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Why Kosmos Energy Stock Rallied Over 10% Today

What happened

Shares of offshore exploration and production company Kosmos Energy (NYSE: KOS) were up as much as 10.5% at 3 p.m. EDT on Oct. 15. That follows on notable gains from the day before. The strong two-day run is basically tied to the same set of facts. Here's why.

So what

After the market closed on Oct. 13 Kosmos Energy announced that it had agreed to pay $550 million to Occidental Petroleum (NYSE: OXY) for an additional 18% interest in the Jubilee field and an additional 11% interest in the TEN fields in Ghana. The company will own 42% and 28% in the Jubilee and TEN fields, respectively, once the deal is completed.

Management believes the investment will have a payback period of three years or less at $65 per barrel of oil, with it generating an additional $1 billion in free cash flow by 2026. Management is confident that this will be a very attractive deal for Kosmos and its shareholders, noting that it already has a deep knowledge of the fields. That helps explains the price gain on Oct. 14.

Image source: Getty Images.

But the energy company still has to pay for the purchase. While that is likely to come from a mixture of debt and stock, it announced pricing on a 37.5 million dollar share sale after the close on Oct. 14, with a portion of the proceeds earmarked for paying down short-term debt. In other words, it's already lining up the capital it needs to get this deal done in an effective manner.

Investors appear to be pleased with the news, given that the stock was up strongly on Oct. 14 with the rally carrying over to Oct. 15. In addition to this news, Kosmos' shares were upgraded to buy by an analyst at Berenberg. Investors like to see analyst upgrades, so this likely helped as well.

Now what

With a market cap of $1.6 billion, Kosmos Energy is a relative small fry in the energy sector. Higher energy prices have been a notable benefit to the company and its shares of late, but growth-oriented acquisitions help, too. That said, the energy sector can be highly volatile and so can Kosmos Energy's shares. Although it appears that things are going well for this offshore driller, most investors would probably be better off with a larger, more diversified energy name, like Chevron.

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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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