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Kosmos Energy Ltd. (NYSE:KOG)

Bank of America Merrill Lynch Global Energy Conference Call

November 13, 2012 2:50 pm ET

Executives

W. Greg Dunlevy – Executive Vice President

Unidentified Analyst

A few folks from here are getting coffee. So we are just going to go ahead and make a start to stay right on track. Kosmos is known to everybody, I’m sure. I’m sure you had wait or thought very positively by Ghana earlier today, and of course this is going to be our centerpiece of this story, but there is a lot more to that. And he would tell us about his Company, CFO, Greg Dunlevy. Greg, thanks for being here.

W. Greg Dunlevy

Thank you, Doug. Thank you all for being here. Not quite the full house we had a few moments ago for Range, but nonetheless appreciate you coming. We’re a smaller company, I guess. Maybe that makes up for, by a bit, not much.

Joining me is Brad Whitmarsh, Head of our Investor Relations program and some of you may know Brad. He is a lot more accessible when you have questions on a day-to-day basis than I am.

There are two fundamental missions we have when I get the system down right at Kosmos. We are focused on unlocking petroleum systems and scale through organic based exploration success, once unlocking them to pursue those through appraisal, predevelopment and more importantly a follow-on exploration. I think you’ve seen the success of our team, both managerial and technical team and what we’ve done in Ghana both with the giant Jubilee field and eight or so other discoveries we have made there in the few years we have been there.

That is the core of what we do. We are, in many ways, an asymmetric risk opportunity and that we have de-risked, high value, near-term growth through expanding production in Ghana, particularly at Jubilee, but also at our TEN development, which I’ll talk to a bit more about later, which was submitted for government approval last week.

A bit longer-term, we have other discoveries in Ghana that will be brought into the developed trained and we have relatively near-term ongoing exploration in Ghana with two wells to be drilled later this year and our first well in Cameroon operated well in Cameroon to be drilled end by this December. A little bit long-term in that we built a very high potential multi-billion barrel play opening exploration program on both sides of the Atlantic margin and I’ll show you a bit about that portfolio in a few minutes.

Lastly, we are well funded, well-financed. The cash flow from our Ghana operations are sufficient to fund not only all of our growth in production and development, but also the high impact exploration program that we have built over the last two years or we built I should say over the last two years. When we formed the company almost a decade ago, our vision was quite simple. We were looking for exploration opportunity of scale, areas we could find multi-billion barrel potential, but areas not only we have big barrels, but big value per barrel. And so you look at the contracts we have in the countries we’ve gone into one of the critical elements is finding a barrel actually finds significant shareholder value not just more barrels.

Driven by our focused and disciplined exploration and business strategy from a business perspective, we focus on front-tier and emerging areas, things that are not quite on the beaten path if you will that many of our peers follow. We are [fematic] and that we have a relatively concentrated portfolio based on a very limited number of areas in which we have technical leadership or knowledge leadership on loquacious play type and discovery in Ghana was when we opened up, when we entered Ghana in 2004 it’s been quite successful for us and has been copied by many of others.

At a geographic focus, we tend to be a limited number of areas on either side of the Atlantic margin as you can see on this slide here. We have controlling positions and these are definitely very large positions on both the West Africa side and the Northeast South American side of that margin.

And we diversified in the sense that we have not only production, which is very meaningful and very high margin, lots of pipeline and development opportunities as well as a very robust exploration program, you’ll hear more about. The foundation of the company and the platform for our growth and the funding of our business drive to growth elsewhere is Ghana specifically the Tano Basin in western portion of Ghana. We open the Upper Cretaceous play there.

In 2004 when we came into Ghana we worked at hard did our 3D seismic define the well location and brought in partners in 2006 and drill that well in 2007. Today that field the Jubilee field as its call is on its way to filling up the FPSO which has a design production capacity about approximately 120,000 barrels a day.

