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TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2011 | ||
or | ||
o | 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.) | |
Two Post Oak Central 1980 Post Oak Boulevard, Suite 1200 Houston, Texas (Address of principal executive offices) | 77056 (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 ý No o
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Number of shares of the registrant's common stock outstanding at March 31, 2011: 356,306,804 shares.
2
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains estimates and forward-looking statements, principally in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our estimates and forward-looking statements are mainly based 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 estimates and 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 factors described in our 2010 Annual Report on Form 10-K filed on March 1, 2011, may adversely affect 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 estimates and forward-looking statements may be influenced by the following factors, among others:
- •
- our and our partners' ability to obtain permits and licenses and drill (i) in the U.S. Gulf of Mexico in light of the legislative and regulatory response resulting from the Deepwater Horizon drilling rig incident and oil spill and (ii) in West Africa;
- •
- current and future government regulation of the oil and gas industry;
- •
- changes in environmental laws or the implementation or interpretation of those laws;
- •
- the costs and delays associated with complying with additional legislation and regulation of the oil and gas industry;
- •
- the successful implementation of our and our partners' prospect development and drilling plans;
- •
- our ability to obtain financing;
- •
- the timing and execution of our production sharing agreement for Block 20 offshore Angola;
- •
- uncertainties inherent in making estimates of our oil and natural gas data;
- •
- the discovery and development of oil reserves;
- •
- projected and targeted capital expenditures and other costs, commitments and revenues;
- •
- termination of or intervention in concessions, licenses, permits, rights or authorizations granted by the United States, Angolan and Gabonese governments to us;
- •
- competition;
- •
- the volatility of oil prices;
- •
- our ability to successfully develop our current prospects and to find, acquire or gain access to other prospects;
- •
- the availability and cost of drilling rigs, containment resources, production equipment, supplies, personnel and oilfield services;
- •
- the availability and cost of developing appropriate infrastructure around and transportation to our prospects;
- •
- military operations, terrorist acts, wars or embargoes;
- •
- our dependence on our key management personnel and our ability to attract and retain qualified personnel;
3
- •
- 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
- •
- other risk factors discussed in the "Risk Factors" section of our 2010 Annual Report on Form 10-K filed on March 1, 2011.
The words "believe," "may," "will," "aim," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar words are intended to identify estimates and forward-looking statements. Estimates and 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. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this Quarterly Report on Form 10-Q might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.
4
COBALT INTERNATIONAL ENERGY, INC.
Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 | 6 | |||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010, and for the period November 10, 2005 (Inception) through March 31, 2011 | 7 | |||
Condensed Consolidated Statements of Changes in Partners' Capital and Stockholders' Equity for the Three Months Ended March 31, 2011 and for the period November 10, 2005 (Inception) through March 31, 2011 | 8 | |||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010, and for the period November 10, 2005 (Inception) through March 31, 2011 | 9 | |||
Notes to Condensed Consolidated Financial Statements | 10 |
5
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Condensed Consolidated Balance Sheets
(Unaudited)
| | March 31, 2011 | December 31, 2010 | ||||||
|---|---|---|---|---|---|---|---|---|
| | ($ in thousands) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 185,200 | $ | 302,720 | ||||
Joint interest and other receivables | 13,323 | 8,237 | ||||||
Prepaid expenses and other current assets | 8,049 | 9,004 | ||||||
Inventory | 39,033 | 34,738 | ||||||
Short-term restricted cash | 10,800 | — | ||||||
Short-term investments | 599,966 | 534,933 | ||||||
Total current assets | 856,371 | 889,632 | ||||||
Property, plant, and equipment: | ||||||||
Oil and gas properties, successful efforts method of accounting, net of accumulated depletion of $-0- | 460,282 | 462,500 | ||||||
Other property and equipment, net of accumulated depreciation and amortization of $3,003 and $2,820, respectively | 1,204 | 1,269 | ||||||
Total property, plant, and equipment, net | 461,486 | 463,769 | ||||||
Long-term restricted cash | 338,658 | 338,515 | ||||||
Long-term investments | 57,500 | 40,003 | ||||||
Other assets | 16,478 | 14,524 | ||||||
Total assets | $ | 1,730,493 | $ | 1,746,443 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Trade and other accounts payable | $ | 5,929 | $ | 11,989 | ||||
Accrued liabilities | 14,852 | 12,570 | ||||||
Total current liabilities | 20,781 | 24,559 | ||||||
Other long-term obligations | 2,850 | 2,850 | ||||||
Stockholders' Equity: | ||||||||
Common stock, $0.01 par value per share; 2,000,000,000 shares authorized, 350,972,742 and 350,733,998 issued and outstanding as of March 31, 2011 and December 31, 2010, respectively | 3,510 | 3,507 | ||||||
Additional paid-in capital | 2,230,609 | 2,226,726 | ||||||
Deficit accumulated during the development stage | (527,257 | ) | (511,199 | ) | ||||
Total stockholders' equity | 1,706,862 | 1,719,034 | ||||||
Total liabilities and stockholders' equity | $ | 1,730,493 | $ | 1,746,443 | ||||
See accompanying notes.
6
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Condensed Consolidated Statements of Operations
(Unaudited)
| | Three Months Ended March 31, | For the Period November 10, 2005 (Inception) Through March 31, 2011 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | |||||||||
| | ($ in thousands except per share data) | ||||||||||
Oil and gas revenue | $ | — | $ | — | $ | — | |||||
Operating costs and expenses: | |||||||||||
Seismic and exploration | 2,440 | (8,317 | ) | 298,790 | |||||||
Dry hole expense and impairment | 2,514 | 25,852 | 61,429 | ||||||||
General and administrative | 11,618 | 12,112 | 170,468 | ||||||||
Depreciation and amortization | 183 | 182 | 3,003 | ||||||||
Total operating costs and expenses | 16,755 | 29,829 | 533,690 | ||||||||
Operating income (loss) | (16,755 | ) | (29,829 | ) | (533,690 | ) | |||||
Other income (expense): | |||||||||||
Interest income (expense), net | 697 | 97 | 6,433 | ||||||||
Total other income (expense) | 697 | 97 | 6,433 | ||||||||
Net loss before income tax | (16,058 | ) | (29,732 | ) | (527,257 | ) | |||||
Income tax expense | — | — | — | ||||||||
Net income (loss) | $ | (16,058 | ) | $ | (29,732 | ) | $ | (527,257 | ) | ||
Basic and diluted income (loss) per share | $ | (0.05 | ) | $ | (0.09 | ) | |||||
Basic and diluted weighted average common shares outstanding | 350,848,559 | 348,122,446 | |||||||||
See accompanying notes.
