10-Q 1 cie-10q_20170930.htm 10-Q cie-10q_20170930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10–Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission file number: 001‑34579

 

Cobalt International Energy, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

27‑0821169
(I.R.S. Employer Identification No.)

 

 

Cobalt Center

920 Memorial City Way, Suite 100

Houston, Texas

(Address of principal executive offices)

77024

(Zip code)

 

(713) 579‑9100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non–accelerated filer (Do not check if a smaller reporting company)

 

 

 

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes   No 

 

Number of shares of the registrant’s common stock outstanding at September 30, 2017: 29,916,693 shares.

 

 

 


TABLE OF CONTENTS

 

 

 

1


Cautionary Note Regarding Forward–Looking Statements

 

This Quarterly Report on Form 10–Q contains forward–looking statements within the meaning of the federal securities laws including, but not limited to, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act (each a “forward–looking statement”).  We have based our forward–looking statements on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations.  Although we believe that these forward–looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us.  Many important factors, in addition to the risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10–K for the year ended December 31, 2016, may have a material adverse effect on our results as indicated in forward–looking statements.  You should read this Quarterly Report on Form 10–Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

Our forward–looking statements may be influenced by the following factors, among others:

 

 

our liquidity and ability to finance our exploration, appraisal, development, and acquisition activities and continue as a going concern;

 

 

our ability to sell our interests in the U.S. Gulf of Mexico, Blocks 20 and 21 offshore Angola, or other assets on acceptable terms;

 

 

the availability and cost of financing, and refinancing, our indebtedness;

 

 

the financial and operational implications of the termination of the purchase and sale agreement with Sociedade Nacional de Combustiveis de Angola–Empresa Publica (“Sonangol”) for the sale of our working interest in Blocks 20 and 21 offshore Angola, including the outcome of our Angolan arbitration proceedings;

 

 

our ability to evaluate and execute upon potential strategic alternatives and initiatives to improve liquidity;

 

 

our ability to meet our obligations under the agreements governing our current or any future indebtedness;

 

our ability to maintain the listing of our common stock on the New York Stock Exchange or another national securities exchange;

 

 

volatility and extended depression of oil and natural gas prices;

 

 

our ability to successfully and efficiently execute our project appraisal, development and exploration activities;

 

 

projected and targeted capital expenditures and other costs and commitments;

 

 

lack or delay of partner, government and regulatory approvals related to our business or required pursuant to agreements to which we are party;

 

 

changes in environmental, safety, health, climate change or greenhouse gas laws and regulations or the implementation or interpretation of those laws and regulations;

 

 

current and future government regulation of the oil and natural gas industry and our operations;

 

 

oil and natural gas production rates on our properties that are currently producing oil and natural gas;

 

 

uncertainties inherent in making estimates of our oil and natural gas data;

 

 

our and our partners’ ability to obtain permits to drill and develop our properties;

2


 

termination of or intervention in concessions, licenses, permits, rights or authorizations granted by the United States, Angolan and Gabonese governments to us;

 

 

our dependence on our key management personnel and our ability to attract and retain qualified personnel;

 

 

our ability to find, acquire or gain access to new prospects;

 

 

the ability of the containment resources we have under contract to perform as designed or contain or cap any oil spill, blow-out or uncontrolled flow of hydrocarbons;

 

 

the availability and cost of developing appropriate oil and natural gas transportation and infrastructure;

 

 

military operations, civil unrest, disease, piracy, terrorist acts, wars or embargoes;

 

 

our vulnerability to severe weather events, especially tropical storms and hurricanes in the U.S. Gulf of Mexico;

 

 

the cost and availability of adequate insurance coverage, and the ability to collect under our insurance policies;

 

 

the results or outcome of any legal proceedings or investigations; and

 

other risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10–K for the year ended December 31, 2016 that was filed with the Securities and Exchange Commission on March 14, 2017.

 

The words “anticipate,” “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “intend,” “could,” “expect,” “plan,” “project” and other similar expressions, and the negative thereof, are intended to identify forward–looking statements.  These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward–looking” information.  The forward–looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any estimate and/or forward–looking statement because of new information, future events or other factors.  All of our forward–looking information involve risks and uncertainties that could cause actual results to differ materially from the results expected.  Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of the risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10–K for the year ended December 31, 2016.

 

 

3


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

COBALT INTERNATIONAL ENERGY, INC.

 

 

4


Cobalt International Energy, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except number of shares and par value amounts)

(Unaudited)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

200,445

 

 

$

613,534

 

Restricted cash

 

 

11,274

 

 

 

2,517

 

Joint interest and other receivables

 

 

186,239

 

 

 

167,573

 

Other current assets

 

 

34,628

 

 

 

23,149

 

Investments

 

 

325,235

 

 

 

340,418

 

Total current assets

 

 

757,821

 

 

 

1,147,191

 

 

 

 

 

 

 

 

 

 

Oil and natural gas properties, net of accumulated depletion of $48,610 and

   $20,204 as of September 30, 2017 and December 31, 2016, respectively

 

 

920,776

 

 

 

1,078,885

 

Other property, net of accumulated depreciation and amortization of $9,491

   and $8,426, as of September 30, 2017 and December, 31, 2016, respectively

 

 

2,837

 

 

 

3,902

 

Other assets

 

 

10,950

 

 

 

500

 

Total assets

 

$

1,692,384

 

 

$

2,230,478

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade and other accounts payable

 

$

26,280

 

 

$

36,954

 

Accrued liabilities

 

 

193,604

 

 

 

227,418

 

Accrued contract amendment costs

 

 

 

 

 

19,582

 

Angolan preliminary consideration

 

 

250,000

 

 

 

250,000

 

Total current liabilities

 

 

469,884

 

 

 

