to enable the debt paydown, but actually, it will -- there will be growth, but it's going to be at a much slower pace.
But Neal, the fundamental metrics behind the free cash flow?
Yes. I mean that's based on our sort of current estimates, in sort of [ 70 TI, 75-ish print ].
Okay. That's helpful, Neal. And then as we think about 2025, a couple of cost structure questions. One is -- is it fair as a placeholder to be using something in the 550 type of CapEx range, recognizing you'll put some more meat on the bones here in the next couple of months?
And then -- and then I saw in the footnote that you talk about operating costs, $115 million to $130 million for Greater Tortue. Is that the right run rate CapEx once the project comes online?
So just -- sorry, I'll cover your second question first, Neil, just on the operating costs. Yes, I mean, I think it will be slightly higher because that's sort of phased over time as the development ramps up, and we get -- this year, there's a couple of moving parts in terms of the ramp-up of commissioning costs, et cetera, except it will be a little higher than that on a regular basis, but the per metric barrel metrics, per DCF metrics will look more attractive on that basis on a '25 in regular run rate going forward.
And then just -- sorry, what was your first question again, Neil?
Just Neal, what do you think of CapEx for '25 rough rule of them recognizing you're going to, you know?
Yes. And again, I think, as we said on the call, sort of [ 20 ] -- that $550 million is what we're targeting for the next several years, including '25 beyond. So I think it's a good sort of number to have penciled into your models.
And that number basically underpins sort of maintenance CapEx of about $300 million to $350 million on a long-term basis, and then growth of sort of $200 million to $250 million. So a much more measured growth, and ultimately at 550 long-term CapEx, you can sustain that free cash flow of $100 million to $150 million per quarter.
Our next questions come from the line of Matt Smith with Bank of America.
The first question on the -- on the capital allocation front. Thanks for laying out the details in the presentation. I think the inflection point is clearly an important one for Kosmos.
So I guess I just wanted to come back, is $550 million CapEx an indication of sort of a steady state? Or is it a firm commitment from Kosmos? Because I think it's clear that you're very opportunity-rich. I mean it's great to see that sort of Phase 2 of Tortue might be coming back on to the table sooner than previously anticipated, and you're talking about Yakaar-Teranga as well. I guess, I just want to understand whether, say, the $550 million is an indication or really, whether that's a commitment to shareholders that's sort of whatever the plan, whatever the work and interest, that's the sort of level of CapEx that you're going to be comfortable sort of spending over the next few years? I just want to sort of understand what -- where the priority is really on that, if that's okay?
And then the second question would be on the FPSO in terms of Tortue. I think, really confirming the news that we've heard elsewhere in terms of the delay in first gas to the third quarter now, I just wondered whether you'd be able to talk about confidence intervals that you have in terms of reaching that milestone this time around, please?
All right. Great, Matt. 2 good questions. If I sort of take the first one around capital allocation. '24, Important year, we're delivering growth through the delivery of Jubilee Southeast, continuing growth Winterfell, and Tortue online. And as you look beyond that, you're right, we do have a rich hopper. And the important point, I think, for shareholders is we're really selective about the projects that we do. And we have choices around the timing, the phasing, and we have choices, as I indicated, around David's question, around the level of participation in those projects. So it's a positive that we have the hopper. It's a positive that we have greater control through operatorship. And we want to work within a framework where we can deliver that long-term growth. As I said in my remarks, it will be a much more measured pace than we've experienced over the last 2 years. But the Kosmos portfolio does have longevity, and therefore, it does have a terminal value. But we have to do that while delivering the free cash flow that shareholders want.
Ultimately, the first priority for that will be debt paydown. And then once we reach the leverage targets, it will be around shareholder returns. So the framework we're using going forward is that $550 million. And we're confident that we can sustain the base production, which is a [indiscernible] an important element, both in Ghana, Gulf of Mexico and Equatorial Guinea in that $300 million to $350 million, which enables that $200 million to $250 million to pursue those electric growth projects. So that's the frame going forward and therefore, the free cash flow targets that we've talked about.
On Tortue. You asked a specific question about the FPSO. Maybe if I just sort of stand back because it is going to be a question that's going to come up, where are you with the project? A lot has been achieved in the quarter. Prior to the quarter, we're obviously all drilling done, up terminal finished. But in the quarter, the [indiscernible] vessel has arrived at the hub terminal, it's [indiscernible], and it's now being connected. That's the connection for the gas in and then for the connection to the offloading. So that work is progressing well.