7
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Condensed Consolidated Statements of Changes in Partners' Capital and Stockholders' Equity
(Unaudited)
| | General Partner | Class A Limited Partners | Class B Limited Partners | Class C Limited Partners | Common Stock | Additional Paid-in Capital | Accumulated Deficit During Development Stage | Total | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | ($ in thousands) | ||||||||||||||||||||||||
Balance, November 10, 2005 (Inception) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
Class A limited partners' contributions | — | 1,256,738 | — | — | — | — | — | 1,256,738 | |||||||||||||||||
Class B & C limited partners' equity compensation | — | — | 6,984 | 734 | — | — | — | 7,718 | |||||||||||||||||
Common stock issued upon corporate reorganization | — | (1,256,738 | ) | (6,984 | ) | (734 | ) | 2,743 | 1,261,713 | — | — | ||||||||||||||
Equity based compensation | — | — | — | — | — | 15,074 | — | 15,074 | |||||||||||||||||
Common stock issued at initial public offering, net of offering costs | — | — | — | — | 630 | 806,629 | — | 807,259 | |||||||||||||||||
Common stock issued at private placement | — | — | — | — | 32 | 42,156 | — | 42,188 | |||||||||||||||||
Common stock issued at the closing of the over-allotment portion of initial public offering, net of offering costs | — | — | — | — | 80 | 101,176 | — | 101,256 | |||||||||||||||||
Common stock issued for vested restricted stock | — | — | — | — | 22 | (22 | ) | — | — | ||||||||||||||||
Net income (loss) | — | — | — | — | — | — | (511,199 | ) | (511,199 | ) | |||||||||||||||
Balance, December 31, 2010 | — | — | — | — | 3,507 | 2,226,726 | (511,199 | ) | 1,719,034 | ||||||||||||||||
Common stock issued for vested restricted stock | — | — | — | — | 3 | (3 | ) | — | — | ||||||||||||||||
Equity based compensation | — | — | — | — | — | 3,886 | — | 3,886 | |||||||||||||||||
Net income (loss) | — | — | — | — | — | — | (16,058 | ) | (16,058 | ) | |||||||||||||||
Balance, March 31, 2011 | $ | — | $ | — | $ | — | $ | — | $ | 3,510 | $ | 2,230,609 | $ | (527,257 | ) | $ | 1,706,862 | ||||||||
See accompanying notes.
8
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | Three Months Ended March 31, | For the Period November 10, 2005 (Inception) Through March 31, 2011 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | ||||||||||
| | ($ in thousands) | |||||||||||
Cash flows provided from operating activities | ||||||||||||
Net income (loss) | $ | (16,058 | ) | $ | (29,732 | ) | $ | (527,257 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 183 | 182 | 3,003 | |||||||||
Dry hole expense and impairment of unproved properties | 2,514 | 25,852 | 61,429 | |||||||||
Equity based compensation | 3,887 | 4,622 | 26,680 | |||||||||
Amortization of premium (accretion of discount) on investment securities | 1,435 | — | 3,043 | |||||||||
Other | — | — | 557 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Joint interest and other receivables | (5,084 | ) | (36,660 | ) | (13,323 | ) | ||||||
Inventory | (4,296 | ) | (8,079 | ) | (39,033 | ) | ||||||
Prepaid expense and other assets | (999 | ) | 1,362 | (21,679 | ) | |||||||
Trade and other accounts payable | (6,061 | ) | 10,452 | 5,916 | ||||||||
Accrued liabilities and other | 2,282 | (27,567 | ) | 12,842 | ||||||||
Net cash provided by (used in) operating activities | (22,197 | ) | (59,568 | ) | (487,822 | ) | ||||||
Cash flows from investing activities | ||||||||||||
Capital expenditures for oil and gas properties | — | — | (704,107 | ) | ||||||||
Capital expenditures for other property and equipment | (119 | ) | (379 | ) | (4,193 | ) | ||||||
Exploratory wells drilling in process | (296 | ) | (1,330 | ) | (154,595 | ) | ||||||
Proceeds from sale of oil and gas properties | — | — | 339,001 | |||||||||
Change in restricted cash | (10,772 | ) | (151,299 | ) | (348,846 | ) | ||||||
Proceeds from maturity of investment securities | 374,885 | — | 599,870 | |||||||||
Purchase of investment securities | (459,021 | ) | — | (1,260,991 | ) | |||||||
Net cash provided by (used in) investing activities | (95,323 | ) | (153,008 | ) | (1,533,861 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Capital contributions prior to IPO—Class A limited partners | — | — | 1,256,180 | |||||||||
Proceeds from initial public offering, net of costs | — | — | 807,259 | |||||||||
Proceeds from private placement, net of costs | — | — | 42,188 | |||||||||
Proceeds from over-allotment portion of initial public offering, net of costs | — | 101,256 | 101,256 | |||||||||
Net cash provided by (used in) financing activities | — | 101,256 | 2,206,883 | |||||||||
Net increase (decrease) in cash and cash equivalents | (117,520 | ) | (111,320 | ) | 185,200 | |||||||
Cash and cash equivalents, beginning of period | 302,720 | 1,093,100 | — | |||||||||
Cash and cash equivalents, end of period | $ | 185,200 | $ | 981,780 | $ | 185,200 | ||||||
See accompanying notes.
9
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Operations
Organization
Cobalt International Energy, Inc. (the "Company") was incorporated pursuant to the laws of the State of Delaware in August 2009 to become a holding company for Cobalt International Energy, L.P. (the "Partnership"). The Partnership is a Delaware limited partnership formed on November 10, 2005, by funds affiliated with Goldman, Sachs & Co., Riverstone Holdings LLC and The Carlyle Group as well as members of the Partnership's management team, collectively constituting Class A limited partners. In 2006, funds affiliated with KERN Partners Ltd. and certain limited partners in such funds affiliated with KERN Partners Ltd, were admitted as Class A limited partners. In 2007, First Reserve Corporation and Four Winds Consulting were admitted as Class A limited partners.
A corporate reorganization occurred concurrently with the completion of the initial public offering ("IPO") on December 21, 2009. All the outstanding interests of the Partnership were exchanged for 283,200,000 shares of the Company's common stock and as a result the Partnership became wholly-owned by the Company. The shares of CIP GP Corp., the general partner of the Partnership were contributed by certain of the Class A limited partners holding such shares to the Company for no consideration. Prior to reorganization, the Company was not subject to federal or state income taxes. Upon completion of the corporate reorganization, the Company became subject to federal and state income taxes.
On December 21, 2009 the Company closed its IPO with the issuance of 63,000,000 shares of common stock from the public offering and 3,125,000 of shares issued in a private placement at a price of $13.50 per share. On January 7, 2010, the Company closed the sale of an additional 7,978,000 shares of its common stock at the public offering price of $13.50 per share pursuant to the exercise of the over-allotment option by the underwriters of the IPO. The proceeds received of approximately $1.0 billion has been and will be used to fund the Company's drilling and exploration program.
