See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
N
OTE
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.
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.
In assessing whether there is substantial doubt about our ability to continue as a going concern, we prepared a detailed cash forecast that included all projected cash inflows and outflows as well as consideration of 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”) (collectively, the “Secured Notes”) contain certain covenants including the maintenance of a minimum consolidated cash balance of at least $200.0 million. As this detailed cash forecast shows that our projected cash balance would be out of compliance with the minimum consolidated cash balance covenant within one year after the date these unaudited condensed consolidated financial statements are issued, we have concluded that there is substantial doubt about our ability to continue as a going concern.
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 for long–term rig and support services; (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.
If we become unable to continue as a going concern, we may find it necessary to file a voluntary petition for reorganization under the Bankruptcy Code in order to provide us additional time to identify an appropriate solution to our financial situation and implement a plan of reorganization aimed at improving our capital structure.
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
9
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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 nece
ssarily 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.
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.
Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,
Compensation – Stock Compensation (Subtopic 718)
. 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.
In November 2016, the FASB issued ASU 2016–18,
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 beginning–of–period and end–of–period total amounts shown on the statement of cash flows. The provisions of ASU 2016–18 are effective for annual and interim periods beginning after December 15, 2017. We elected to early adopt the provisions of ASU 2016–18 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
|
|
Three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
(Accretion of discount) amortization of premium on investments
|
|
$
|
928
|
|
|
$
|
733
|
|
Joint interest and other receivables
|
|
|
(1,901
|
)
|
|
|
(1,791
|
)
|
Net cash flows provided by operating activities
|
|
|
22,002
|
|
|
|
21,917
|
|
Change in restricted funds
|
|
|
14,339
|
|
|
|
—
|
|
Proceeds from maturity of investment securities
|
|
|
570,582
|
|
|
|
910,041
|
|
Purchase of investment securities
|
|
|
(387,209
|
)
|
|
|
(673,633
|
)
|
Net cash flows (used in) provided by investing activities
|
|
|
(16,767
|
)
|
|
|
21,929
|
|
Increase in cash, cash equivalents and restricted cash
|
|
|
5,235
|
|
|
|
43,846
|
|
(1)
|
Amounts are after reclassification of Angolan operations to no longer reflect these operations as discontinued.
|
No other new accounting pronouncements issued or effective during the three months ended March 31, 2017 have had or are expected to have a material impact on our unaudited condensed consolidated financial statements.
10
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 2
. INVESTMENTS
Our investments in held–to–maturity securities consist of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Corporate securities
|
|
$
|
396,153
|
|
|
$
|
227,854
|
|
Commercial paper
|
|
|
273,046
|
|
|
|
292,466
|
|
U.S. Treasury securities
|
|
|
—
|
|
|
|
161,778
|
|
Total
|
|
$
|
669,199
|
|
|
$
|
682,098
|
|
These investments are recorded in our unaudited condensed consolidated balance sheets as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Cash and cash equivalents
|
|
$
|
28,557
|
|
|
$
|
341,680
|
|
Short-term investments
(1)
|
|
|
640,642
|
|
|
|
340,418
|
|
|
|
$
|
669,199
|
|
|
$
|
682,098
|
|
(1)
|
As of December 31, 2016, $9.1 million of these investments served as collateral for certain of our obligations.
|
At March 31, 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 tables presents the fair value hierarchy for our assets 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 March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.75% first lien notes due 2021
|
|
$
|
21,572
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,572
|
|
7.75% second lien notes due 2023
|
|
|
32,545
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,545
|
|
Total
|
|
$
|
54,117
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
54,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
11
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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 diffe
rence 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 prob
ability 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.