533,954

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,496,310

 

 

 

2,479,349

 

Long-term derivative liabilities

 

 

186,427

 

 

 

50,123

 

Asset retirement obligations

 

 

8,486

 

 

 

6,523

 

Other long-term liabilities

 

 

1,721

 

 

 

1,863

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 133,333,333 shares authorized,

   29,624,874 and 29,422,864 issued and outstanding as of September 30,

   2017 and December 31, 2016, respectively

 

 

296

 

 

 

294

 

Additional paid-in capital

 

 

4,236,432

 

 

 

4,223,729

 

Accumulated deficit

 

 

(5,707,172

)

 

 

(5,065,357

)

Total stockholders’ equity

 

 

(1,470,444

)

 

 

(841,334

)

Total liabilities and stockholders’ equity

 

$

1,692,384

 

 

$

2,230,478

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


Cobalt International Energy, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Oil, natural gas and natural gas liquids revenues

 

$

14,427

 

 

$

4,228

 

 

$

38,043

 

 

$

9,037

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seismic and exploration costs

 

 

11,522

 

 

 

21,228

 

 

 

32,605

 

 

 

36,719

 

Dry hole costs and impairments

 

 

45,983

 

 

 

50,346

 

 

 

325,574

 

 

 

205,735

 

Loss on amendment of contract

 

 

 

 

 

95,908

 

 

 

 

 

 

95,908

 

Lease operating expenses

 

 

2,638

 

 

 

2,373

 

 

 

8,371

 

 

 

5,031

 

General and administrative expenses

 

 

19,934

 

 

 

31,251

 

 

 

66,558

 

 

 

82,571

 

Accretion expense

 

 

296

 

 

 

102

 

 

 

883

 

 

 

306

 

Depreciation, depletion and amortization

 

 

10,500

 

 

 

7,183

 

 

 

29,472

 

 

 

14,642

 

Total operating costs and expenses

 

 

90,873

 

 

 

208,391

 

 

 

463,463

 

 

 

440,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(76,446

)

 

 

(204,163

)

 

 

(425,420

)

 

 

(431,875

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

169

 

 

 

 

 

 

10,870

 

 

 

4,375

 

Loss on embedded derivatives

 

 

(32,664

)

 

 

 

 

 

(103,194

)

 

 

 

Interest income

 

 

1,478

 

 

 

990

 

 

 

4,683

 

 

 

3,781

 

Interest expense

 

 

(42,155

)

 

 

(15,034

)

 

 

(128,380

)

 

 

(46,650

)

Total other expense, net

 

 

(73,172

)

 

 

(14,044

)

 

 

(216,021

)

 

 

(38,494

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(149,618

)

 

$

(218,207

)

 

$

(641,441

)

 

$

(470,369

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(5.05

)

 

$

(7.98

)

 

$

(21.72

)

 

$

(17.21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

   (basic and diluted)

 

 

29,606

 

 

 

27,359

 

 

 

29,532

 

 

 

27,330

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


Cobalt International Energy, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(In thousands)

(Unaudited)

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated Deficit

 

 

Total

 

Balance, December 31, 2016

 

$

294

 

 

$

4,223,729

 

 

$

(5,065,357

)

 

$

(841,334

)

Cumulative effect of change in accounting for equity based

   compensation

 

 

 

 

 

374

 

 

 

(374

)

 

 

 

Equity based compensation

 

 

 

 

 

7,707

 

 

 

 

 

 

7,707

 

Effect of equity award modification

 

 

 

 

 

4,624

 

 

 

 

 

 

4,624

 

Issuance of common stock

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(641,441

)

 

 

(641,441

)

Balance, September 30, 2017

 

$

296

 

 

$

4,236,432

 

 

$

(5,707,172

)

 

$

(1,470,444

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

7


Cobalt International Energy, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(641,441

)

 

$

(470,369

)

Adjustments to reconcile net loss to net cash flows used in operating activities:

 

 

 

 

 

 

 

 

Dry hole costs and impairments

 

 

325,574

 

 

 

205,735

 

Equity based compensation

 

 

7,620

 

 

 

11,052

 

Accretion expense

 

 

883

 

 

 

306

 

Depreciation, depletion and amortization

 

 

29,472

 

 

 

14,642

 

Loss on embedded derivatives

 

 

103,194

 

 

 

 

Amortization of premium on investment securities

 

 

121

 

 

 

129

 

Amortization of debt discount and debt issuance costs

 

 

26,172

 

 

 

77,041

 

Other

 

 

(192

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Joint interest and other receivables

 

 

(17,140

)

 

 

6,748

 

Other current assets

 

 

(1,934

)

 

 

41,313

 

Trade and other accounts payable

 

 

(7,757

)

 

 

39,751

 

Accrued liabilities

 

 

18,659

 

 

 

(66,134

)

Accrued contract amendment costs

 

 

(19,582

)

 

 

50,908

 

Other

 

 

(3,934

)

 

 

14,040

 

Net cash flows used in operating activities

 

 

(180,285

)

 

 

(74,838

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

 

(225,896

)

 

 

(545,874

)

Capital expenditures for other property

 

 

 

 

 

(3,480

)

Proceeds from maturity of investment securities

 

 

542,006

 

 

 

2,732,291

 

Purchase of investment securities

 

 

(528,472

)

 

 

(1,805,516

)

Net cash flows (used in) provided by investing activities

 

 

(212,362

)

 

 

377,421

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities - payment to settle equity based

   compensation awards

 

 

(1,285

)

 

 

 

 

 

 

 

 

 

 

 

 

(Decrease) increase in cash, cash equivalents and restricted cash

 

 

(393,932

)

 

 

302,583

 

Cash, cash equivalents and restricted cash — beginning of year

 

 

616,051

 

 

 

138,886

 

Cash, cash equivalents and restricted cash — end of period

 

$

222,119

 

 

$

441,469

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

8


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

General

 

Cobalt International Energy, Inc., together with its wholly–owned subsidiaries (“we,” “our” or “us”) is an independent exploration and production company with operations in the deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa.  We operate in one reportable segment as our chief operating decision maker, the Chief Executive Officer, assesses performance and allocates resources based on the consolidated results of our business.