Operations
The Company is an independent, oil-focused exploration and production company with a current focus in the deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. The terms "Company," "Cobalt," "we," "us," "our," "ours," and similar terms refer to Cobalt International Energy, Inc. unless the context indicates otherwise.
On April 20, 2010, the Transocean Deepwater Horizon, a semi-submersible offshore drilling rig operating in the deepwater U.S. Gulf of Mexico under contract to BP plc exploded, burned for two days and sank, resulting in loss of life, injuries and a massive oil spill. Hydrocarbons discharged continuously from the well since the time of this disaster until July 15, 2010 when a capping mechanism temporarily stopped the flow of hydrocarbons and until September 19, 2010 when efforts to permanently stop the flow of hydrocarbons from the well were successful. Although the Company has no economic interest in this well or the Deepwater Horizon, all of the Company's and its partners' plans for exploration and appraisal drilling activities in the U.S. Gulf of Mexico were suspended and continue to be significantly delayed as a result of the response by the U.S. government and its regulatory agencies to the Deepwater Horizon incident.
The Company does not know when it will be able to resume drilling operations in the U.S. Gulf of Mexico or at what cost. The uncertainty surrounding the timing and cost of the Company's drilling
10
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
1. Organization and Operations (Continued)
activities in the U.S. Gulf of Mexico is primarily the result of (i) newly issued regulations by the U.S. Department of the Interior ("DOI") and the DOI's Bureau of Ocean Energy Management, Regulation and Enforcement ("BOEMRE"), (ii) ongoing clarifications and interpretive guidance often in the form of a Notice to Lessees ("NTL") issued by the DOI and the BOEMRE relating to these newly issued regulations as well as with respect to existing regulations, (iii) the Company's continuing compliance efforts relating to these regulations, clarifications and guidance, (iv) the uncertainty as to the ability of the BOEMRE to timely review submissions and issue drilling permits, (v) the general uncertainty regarding additional regulation of the oil and gas industry's operations in the U.S. Gulf of Mexico and (vi) ongoing and potential third party legal challenges to industry drilling operations in the U.S. Gulf of Mexico.
The successful execution of the Company's U.S. Gulf of Mexico business plan depends on its ability to continue its exploration and appraisal efforts. Given the current restrictions, potential future restrictions and the uncertainty surrounding the availability of any exceptions to any restrictions, the Company cannot predict when it will be able to continue its exploratory and appraisal program in the U.S. Gulf of Mexico. A prolonged suspension of or delay in the Company's drilling operations would adversely affect its business, financial position or future results of operations.
As of March 31, 2011, the Company had no proved oil and gas reserves.
Business Relationships
TOTAL Alliance
On April 6, 2009, the Company announced a long-term alliance with TOTAL E&P USA, Inc. ("TOTAL") in which, through a series of transactions, the Company combined its respective U.S. Gulf of Mexico exploratory lease inventory (which excludes the Heidelberg portion of its Ligurian/Heidelberg prospect, its Shenandoah prospect, and all developed or producing properties held by TOTAL in the U.S. Gulf of Mexico) through the exchange of a 40% interest in its leases for a 60% interest in TOTAL's leases, resulting in a current combined alliance portfolio covering 224 blocks. The Company will act as operator on behalf of the alliance through the exploration and appraisal phases of development. As part of the alliance, TOTAL committed, among other things, to (i) provide a 5th generation deepwater rig to drill a mandatory five-well program on the Company's existing operated blocks, (ii) pay up to $300 million to carry a substantial share of the Company's costs with respect to this five-well program (above the amounts TOTAL is obligated to pay as owner of a 40% interest), (iii) pay an initial amount of approximately $280 million primarily as reimbursement of the Company's share of historical costs in its contributed properties and consideration under purchase and sale agreements, (iv) pay 40% of the general and administrative costs relating to the Company's operations in the U.S. Gulf of Mexico during the 10-year alliance term, and (v) award the Company up to $180 million based on the success of the alliance's initial five-well program, in all cases subject to certain conditions and limitations. The exchange transactions on the leases resulted in no gain or loss to the Company. Additionally, as part of the alliance, TOTAL and the Company formed a U.S. Gulf of Mexico-wide area of mutual interest, whereby each party has the right to participate in any oil and natural gas lease interest acquired by the other party within this area. As of March 31, 2011, approximately $196 million of the $300 million that Total is obligated to carry the Company remains available to it, as does the potential award of up to $180 million based on the success of the alliance.
11
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
1. Organization and Operations (Continued)
Sonangol Partnership
On April 22, 2009, the Company announced a partnership in the U.S. Gulf of Mexico with the national oil company of Angola, Sociedade Nacional de Combustíveis de Angola—Empresa Pública ("Sonangol"), whereby Sonangol acquired a 25% non-operated interest of the Company's pre-TOTAL alliance interests in 11 of the Company's U.S. Gulf of Mexico leases. The price Sonangol paid the Company for this interest was calculated using the price the Company paid for such leases plus $10 million to cover the Company's historical seismic and exploration costs. Sonangol has since acquired a 15% non-operated interest in three additional U.S. Gulf of Mexico leases and a 25% non-operated interest in another U.S. Gulf of Mexico lease pursuant to this partnership, bringing the total partnership portfolio to 15 U.S. Gulf of Mexico leases. This transaction resulted in no gain or loss to the Company. This transaction is notable as it represents Sonangol's initial entry into the North American exploration and production sector.
Sonangol Risk Services Agreements
On February 24, 2010, the Company executed Risk Services Agreements (the "RSAs") for Blocks 9 and 21 offshore Angola with Sonangol, as well as Sonangol Pesquisa e Produção, S.A., Nazaki Oil and Gáz, S.A. ("Nazaki") and Alper Oil, Limitada. The RSAs govern the Company's 40% interest in and operatorship of Blocks 9 and 21 offshore Angola and form the basis of its exploration, development and production operations on these blocks.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed unaudited consolidated financial statements include the financial statements of Cobalt International Energy, Inc. and all of its wholly owned subsidiaries. All significant intercompany transactions and amounts have been eliminated. Because the Company is a development stage enterprise, it has presented its financial statements in accordance with FASB Accounting Standards Codification (ASC) No. 915"Development Stage Entities."
The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be presented for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.
12
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by the Company include (i) accruals related to expenses, (ii) assumptions used in estimating fair value of equity based awards and (iii) assumptions used in impairment testing. Although the Company believes these estimates are reasonable, actual results could differ from these estimates.
Income (Loss) Per Share
Basic income (loss) per share was calculated by dividing net income or loss applicable to common shares by the weighted average number of common shares outstanding during the periods presented. The calculation of diluted income (loss) per share should include the potential dilutive impact of nonvested restricted shares outstanding during the year, unless their effect is anti-dilutive. For the three months ended March 31, 2011 and 2010, 6,719,961 and 6,956,814 shares of non-vested restricted stock, stock options and performance-based awards, respectively, were excluded from the diluted income (loss) per share because they are anti-dilutive.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, joint interest and other receivables, investments and restricted cash. The fair value of these instruments approximates carrying values due to their short-term duration.See Note 4—Restricted Cash and Note 5—Investments, for a discussion of the carrying value and fair value of the Company's investments in held-to-maturity securities.