The reconciliation of changes in the fair value of our embedded derivatives is as follows for the three months ended March 31:
|
|
2017
|
|
Beginning of period
|
|
$
|
50,123
|
|
Issuance of additional Second Lien Notes
|
|
|
5,900
|
|
Change in fair value
|
|
|
(1,906
|
)
|
End of period
|
|
$
|
54,117
|
|
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 March 31, 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:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
10.75% first lien notes due 2021
|
|
$
|
473,440
|
|
|
$
|
482,250
|
|
7.75% second lien notes due 2023
|
|
|
361,985
|
|
|
|
327,449
|
|
2.625% convertible senior notes due 2019
|
|
|
203,321
|
|
|
|
305,378
|
|
3.125% convertible senior notes due 2024
|
|
|
268,872
|
|
|
|
332,344
|
|
|
|
$
|
1,307,618
|
|
|
$
|
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.
12
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE 4
. OIL AND NATURAL GAS PR
OPERTIES
Oil and natural gas properties consist of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Proved oil and natural gas properties:
|
|
|
|
|
|
|
|
|
Well and development costs
|
|
$
|
128,575
|
|
|
$
|
118,245
|
|
Accumulated depletion
|
|
|
(28,721
|
)
|
|
|
(20,204
|
)
|
Total proved oil and natural gas properties
|
|
|
99,854
|
|
|
|
98,041
|
|
|
|
|
|
|
|
|
|
|
Unproved oil and natural gas properties:
|
|
|
|
|
|
|
|
|
Oil and natural gas leaseholds
|
|
|
629,770
|
|
|
|
651,295
|
|
Accumulated valuation allowance
|
|
|
(490,189
|
)
|
|
|
(507,198
|
)
|
|
|
|
139,581
|
|
|
|
144,097
|
|
Exploratory wells in process
|
|
|
712,715
|
|
|
|
836,747
|
|
Total unproved oil and natural gas properties
|
|
|
852,296
|
|
|
|
980,844
|
|
|
|
|
|
|
|
|
|
|
Total oil and natural gas properties, net
|
|
$
|
952,150
|
|
|
$
|
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.
In the three months ended March 31, 2017, we expensed suspended exploratory well costs of $232.8 million related to our Shenandoah discovery following the suspension of appraisal activity by the operator. Of this amount, $159.7 million had been capitalized for a period greater than one year after completion of drilling.
The net changes in and the cumulative costs of capitalized exploratory wells (excluding any related leasehold costs) are as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Beginning of period
|
|
$
|
836,747
|
|
|
$
|
1,727,181
|
|
Additions to capitalized exploration
|
|
|
|
|
|
|
|
|
Exploratory well costs
|
|
|
94,189
|
|
|
|
499,985
|
|
Capitalized interest
|
|
|
14,228
|
|
|
|
99,541
|
|
Amounts charged to expense
(1)
|
|
|
(232,449
|
)
|
|
|
(1,489,960
|
)
|
End of period
|
|
$
|
712,715
|
|
|
$
|
836,747
|
|
(1)
|
Amounts represent dry hole costs related to exploratory wells which did not encounter commercial hydrocarbons or where it was determined that sufficient progress was not being made.
|
13
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Cumulative costs:
|
|
|
|
|
|
|
|
|
Exploratory well costs
|
|
$
|
443,855
|
|
|
$
|
582,115
|
|
Capitalized interest
|
|
|
268,860
|
|
|
|
254,632
|
|
|
|
$
|
712,715
|
|
|
$
|
836,747
|
|
Well costs capitalized for a period greater than one year
after completion of drilling (included in table above)
|
|
$
|
458,924
|
|
|
$
|
609,893
|
|
As of March 31, 2017 and December 31, 2016, capitalized exploratory well costs that have been suspended longer than one year are associated with our North Platte, Anchor, and Diaman discoveries. 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:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
10.75% first lien notes due 2021:
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Unamortized discount
(1)
|
|
|
(33,131
|
)
|
|
|
(34,416
|
)
|
Carrying amount
|
|
|
466,869
|
|
|
|
465,584
|
|
|
|
|
|
|
|
|
|
|
7.75% second lien notes due 2023:
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
|
723,970
|
|
|
|
584,732
|
|
Unamortized discount
(2)
|
|
|
(38,757
|
)
|
|
|
(54,856
|
)
|
Carrying amount
|
|
|
685,213
|
|
|
|
529,876
|
|
|
|
|
|
|
|
|
|
|
2.625% convertible senior notes due 2019:
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
|
625,603
|
|
|
|
763,446
|
|
Unamortized discount and debt issuance costs
(3)
|
|
|
(82,990
|
)
|
|
|
(109,689
|
)
|
Carrying amount
|
|
|
542,613
|
|
|
|
653,757
|
|
|
|
|
|
|
|
|
|
|
3.125% convertible senior notes due 2024:
|
|
|
|
|
|
|
|
|
Principal outstanding
|
|
|
1,144,136
|
|
|
|
1,204,145
|
|
Unamortized discount and debt issuance costs