On the subsea, real progress. I think all seats put out a notice to the market that they've completed the installation of the deepwater pipelines, the 10-inch and the 16-inch. In fact, all of that work scope is now completed, which is a significant milestone. What remains in the subsea now is the installation of the jumpers, that's the [indiscernible] work scope, and that work is targeted to be finished by the end of the second quarter.
On the FPSO itself, there is work being done in Tenaris, at a shipyard in Tenaris to prepare the inspect and repair the fair leads. And that's essentially the mooring device for the vessel when it's on location. Visited the hub myself about a month ago. That work is going well. We've inspected the fairleads now. So we know the level of repair, relatively modest. And so the FPSO target to leave beginning of next quarter, be on location, and then we start the mooring and hook-up process there. All of that will enable first gas in the third quarter, which then leads to LNG in the fourth quarter.
So Matt, the critical path as you go through all that, given the progress that's been made on the subsea, remains on the FPSO. The operator's is obviously strongly focused on that. But I think it is now -- as you bring a large project like this to completion, each milestone you achieve is an important milestone because it derisks the forward program. I think we achieved quite a lot in the last 3 months and look forward to those milestones be not tough as we go forward through the year.
Our next questions come from the line of Charles Meade with Johnson Rice.
Andy, I wonder if you could -- this is a question about EG. I believe I heard in your prepared comments that the upper -- or the upper end of your guidance assumes that you do get a rig back in there and you get some work done in '24. I wonder if you could speak to what the chances of that are? And perhaps if that's -- if you have some -- if there's any kind of special capability of the rig that you need to procure to do that work or whether it's more of a [ vanilla ] thing that has a higher probability of happening.
Yes. I think it's a little early to give you a lot of insight on that. We're clearly just going out to the market, as we speak, to look out available rigs.
In terms of the spec of the rig, it's not anything out with what a [ fixed gen ] can -- [ fixed gen ] can do today. So the only issue is it has to be sort of completion ready because we're obviously on the infill wells we're drilling and completing. You can deepwell it, it's purely an exploration well.
So I think a little early, Charles, to say exactly how that process is going to shake out. But I think we just wanted to make sure in our guidance, we were sort of clear and have covered the spectrum. So we haven't included any contribution from the infill program in our production guidance, but we have included a potential outcome of the rig being included in our activity set in 2024.
So I think that's an appropriate way to look at the situation today. And obviously, we'll update you as we make progress in the investigations with the market in terms of available rigs.
Got it. And then the follow-up question, along the same line, but in Ghana at TEN, can you give us a sense of -- so you've submitted a new proposed work scope to the government. Can you give us a sense of the timeline for whether when that might be approved and then acted upon? And order of magnitude, what it might -- what it might do to production at that field or that -- those fields?
Yes. Look, good question, Charles. I think the write-down on TEN was fundamentally around sort of a couple of issues. The first was the well performance of recent wells have been drilled. They haven't delivered quite what we'd hoped. And then confidence around the future work program, which would require approval from the government in terms of the plan of development. So as of today, we haven't included any significant future work scope in TEN. And equally well, if there was a breakthrough on the PoD, that capital expenditure would have to compete for capital within the framework that we set out in our prepared comments.
So I'm comfortable with where we are today. Predicting when the PoD could be approved is tough. There's clearly -- we're going to [indiscernible] an election here in Ghana. And I think that makes life a little tougher to be confident about when and if things might happen.
But I think the most important thing from a Kosmos perspective is actually, as we've commented earlier, very rich hopper set. We've actually got a very rich set of opportunities in the base between Equatorial Guinea, Gulf of Mexico and actually Ghana in Jubilee. We actually -- the reserve replacement ratio of 104% this year was driven by the performance of Jubilee more than offsetting the downside in TEN. So there is a strong opportunity set there in Jubilee.
Jubilee is a field, a big field that's going to get bigger. And therefore, I can see us prioritizing capital there. So TEN is sort of waiting, and I'm fine with that. I think for us, it's about ensuring that we're putting our base capital to our best opportunities. And certainly, Jubilee would run very highly.
Our next questions come from the line of Bob Brackett with Bernstein Research.
Returning back to the GTA FPSO and the issue around repair of fairleads. Has that FPSO been turned over from the contractor to the operator? Is there some sort of recourse in the same way as, say, [ turret ], issues Jubilee or even the pipelay vessel issues, will you go back to that contractor and say you didn't deliver the FPSO on time and on scope?
Yes. The detailed answer to your question is, it has not been turned over, okay? So I think which ultimately answers your subsequent questions, yes?
Fair. And an easy follow-up. Contrast the challenges around GTA with sort of the process of getting Winterfell up and online in the Gulf of Mexico and talk to your relative conviction there.