Investments
In 2010, the Company adopted a policy on accounting for its investments, which consist entirely of debt securities, based on the guidance of Accounting Standards Codification No. 320,Accounting for Certain Investments in Debt and Equity Securities. The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as long-term investments. The debt securities are carried at amortized costs and classified as held-to-maturity securities as the Company has the positive intent and ability to hold them until they mature. The net carrying value of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the securities. Held-to-maturity securities are stated at amortized cost, which approximates fair market value as of March 31, 2011. Income related to these securities is reported as a component of interest income in the Company's consolidated statement of operations.
Investments are considered to be impaired when a decline in fair value is determined to be other-than-temporary. The Company conducts a regular assessment of its debt securities with
13
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
2. Summary of Significant Accounting Policies (Continued)
unrealized losses to determine whether securities have other-than-temporary impairment ("OTTI"). This assessment considers, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, market conditions and whether the Company intends to sell or whether it is more likely than not that the Company will be required to sell the debt securities. For the three months ended March 31, 2011, the Company has no OTTI in its debt securities.
3. Cash and Cash Equivalents
Cash and cash equivalents consisted of the following:
| | March 31, 2011 | December 31, 2010 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
Cash at banks | $ | 5,039 | $ | 10,327 | |||
Money market funds | 64,181 | 59,792 | |||||
Held-to-maturity securities(1) | 115,980 | 232,601 | |||||
| $ | 185,200 | $ | 302,720 | ||||
- (1)
- These securities mature within 90 days from the date of purchase.
4. Restricted Cash
Restricted cash consisted of the following:
| | March 31, 2011 | December 31, 2010 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
Short-term: | |||||||
Ocean Confidence escrow account(1) | $ | 10,800 | $ | — | |||
| $ | 10,800 | $ | — | ||||
Long-term: | |||||||
Ensco 8503 escrow account(2) | $ | 186,225 | $ | 186,184 | |||
Collateral on letters of credit for Angola(3) | 151,717 | 151,615 | |||||
Other vendor restricted cash | 716 | 716 | |||||
| $ | 338,658 | $ | 338,515 | ||||
- (1)
- The $10.8 million was held in an escrow account established in January 2011 as a guarantee of performance to Z North Sea Ltd, a subsidiary of Diamond Offshore Drilling, Inc. for the Ocean Confidence drilling rig contract. During the three months ended March 31, 2011, this escrow fund was invested in a money market deposit account.
- (2)
- $186.0 million was held in an escrow account established in December 2009 as a guarantee of performance to Ensco plc for the Ensco 8503 drilling rig contract. During the three months ended March 31, 2011, this escrow fund was invested in U.S. Treasury bills, purchased at a discount, resulting in net carrying value of $186.2 million as of
14
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
4. Restricted Cash (Continued)
March 31, 2011. The contractual maturities of these U.S. Treasury bills are within one year.
- (3)
- $151.3 million was held in a collateral account established in March 2010 as collateral for letters of credit issued in support of the Company's contractually agreed work program obligations on Blocks 21 and 9 offshore Angola. During the three months ended March 31, 2011, the funds in this collateral account were invested in U.S. Treasury bills, purchased at a discount, resulting in a net carrying value of $151.7 million as of March 31, 2011. The contractual maturities of these U.S. Treasury bills are within one year.
5. Investments
The Company's investments in held-to-maturity securities, which are stated at amortized cost, were as follows at March 31, 2011 and December 31, 2010:
| | March 31, 2011 | December 31, 2010 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
U.S. Treasury securities | $ | 606,056 | $ | 604,035 | |||
Corporate securities | 111,800 | 180,191 | |||||
Commercial paper | 291,924 | 282,039 | |||||
U.S. government agency securities | 57,500 | 60,003 | |||||
Municipal bonds | 44,108 | 19,068 | |||||
Total | $ | 1,111,388 | $ | 1,145,336 | |||
The Company's condensed consolidated balance sheet included the following held-to-maturity securities:
| | March 31, 2011 | December 31, 2010 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
Cash and cash equivalents | $ | 115,980 | $ | 232,601 | |||
Short-term investments | 599,966 | 534,933 | |||||
Restricted cash | 337,942 | 337,799 | |||||
Long-term investments | 57,500 | 40,003 | |||||
| $ | 1,111,388 | $ | 1,145,336 | ||||
The contractual maturities of these held-to-maturity securities as of March 31, 2011 were as follows:
| | Amortized Cost | Estimated Fair Value | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
Within 1 year | $ | 1,053,888 | $ | 1,053,888 | |||
1 year through 5 years | 57,500 | 57,500 | |||||
| $ | 1,111,388 | $ | 1,111,388 | ||||
All of the Company's investments mature within 18 months of March 31, 2011.
15
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Joint Interest and Other Receivables
Joint interest and other receivables result primarily from billing shared costs under the respective operating agreements to the Company's partners. As of March 31, 2011, the balance due from the Company's partners in the U.S. Gulf of Mexico and West Africa was $10.4 million and represents amounts due for reimbursable charges. These are usually settled within 30 days of the invoice date. In addition, other receivables include $2.9 million of accrued interest on investment securities.
7. Inventory
Inventories consist of various tubular and wellhead products that are used in the Company's drilling programs. The products are stated at the lower of cost or market. Cost is determined on weighted average method and consists of purchase price and other directly attributable costs.
8. Property, Plant, and Equipment
Property, plant, and equipment is stated at cost less accumulated depreciation/amortization and consisted of the following:
| | Estimated Useful Life (Years) | March 31, 2011 | December 31, 2010 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | | ($ in Thousands) | ||||||||
Unproved oil and gas properties | $ | 353,105 | $ | 355,619 | ||||||
Exploratory wells in process | 107,177 | 106,881 | ||||||||
Computer equipment and software | 3 | 2,383 | 2,300 | |||||||
Office equipment and furniture | 3 | 1,047 | 1,047 | |||||||
Vehicles | 3 | 76 | 76 | |||||||
Leasehold improvements | 3 | 701 | 666 | |||||||
| 464,489 | 466,589 | |||||||||
Less: accumulated depreciation and amortization | (3,003 | ) | (2,820 | ) | ||||||
Property, plant, and equipment, net | $ | 461,486 | $ | 463,769 | ||||||
The Company recorded $0.2 million, $0.2 million and $3.0 million of depreciation and amortization expense for the three months ended March 31, 2011 and 2010 and for the period November 10, 2005 (inception) through March 31, 2011, respectively.