(4)
|
|
|
(346,738
|
)
|
|
|
(374,013
|
)
|
Carrying amount
|
|
|
797,398
|
|
|
|
830,132
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,492,093
|
|
|
$
|
2,479,349
|
|
(1)
|
Effective interest rate of 12.6%
|
(2)
|
Effective interest rate of 8.8%
|
(3)
|
Effective interest rate of 8.2%
|
(4)
|
Effective interest rate of 8.9%
|
On January 31, 2017, we consummated a follow–on debt exchange transaction (the “Transaction”) with certain holders (the “Holders”) of our outstanding 2.625% convertible senior notes due 2019 (the “2019 Notes”) and 3.125% convertible senior notes due 2024 (the “2024 Notes”) whereby we issued an aggregate principal amount of
14
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
$139.2 million in additional Second Lien Notes in exchange for $137.8 million aggregate principal amount of the 2019 Notes and $60.0 million aggregate pri
ncipal amount of the 2024 Notes held by the Holders.
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 January 31, 2017 and to fair value the derivative as of each subsequent reporting date (see Note 3). At January 31, 2017, we recognized an additional derivative liability of $5.9 million for our Second Lien Notes, which decreased the carrying value of these notes.
We accounted for the Transaction as a troubled debt restructuring. We did not recognize any gain or loss on the Transaction and have prospectively adjusted the effective interest rates on the 2019 Notes and 2024 Notes. Costs related to the Transaction totaled $1.0 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. Lead Plaintiffs also have filed a motion for class certification, seeking to certify a class of all persons and entities who purchased or otherwise acquired our securities between March 1, 2011 and November 3, 2014. 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
15
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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.
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. Our deadline to answer or otherwise respond to the plaintiff’s petition is June 5, 2017.
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, the Ogden derivative action, 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 settled claims against XL pursuant to which XL agreed to pay $11.5 million. We continue to pursue our claims against both Axis and AIG.
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.
As previously disclosed, 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 billion dollars, plus applicable interest and costs. We also filed a separate RFA with the ICC against
Sonangol Pesquisa e Produção, S.A. (“Sonangol P&P”)
seeking recovery of over $174 million, plus applicable interest and costs, representing the joint interest receivable owed to us for operations on Block 21
16
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
offshore Angola. Unless resolved to our sat
isfaction, we intend to vigorously prosecute these claims in arbitration and seek all available remedies in law and equity.
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.
Grants in 2017
Performance Stock Units
In February 2017, we issued 6.6 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 9.9 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.
Non–Employee Director Grants
In the three months ended March 31, 2017, we granted a total of 0.1 million shares of our common stock to our non–employee directors as retainer awards. The directors have elected to defer the issuance of this stock. Accordingly, we have recorded a liability for the future issuance of these shares. The fair value of these retainer awards on the date of grant was $0.1 million.
In addition, we granted 0.03 million RSUs to one of our non–employee directors. These RSUs will be settled 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 $0.04 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 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 compensation costs recognized in our unaudited condensed consolidated statements of operations:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Equity awards
|
|
$
|
3,664
|
|
|
$
|
7,763
|
|
Liability awards
|
|
|
(71
|
)
|
|
|
—
|
|
Total
|
|
$
|
3,593
|
|
|
$
|
7,763
|
|
17
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.
As of March 31, 2017, there was $27.8 million of unrecognized compensation costs which are expected to be recognized over a weighted average period of 2.1 years.
