Cobalt International Energy 10-Q 2012 Q3 Quarterly report

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TABLE OF CONTENTS

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 September 30, 2012 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.)
Cobalt Center 920 Memorial City Way, Suite 100 Houston, Texas (Address of principal executive offices)	77024 (Zip code)

(713) 579-9100
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý Noo

        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). Yesý Noo

        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 filerý	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noý

        Number of shares of the registrant's common stock outstanding at September 30, 2012: 410,572,774 shares.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38

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 2011 Annual Report on Form 10-K filed on February 21, 2012, 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:

•

the discovery and development of oil and gas reserves;

•

to what extent the implementation of our and our partners' prospect development and drilling plans is successful;

•

projected and targeted capital expenditures and other costs and commitments;

•

the availability, cost and reliability of drilling rigs, containment resources, production equipment and facilities, supplies, personnel and oilfield services;

•

our and our partners' ability to obtain permits and licenses and drill in the U.S. Gulf of Mexico and offshore West Africa;

•

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

•

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;

•

our ability to obtain financing;

•

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

•

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

•

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

•

the availability and cost of developing appropriate infrastructure around and transportation to our prospects;

•

military operations, terrorist acts, wars or embargoes;

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 2011 Annual Report on Form 10-K filed on February 21, 2012.

        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

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

COBALT INTERNATIONAL ENERGY, INC.

Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	6
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2012 and 2011, and for the period November 10, 2005 (Inception) through September 30, 2012	7
Condensed Consolidated Statements of Changes in Partners' Capital and Stockholders' Equity for the Nine Months Ended September 30, 2012 and for the period November 10, 2005 (Inception) through September 30, 2012	8
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011, and for the period November 10, 2005 (Inception) through September 30, 2012	9
Notes to Condensed Consolidated Financial Statements	10

5

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Condensed Consolidated Balance Sheets

	September 30, 2012			December 31, 2011
	(Unaudited) ($ in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents	$	126,770		$	292,546
Joint interest and other receivables		89,077			56,983
Prepaid expenses and other current assets		21,813			22,214
Inventory		39,676			36,049
Short-term restricted funds		90,280			69,009
Short-term investments		885,394			858,293
Total current assets		1,253,010			1,335,094
Property, plant, and equipment:
Oil and gas properties, successful efforts method of accounting, net of accumulated depletion of $—0-		1,022,159			861,955
Other property and equipment, net of accumulated depreciation and amortization of $2,124 and $3,555, as of September 30, 2012 and December 31, 2011, respectively		3,965			1,371
Total property, plant, and equipment, net		1,026,124			863,326
Long-term restricted funds		394,453			270,235
Long-term investments		12,853			47,232
Other assets		2,769			12,057
Total assets	$	2,689,209		$	2,527,944
Liabilities and Stockholders' Equity
Current liabilities:
Trade and other accounts payable	$	17,293		$	71,186
Accrued liabilities		84,572			34,418
Short-term contractual obligations		49,019			132,465
Total current liabilities		150,884			238,069
Long-term contractual obligations		168,238			210,961
Other long-term liabilities		1,577			—
Stockholders' Equity:
Common stock, $0.01 par value per share; 2,000,000,000 shares authorized, 406,559,153 and 387,531,630 issued and outstanding as of September 30, 2012 and December 31, 2011, respectively		4,065			3,875
Additional paid-in capital		3,225,749			2,719,875
Deficit accumulated during the development stage		(861,304	)		(644,836	)
Total stockholders' equity		2,368,510			2,078,914
Total liabilities and stockholders' equity	$	2,689,209		$	2,527,944

See accompanying notes.