Acquisition costs of unproved leasehold properties are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. Significant unproved leases are assessed individually for impairment based on the Company's current exploration plans and an allowance is provided if impairment is indicated. Unproved leasehold costs for properties that are individually less than $1.0 million in carrying value are amortized on a group basis over the average terms of the leases, at rates that provide for full amortization of leases upon lease expiration. These leases have expiration dates ranging from 2011 through 2020. As of March 31, 2011, the balance for unproved leaseholds that were individually less than $1.0 million was $65.1 million. For the three months ended March 31, 2011 and 2010, and for the period November 10,
16
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Property, Plant, and Equipment (Continued)
2005 (inception) through March 31, 2011, the Company recorded $2.5 million, $2.3 million, and $11.8 million, respectively, as amortized expense on its unproved leasehold properties.
Capitalized Exploratory Well Costs
If an exploratory well provides evidence as to the existence of sufficient quantities of hydrocarbons to justify potential completion as a producing well, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas (generally, deepwater and international locations) depending upon, among other things, (i) the amount of hydrocarbons discovered, (ii) the outcome of planned geological and engineering studies, (iii) the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan and (iv) the requirement for government sanctioning in international locations before proceeding with development activities.
The following table reflects the Company's net changes in and the cumulative costs of capitalized exploratory well costs (excluding any related leasehold costs):
| | March 31, 2011 | December 31, 2010 | ||||||
|---|---|---|---|---|---|---|---|---|
| | ($ in thousands) | |||||||
Gulf of Mexico: | ||||||||
Beginning of period | $ | 106,881 | $ | 107,226 | ||||
Addition to capitalized exploratory well cost pending determination of proved reserves: | ||||||||
Shenandoah #1 Exploratory Well | — | 176 | ||||||
Heidelberg #1 Exploratory Well | — | 8 | ||||||
Heidelberg #2 Appraisal Well | — | 10,854 | ||||||
Ligurian #1 Exploratory Well | — | 86 | ||||||
Criollo #1 Exploratory Well | — | 8,171 | ||||||
Firefox #1 Exploratory Well | — | 12,463 | ||||||
Other pre-spud costs | — | 2,839 | ||||||
Helix subsea containment costs | 296 | — | ||||||
Reclassifications to wells, facilities, and equipment based on determination of proved reserves | — | — | ||||||
Amounts charged to expense | — | (34,942 | ) | |||||
End of period | $ | 107,177 | $ | 106,881 | ||||
17
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Property, Plant, and Equipment (Continued)
| | Spud Year | As of March 31, 2011 | As of December 31, 2010 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | | ($ in thousands) | |||||||||
Cumulative costs: | |||||||||||
Shenandoah #1 Exploratory Well | 2008 | $ | 69,521 | $ | 69,521 | ||||||
Heidelberg #1 Exploratory Well | 2008 | 20,240 | 20,240 | ||||||||
Heidelberg #2 Appraisal Well | 2010 | — | — | ||||||||
Ligurian #1 Exploratory Well | 2009 | 8,100 | 8,100 | ||||||||
Criollo #1 Exploratory Well | 2009 | 9,020 | 9,020 | ||||||||
Firefox #1 Exploratory Well | 2010 | — | — | ||||||||
Helix subsea containment costs | 296 | — | |||||||||
| $ | 107,177 | $ | 106,881 | ||||||||
Exploratory Well costs capitalized for a period greater than one year after completion of drilling at March 31, 2011 (included in table above) | $ | 106,881 | $ | 106,881 | |||||||
Capitalized exploratory well costs that have been suspended longer than one year are associated with the Shenandoah #1, Heidelberg #1, Ligurian #1 and Criollo #1 projects. These exploratory 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. Management believes these projects exhibit sufficient indications of hydrocarbons to justify potential development and is 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 projects, the associated costs will be expensed at that time.
As of March 31, 2011, no exploratory wells have been drilled by the Company in offshore Angola or Gabon.
9. Other Assets
As of March 31, 2011, costs associated with the mobilization of the Ensco 8503 and the Ocean Confidence drilling rigs were deferred in other assets. The rigs are currently assigned to other companies by their owners until mid 2011. Upon completion of these assignments, the Company will amortize these costs to respective exploratory wells as and when the rigs are used for drilling activities over the terms of their respective drilling contract. These costs will be expensed or capitalized to oil
18
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. Other Assets (Continued)
and gas properties as exploratory drilling costs, depending on the drilling results. The accumulated costs associated with these drilling rigs in other assets are as follows:
| | As of March 31, 2011 | As of December 31, 2010 | |||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | ||||||
Ensco 8503 | $ | 14,524 | $ | 14,524 | |||
Ocean Confidence | 1,954 | — | |||||
| $ | 16,478 | $ | 14,524 | ||||
10. Other Long-Term Obligations
The Company is required to make $4.2 million of social obligation payments to Sonangol based on the terms of the RSAs as described in Note 1—Business Relationships. As of March 31, 2011, $2.9 million relates to the long-term portion of these social obligation payments to be paid over a five year period.
11. Stockholders' Equity
Upon closing of the IPO on December 21, 2009, the Company was authorized to issue 2,000,000,000 shares of common stock, $0.01 par value per share, and 200,000,000 shares of preferred stock, $0.01 par value per share. As a result of the corporate reorganization, all the outstanding partnership interests in the Partnership were exchanged for 283,200,000 shares of the Company's common stock, of which 274,392,583 were issued on December 21, 2009 and 8,015,041 were non-vested restricted stock.
On December 21, 2009, the Company issued 63,000,000 shares of its common stock through the IPO and 3,125,000 shares of common stock through a private placement at a price of $13.50 per share.
On January 7, 2010, the Company closed the sale of an additional 7,978,000 shares of its common stock at the public offering price of $13.50 per share pursuant to the exercise over-allotment option by the underwriters of the IPO.
19
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
12. Seismic and Exploration Expenses
Seismic and exploration expenses consisted of the following:
| | Three Months Ended March 31, | For the Period November 10, 2005 (Inception) through March 31, 2011 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | ||||||||
| | ($ in Thousands) | |||||||||
Seismic data costs | $ | 756 | $ | 5,446 | $ | 287,369 | ||||
Seismic cost recovery(1) | — | (15,126 | ) | (25,126 | ) | |||||
Leasehold delay rentals | 1,035 | 1,363 | 21,479 | |||||||
Force Majeure expense(2) | — | — | 13,549 | |||||||
Drilling rig acceptance expense | 649 | — | 1,519 | |||||||
| $ | 2,440 | $ | (8,317 | ) | $ | 298,790 | ||||
- (1)
- These amounts represent reimbursement of past seismic costs incurred by the Company.
- (2)
- Expenditures resulting from suspension of drilling activities in the U.S. Gulf of Mexico as a result of the explosion and sinking of the Deepwater Horizon drilling rig in the U.S. Gulf of Mexico, the resulting oil spill and the regulatory response thereto.