Yes, again, great question, Bob. But these reflects clearly a different scale, and you're doing something which is sort of establishing a first phase of a large project with GTA. It is a greenfield project. It's got wells. It's got a hub terminal, it's got an LNG facility and it's got an FPSO. So multiple as it were segments of the project. Winterfell, much more simple sort of tie back. It's in a basin that has the supply base and therefore access to equipment easier. And it's well subsea tied back to an existing facility.
So just an ultimate different order of magnitude. And I think it's a great question because it sort of brings you back to the fundamentals of the company. We're investing in short-cycle, fast payback, ILX type opportunities on the oil side, that deliver a very different economic outturn and actually a risk profile, but you create the longevity for the business in terms of building out a gas business.
Now, we are having established Tortue Phase 1, and our Phase 2 with the brownfield, it comes with a very different execution risk.
So it's hard to get started. And I think we clearly struggled with Tortue to get it there. But with the end in sight, the next phase is -- Tortue isn't got a very different risk profile.
So yes, relative confidence in which we'll study up, yes, it will be at the beginning of the quarter, flowback, both of the wells, we're confident that, that was the third one to follow. And actually, the interesting thing about Winterfell is not just that first phase of development in subsequent phases. I think it will be ultimately be a much larger resource pool.
So it's got not only a short cycle fund end to it, but it has that development opportunity to follow.
Our next questions come from the line of Subhasish Chandra with Benchmark Company.
Can you reiterate -- I might have missed it, Tortue volumes, what, if any, are included in the '24 guide?
Neal, do you want to cover that?
Yes. And so yes, we've got a -- basically, we're assuming it's in line with the detailed guidance that was in the presentation, which is there's some entitlement volumes in 3Q and then close to the full rate in the 4Q, which works out to, call it, 2,000 to 3,000 barrels a day of BOEs net with the forecast.
So there's not in the full year average. But again, it gets close to full rate within the fourth quarter.
Got it. I was just curious, so should we -- is that OpEx included in the guide? I was just confused on the footnote versus the guide for the year?
Yes. So the OpEx, so it's not included in the per barrel metric. So the per barrel is basically on the base business with the OpEx just for the [ MS ] portion.
The reason we've done that is because in the -- as you go from the project to the operation, there's quite a large commission element to that. So that the absolute number includes that transition, the sort of the -- some of the commissioning costs and then the operating costs associated with the field as it comes online.
Okay. Got it. And finally, I guess, just apples-to-apples, for CapEx last year versus the '24 guide, how much cap interest is included?
It's about $25 million a quarter, Subhasish. So we'd sort of -- if we look at the guidance, sort of we're only assuming it happens in the first half of this year and then goes away in the second half of the year. So interest, hence the $25 million to sort of versus the full year $150 million guide.
All right. And so last year, was that $100 million of cap interest?
Exactly, it's about the same, yes. annualized.
Our next questions come from the line of Matt Cooper with Peel Hunt.
So just firstly, I wonder if you could comment on the current Jubilee production rate and other 2 wells brought online in 1Q performing per expectations?
Yes, Matt, sort of step back on Jubilee, I think the key points to note are performance in the year will be dependent on 2 issues. The first is maintenance of the base, which is about voidage replacement. We struggled to do that, really in the third quarter of last year, but really from about sort of November time onwards, we've been injecting water at record levels, and they've been at 100% voidage replacement, probably in the prior 3 months of that, it was as low as 40% when the water injection was down. So I feel good about the way that the base has been -- has been performing as we enter the year and actually have sort of been through the first 2 months.
Then you're sort of adding additional well start. We've added 1 water injector and 1 producer. I think literally, probably today, we're adding the -- second producer will start up. So once that second producer's online, we'll be up at around sort of the 100,000 barrel a day back up, above 100,000 -- we're around 100,000. So that's an important milestone for us.
Then you've got 2 more wells to follow. So you've got an additional producer and an additional injector. So as we look to the year and the performance in the year, I think the wells have delivered. We're actually -- when you look at the overall program, the operators would probably deliver the wells 6 months ahead of time. which is why we're going to take the break and slightly earlier than we'd anticipated to allow us to rebuild that well still. But the fundamental thing to sort of we're focusing on is the water injection and therefore the voidage replacement that sustains the pace.
And just to confirm. So those first 2 wells, I think you said they went in early 1Q. The injection and the production that you're seeing from those is in line with expectations at the moment?
Yes, it's in line with expectations. And you can -- yes, they're in line with expectations. The base is probably a little bit better than we saw but fundamentally in line with expectations.
So then with the second well, second part is starting up now. The objective was to be above that 100,000 barrels a day and that's what we anticipate to be.