6

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						For the Period November 10, 2005 (Inception) Through September 30,
	2012			2011			2012			2011			2012
	($ in thousands except per share data)
Oil and gas revenue	$	—		$	—		$	—		$	—		$	—
Operating costs and expenses:
Seismic and exploration		6,327			4,757			35,682			12,010			364,272
Dry hole expense and impairment		15,041			31,840			131,720			36,859			236,368
General and administrative		18,916			11,459			52,239			36,115			270,217
Depreciation and amortization		269			186			782			549			4,337
Total operating costs and expenses		40,553			48,242			220,423			85,533			875,194
Operating income (loss)		(40,553	)		(48,242	)		(220,423	)		(85,533	)		(875,194	)
Other income:
Interest income		1,339			1,255			3,955			3,010			13,890
Total other income		1,339			1,255			3,955			3,010			13,890
Net income (loss) before income tax		(39,214	)		(46,987	)		(216,468	)		(82,523	)		(861,304	)
Income tax expense		—			—			—			—			—
Net income (loss)	$	(39,214	)	$	(46,987	)	$	(216,468	)	$	(82,523	)	$	(861,304	)
Basic and diluted income (loss) per share	$	(0.10	)	$	(0.12	)	$	(0.54	)	$	(0.22	)
Basic and diluted weighted average common shares outstanding		406,543,628			386,826,845			402,272,534			373,073,307

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			—			—
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 at public offering, net of costs		—		—			—			—			357			477,846			—			478,203
Common stock issued for restricted stock and stock options		—		—			—			—			34			(34	)		—			—
Equity based compensation		—		—			—			—			—			30,579			—			30,579
Common stock withheld for taxes on equity based compensation		—		—			—			—			(1	)		(190	)		—			(191	)
Net income (loss)		—		—			—			—			—			—			(644,836	)		(644,836	)
Balance, December 31, 2011		—		—			—			—			3,875			2,719,875			(644,836	)		2,078,914
Common stock issued at public offering, net of costs		—		—			—			—			181			489,128			—			489,309
Common stock issued for restricted stock and restricted stock units		—		—			—			—			9			(9	)		—			—
Equity based compensation		—		—			—			—			—			16,650			—			16,650
Exercise of stock options		—		—			—			—			—			275			—			275
Common stock withheld for taxes on equity based compensation		—		—			—			—			—			(170	)		—			(170	)
Net income (loss)		—		—			—			—			—			—			(216,468	)		(216,468	)
Balance, September 30, 2012	$	—	$	—		$	—		$	—		$	4,065		$	3,225,749		$	(861,304	)	$	2,368,510

See accompanying notes.

8

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Condensed Consolidated Statements of Cash Flows

(Unaudited)

							For the Period November 10, 2005 (Inception) Through September 30, 2012
	Nine Months Ended September 30,
	2012			2011
	($ in thousands)
Cash flows provided from operating activities
Net income (loss)	$	(216,468	)	$	(82,523	)	$	(861,304	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		782			549			4,337
Dry hole expense and impairment of unproved properties		131,720			36,859			236,368
Equity based compensation		16,650			11,366			54,947
Amortization of premium (accretion of discount) on investment securities		13,269			8,581			29,287
Other		—			—			558
Changes in operating assets and liabilities:
Joint interest and other receivables		(25,425	)		(29,632	)		(84,025	)
Inventory		(3,627	)		(3,105	)		(39,676	)
Prepaid expense and other assets		9,688			1,435			(24,583	)
Trade and other accounts payable		(53,892	)		21,994			17,293
Accrued liabilities and other		(7,344	)		(1,068	)		33,375
Net cash provided by (used in) operating activities		(134,647	)		(35,544	)		(633,423	)
Cash flows from investing activities
Capital expenditures for oil and gas properties		(130,719	)		—			(834,825	)
Capital expenditures for other property and equipment		(3,376	)		(646	)		(8,302	)
Exploratory wells drilling in process		(228,299	)		(43,012	)		(492,671	)
Proceeds from sale of oil and gas properties		—			—			339,001
Change in restricted funds		31,483			(281	)		(308,474	)
Proceeds from maturity of investment securities		784,456			1,084,662			2,299,286
Purchase of investment securities		(974,088	)		(1,593,463	)		(3,408,130	)
Net cash provided by (used in) investing activities		(520,543	)		(552,740	)		(2,414,115	)
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		—			—			950,702
Proceeds from public offering, net of costs		489,309			478,204			967,511
Proceeds from stock option exercise		275			—			275
Payments for common stock withheld for taxes on equity based compensation		(170	)		—			(360	)
Net cash provided by (used in) financing activities		489,414			478,204			3,174,308
Net increase (decrease) in cash and cash equivalents		(165,776	)		(110,080	)		126,770
Cash and cash equivalents, beginning of period		292,546			302,720			—
Cash and cash equivalents, end of period	$	126,770		$	192,640		$	126,770
Non-Cash Disclosures
Capital expenditures in liabilities	$	270,031		$	8,928		$	270,031
Transfer of investment securities to and from restricted funds	$	178,830			—		$	178,830

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.