Additionally as we ramp that up we are working on the TEN development, which is an area on the western part of the block over here which will be the side of our next FPSO base development, these are oil based developments at this point. That’s as I mention it was submitted to the government for its approval on last week.

Ongoing, we have other fields in the area over here that we will tie into and add into the development pipeline as capacity becomes available or can be made to be available. Talking a bit, sorry, a little bit about Jubilee is one of the largest discoveries in the West Africa in the past decade or so.

It showed a (inaudible) earlier exploration leadership, but the pace which was developed from first discovery to first oil in 42 months shows, I think the sense of our development capability, while most people know Tullow was the unit operator and responsible for in country and drilling activities Kosmos was the technical operator for development and led the design, construction and installation of all the subsea architecture flow lines, gathering systems and the FPSO. We have nearly 15 million barrels produced to-date, the reservoir is performing excellently and then we have very high uptime on our FPSO.

We continue to grow production into the facility following a little bit of early late last year early this year so near-term production delay associated with scale, which I’ll talk about that in a minute. But we’ve now figured the solution and we are on the way to building very strong cash flows and production in Ghana.

Just give you a sense of work that’s been done to identify the problem I mentioned the scale and to solve it. We now see production ramping up and should be early next year the targeted level the production we want to see in Ghana. We define the problem as a water-related calcium carbonate scale in a very near well bore, well we’ve now designed a very small volume acid treatment when you tweak the formula if you will and we believe we have the perfect formula to address this should it occur, when it occurs in the future, we’ve treated five of nine wells, perfected the formula over those five and we’ll treat the remaining four wells right now planned for two this year and two next year.

We also have Phase 1a underway. We’ve drilled five out of the nine wells in that phase they are hocked up in the subsea architecture and now waiting completion we expect the first o those to be completed this month Second one to be completed near year, and then the rest to be done next year. So we should except the year the highest production level ever and reach plateau capacity of the FPSO as I mentioned in the early part of 2013.

The second major oil tier project is the 10 project we’re building on our success in Jubilee, the lessons learned and we’re designing this as a phase development. It’s an oil-focused development, though maybe a year ago (inaudible) moved up possibly, a gas condensate test stream, but we have focused down to just the oil phase of the development. And incorporated all those earnings we’ve learned around the drilling and well completions on Jubilee.

We have several exploration wells in the area. We drilled Wawa earlier this year. We’re drilling Okure now and we’ll drill deepwater Sapele later this year. These offer the opportunity to be tieback into existing FPSO or the contemplated FPSO for 2010. We did additional appraisal in Akasa earlier this year and it confirmed deliverabilities from those wells within the range of 10,000 barrels a day of oil or better.

So we are finalizing our assessment of those that area, which is over here as part of the longer-term strategy to tie them back and develop them into the Jubilee FPSO. Talk a little bit about expanding our exploration portfolio, when we built our first portfolio about five, six years ago, it was very successful and resulted in the Jubilee discovery.

The acreage we acquired in Ghana is that little yellow area there, and what we’ve done is we’ve built an ongoing portfolio of exploration opportunities. We’ve upped our scale. We’ve increased the size of the acreage, such that, if successful something like this Morocco acreage in the north, this Morocco acreage in the south, has a much bigger impact in driver of value then Ghana was, not that Ghana was. It is a significant driver. We’ve tripled the acreage into contract to the last 18 months; have over 24 million acres on a gross basis.

As you can see on this map, putting the Gulf of Mexico, it represents a massive acreage position. We continue to be very disciplined and focused in applying the exploration methodologies that we use in adding new acreage. So you should expect to see us add acreage. We will as it’s our normal approach from a business perspective format pre-drill, so you should expect us to bring partners in.

We generally target a 40% to 50% hold level. We are little lower than that in Ghana because we ended up with two partners instead of one. And you should expect us to follow the type of themes and geographies that we have followed before. We are a Atlantic margin player on both sides of the Atlantic margin.