13. Equity Based Compensation
The Company accounts for stock-based compensation at fair value. The Company grants various types of stock-based awards including stock options, restricted stock and performance-based awards. The fair value of stock option awards is determined using the Black-Scholes-Merton option-pricing model. For restricted stock awards with market conditions, the fair value of the awards is measured using the asset-or-nothing option pricing model. Restricted stock awards without market conditions and the performance-based awards are valued using the market price of the Company's common stock on the grant date. The Company records compensation cost, net of estimated forfeitures, for stock-based compensation awards over the requisite service period except for performance-based awards. For performance-based awards, compensation cost is recognized over the requisite service period as and when the Company determines that the achievement of the performance condition is probable, using the per-share fair value measured at grant date.
20
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
13. Equity Based Compensation (Continued)
The following table summarizes grant, vesting and forfeiture information about the Company's restricted stock, stock options and restricted stock units from December 31, 2010 to March 31, 2011:
| | Number of shares relating to Restricted Stock | Weighted Average Grant Date Fair Value Per Share | Number of shares relating to Stock Options | Weighted Average Grant Date Fair Value Per Option | Number of shares relating Restricted Stock Units | Weighted Average Grant Date Fair Value Per Unit | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Non-vested at December 31, 2010 | 5,570,895 | $ | 9.77 | 1,133,960 | $ | 6.78 | 198,838 | $ | 12.45 | ||||||||||
Granted | — | — | — | — | — | ||||||||||||||
Vested | (236,832 | ) | $ | 0.31 | — | — | — | — | |||||||||||
Forfeited or expired | — | — | — | — | — | — | |||||||||||||
Non-vested units at March 31, 2011 | 5,334,063 | $ | 10.19 | 1,133,960 | $ | 6.78 | 198,838 | $ | 12.45 | ||||||||||
Weighted-average period remaining | 3.1 years | 3.75 years | 3.75 years | ||||||||||||||||
Unrecognized compensation, net of estimated forfeitures ($ in thousands) | $ | 36,792 | $ | 6,750 | $ | ** | |||||||||||||
- **
- Each Restricted Stock Unit ("RSU") will vest within a range of 0% to 200%, or between zero and two shares of common stock, on the applicable vesting dates and contingent upon the recipient's continued service at such vesting dates and based upon the achievement of successful drilling results as defined in the RSU award agreement. The fair value of each RSU is determined by the closing price of the Company's common stock at the date of grant, which was $12.45 per share. Compensation cost will be recognized as and when the performance conditions are satisfied. Until such time the Company resumes its drilling activities in the U.S. Gulf of Mexico and/or commences its drilling activities offshore Angola, the Company will be unable to determine whether the minimum drilling success rate as set forth in the RSU award agreement will be achieved. As a result, no compensation expense was recognized since the initial date of grant on December 3, 2010 through March 31, 2011. Assuming the minimum drilling success rate as set forth in the RSU award agreement is achieved, compensation relating to RSUs could total up to $5.0 million.
There were no restricted stock unit awards to non-employee directors during the three months ended March 31, 2011. For the period November 10, 2005 (inception) through March 31, 2011, the Company granted a total of 53,121 restricted stock units to non-employee directors.
21
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
13. Equity Based Compensation (Continued)
The table below summarizes the equity-based compensation costs, net of forfeitures, recognized for the three months ended March 31, 2011 and 2010, and for the period November 10, 2005 (inception) through March 31, 2011:
| | Three Months Ended March 31, | For the Period November 10, 2005 (Inception) through March 31, 2011 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | |||||||||
| | ($ in thousands) | ||||||||||
Restricted stock: | |||||||||||
Employees | $ | 3,130 | $ | 4,522 | $ | 23,488 | |||||
Non-employee directors | 143 | 101 | 650 | ||||||||
Stock options: | |||||||||||
Employees | 613 | — | 714 | ||||||||
Restricted stock units (performance-based) | — | — | — | ||||||||
Deferred stock compensation(1) | — | — | 1,828 | ||||||||
| $ | 3,886 | $ | 4,623 | $ | 26,680 | ||||||
- (1)
- In December 2008, the Company adopted a deferred compensation plan and provided certain executive officers the opportunity to defer under the Plan all or a portion of their salary and/or annual bonus for 2009. Amounts deferred under the Plan generally are deemed to be invested in a money market account prior to the IPO and shares of the Company's common stock following the IPO. Subject to accelerated payment under specified circumstances, the deferred amounts will be distributed to these executive officers in January 2012 in the form of shares of the Company's common stock. As of March 31, 2011, there were 121,637 shares under the Plan to be distributed to these executive officers.
14. Contingencies
The Company is not currently party to any legal proceedings. However, from time to time the Company may be subject to various lawsuits, claims and proceedings that arise in the normal course of business, including employment, commercial, environmental, safety and health matters. It is not presently possible to determine whether any such matters will have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.
22
Cobalt International Energy, Inc.
(a Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
15. Supplemental Cash Flow Information
The following reflects the Company's supplemental cash flow information:
| | Three Months Ended March 31, | For the Period November 10, 2005 (Inception) through March 31, 2011 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | ||||||||
| | ($ in Thousands) | |||||||||
Noncash additions to property, plant, and equipment relating to current liabilities and accounts payable | — | $ | 25,100 | $ | 1,765 | |||||
16. Subsequent Events
On April 15, 2011, the Company completed a registered underwritten public offering of 35,650,000 shares of its common stock at a public offering price of $14.00 per share, resulting in net proceeds to the Company of approximately $478.4 million. The following table sets forth the Company's consolidated financial statements as of and for the three months ended March 31, 2011 on an actual basis and on a pro forma basis to give effect to (i) the proceeds from the above common stock offering, which resulted in a $478.4 million increase in current assets and a corresponding increase in equity, and (ii) on a pro forma basis to give effect to the earnings per share and weighted average common shares outstanding from the issuance of 35,650,000 shares of the Company's common stock.
| | March 31, 2011 | ||||||
|---|---|---|---|---|---|---|---|
| | Actual | Pro Forma | |||||
| | ($ in thousands) | ||||||
Consolidated Balance Sheet: | |||||||
Total current assets | $ | 856,371 | $ | 1,334,721 | |||
Total assets | 1,730,493 | 2,208,843 | |||||
Total current liabilities | 20,781 | 20,781 | |||||
Total stockholders' equity | 1,706,862 | 2,185,212 | |||||
Total liabilities and stockholders' equity | 1,730,493 | 2,208,843 | |||||
| | Three Months Ended March 31, 2011 | ||||||
|---|---|---|---|---|---|---|---|
| | Actual | Pro Forma | |||||
| | ($ in thousands except per share data) | ||||||
Consolidated Statement of Operations: | |||||||
Net income (loss) before income tax | $ | (16,058 | ) | $ | (16,058 | ) | |
Income tax | — | — | |||||
Net income (loss) | $ | (16,058 | ) | $ | (16,058 | ) | |
Basic and diluted income (loss) per share | $ | (0.05 | ) | $ | (0.04 | ) | |
Basis and diluted weighted average common shares outstanding | 350,848,559 | 386,498,559 | |||||
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" and the other matters set forth in this Quarterly Report on Form 10-Q. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2010.