 

Liquidity and Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.  

 

As of September 30, 2017, we had $547.3 million in cash and cash equivalents, restricted cash, short–term investments and long–term restricted cash and $2,840.8 million in aggregate principal amount of long–term debt outstanding.  We have interest payments of $167.0 million due on our outstanding long–term debt in the next twelve months, including an interest payment of $12.3 million due on November 15, 2017 on our 2024 Notes (as described below).  In addition, we continue to incur significant net losses, which has caused us to have a stockholders’ deficit of $1,470.4 million as of September 30, 2017.  

 

Although we commenced initial production from our Heidelberg project in January 2016, our ongoing capital and operating expenditures will vastly exceed the revenue we expect to receive from our oil and natural gas operations for the foreseeable future.  In order to grow production, we need to develop our discoveries into producing oil and natural gas properties, which will require that we raise substantial additional funding.  If we are unable to raise substantial additional funding on a timely basis or on acceptable terms, we may be required to significantly curtail our exploration, appraisal and development activities or sell assets.  

 

In assessing whether there is substantial doubt about our ability to continue as a going concern, we considered our projected cash inflows and outflows as well as any cash related covenants associated with our financing structure.  The indentures governing our 10.75% first lien notes due 2021 (the “First Lien Notes”) and our 7.75% second lien notes due 2023 (the “Second Lien Notes” and together with the First Lien Notes, the “Secured Notes”) contain certain covenants including the maintenance of a minimum consolidated cash balance (as defined in such indenture) of at least $200.0 million.  If we are unsuccessful in our current marketing efforts with respect to the sale of our Gulf of Mexico assets and do not make or receive any payments to or from Sonangol, we expect our projected cash balance would be out of compliance with the minimum consolidated cash balance covenant during the first quarter of 2018. If the holders of the Secured Notes were to accelerate the indebtedness under the Secured Notes as a result of such default, such acceleration would cause a cross–default or cross–acceleration of all of our other outstanding indebtedness. Such a cross–default or cross–acceleration could have a wider impact on our liquidity than might otherwise arise from a default or acceleration of a single debt instrument. If an event of default occurs, or if other debt agreements cross–default, and the lenders under the affected debt agreements accelerate the maturity of the debt outstanding, we will not have sufficient liquidity to repay all of our outstanding indebtedness. Thus, we have concluded that there is substantial doubt about our ability to continue as a going concern. 

 

On October 10, 2017, we received a notification from the New York Stock Exchange (“NYSE”) that we are no longer in compliance with the continued listing standards because our average global market capitalization had fallen below $50.0 million for 30 consecutive trading days and our stockholders’ equity was less than $50.0 million. If we are unable to maintain compliance with the NYSE listing requirements, our common stock will be delisted from the NYSE, which would constitute a “fundamental change” under the terms of the indentures governing our 2.625% Convertible Senior Notes due 2019 (the “2019 Notes”) and our 3.125% Convertible Senior Notes due 2024 (the “2024 Notes” and together with our 2019 Notes, the “Convertible Notes”). In such case, we could be required to repurchase for cash any such Convertible Notes. A requirement by such holders for us to repurchase some or all of such notes for cash would cause a cross–default or cross–acceleration of all of our other outstanding indebtedness.

9


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Our ability to continue as a going concern is subject to, among other factors, (i) our ability to monetize assets,  obtain financing or refinance existing indebtedness and continue our cost cutting efforts; (ii) the production rates achieved from Heidelberg; (iii) oil and natural gas prices; (iv) the number of commercially viable hydrocarbon discoveries made and the quantities of hydrocarbons discovered; (v) the speed and cost with which we can bring such discoveries to production; (vi) whether and to what extent we invest in additional oil leases and concessional licenses; and (vii) the actual cost of exploration, appraisal and development of our prospects.

 

There can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all.  In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and support our growth.  If additional funding cannot be obtained on a timely basis and on satisfactory terms, then our operations would be materially negatively impacted.  We have engaged Houlihan Lokey, Inc. as financial advisor and Kirkland & Ellis LLP as special legal advisor to advise management and our board of directors regarding potential strategic alternatives to enhance liquidity and address our current capital structure. Such strategic alternatives may include asset sales or liquidity–enhancing transactions that we have commenced previously, as well as restructuring some or all of our debt to preserve cash flow which may include seeking private restructuring or reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code").

 

The marketing efforts with respect to our Gulf of Mexico assets continue, but have taken longer than anticipated. If we are unable to sell our Gulf of Mexico assets or the entire company on favorable terms or at all, or enter into an alternative strategic transaction, we may seek bankruptcy protection to continue our efforts to restructure our business and capital structure and may have to liquidate our assets and may receive less than the value at which those assets are carried on our unaudited condensed consolidated financial statements.

 

Basis of Presentation

 

Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  We believe that the presentations and disclosures herein are adequate to make the information not misleading.  The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) for a fair presentation of the interim periods.  The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in Item 8 of our Annual Report on Form 10–K for the year ended December 31, 2016.  