We have the strong buyers towards the late Cretaceous but there are fewer other (inaudible) as we bring acreage and yield you’ll see what we are doing. The next well to be drilled is in Cameroon, outside of Ghana, I should say is in Cameroon. This is the most mature the exploration prospects in our portfolio. This is actually a deepwater play, it is today located on land it’s a extension of a deepwater system at Tertiary Tarhazoute system that has resulted in a big gas composite field here. And a little further down a big oil field of the coast of Equator Guinea call this is a pure field.

We’ll spot that well later this year as I mentioned in December this is going to be a Heli-rig operation with low environmental footprint and low environmental impact. It’s in part of the national forest of Cameroon. We expect it to be a 45 to 60 day well there about. There are a lot of look alike prospects along trend this is a 2D seismic line here that shows the prospect and we have a number of look alike along there that probably puts if its successful this in 0.5 billion barrel range currently we own all of this but we have had a active format program underway that is still ongoing. We may have a partner, we may not but in any case we will be drilling this well starting next month.

Talk about some of the other new opportunities we put in the portfolio offshore Morocco we built two very large acreage positions in the Northern part of the country, here on the Agadir Basin and the Southern part on the Aaiun Basin, a 14 million acres total. This is a classic example of our exploration strategy, our business commercial strategy that’s best first move advantage we got in here before the neighborhood became popular. It has become very popular of recent that we’ve had a number of book purchase about (inaudible) all the companies are started to moving to Morocco, in a significant way. But we believe we’ve acquired the principal acreage in the primaries full exploration in the country.

We are able to get a very large acreage positions. We’re able to get very good fiscal terms again when you are first moving the fiscal terms are usually in advantage and we entered with relatively low upfront costs unlike some places where you here in a multi $100 million bonuses all we had to do is commit the shoot of 3D seismic and we actually shot drastic more seismically was recorded with the contract having wrapped up just under 4,000 square foot survey.

In the North here, a few months ago and we did a 2,500 square kilometer survey, a couple of years ago. We are reprocessing the data from the southern survey and to finalize prospect selection and we are have a first cube back, but we’re the first processing stage on the Northern acreage. Our goal is to be cheat up for multi-well drilling program, as early as like 2013. This is a potential game changer for us and for the country and for the industry. The scale of the acreage if it works has a massive a potential impact to shareholder value for us.

And the North, the Agadir Basin that’s about half of the 14 million acres I mentioned. This is an interesting acreage in it. It takes the best of our upper cretaceous knowledge and learnings from gamma. In our experience when it combines us with the last remaining undrilled sub-cell play in Africa, and Atlantic merger echo familiar with the Gulf of Mexico and Brazil and most recently Angola.

There’s a significant subsalt play in Morocco as well that is marginally been unrecognized until probably the last six, eight months and we have seen a lot of peer companies move into it in a fierily aggressive way. There is a proven source [block in the] area. We can see quite substantial trapping on the seismic event so far. I guess the most unknown is to this point the reservoir, which we hope to be testing, as I said, in little over a year at the earliest. The 3D is looking good on the southern block and the past track, even north looks very encouraging with a number of prospects showing up clearly on it.

Moving across Atlantic to Suriname, we entered Suriname, basically following Late Cretaceous play across the Atlantic margin. In many ways this has a lot to do with Ghana. It’s not exactly a perfect match-up coast-to-coast, but the Upper Cretaceous play is as valuable here as viable was in Ghana. Force Majeure, we got into Force Majeure as well in French Guinea, Ghana that has firmed up the prospect in this side of the Atlantic. So 2.8 million acre play, which is quite large, you saw that compared to Ghana earlier.

Importantly there is 1 billion barrel oil field right here. That’s all in place updip from where we are and we are very confident the source kitchen is out here. So we believe that [admirably] the source of oil has been proven here. We know there’s reservoir rock up here. There have been a couple of wells drilled. It should give us a great deal of technical insight, but so far have not been commercially viable. We think they were drilled too fall uptip and we’ve picked up this acreage position based upon that.

