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.
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 c
an 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.
11
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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
–
1
8
are
effective for annual and interim periods beginning after December 15, 2017. We elec
ted 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
|
|
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
|
|
12
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 subsequent
ly 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 ex
ploratory 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 discl
osures, 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 wer
e 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 enric
hment 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 t
he 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.
O
n 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.
Th
e 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
19
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
vesting. We
account for f
orfeitures 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
|
|
|
$
|
14,651
|
|
|
$
|
11,052
|
|
These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations. As of September 30, 2017, there was $21.7 million of unrecognized equity compensation costs which are expected to be recognized over a weighted average period of 1.2 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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares outstanding
(basic and diluted)
|
|
|
29,606
|
|
|
|
27,359
|
|
|
|
29,532
|
|
|
|
27,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from diluted loss
per share
(1)
|
|
|
4,100
|
|
|
|
7,004
|
|
|
|
4,602
|
|
|
|
7,004
|
|
(1)
|
Includes 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 September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash and cash equivalents
|
|
$
|
200,445
|
|
|
$
|
294,189
|
|
Restricted cash
|
|
|
11,274
|
|
|
|
147,280
|
|
Other assets
|
|
|
10,400
|
|
|
|
—
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
222,119
|
|
|
$
|
441,469
|
|
The restricted cash serves as collateral for certain of our obligations and is invested in interest–bearing accounts. The $10.4 million of restricted cash included in other assets consists of the funds
held in escrow for the benefit of the insured persons under the XL policy (see Note 6).
20
Cobalt International Energy, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Supplemental noncash transactions are as follows:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Non-cash disclosure - changes in accrued capital expenditures
|
|
$
|
(55,251
|
)
|
|
$
|
(9,241
|
)
|
Accrued liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Costs for additions to oil and natural gas properties
|
|
$
|
5,443
|
|
|
$
|
73,808
|
|
Social obligation payments
|
|
|
86,206
|
|
|
|
86,473
|
|
Funds from release of letter of credit on Block 9
|
|
|
18,375
|
|
|
|
18,375
|
|
Interest
|
|
|
56,703
|
|
|
|
13,793
|
|
Angolan consumption tax and withholding on services
|
|
|
9,796
|
|
|
|
9,796
|
|
Bonuses
|
|
|
2,419
|
|
|
|
8,900
|
|
Seismic and other operating costs
|
|
|
8,658
|
|
|
|
5,625
|
|
General expenses
|
|
|
4,933
|
|
|
|
5,849
|
|
Other
|
|
|
1,071
|
|
|
|
4,799
|
|
Total accrued liabilities
|
|
$
|
193,604
|
|
|
$
|
227,418
|
|
NOTE 10. OTHER MATTERS
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. We have been cooperating with the SEC, and have been providing requested information regarding the Technology Center and other aspects of our Angolan operations.
In August 2017, we entered into retention agreements with certain of our officers and employees. The retention agreements provided for one–time lump sum payments totaling $16.1 million. Of this amount, $12.2 million was paid to certain officers for the repurchase of the Awards (see Note 7) and $3.9 million was paid as retention bonuses to certain employees. Each of the payments is subject to clawback and repayment by the applicable officer and employee in the event such officer or employee is terminated with cause or resigns without good reason before the one–year anniversary of the agreement. As of September 30, 2017, $13.2 million of these payments, consisting of equity compensation costs of $9.8 million (see Note 7) and compensation expense of $3.4 million, are included in “Other current assets” in our unaudited condensed consolidated balance sheets and will be recognized over the remaining service period. In the three months and nine months ended September 30, 2017, $7.5 million of these payments are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.
NOTE 11. SUBSEQUENT EVENTS
As described in more detail in Note 6, 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.
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 material items that required recognition or disclosure in our unaudited condensed consolidated financial statements.
21