 

On June 16, 2017, we effected a one–for–fifteen reverse stock split of our common stock through an amendment to our second amended and restated certificate of incorporation.  As of the effective time of the reverse stock split, every 15 shares of issued and outstanding common stock were converted into one share of common stock, without any change in par value.  The amendment to our second amended and restated certificate of incorporation also reduced the number of our authorized shares of common stock from 2.0 billion shares to 133.3 million shares.  No fractional shares were issued in connection with the reverse stock split.  Instead, each fractional share was rounded up to the nearest whole share of common stock.  However, any fractional shares resulting from adjustments to the number of shares underlying stock options and stock appreciation rights were rounded down to the nearest whole share of common stock.  All references to shares of common stock, all per share data and all equity compensation activity for all periods presented in the unaudited condensed consolidated financial statements and notes to the unaudited condensed consolidation financial statements have been adjusted to reflect the reverse stock split on a retroactive basis.  

 

All intercompany accounts and transactions have been eliminated in consolidation.  In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and share amounts in tabulations are in thousands of dollars and shares, respectively, unless otherwise indicated.

 

 

10


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014–09, Revenue from Contracts with Customers. This ASU superseded virtually all of the revenue recognition guidance in generally accepted accounting principles in the United States. The core principle of the five–step model is that an entity will recognize revenue when it transfers control of goods or services to customers at an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. The provisions of ASU 2014–09 are applicable to annual reporting periods beginning after December 15, 2017 and interim periods within those annual periods. We plan to adopt ASU 2014-09 as of January 1, 2018 using the modified retrospective method with the cumulative effect, if any, of initial adoption to be recognized at the date of initial application. We have analyzed ASU 2014–09 and have determined the adoption will not have a material impact on our unaudited condensed consolidated financial statements.  We continue to analyze ASU 2014–09 to determine the impact on our related disclosures.  

 

In February 2016, the FASB issued ASU No. 2016-02, Leases.  Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months.  Consistent with current accounting guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification as a finance or operating lease.  However, unlike current accounting guidance, which requires only capital leases to be recognized on the balance sheet, ASU 2016–02 will require both types of leases to be recognized on the balance sheet.  ASU 2016-02 will also require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.  Although ASU 2016–02 does not apply to leases for oil and natural gas properties, it does apply to equipment used to explore and develop oil and natural gas resources.  ASU 2016–02 is effective for annual and interim periods beginning after December 15, 2018 and is to be applied using the modified retrospective approach.  We plan to adopt ASU 2016–02 effective January 1, 2019 and are currently evaluating the impact on our unaudited condensed consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation.  This ASU simplifies several aspects of the accounting for employee share–based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as classification in the statement of cash flows.  We adopted ASU 2016–09 on January 1, 2017 and elected to change our policy to account for forfeitures as they occur rather than by applying an estimated forfeiture rate at the time of grant.  As a result, we recorded a $0.4 million cumulative effect adjustment to beginning accumulated deficit and additional paid in capital on January 1, 2017.  Prior periods have not been retrospectively adjusted.  There was no cumulative effect adjustment for previously unrecognized excess tax benefits as the related deferred tax assets were fully offset by a valuation allowance.

 

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Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

In November 2016, the FASB issued ASU 201618, Statement of Cash Flows, which requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginningofperiod and endofperiod total amounts shown on the statement of cash flows.  The provisions of ASU 201618 are effective for annual and interim periods beginning after December 15, 2017.  We elected to early adopt the provisions of ASU 201618 on December 31, 2016, which required that we apply the guidance on a retrospective basis, wherein our unaudited condensed consolidated statements of cash flows was adjusted to reflect the effects of applying the guidance.  The following table shows the effects of applying the guidance:  

 

 

 

Prior to Adoption (1)

 

 

After Adoption

 

Nine months ended September 30, 2016:

 

 

 

 

 

 

 

 

Amortization of premium on investments

 

$

472

 

 

$

129

 

Joint interest and other receivables

 

 

6,411

 

 

 

6,748

 

Net cash flows used in operating activities

 

 

(74,832

)

 

 

(74,838

)

Change in restricted funds

 

 

14,492

 

 

 

 

Proceeds from maturity of investment securities

 

 

1,463,268

 

 

 

2,732,291

 

Purchase of investment securities

 

 

(639,556

)

 

 

(1,805,516

)

Net cash flows provided by investing activities

 

 

288,850

 

 

 

377,421

 

Increase in cash, cash equivalents and restricted cash

 

 

214,018

 

 

 

302,583

 

 

(1)

Amounts are after reclassification of Angolan operations to no longer reflect these operations as discontinued.

 

In May 2017, the FASB issued ASU 2017–09, Compensation – Stock Compensation, which provides guidance about which changes to the terms or conditions of a share–based payment award require an entity to apply modification accounting in Topic 718.  Under ASU 2017–09, an entity should not apply modification accounting (i) if the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (ii) if the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award is the same as the classification of the original award immediately before the original award is modified.  The provisions of ASU 2017–09 are effective for annual and interim periods beginning after December 15, 2017 and is to be applied prospectively to an award modified on or after the adoption date.  

 

No other new accounting pronouncements issued or effective during the nine months ended September 30, 2017 had or are expected to have a material impact on our unaudited condensed consolidated financial statements.

 

NOTE 2.  INVESTMENTS

 

Our investments in held–to–maturity securities consist of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Corporate securities

 

$

152,807

 

 

$

227,854

 

Commercial paper

 

 

287,308

 

 

 

292,466

 

U.S. Treasury securities

 

 

 

 

 

161,778

 

Total

 

$

440,115

 

 

$

682,098

 

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Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

 

These investments are recorded in our unaudited condensed consolidated balance sheets as follows:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Cash and cash equivalents

 

$

114,880

 

 

$

341,680

 

Short-term investments (1)

 

 

325,235

 

 

 

340,418

 

 

 

$

440,115

 

 

$

682,098

 

    

(1)

As of December 31, 2016, $9.1 million of these investments served as collateral for certain of our obligations.