Just finished up the 3,800 square kilometer 3D survey. We are waiting the fast-track cube on that and we will be processing that for other attributes during much of 2013. We target this area for first drilling in 2014.

I’m going to wrap-up here, if any questions we might have. We have a very clear and focused strategy at Kosmos. From when we set this company up, we’ve been doing what we’ve been doing as a team for 20 years and the most recent inclination at Kosmos. We will continue to grow our Ghana business. We will continue to build billion barrel potential new basin opening exploration portfolio that can drive substantial shareholder value creation for the company.

The cash flow coming out of the high margin Jubilee Field is funding all of our growth in Ghana. It’s funding the next phase and will fund future phases of development, combined with strong liquidity due hedged, derisked our downside oil prices were going to extremely well funded to fund our exploration program for the long-term and we are working quickly to move the 10 development to at a proved stage, and sanction stage. So we can build that next level of production into the company’s stable if you will.

We have a number of exploration prospects this year in Ghana, and then Cameroon and then we will later next year start the process to open up on a regular annual basis multiple play of being exploration wells targeting two to three per year, each with billion barrel potential.

We continue to expand an exploration portfolio, looking for the next Ghana and the next Ghana, if you will and making sure we have a robust inventory of high quality, inventory that needs the characteristics and follows the strategy that we’ve been employing as a team as I’ve said almost two decades.

With that I’m going to close on my formal remarks, open the floor to questions from Doug or others. And thank you for your time as well.

Question-and-Answer Session

Unidentified Analyst

Thanks Greg I appreciate the comments. Again if anybody has got any questions you have to make appointment at the back of the room. I have a list here, so if…

W. Greg Dunlevy

So, how are we going to end up that Doug?

Unidentified Analyst

Let me just get some clarity on Ghana the FPSO capacity from Phase I and Phase Ia will be filled by when in your view?

W. Greg Dunlevy

We’re not being overly specific we will pay a pick production for the FPSO in early 2013. We mentioned in our third quarter conference call that we’ve been currently to earn 85,000 barrels a day. We have two new Phase Ia well is coming on one this month, one later in the end of the year and we have two more asset jobs. Those should add extremely a meaningful production to the 85.000 they currently have.

Unidentified Analyst

But there hasn’t been any resource degradation?

W. Greg Dunlevy

No, now that the reservoirs are performing brilliantly we had acid scale within 18 to 24 inches of the well bore and about 100 barrels of the acid has done the trick it cleans them out. We’ve had wells come back produce more than initial production rate after the acid jump.

Unidentified Analyst

So where do you expect to pluck hole to be?

W. Greg Dunlevy

Well, that’s two question what is the effective design capacity of the FPSO. We’ve already started looking at options that might allow us to expand the capacity and debottleneck the FPSO. But to get too far in that we actually need to fill it up and see where the bottlenecks are. We’ve done hypothetical with fuel conceptual work in engineering studies, but ultimately we need to see where they are once we’ve defined where those bottlenecks are, our plan will be to expand fixed and prudent and generating the kind of returns we do want to return the capacity of that.

Unidentified Analyst

But reasonable plateau life or the field that those kind of levels.

W. Greg Dunlevy

Yeah, we see a very long plateau six to eight years if we didn’t debottleneck on this facility, and then we haven’t even considered bringing the MTA fields in which currently are conceptualized as add-on phases to Jubilee those are the three fields to be immediate east of the jubilee facility and the most probable development option for them from the return perspectives to bring them back in as tie ends to the FPSO.

Unidentified Analyst

You just basically answer my second question, which was is there a potential about 35% what there is no.

W. Greg Dunlevy

I think it’s an extremely probability. We haven’t ruled it out, but I think we’ve indicated it. Our belief is the most likely outcome is that these will be tied back into Jubilee.

Unidentified Analyst

Again another one to keep moving with questions if there’s any on the floor. One right here.