Overview
We are an independent, oil-focused exploration and production company with a world-class below salt prospect inventory in the deepwater of the U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. Primarily through our highly targeted leasing strategy, we have established a current portfolio of 132 identified, well defined prospects, comprised of 47 prospects located in the deepwater U.S. Gulf of Mexico and 85 prospects located in Blocks 9 and 21 offshore Angola and the Diaba Block offshore Gabon.
First Quarter 2011 Operational Highlights
- •
- On January 24, 2011, we announced that we had been conditionally awarded a 40% working interest and indicated as operator of Block 20 offshore Angola, on which we have identified 37 prospects.
- •
- On February 4, 2011, we accepted the Ensco 8503 drilling rig and on February 9, 2011 it departed the U.S. Gulf of Mexico for French Guiana on an approximate five month direct sublet from its owner, Ensco Offshore Company to a subsidiary of Tullow Oil plc. At the end of this sublet, we have no reason to believe that we will not have all applicable permits to resume our drilling operations in the U.S. Gulf of Mexico. However, the exact timing of the resumption of our operations depends on when such permits will be granted by the Bureau of Ocean Energy, Management, Regulation and Enforcement ("BOEMRE"), notably the BOEMRE's approval of the drilling permit (APD) for our North Platte #1 exploratory well, among other things. We will only be obligated to pay certain amortized costs associated with certain rig upgrades during the term of the sublet.
- •
- On February 24, 2011, we announced that we had received a letter from the BOEMRE, notifying us of the BOEMRE's approval of the Exploration Plan (EP) for our North Platte #1 exploratory well.
- •
- We completed the acquisition of 2,487 square kilometers of 3D seismic data on Block 9 offshore Angola. In connection with this acquisition, the face value of our letter of credit securing our work obligations on Block 9 offshore Angola was reduced by approximately $9.4 million to approximately $45.3 million, resulting in actual cash proceeds to us of approximately $10.2 million due to the return of cash collateral and distribution of investment income.
- •
- We received approval from Sociedade Nacional de Combustíveis de Angola—Empresa Pública ("Sonangol"), the national oil company of Angola, to spud the Bicuar #1 exploratory well and the Camiea #1 exploratory well. We expect to commence our initial two well pre-salt exploration program on Block 21 offshore Angola, which consists of these two exploratory wells, during the second quarter of 2011, depending on when the Ocean Confidence drilling rig, which we have under contract, is returned to us from an Angolan affiliate of Total S.A. to whom we have assigned the Ocean Confidence drilling rig to drill one well.
24
First Quarter 2011 Financial Highlights
- •
- We recorded a net loss of approximately $16.1 million, a 46% decrease from the first quarter of 2010.
- •
- Total operating expenses were approximately $16.8 million, a 44% decrease from the first quarter of 2010.
- •
- Cash expenditures, excluding changes in working capital, were approximately $11 million.
- •
- On April 15, 2011, we completed a registered underwritten offering of 35,650,000 shares of our common stock at a public offering price of $14.00 per share, resulting in net proceeds to us of approximately $478.4 million. Including the net proceeds from this offering, our existing cash and investments on hand and restricted cash as of March 31, 2011, we have approximately $1.7 billion of liquidity.
Results of Operations
The following tables set forth selected financial data for the periods indicated:
| | Three Months Ended March 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | Increase (Decrease) | % | ||||||||||
| | ($ in thousands) | |||||||||||||
Oil and gas revenue | $ | — | $ | — | $ | — | — | |||||||
Operating costs and expenses: | ||||||||||||||
Seismic and exploration | 2,440 | (8,317 | ) | 10,757 | 129.34 | % | ||||||||
Dry hole expense and impairment | 2,514 | 25,852 | (23,338 | ) | (90.28 | )% | ||||||||
General and administrative | 11,618 | 12,112 | (494 | ) | (4.08 | )% | ||||||||
Depreciation and amortization | 183 | 182 | 1 | 0.55 | % | |||||||||
Total operating costs and expenses | 16,755 | 29,829 | (13,074 | ) | (43.83 | )% | ||||||||
Operating income (loss) | (16,755 | ) | (29,829 | ) | (13,074 | ) | (43.83 | )% | ||||||
Other income (expense): | ||||||||||||||
Interest income (expense), net | 697 | 97 | 600 | 618.56 | % | |||||||||
Total other income (expense) | 697 | 97 | 600 | 618.56 | % | |||||||||
Net income (loss) before income tax | (16,058 | ) | (29,732 | ) | (13,674 | ) | (45.99 | )% | ||||||
Income tax expense (benefit) | — | — | — | — | ||||||||||
Net income (loss) | $ | (16,058 | ) | $ | (29,732 | ) | $ | (13,674 | ) | (45.99 | )% | |||
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
Oil and gas revenue. We have not yet commenced oil production. Therefore, we did not realize any oil and gas revenue during the three months ended March 31, 2011 and 2010, respectively.
Operating costs and expenses. Our operating costs and expenses consisted of the following during the three months ended March 31, 2011 and 2010:
Seismic and exploration. Seismic and exploration costs increased by $10.8 million during the three months ended March 31, 2011, as compared to the three months ended March 31, 2010. The increase was primarily due to the $15.1 million reimbursement of past seismic costs from partners during the three months ended March 31, 2010 resulting in a negative balance of $8.3 million in seismic and exploration costs. For the three months ended March 31, 2011, seismic costs decreased by $4.6 million and leasehold delay rentals decreased by $0.3 million, which were offset by an increase of $0.6 million in drilling rig acceptance expense. The seismic and exploration costs incurred for the three months
25
ended March 31, 2011 consisted of (i) $0.8 million incurred for seismic data acquisition and processing for the U.S. Gulf of Mexico and offshore West Africa, (ii) $1.0 million for leasehold delay rentals and (iii) $0.6 million relating to costs incurred to ensure that the Ensco 8503 drilling rig meets the regulatory requirements for drilling in the U.S. Gulf of Mexico.
Dry hole expense and impairment. Dry hole expense and impairment decreased by $23.3 million during the three months ended March 31, 2011, as compared to the three months ended March 31, 2010 due primarily to no additional dry holes being drilled. For the three months ended March 31, 2011, we recorded an allowance of $2.5 million against future impairment on the carrying value of our unproved leasehold properties that are individually less than $1 million.
General and administrative. General and administrative costs decreased by $0.5 million during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. The decrease in general and administrative costs during this period was primarily attributed to a $0.3 million increase in insurance-related expense, a $1.7 million increase in office related expenses primarily related to start-up of operations in Angola, a decrease of $4.2 million for social obligation payments required by our Risk Services Agreements, executed on February 24, 2010, in Angola, which were offset by an decrease of $1.7 million for reimbursement of our general and administrative costs from our partners in the U.S. Gulf of Mexico and West Africa.