 

At September 30, 2017 and December 31, 2016, the contractual maturities of our investments were within one year.  Actual maturities may differ from contractual maturities as some borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  

 

NOTE 3.  FAIR VALUE MEASUREMENTS

 

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.  Level 1 refers to fair values determined based on quoted prices in active markets for identical assets or liabilities.  Level 2 refers to fair values determined based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration.  Level 3 refers to fair values determined based on unobservable inputs used in the measurement of assets and liabilities at fair value.

 

Recurring Basis

 

The following table presents the fair value hierarchy for our liabilities that are required to be measured at fair value on a recurring basis:

 

 

 

 

 

 

 

Fair Value Measurements at the End of the Reporting Period

 

 

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

As of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.75% first lien notes due 2021

 

$

14,670

 

 

$

 

 

$

 

 

$

14,670

 

7.75% second lien notes due 2023

 

 

171,757

 

 

 

 

 

 

 

 

 

171,757

 

Total

 

$

186,427

 

 

$

 

 

$

 

 

$

186,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.75% first lien notes due 2021

 

$

27,012

 

 

$

 

 

$

 

 

$

27,012

 

7.75% second lien notes due 2023

 

 

23,111

 

 

 

 

 

 

 

 

 

23,111

 

Total

 

$

50,123

 

 

$

 

 

$

 

 

$

50,123

 

 

The fair values of these embedded derivatives were estimated using the “with” and “without” method.  Using this methodology, the First Lien Notes and the Second Lien Notes were first valued with the embedded derivatives (the “with” scenario) and subsequently valued without the embedded derivative (the “without” scenario).  The fair values of the embedded derivatives were estimated as the difference between the fair values of the First Lien Notes and Second Lien Notes in the “with” and “without” scenarios.  The fair values of the First Lien Notes and Second Lien Notes in the “with” and “without” scenarios were estimated using a risk–neutral probability of default model.  Significant Level 3 assumptions used in the valuation of the embedded derivatives were the fair values of our long–term debt, the expected recovery rates, the risk–neutral probability of default and the risk–free rates.

13


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

 

The reconciliation of changes in the fair value of our embedded derivatives is as follows:

 

 

Three Months Ended

September 30, 2017

 

 

Nine Months Ended

September 30, 2017

 

Beginning of period

 

$

153,763

 

 

$

50,123

 

Issuance of additional 7.75% second lien notes due 2023

 

 

 

 

 

33,110

 

Change in fair value

 

 

32,664

 

 

 

103,194

 

End of period

 

$

186,427

 

 

$

186,427

 

 

Nonrecurring Basis

 

In the three months ended September 30, 2017, we performed an assessment taking into consideration various factors, including a recent sale in the area, and recorded an impairment charge of $43.3 million to write down our Diaman discovery and related unproved leaseholds offshore Gabon to $2.0 million.    

Financial Instruments

 

The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, joint interest and other receivables, held–to–maturity investments, accounts payable and accrued liabilities. The carrying amounts of our financial instruments, other than held–to–maturity–investments and long–term debt, approximate fair value because of the short–term nature of the items.   

 

There were no significant unrecognized holding gains or losses related to our held–to–maturity investments as of September 30, 2017 and December 31, 2016.  Accordingly, the carrying value of our held–to–maturity investments approximates their fair value.  Our held–to–maturity investments are not traded on a public exchange and the fair value of these investments is based on inputs using valuations obtained from independent brokers.  As these valuations use readily observable market parameters that are actively quoted and can be validated through external sources, we have categorized these investments as Level 2.    

 

The estimated fair values of our long–term debt are as follows:

 

 

September 30,

2017

 

 

December 31,

2016

 

10.75% first lien notes due 2021

 

$

492,500

 

 

$

482,250

 

7.75% second lien notes due 2023

 

 

592,461

 

 

 

327,449

 

2.625% convertible senior notes due 2019

 

 

146,278

 

 

 

305,378

 

3.125% convertible senior notes due 2024

 

 

142,625

 

 

 

332,344

 

 

 

$

1,373,864

 

 

$

1,447,421

 

 

The fair values of our long–term debt were estimated using quoted market prices.  As these valuations use quoted prices in active markets for identical assets or liabilities, we have categorized the long–term debt as Level 1.

  

14


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

NOTE 4. OIL AND NATURAL GAS PROPERTIES

 

Oil and natural gas properties consist of the following:

 

 

September 30,

2017

 

 

December 31,

2016

 

Proved oil and natural gas properties:

 

 

 

 

 

 

 

 

Well and development costs

 

$

128,517

 

 

$

118,245

 

Accumulated depletion

 

 

(48,610

)

 

 

(20,204

)

Total proved oil and natural gas properties

 

 

79,907

 

 

 

98,041

 

 

 

 

 

 

 

 

 

 

Unproved oil and natural gas properties:

 

 

 

 

 

 

 

 

Oil and natural gas leaseholds

 

 

570,553

 

 

 

651,295

 

Accumulated valuation allowance

 

 

(467,933

)

 

 

(507,198

)

 

 

 

102,620

 

 

 

144,097

 

Exploratory wells

 

 

738,249

 

 

 

836,747

 

Total unproved oil and natural gas properties

 

 

840,869

 

 

 

980,844

 

 

 

 

 

 

 

 

 

 

Total oil and natural gas properties, net

 

$

920,776

 

 

$

1,078,885

 

 

Capitalized Exploratory Well Costs

 

Costs for exploratory wells that find reserves that cannot yet be classified as proved are capitalized if the well has found a sufficient quantity of reserves to justify its completion as a producing well and we are making sufficient progress assessing the reserves and the economic and operating viability of the project.  Often, the ability to move into the development phase and record proved reserves is dependent on obtaining permits and government or partner approvals, the timing of which is ultimately beyond our control.  Exploratory well costs remain suspended as long as we are actively pursuing such approvals and permits, and believe they will be obtained.  For complex exploratory projects, it is not unusual to have exploratory wells remain suspended on the balance sheet for several years while additional appraisal drilling and seismic work is performed on the field or while we seek government or partner approval of development plans.  Our assessment of suspended exploratory well costs is continuous until a determination is made to either sanction the project or to expense the well costs as dry hole costs as sufficient progress has not been made in assessing the reserves and the economic and operating viability of the project.