        The terms "Company," "Cobalt," "we," "us," "our," "ours," and similar terms refer to Cobalt International Energy, Inc. unless the context indicates otherwise.

Operations

        The Company is an independent, oil-focused exploration and production company with an extensive below salt prospect inventory in the deepwater of the U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. All of the Company's prospects are oil-focused. Offshore Angola, the Company has drilled as operator the Cameia #1 exploratory well on Block 21, which resulted in the Cameia pre-salt discovery, and the Cameia #2 appraisal well. In the U.S. Gulf of Mexico, the Company has drilled as operator three exploratory wells (Ligurian #1 and #2 and Criollo #1), and participated as non-operator in three exploratory wells (Heidelberg #1, Shenandoah #1 and Firefox #1) and two appraisal wells (Heidelberg #2 and Heidelberg #3). These drilling efforts have resulted in the Heidelberg and Shenandoah discoveries. The Company is currently drilling as operator the North Platte #1 exploratory well and participating as a non-operator in the appraisal well on the Shenandoah prospect. The Company continues to mature what it believes are the most promising prospects in its portfolio for upcoming exploratory drilling in both the deepwater of the U.S. Gulf of Mexico and the deepwater offshore Angola and Gabon. In addition, the Company plans to develop and produce its current discoveries.

        As of September 30, 2012, the Company had no proved oil and gas reserves.

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

10

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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 unaudited 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 condensed unaudited 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, 2011.

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.

Recently Adopted Accounting Standards

        Effective January 1, 2012, the Company adopted the accounting standards update that required hierarchy classification for items whose fair value is only disclosed in the footnotes, additional disclosure about fair value measurements that involve significant unobservable inputs, including additional quantitative information about the unobservable inputs, a description of valuation techniques used, and a qualitative evaluation of the sensitivity of these measurements. The adoption of these standards has no material impact to the Company's financial statements.

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 non-vested restricted shares, non-vested restricted stock units and outstanding stock options during the period, unless their effect is anti-dilutive. For the three months and nine months ended September 30, 2012, 5,594,092 shares of non-vested restricted stock, non-vested restricted stock units and outstanding stock options, respectively, were excluded from the diluted income (loss) per share because they are anti-dilutive. For the three months and nine months ended September 30, 2011, 6,561,373 shares of non-vested restricted stock, non-vested restricted stock units and outstanding stock options, respectively, were excluded from the diluted income (loss) per share because they are anti-dilutive.

11

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Investments

        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. 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 September 30, 2012 and December 31, 2011. Income related to these securities is reported as a component of interest income in the Company's condensed consolidated statement of operations.See Note 5—Investments.

        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 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. As of September 30, 2012 and December 31, 2011, the Company has no OTTI in its debt securities.

3. Cash and Cash Equivalents

        Cash and cash equivalents consisted of the following:

	September 30, 2012		December 31, 2011
	(in thousands)
Cash at banks	$	59,013	$	2,992
Money market funds		50,694		104,805
Held-to-maturity securities(1)		17,063		184,749
	$	126,770	$	292,546

(1)

These securities mature three months or less from the date of purchase.

12

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

4. Restricted Funds

        Restricted funds consisted of the following:

	September 30, 2012		December 31, 2011
	(in thousands)
Short-term:
Ocean Confidence escrow account	$	—	$	10,804
Collateral on letters of credit for Angola		—		53,322
Ensco 8503 escrow account		90,280		4,883
	$	90,280	$	69,009
Long-term:
Ensco 8503 escrow account	$	90,280	$	181,159
Collateral on letters of credit for Angola		303,455		88,358
Other vendor restricted funds		718		718
	$	394,453	$	270,235