Depreciation and amortization. Depreciation and amortization did not change significantly from the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.
Other income. Other income increased by $0.6 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. The increase of $0.6 million was primarily due to interest recognized on investment securities.
Income tax expense/benefit. No income tax benefit has been reflected since a full valuation allowance has been established against the deferred tax asset that would have been generated as a result of the operating results.
Liquidity and Capital Resources
We are a development stage enterprise and will continue to be so until commencement of substantial production from our oil properties. We do not know when we will be able to resume any drilling operations in the U.S. Gulf of Mexico and, therefore, we do not know when we will be able to commence production in the U.S. Gulf of Mexico. In addition, given that our initial source of production could be from our two previously announced discoveries and that those discoveries are operated by an entity that is involved in the Deepwater Horizon incident, development plans and production from these discoveries may be further delayed. Prior to the Deepwater Horizon incident, our expected time from discovery to first production was four to five years in the U.S. Gulf of Mexico. We do not know how this timeline will change as a result of new and forthcoming regulations. Offshore Angola, we expect production within five years of a commercial discovery, which will depend upon successful exploration and appraisal drilling results, additional capital funding, access to suitable infrastructure and rig availability. Until substantial production is achieved, our primary sources of liquidity are expected to be cash on hand, amounts paid pursuant to the terms of our Total alliance and funds from future equity and debt financings, asset sales and farm-out arrangements.
We expect to incur substantial expenses and generate significant operating losses as we continue to:
- •
- conduct our current exploration and appraisal drilling program in the U.S. Gulf of Mexico and our current exploration drilling program offshore Angola and Gabon, including increased industry costs in the U.S. Gulf of Mexico resulting from the Deepwater Horizon incident;
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- •
- purchase and analyze seismic data in order to assess current prospects and identify future prospects;
- •
- develop our discoveries which we determine to be commercially viable; and
- •
- incur expenses related to operating as a public company and compliance with regulatory requirements.
Our future financial condition and liquidity will be impacted by, among other factors, the success of our exploration and appraisal drilling program, the number of commercially viable hydrocarbon discoveries made and the quantities of hydrocarbons discovered, the speed with which we can bring such discoveries to production, whether and to what extent we invest in additional oil leases and concessional licenses, and the actual cost of exploration, appraisal and development of our prospects.
We expect our full year 2011 cash expenditures, excluding changes in working capital and including expenditures associated with Block 20 offshore Angola, to be between $325 million and $400 million, approximately $11 million of which was spent in the first quarter. The range of 2011 expenditures is primarily dependent on when we recommence U.S. Gulf of Mexico drilling operations as well as potential testing and appraisal expenditures associated with any discoveries offshore Angola. We expect to incur cash expenditures during fiscal years 2011 through 2013 of approximately $1.3 billion to $1.4 billion. Key components of these cash expenditures are expected to be (i) approximately $300 to $350 million for our West Africa drilling program; (ii) approximately $450 to $500 million for our U.S. Gulf of Mexico drilling program (net of cash expenditures to be made from the TOTAL drilling fund); and (iii) assuming we execute the Production Sharing Agreement governing our interests in Block 20 offshore Angola, approximately $350 to $400 million for certain social bonus payments and to establish our work program guarantees, such guarantees to be reduced over the initial five year exploration period under the Production Sharing Agreement as work program obligations are met.
We expect that our existing cash on hand, including the proceeds from our recent public offering of common stock which closed on April 15, 2011, will be sufficient to fund our planned exploration and appraisal drilling program, including any expenditures relating to Block 20 offshore Angola, through the end of 2013. However, we may require additional funds earlier than we currently expect in order to execute our strategy as planned. We may seek additional funding through asset sales, farm-out arrangements and equity and debt financings. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our existing stockholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing stockholders will result. If we are unable to obtain funding on a timely basis or on acceptable terms, we may be required to significantly curtail one or more of our exploration and appraisal drilling programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our prospects which we would otherwise develop on our own, or with a majority working interest.
Cash Flows
| | Three Months Ended March 31. | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | ||||||
| | ($ in thousands) | |||||||
Net cash provided by (used in): | ||||||||
Operating Activities | $ | (22,197 | ) | $ | (59,568 | ) | ||
Investing Activities | (95,323 | ) | (153,008 | ) | ||||
Financing Activities | — | 101,256 | ||||||
Operating activities. Net cash used in operating activities for the three months ended March 31, 2011 was $22.2 million compared with net cash used in operating activities of $59.6 million for the
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three months ended March 31, 2010. The decrease was attributed primarily to no exploratory activities from April 2010 through March 2011.
Investing activities. Net cash used in investing activities for the three months ended March 31, 2011 was $95.3 million compared with net cash used in investing activities of $153.0 million for the three months ended March 31, 2010. The decrease in net cash used in investing activities for the three months ended March 31, 2011 was primarily attributed to the $151.3 million of restricted cash to back letters of credit issued to guarantee our contractual obligations in West Africa during the three months ended March 31, 2010 as compared to $10.8 million of restricted cash placed in an escrow account for the guarantee of the Ocean Confidence drilling contract during the three months ended March 31, 2011. In addition, during the three months ended March 31, 2011, we received total proceeds of $374.9 million from the maturity of certain investment securities and purchased new investment securities totaling approximately $459.0 million.
Financing activities. There were no financing activities during the three months ended March 31, 2011. The decrease in net cash provided by financing activities was due to the net proceeds of approximately $101.3 million from the closing of the over-allotment portion of our IPO on January 7, 2010.
Critical Accounting Policies
Our significant accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in our 2010 Annual Report on Form 10-K for the year ended December 31, 2010. Also refer to the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information provided under Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" in our 2010 Annual Report on Form 10-K for the year ended December 31, 2010.
Item 4. Controls and Procedures
We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rules 13a-15 and 15d-15 as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are not currently party to any legal proceedings. However, from time to time we may be subject to various lawsuits, claims and proceedings that arise in the normal course of business, including employment, commercial, environmental, safety and health matters. It is not presently possible to determine whether any such matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
None.
| Exhibit Number | Description of Document | ||
|---|---|---|---|
| 31.1 | * | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
31.2 | * | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
32.1 | * | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | * | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
- *
- Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Cobalt International Energy, Inc. | ||||||
By: | /s/ JOSEPH H. BRYANT | |||||
| Name: | Joseph H. Bryant | |||||
| Title: | Chairman of the Board of Directors and Chief Executive Officer | |||||
Dated: May 3, 2011
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| Exhibit Number | Description of Document | ||
|---|---|---|---|
| 31.1 | * | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
31.2 | * | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 | |
32.1 | * | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | * | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
- *
- Filed herewith.