 

The net changes in the costs of capitalized exploratory wells (excluding any related leasehold costs) are as follows:

 

 

2017

 

 

2016

 

Balance as of January 1

 

$

836,747

 

 

$

1,727,181

 

Additions to capitalized exploration

 

 

 

 

 

 

 

 

Exploratory well costs

 

 

139,568

 

 

 

416,825

 

Capitalized interest

 

 

44,413

 

 

 

89,067

 

Amounts charged to expense (1)

 

 

(282,479

)

 

 

(152,798

)

Balance as of September 30

 

$

738,249

 

 

$

2,080,275

 

 

(1)

Amounts represent dry hole costs impairments related to exploratory wells which did not encounter commercial hydrocarbons or where it was determined that sufficient progress was not being made.  Of the $282.5 million in 2017, $236.4 million relates to our Shenandoah discovery which was written off following the suspension of appraisal activity by the operator and $43.3 million relates to our Diaman exploratory well offshore Gabon (see Note 3).  Of the $152.8 million in 2016, $149.6 million relates to the Goodfellow #1 exploratory well and sidetrack.   

 

As of September 30, 2017, capitalized exploratory wells costs of $431.1 million associated with our North Platte, and Anchor discoveries have been suspended for a period greater than one year after completion of drilling.  As of

15


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

December 31, 2016, capitalized exploratory well costs of $609.9 million associated with our North Platte, Anchor, Shenandoah and Diaman discoveries have been suspended for a period greater than one year after completion.  

 

These well costs are suspended pending ongoing evaluation including, but not limited to, results of additional appraisal drilling, well–test analysis, additional geological and geophysical data and approval of a development plan.  We believe these discoveries exhibit sufficient indications of hydrocarbons to justify potential development and are actively pursuing efforts to fully assess them.  If additional information becomes available that raises substantial doubt as to the economic or operational viability of these discoveries, the associated costs will be expensed at that time.  

 

NOTE 5.  LONG–TERM DEBT, NET

 

Long–term debt, net consisted of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

10.75% first lien notes due 2021:

 

 

 

 

 

 

 

 

Principal outstanding

 

$

500,000

 

 

$

500,000

 

Unamortized discount (1)

 

 

(30,438

)

 

 

(34,416

)

Carrying amount

 

 

469,562

 

 

 

465,584

 

 

 

 

 

 

 

 

 

 

7.75% second lien notes due 2023:

 

 

 

 

 

 

 

 

Principal outstanding

 

 

934,732

 

 

 

584,732

 

Unamortized discount (2)

 

 

(19,929

)

 

 

(54,856

)

Carrying amount

 

 

914,803

 

 

 

529,876

 

 

 

 

 

 

 

 

 

 

2.625% convertible senior notes due 2019:

 

 

 

 

 

 

 

 

Principal outstanding

 

 

619,167

 

 

 

763,446

 

Unamortized discount and debt issuance costs (3)

 

 

(68,061

)

 

 

(109,689

)

Carrying amount

 

 

551,106

 

 

 

653,757

 

 

 

 

 

 

 

 

 

 

3.125% convertible senior notes due 2024:

 

 

 

 

 

 

 

 

Principal outstanding

 

 

786,895

 

 

 

1,204,145

 

Unamortized discount and debt issuance costs (4)

 

 

(226,056

)

 

 

(374,013

)

Carrying amount

 

 

560,839

 

 

 

830,132

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,496,310

 

 

$

2,479,349

 

 

(1)

Effective interest rate of 12.6%

(2)

Effective interest rate of 8.2%

(3)

Effective interest rate of 8.2%

(4)

Effective interest rate of 8.9%

 

In the nine months ended September 30, 2017, we consummated three follow–on debt exchange transactions (the “Transactions”) with certain holders (the “Holders”) of our outstanding 2019 Notes and 2024 Notes whereby we issued an aggregate principal amount of $350.0 million in additional Second Lien Notes in exchange for $144.3 million aggregate principal amount of the 2019 Notes and $417.2 million aggregate principal amount of the 2024 Notes held by the Holders.  We have fully utilized the availability under our senior secured indentures to issue additional second lien secured indebtedness.     

 

Our Secured Notes have requirements to pay an applicable premium upon a change in control or an event of default and also have a requirement to repay amounts outstanding using the proceeds from an asset sale.  These requirements were determined to be an embedded derivative that requires us to bifurcate and fair value the derivative as of the date of each of the Transactions and to fair value the derivative as of each subsequent reporting

16


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

date (see Note 3).  As of September 30, 2017, we recognized additional derivative liabilities of $33.1 million for our Second Lien Notes, which decreased the carrying value of these notes.  

 

We accounted for the Transactions as troubled debt restructurings.  We did not recognize any gain or loss on the Transactions and have prospectively adjusted the effective interest rates on the 2019 Notes and 2024 Notes.  Costs related to the Transactions totaled $3.0 million and are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.

 

NOTE 6. COMMITMENTS AND CONTINGENCIES

 

We are currently, and from time to time we may become, involved in various legal and regulatory proceedings arising in the normal course of business.