Unidentified Analyst

Can you tell us a little bit more about Cameroon because quite recently we have seen a deal done by I think with Bowleven signing a deal with Petrofac sourcing out their I guess we call it a lack of cash to develop that field and kind of progressing that fertilizer plant on shore Cameroon. Can you maybe give us a bit of color on any involvement you might have with any of the existing assets so far has is proven to be quite gassy if you were to find gas hypothetically speaking would you combine and then potentially sell it to the fertilizer and just how do you see the evolution of Cameroon as a substantial hydrocarbon base.

W. Greg Dunlevy

Yeah, if you look at Cameroon we get up in this area, there is a fair amount of oil. This is old shell and total acreage which I believe now all owned by Premcor they sold out this has been around for 30, 40 years. Cameroon just of high gas risk which you can see this is Bowleven I think they are in this general area fairly here I think one of these is Bowleven I think the rest this is noble. Noble seem to find more oil than gas where simply the other way around Bowleven to find more gas and very little oil its one of the big risks you have when every operator in Cameroon gas risk is the highest risk there is a really little market for gas in Cameroon. They are trying to build enough scale to get some commercial LNG operation.

They aren’t there yet we’re very focused on oil and following this oil trend in from the rest, but we’ve recognized gas is the biggest risk that we have here, this is roughly a one in six risk prospect, one-in five and a half risk prospect in our thinking, but at 150 million barrels onshore, it has a very significant economic impact on the bottom line and successful.

So up, this is part of build up and is I don't think we'll be doing anything we build up in it vice versa. There is probably a fair amount of gas here on the Cameroon side that means to find a home. If you did anything would be actually combine it with them.

Unidentified Analyst

Question, following upon from Cameroon you’ve stated that as pretends to filing out you prefer a 40% to 50% hold level, but you also stated you’d drill Cameroon and with or without a partner? Can you kind of elaborate on that?

W. Greg Dunlevy

Yeah, our target hold level across the portfolio is 40% to 45%. We realized there will be some higher some lower, sometimes the formals will happen in time, sometimes it won't. I have told the story really up in the one-on-one room did, we. Prior company trade we found out a well that has been drilling for a week. It was three days from getting into the target zone.

So sometimes formals will happen as early you’d like in the process. And sometimes they don’t happen at all. So we are comfortable with the well costs you have this is not deepwater, this is not an AS type $125 million plus well, this is an onshore rig which is more like $40 million well.

So that cost us, given our size and our liquidity position is not a risk but our general philosophy is we found out everything if we can, we have the opportunity, because we like the technical push and shove and balance the country via partner. So, hey we think differently here is what we are thinking, here is what we are doing. We like partners, if they can add in country or relevant experience, that’s always a plus you would like to have some technical skill sets, some operating skill set benefit not just dollars and [fake] dollars. You can find dollars in a lot of places.

Unidentified Analyst

(inaudible)

W. Greg Dunlevy

Although we’ve had a pretty robust attendance in the data room, the question is, do we get the offer we’re willing to accept?

Unidentified Analyst

Just a couple of questions about some of these other prospects, Morocco and Suriname, little (inaudible) is talking about. Can you talk about water depths, and assuming you have success there, rigs for development programs, those kinds of things, an outline?

W. Greg Dunlevy

Regard to water depths vary, two of the blocks up here are on 1,000 meter or less range for most of the acreage. One of them is more 1,500 plus. This is a mix, but around 1,000 to 1,600 meters, so not much different than Ghana. Suriname has been deeper in 2,000 meters, but have some shallow and some deeper than that. Mauritania has some, in the 1,500, actually have some closer to 1,000 meters up to almost 3,000 meters and there’s one of the blocks that’s further outboard. Bring the map. We’ll have the Mauritania slide here, just below. That part of the Mauritania is the deepest part, but how more prospect this part is probably at the shallower end.