5. Investments

        The Company's investments in held-to-maturity securities, which are stated at amortized cost, were as follows as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
	(in thousands)
U.S. Treasury securities	$	330,953	$	379,618
Corporate bonds		736,721		535,846
Commercial paper		320,661		369,432
U.S. government agency securities		—		71,856
Municipal bonds		2,033		42,193
Certificates of deposit		7,003		12,500
Total	$	1,397,371	$	1,411,445

        The Company's condensed consolidated balance sheet included the following held-to-maturity securities:

	September 30, 2012		December 31, 2011
	(in thousands)
Cash and cash equivalents	$	17,063	$	184,749
Short-term investments		885,394		858,293
Short-term restricted funds		90,280		53,322
Long-term restricted funds		391,781		267,849
Long-term investments		12,853		47,232
	$	1,397,371	$	1,411,445

13

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

5. Investments (Continued)

        The contractual maturities of these held-to-maturity securities as of September 30, 2012 and December 31, 2011 were as follows:

	September 30, 2012				December 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	($ in thousands)
Within 1 year	$	1,384,518	$	1,384,518	$	1,364,213	$	1,364,213
After 1 year		12,853		12,853		47,232		47,232
	$	1,397,371	$	1,397,371	$	1,411,445	$	1,411,445

6. Fair Value Measurements

        The fair values of the Company's cash and cash equivalents, joint interest and other receivables, restricted funds and investments approximate their carrying amounts due to their short-term duration. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements as applicable to one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. The levels are:

        Level 1—Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. This category includes the Company's cash and money market funds.

        Level 2—Quoted prices in non-active markets or in active markets for similar assets or liabilities, and inputs other than quoted prices that are observable, for the asset or liability, either directly or indirectly for substantially the full contractual term of the asset or liability being measured. This category includes the Company's U.S. Treasury bills, U.S. Treasury notes, U.S. Government agency securities, commercial paper, corporate bonds, municipal bonds and certificates of deposits.

        Level 3—Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the asset or liability. The Company does not currently have any financial instruments categorized as Level 3.

14

        The following tables summarize the Company's significant financial instruments as categorized by the fair value measurement hierarchy:

	Level 1				Level 2
	Amortized Cost		Fair Value(1)		Amortized Cost		Fair Value(1)		Balance as of September 30, 2012
	($ in Thousands)
Cash and cash equivalents:
Cash	$	59,013	$	59,013	$	—	$	—	$	59,013
Money market funds		50,694		50,694		—		—		50,694
Commercial paper		—		—		17,063		17,063		17,063
Subtotal		109,707		109,707		17,063		17,063		126,770
Short-term restricted funds:
U.S. Treasury notes		—		—		90,280		90,280		90,280
Subtotal		—		—		90,280		90,280		90,280
Short-term investments:
Corporate bonds		—		—		572,760		572,760		572,760
Municipal bonds		—		—		2,033		2,033		2,033
Commercial paper		—		—		303,598		303,598		303,598
Certificate of deposits		—		—		7,003		7,003		7,003
Subtotal		—		—		885,394		885,394		885,394
Long-term restricted funds:
Cash		718		718		—		—		718
Money market funds		1,954		1,954		—		—		1,954
U.S. Treasury bills		—		—		87,741		87,741		87,741
U.S. Treasury notes		—		—		152,932		152,932		152,932
Corporate bonds		—		—		151,108		151,108		151,108
Subtotal		2,672		2,672		391,781		391,781		394,453
Long-term investments:
Corporate bonds		—		—		12,853		12,853		12,853
Subtotal		—		—		12,853		12,853		12,853
Total	$	112,379	$	112,379	$	1,397,371	$	1,397,371	$	1,509,750

