Raymond James Still Bullish On Kosmos, But Risk-Reward Is Less Compelling

Shares of Kosmos Energy Ltd. KOS near a five-year high, and some analysts remain fans of the long-term outlook.

The Analysts

Raymond James analyst Pavel Molchanov downgraded Kosmos Energy from Strong Buy to Outperform and reiterated a $10 price target.

The Thesis

The results from the Pontoenoe exploration well in Suriname are on the docket.

“In August, Kosmos and its partners (Chevron and Hess) spud the Pontoenoe prospect in Block 42, the company’s second prospect of the 2018 exploration program in Suriname," Molchanov said in a note. "While there is no precise timetable for the result, it’s probably a matter of weeks.”

Despite the location and its relation to discoveries in neighboring Guyana, success isn't guaranteed, Molchanov said. In June, Kosmos reported the first Suriname project in 2018 had come up dry.

“While assigning any specific probability of success would be fairly arbitrary in a situation where brand-new acreage is being drilled, we have to be clear-minded about the fact that all the activity in Suriname is emphatically in the category of frontier exploration.”

Molchanov stated that a dry result directly causes pressure on this stock.

“The risk of a dry hole is mainly a matter of short-term volatility, as had been illustrated over the past year (following previous dry holes at Hippocampe, Lamantin, and Requin Tigre), and there are plenty of earlier examples too. Each prospect is different, of course, and so is the perception of what the market is pricing in.”

Price Action

Kosmos shares were down 1.5 percent to $9.50 on Wednesday afternoon.

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