 

In November 2014, two purported stockholders, St. Lucie County Fire District Firefighters’ Pension Trust Fund and Fire and Police Retiree Health Care Fund, San Antonio, filed a class action lawsuit in the U.S. District Court for the Southern District of Texas on behalf of a putative class of all purchasers of our securities from February 21, 2012 through November 4, 2014 (the “St. Lucie lawsuit”). The St. Lucie lawsuit, filed against us and certain officers, former and current members of the Board of Directors, underwriters, and investment firms and funds, asserted violations of federal securities laws based on alleged misrepresentations and omissions in SEC filings and other public disclosures, primarily regarding compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”) in our Angolan operations and the performance of certain wells offshore Angola.

 

In December 2014, Steven Neuman, a purported stockholder, filed a substantially similar lawsuit against us and certain of our officers in the U.S. District Court for the Southern District of Texas on behalf of a putative class of all purchasers of our securities from February 21, 2012 through August 4, 2014 (the “Neuman lawsuit”). Like the St. Lucie lawsuit, the Neuman lawsuit asserted violations of federal securities laws based on alleged misrepresentations and omissions in SEC filings and other public disclosures regarding our compliance with the FCPA in our Angolan operations.

 

In March 2015, the Court entered an order consolidating the Neuman lawsuit with the St. Lucie lawsuit (the “Consolidated Action”) and also entered an order in the Consolidated Action appointing Lead Plaintiffs and Lead Counsel. Lead Plaintiffs filed their consolidated amended complaint in May 2015. Among other remedies, the Consolidated Action seeks damages in an unspecified amount, along with an award of attorney fees and other costs and expenses to the plaintiffs. We filed a motion to dismiss the consolidated amended complaint in June 2015, and the other defendants also filed motions to dismiss. The Court denied our motion to dismiss in January 2016, and, in March 2016, the Court also denied our motion requesting that the Court certify its order on the motions to dismiss so that we may seek interlocutory appellate review of the order.   In June 2017, the Court certified a class of all persons and entities who purchased or otherwise acquired our securities between March 1, 2011 and November 3, 2014.  In July 2017, we filed a petition for permission to file an interlocutory appeal challenging the class certification order.  On August 4, 2017, the Fifth Circuit Court of Appeals granted our petition for permission to file the interlocutory appeal, and we filed our appeal on October 10, 2017.  The matter remains ongoing.

 

In May 2016, Gaines, a purported stockholder, filed a derivative action in the 295th District Court in Harris County, Texas against us, as a nominal defendant, certain of our current and former officers and directors, and certain investment firms and funds.  The lawsuit alleges that current and former officers and directors breached their fiduciary duties by making, and permitting us to make, alleged misrepresentations about two of our exploration wells offshore Angola; that certain officers received performance-based compensation in excess of what they were entitled; and that the investment firms and funds owed a fiduciary duty to us as controlling stockholders and breached that duty by engaging in insider trading.  The lawsuit further alleges that demand was wrongfully refused.  The plaintiff asserts claims for breach of fiduciary duty and unjust enrichment and seeks damages in an unspecified amount, disgorgement of profits, appropriate equitable relief, and an award of attorney fees and other costs and expenses.  In July 2016, we filed our answer and special exceptions challenging the plaintiff’s standing to bring such claims against us.  The Court heard arguments on our special exceptions in December 2016.  The matter remains ongoing.

 

17


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

In November 2016, McDonaugh, a purported stockholder, filed a derivative action in the 80th District Court in Harris County, Texas against us, as a nominal defendant, and certain of our current and former officers and directors.  The lawsuit alleges that defendants breached their fiduciary duties by failing to maintain adequate internal controls and by permitting or failing to prevent alleged misrepresentations and omissions in our SEC filings and other public disclosures, including in relation to compliance with the FCPA in our Angolan operations and regarding the performance of certain wells offshore Angola.  The lawsuit also alleges that defendants received compensation or other benefits in excess of what they were entitled and that certain officers and directors engaged in unlawful trading and misappropriation of information.  The lawsuit further alleges that demand was wrongfully refused.  The plaintiff asserts claims for breach of fiduciary duty and unjust enrichment and seeks damages in an unspecified amount, reform of our governance and internal controls, restitution and disgorgement of profits, and an award of attorney fees and other costs and expenses.  We filed our answer and special exceptions challenging the plaintiff’s standing to bring such claims against us in January 2017.  The matter remains ongoing.

 

In April 2017, Hafkey, a purported stockholder, filed a derivative action in the 295th District Court in Harris County, Texas against us, as a nominal defendant, and certain of our current and former officers and directors.  The lawsuit alleges that current and former officers and directors breached their fiduciary duties by making, and permitting us to make, alleged misrepresentations about two of our exploratory wells offshore Angola; that certain directors caused us to waste corporate assets; and that certain officers received performance–based compensation in excess of what they were entitled. The lawsuit further alleges that demand was wrongfully refused.  The plaintiff asserts claims for breach of fiduciary duty, corporate waste, and unjust enrichment and seeks damages in an unspecified amount, disgorgement of profits, appropriate equitable relief, and an award of attorney fees and other costs and expenses.  We filed our answer and special exceptions challenging the plaintiff’s standing to bring such claims against us in June 2017.  The matter remains ongoing.