In terms of rate capacities that is a challenge and it’s not just getting rigs. It’s getting good rigs. They have a lot, as you probably heard something of the service companies talk about the lot of old one, entire rigs out there and for this water depths and the current things we want to do, we want to have good rigs, we want good (inaudible) we want people with good safety protocols, good training. We spent a lot of time. We’re the only U.S. oil and gas producers as group on rig safety. We’re one of the few small independent on the group, mainly its majors.

Fundamentally, it’s part of our license to operate. You have to be able to drill safely, both environmentally health-wise as well as culturally-wise in these countries and you can’t get super major partners unless they are comfortable with you as an operator.

We’re the operator in Suriname and shareholder is in the process of forming and submit the final government approval with us as the operator in trouble with the first well and that’s not something you’re going to see a lot of company to be able to do unless they spend a great deal of time developing their in-house technical capabilities, their safety capabilities, their barrier policies, their well-controlled policies in a comprehensive HSE Management System.

We also have security to that given that there are parts of the world that are a little less secure than at the and at the (inaudible) in Pennsylvania, but we are very familiar with those parts of the world. So for us that’s like Pennsylvania, but that maybe a longer answer than you wanted, but it’s a couple of different things.

But the biggest challenge will be getting those good rigs when you need them and that’s why I think we’re looking at rig clubs. We also can – the one factor performing can be if you bring the right rig. That could make a difference between a form in partner A, and form in partner B. In fact if you go back to Ghana, Anadarko farmed in one of the critical factors in Anadarko farming is deepwater rig. And if you remember how tight the rig market was in 2005, 2006, much tighter than it was today, but that was a deciding factor in their favor and why they are in Ghana and not as opposed to North.

Unidentified Analyst

Then I can take the final question, Greg. Little bit of a long-tier one, I guess. So we’ve talked (inaudible) about free floor and where the share price is relative to the IPO and so on. I mean clearly you have an extraordinary valuable set of assets, especially in Ghana, but to what extend the IPO is what three years ago now or something like…

W. Greg Dunlevy

18 months.

Unidentified Analyst

Just like….

W. Greg Dunlevy

Just today.

Unidentified Analyst

And that seems longer. Okay, so basically, the IPO put a price on the company, but to what extent is management on your funding shareholders happy with the outcome of that cost asset and how do you see things moving forward?

W. Greg Dunlevy

Well, there a couple of ways of looking at that, I mean, we are not exactly short-term thinkers. I mean, we are not worried about what next month looks like, we’re building an exploration program that we’re going to put a fair amount of investment open multiple multi billion barrel fairways. That’s the kind of returns that we generated with the first portfolio Kosmos the kind of returns. Our investors that we believe want its definitely the kind of return margins, (inaudible) Blackstone and other two, largest investors one they see the upside they know our repetitions in that what we’ve done they’ve seen as do it onetime couple of years ago. So they are very illiquid shareholders with the kind of size they have on a combined basis they owned approximately 70% of the company.

The rest is the management employees and the IPO. In terms of the IPO itself I mean it raised circa $600 million for us which is really underpinned our financial strength and allowed us to have illiquidity that we need to move forward, what we have most of that money still on our balance sheet, we paid a little debt down since we did the deal but its there in the debt capacity still there, so we are keyed up to drill, to develop to build the exploration portfolio. And then when the next success happens to move quickly to capitalize on it.

One other things we learned, with Ghana was we had this great discovery in 2007, we drilled an appraisal well in late 2007, early 2008, w knew we had to find we are going hard putting together a development and record time and there is a little thing on being and [happened] and certainly the capital market shutdown we will not expose ourselves with those kind of capital market risks, so you will see is quite a very liquid company able to exploit the success we expect to have from this portfolio.

Unidentified Analyst

We appreciate the answer.

W. Greg Dunlevy

Sure, Doug.

Unidentified Analyst

Thank you Greg. thanks.

W. Greg Dunlevy

You’re welcome.

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