Kosmos Energy Ltd. (KOS) in Hamilton, Bermuda is an independent oil and gas exploration and production company that concentrates on the Atlantic Margins. The company's principal assets include production offshore Ghana, Equatorial Guinea, and the U.S. Gulf of Mexico, and gas development offshore Mauritania and Senegal.

The oil and gas sector has benefited handsomely over the last year due to increased crude oil and natural gas prices amid a prolonged supply crisis. KOS stock has gained 152.9% in price over the past year and 168.7% over the past six months to close yesterday's trading session at $7.74.

While the surging oil and gas prices could benefit the company's revenue growth, its negative profit margins and premium valuation we think make KOS' near-term prospects look bleak.

Here is what could shape KOS's performance in the near term:

Ratings Downgrade

In February, Moody's Investors Service downgraded KOS' rating outlook to stable from positive, while upholding the company's B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating (PDR), and B3 senior unsecured notes. The downgrading of the Government of Ghana (Ghana, Caa1 stable), where the majority of KOS's production and cash flow are concentrated today, prompted the change in Moody’s outlook.

Premium Valuation

In terms of trailing-12-months Price/Sales, the stock is currently trading at 1.73x, which is 10.3% higher than the 1.57x industry average. Also, its 2.99x trailing-12-months EV/Sales is 32.8% higher than the 2.25x industry average. Furthermore, KOS’ 3.35x trailing-12-months Price/Book is 62.7% higher than the 2.06x industry average.

Poor Profitability

KOS’ 0.3% trailing-12-months asset turnover ratio is 35.3% lower than the 0.47% industry average. Its 6.9% trailing-12-months EBIT margin is 39.8% lower than the 11.5% industry average. Also, its trailing-12-months ROA, levered FCF margin, and net income margin are negative 1.6%, negative 41.3%, and negative 5.8%, respectively.

POWR Ratings Reflect Uncertainty

KOS has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. KOS has a D grade for Value and Stability. The company's higher-than-industry valuation is consistent with the Value grade. In addition, the stock beta of 3.25 is in sync with the Stability grade.

Of the 42 stocks in the A-rated Foreign Oil & Gas industry, KOS is ranked #41.

Beyond what I have stated above, you can view KOS ratings for Quality, Momentum, Growth, and Sentiment here.

Bottom Line

An increase in oil and gas prices has helped the energy industry attract substantial investor attention since the beginning of the year. While KOS could continue to gain from the commodities' continuing surge, its premium valuations and poor profitability make it less appealing when compared to its peers. Therefore, we believe the stock is best avoided now.

How Does Kosmos Energy Ltd. (KOS) Stack Up Against its Peers?

While KOS has an overall D rating, one might want to consider its industry peers, GroPark Ltd. (GPRK), TransGlobe Energy Corp. (TGA), and Parex Resources Inc. (PARXF), which have an overall A (Strong Buy) rating.

Note that TGA is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

KOS shares rose $0.11 (+1.42%) in premarket trading Thursday. Year-to-date, KOS has gained 128.03%, versus a -5.82% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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