 

In May 2016, we filed suit against XL Specialty Insurance Company (“XL”) in Harris County District Court in Houston, Texas.  We assert XL improperly denied coverage for insurance claims made in July 2012 and other claims subsequently submitted to them in connection with our defending against the St. Lucie lawsuit and other investigations and actions.   In December 2016, we amended our petition to add Axis Insurance Company (“Axis”).   Axis provides coverage in excess of the XL policy’s limit of liability.  We allege breach of contract, violation of the Texas Prompt Payment of Claims Act, and seek a declaratory judgment that XL and Axis are obligated to pay any additional loss suffered by us due to the circumstances, investigation, and claims described in the suit.  In December 2016, we also amended our petition to add claims against Illinois National Insurance Company, an AIG subsidiary (“AIG”), which served as our insurer after XL.  Against AIG, we allege breach of contract, violation of the Texas Prompt Payment of Claims Act, violation of the Texas Deceptive Trade Practices-Consumer Protection Act, and seek a declaratory judgment that AIG is obligated to pay any additional loss suffered by us due to the circumstances, investigations, and actions related to the Lontra and/or Loengo wells.  In April 2017, we and certain of our current and former officers and directors (the “Intervenors”) settled claims against XL pursuant to which XL paid $11.5 million.  In October 2017, we and the Intervenors settled claims against Axis pursuant to which Axis has agreed to pay $6.65 million. We continue to pursue our claims against AIG.

 

The XL settlement proceeds are included in “Other income” in our unaudited condensed consolidated statements of operations for the nine months ended September 30, 2017.  Of the $11.5 million, $10.4 million is being held in escrow for the benefit of the insured persons under the XL policy.  This restricted cash is included in “Other assets” in our unaudited condensed consolidated balance sheets.   

 

We are vigorously defending against the current lawsuits and do not believe they will have a material adverse effect on our business. However, we cannot predict the occurrence or outcome of these proceedings with certainty, and if we are unsuccessful in these litigations and any loss exceeds our available insurance, this could have a material adverse effect on our results of operations.

 

On March 8, 2017, we submitted a Notice of Dispute to Sonangol pursuant to the purchase and sale agreement (the “Agreement”) for the sale by us to Sonangol of the entire issued and outstanding share capital of our indirect wholly–owned subsidiaries, CIE Angola Block 20 Ltd. and CIE Angola Block 21 Ltd., which respectively hold our 40% working interest in each of Block 20 and Block 21 offshore Angola.  Subsequently, we filed a Request for Arbitration (“RFA”) with the International Chamber of Commerce (“ICC”) against Sonangol for breach of the Agreement.  Through this arbitration proceeding, we are requesting an award against Sonangol in excess of $2

18


Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

billion, plus applicable interest and costs.  On July 17, 2017, Sonangol filed an Answer to our RFA and Counterclaim, asking for repayment of the $250.0 million initial payment that Sonangol made to us under the Agreement.  The arbitral tribunal has been constituted, and we are in the process of agreeing with the parties the Terms of Reference for the arbitration.

 

We also filed a separate RFA with the ICC against Sonangol Pesquisa e Produção, S.A. (“Sonangol P&P”) seeking recovery of over $178.9 million, including applicable interest and costs, representing the joint interest receivable owed to us for operations on Block 21 offshore Angola.  The arbitral tribunal has been constituted, the Terms of Reference agreed, and the parties are currently working with the tribunal on a procedural timetable for the arbitration hearings.  

 

Unless resolved to our satisfaction, we intend to continue to vigorously prosecute these claims in arbitration and seek all available remedies in law and equity.  We also intend to vigorously defend against any counterclaims Sonangol and Sonangol P&P might assert.   

 

NOTE 7.  EQUITY–BASED COMPENSATION

 

We grant various forms of equity–based compensation to our employees and non–employee directors.  These equity–based awards consist of restricted stock awards, non–qualified stock options, performance stock units (“PSUs”), restricted stock units (“RSUs”) and stock appreciation rights.  

 

Settlement of Equity–Based Awards

 

In August 2017, we entered in retention agreements with certain of our officers (see Note 10).  Included in these agreements were payments totaling $12.2 million for the repurchase of certain PSUs and RSUs (collectively, the “Awards”) that had been issued to these officers in February.  Each of the payments is subject to clawback and repayment by the applicable officer in the event such officer is terminated with cause or resigns without good reason before the one–year anniversary of the agreement.  The repurchase of the Awards was accounted for as a modification of the original Awards with a revised service period of 18 months (date of grant through the end of the clawback period).

 

As the Awards were not vested as of the repurchase date, we recognized $7.0 million of equity compensation cost in the three months and nine months ended September 30, 2017.  This amount corresponds to the percentage of the service period that had been rendered prior to the modification date.  The remainder of the equity compensation cost will be recognized over the remaining service period of the Awards.  

 

Grants in 2017

 

Performance Stock Units

 

In February 2017, we issued 0.4 million PSUs to our employees.  These PSUs vest in March 2020 subject to our common stock attaining a specified return by the vesting date.  These PSUs may be settled by, at our discretion, either the issuance of our common stock, cash or a combination thereof.  As these PSUs had both service and market conditions, we estimated the fair value of these PSUs using the Monte Carlo simulation model.  The fair value of these PSUs on the date of grant was $4.3 million.  

 

Restricted Stock Units

 

In February 2017, we issued 0.7 million RSUs to our employees.  These RSU’s vest in three equal annual installments by, at our discretion, either the issuance of our common stock, cash, or a combination thereof.  The fair value of these RSUs on the date of grant was $7.5 million.

 

Compensation Costs

 

Equity–based compensation cost is measured at the date of grant based on the calculated fair value of the award and is generally recognized on a straight–line basis over the requisite service period, including those with graded

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Cobalt International Energy, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 

vesting.  We account for forfeitures as they occur rather than by applying an estimated forfeiture rate at the time of grant.

 

The following table presents the equity compensation costs recognized in our unaudited condensed consolidated statements of operations:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Equity awards

 

$

1,082

 

 

$

5,237

 

 

$

7,707

 

 

$

8,068

 

Effect of equity award modification

 

 

7,031

 

 

 

 

 

 

7,031

 

 

 

 

Liability awards

 

 

(15

)

 

 

1,339

 

 

 

(87

)

 

 

2,984

 

Total

 

$

8,098

 

 

$

6,576