So yes, it's -- the start of the year has been solid, yes. And the key thing, and I keep bashing on about it, but getting the base properly supported is the key thing that we need to focus on.
That's helpful. And just finally, I just wanted to ask on EG. I wondered how much strip in the infill drilling out reduced 2024 production? Just kind of thinking about how much upside there could be there if you do procure a rig this year? And then kind of the flip side, about how much risk is there that the new rig will be at a higher cost?
Yes. So basically -- Neal will come back to the production numbers. Yes, the [indiscernible] contract was probably done at a more advantageous time in the market. So yes, I think we'll probably see a slightly higher rig rate. But again, with all -- I know it tends to be a headline number you look at, but you've got to remember that it's a relative, probably 1/3 of the cost of the overall spread rate. So even small, an increment there gets diluted on that basis. And then you've got to figure out how you deliver low NPT. So ultimately, the well costs, the absolute well costs then go up.
So yes, we will see a slightly higher rig cost, but it's not something that is ultimately going to interfere with the capital guidance or with the economics of the wells.
Yes. And then just on the production, yes, the guide we have for EG is around 8,000 barrels a day net for the year, if we sort of drill as planned, we were closer to sort of [ 11 ]. So it's about a 3 million barrel a day impact we can get. Again, I think some of that -- there is some upside if we do end up drilling this year, but that's not included in the base guidance.
Our next questions come from the line of Mark Wilson with Jefferies.
Very clear on the catalyst for this year and the CapEx once you get through Tortue.
First of all, just given an idea of the physical work within that $550 million a year and the maintenance split, are you expecting to be -- that we would have, for instance, an ILX well in the Gulf of Mexico from each year from 2025, given the success you've seen with Winterfell and Tiberius as one part of that CapEx? And also, are you assuming a return of a rig to Jubilee in 2025 and onwards? That's the first question.
Yes, good, good questions, Mark. So if you sort of conceptual [indiscernible], yes, if you look at the base and the maintenance of the base, we're looking at 3 quarters of a rig year in Jubilee. Now clearly, as it were, there will be sort of rollover. So yes, the rig would return in '25, would maybe drilling '26, and then a break and so on, yes. If you sort of figure it out that there's probably 3 quarters of a rig year, that makes sense, whereas actually this year, we'll have sort of half of a rig year in Ghana.
So yes, it does include that. It includes a similar sort of drilling program in Equatorial Guinea going forward, sort of, yes.
Yes, but once every 18 months.
About once every 18 months and maybe a package of sort of 3 wells, yes. Those are the primary base pieces. Then in the Gulf of Mexico, yes, probably at a sort of 30% working interest, sort of 1x -- ILX well per year. We sort of run the $20 million or $30 million. That would be in the growth [indiscernible].
That would be in that $200 million to $250 million of growth versus the $300 million to $350 million in maintenance, which really cover the Jubilee EG and occasionally some [ GoM ] maintenance drilling.
Okay. Got it. No, that's very helpful. And then over to Tortue. I just want to confirm all the physical things for the startup have been discussed. Are there any commercial arrangements to be finalized before those first LNG? And maybe tie into that, what are the outcomes or any kind of impact from that? You said that the contractual discussion should -- or debate should be resolved in the middle of the year? Does that -- what should we look at around that?
Yes. Yes. So cargo divisions, the timing of the arbitration is around midyear, decision will be around midyear. The arbitration itself will be held in the second quarter. And typically, you get a ruling sort of a couple of months afterwards, so probably around midyear. Yes. And I don't -- in terms of -- so the -- ultimately, the contractual arrangements aren't going to slow down the completion of the project, actually executing the physical work is the thing that is driving the timeline.
And there was a question on the call, someone asked about Phase 2 potentially coming back into view. Is that -- is there any update worth giving on Tortue Phase 2 versus the other projects in Senegal or a longer-term timeline?
No. As we've said in the past, Phase 1 is about building out the infrastructure. I think what I would say is there's a real push from the NOCs to find the right next concept for Phase 2 that fully utilizes the infrastructure that's been laid in, and that is a new conversation that's occurring now with the NOCs.
So partly, on back of the work we're doing on the Yakaar-Teranga, both SMH and PETROSEN are interested in seeing how we can accelerate the timeline for Phase 2, it's clearly in the country's interest and actually is the interest of the partnership ahead of the day the BP had previously guided. So that's the conversation that's going on there, Mark.
Thank you. Since there are no further questions at this time, I want to bring the call to a close. Thanks to everyone joining today. You may disconnect your lines at this time, and thank you for your participation.