NOTE 8. EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and diluted loss per share computations is as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares outstanding (basic and diluted)
|
|
|
441,792
|
|
|
|
409,260
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from diluted loss per share
(1)
|
|
|
92,713
|
|
|
|
105,252
|
|
(1)
|
Excludes restricted stock awards, non–qualified stock options, PSUs, RSUs, stock appreciation rights, the 2019 Notes and the 2024 Notes that are potentially issuable as their effect, if included, would have been anti–dilutive.
|
NOTE 9. OTHER SUPPLEMENTAL INFORMATION
Cash, cash equivalents and restricted cash are recorded in our unaudited condensed consolidated balance sheet as follows:
|
|
As of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
118,493
|
|
|
$
|
85,406
|
|
Restricted cash
|
|
|
11,274
|
|
|
|
97,326
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
129,767
|
|
|
$
|
182,732
|
|
Restricted cash serves as collateral for certain of our obligations and is invested in interest–bearing accounts.
Supplemental noncash transactions are as follows:
|
|
As of March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Non-cash disclosure - changes in accrued capital expenditures
|
|
$
|
(15,512
|
)
|
|
$
|
11,232
|
|
Accrued liabilities consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Costs for additions to oil and natural gas properties
|
|
$
|
59,026
|
|
|
$
|
73,808
|
|
Social obligation payments
|
|
|
86,273
|
|
|
|
86,473
|
|
Funds from release of letter of credit on Block 9
|
|
|
18,375
|
|
|
|
18,375
|
|
Interest
|
|
|
54,511
|
|
|
|
13,793
|
|
Angolan consumption tax and withholding on services
|
|
|
9,796
|
|
|
|
9,796
|
|
Bonuses
|
|
|
2,692
|
|
|
|
8,900
|
|
Seismic and other operating costs
|
|
|
575
|
|
|
|
5,625
|
|
General expenses
|
|
|
2,209
|
|
|
|
5,849
|
|
Other
|
|
|
1,808
|
|
|
|
4,799
|
|
Total accrued liabilities
|
|
$
|
235,265
|
|
|
$
|
227,418
|
|
18
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
NOTE
1
0
. OTHER MATTERS
In February 2017, we received a letter from the Department of Justice (“DOJ”) advising us that the DOJ has closed its investigation into our operations in Angola. This formally concluded the DOJ investigation and no regulatory action has been taken against us as a result of this investigation.
In March 2017, the SEC informed us by telephone that they have initiated an informal inquiry regarding the Sonangol Research and Technology Center (the “Technology Center”). As background, in December 2011, we executed the Block 20 Production Sharing Contract under which we and BP Exploration Angola (Kwanza Benguela) Limited are required to make certain social contributions to Sonangol, including for the Technology Center. In March 2017, we also received a voluntary request for information regarding such inquiry. We believe our activities in Angola have complied with all applicable laws, including the Foreign Corrupt Practices Act, and we are cooperating with the SEC’s inquiry.
In September 2016, we announced that we entered into an amendment to our drilling contract with Rowan (UK) Reliance Limited (“Rowan”) and recorded a charge of $95.9 million, of which $76.3 million was paid in 2016. This amendment provided for the early termination of our long–term drilling contract for one of their drillships. The drilling contract was originally scheduled to terminate in February 2018, but the amendment provides for a contact termination date in March 2017. As of December 31, 2016, we had accrued costs of $19.6 million, which was paid in March 2017.
NOTE 11. SUBSEQUENT EVENTS
In April 2017, we completed an additional follow–on debt exchange transaction with certain holders of our outstanding convertible notes whereby we issued an aggregate principal amount of $178.6 million in additional Second Lien Notes in exchange for $6.4 million aggregate principal amount of the 2019 Notes and $296.3 million aggregate principal amount of the 2024 Notes held by these holders.
We evaluated subsequent events for appropriate accounting and disclosure through the date these unaudited condensed consolidated financial statements were issued and determined that there were no other material items that required recognition or disclosure in our unaudited condensed consolidated financial statements.
19