15

	Level 1				Level 2
	Amortized Cost		Fair Value(1)		Amortized Cost		Fair Value(1)		Balance as of December 31, 2011
	($ in Thousands)
Cash and cash equivalents:
Cash	$	2,992	$	2,992	$	—	$	—	$	2,992
Money market funds		104,805		104,805		—		—		104,805
Commercial paper		—		—		172,249		172,249		172,249
Certificate of deposits		—		—		12,500		12,500		12,500
Subtotal		107,797		107,797		184,749		184,749		292,546
Short-term restricted funds:
Cash		4,883		4,883		—		—		4,883
Money market funds		10,804		10,804		—		—		10,804
U.S. Treasury bills		—		—		53,322		53,322		53,322
Subtotal		15,687		15,687		53,322		53,322		69,009
Short-term investments:
U.S. Treasury bills		—		—		112,507		112,507		112,507
U.S. Government agency securities		—		—		40,000		40,000		40,000
Corporate bonds		—		—		466,411		466,411		466,411
Municipal bonds		—		—		42,193		42,193		42,193
Commercial paper		—		—		197,182		197,182		197,182
Subtotal		—		—		858,293		858,293		858,293
Long-term restricted funds:
Cash		718		718		—		—		718
Money market funds		1,668		1,668		—		—		1,668
U.S. Treasury bills		—		—		40,597		40,597		40,597
U.S. Treasury notes		—		—		173,192		173,192		173,192
Corporate bonds		—		—		54,060		54,060		54,060
Subtotal		2,386		2,386		267,849		267,849		270,235
Long-term investments:
U.S. Government agency securities		—		—		31,856		31,856		31,856
Corporate bonds		—		—		15,376		15,376		15,376
Subtotal		—		—		47,232		47,232		47,232
Total	$	125,870	$	125,870	$	1,411,445	$	1,411,445	$	1,537,315

(1)

As of September 30, 2012 and December 31, 2011, the Company did not record any OTTI on these assets.

16

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. 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 September 30, 2012 and December 31, 2011, the balance due primarily from the Company's partners in the U.S. Gulf of Mexico and West Africa totaled $80.9 million and $46.7 million, respectively. These are usually settled within 30 days of the invoice date. In addition, other receivables which primarily include accrued interest on investment securities were $8.2 million and $10.3 million as of September 30, 2012 and December 31, 2011, respectively.

8. 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 the weighted average method and consists of purchase price and other directly attributable costs.

9. 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)		September 30, 2012			December 31, 2011
			($ in Thousands)
Oil and Gas Properties:
Unproved oil and gas properties			$	720,349		$	701,892
Less: accumulated allowance for impairment				(76,062	)		(18,275	)
				644,287			683,617
Exploratory wells in process				377,872			178,338
Total oil and gas properties, net				1,022,159			861,955
Other Property and Equipment:
Computer equipment and software		3		2,847			2,847
Office equipment and furniture		3 - 5		1,049			1,114
Vehicles		3		268			129
Leasehold improvements		3 - 10		1,925			836
				6,089			4,926
Less: accumulated depreciation and amortization(1)				(2,124	)		(3,555	)
Total other property and equipment, net				3,965			1,371
Property, plant, and equipment, net			$	1,026,124		$	863,326

(1)

During the period ended September 30, 2012, the Company wrote off $2.2 million of old computer equipment and leasehold improvements which were fully depreciated and therefore had no impact on the consolidated statements of operations and consolidated statements of cash flow.

17

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

        The Company recorded $0.3 million and $0.2 million of depreciation and amortization expense for the three months ended September 30, 2012 and 2011, respectively, $0.8 million and $0.5 million for the nine months ended September 30, 2012 and 2011, respectively, and $4.3 million for the period November 10, 2005 (inception) through September 30, 2012.

Unproved Oil and Gas Properties

        On December 20, 2011, the Company acquired a 40% working interest in Block 20 offshore Angola for a total consideration of $347.1 million, of which $337.1 million is contractually scheduled to be paid over five years commencing in January 2012. As of September 30, 2012, $122.8 million was paid during the first quarter of 2012 and the remaining $214.3 million was accrued in short-term and long-term contractual obligations—see Note 11. In addition to the Block 20 interests, the Company has $10.8 million of unproved property acquisition costs relating to its 40% working interests in Blocks 9 and 21 offshore Angola and its 21.25% working interest in the Diaba block offshore Gabon. The Company also has $286.4 million of unproved property acquisition costs, net of allowance for impairment, relating to its U.S. Gulf of Mexico properties. As of September 30, 2012 and December 31, 2011, the Company has a net total of $644.3 million and $683.6 million, respectively, of unproved property acquisition costs on the condensed consolidated balance sheets.

        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. There are no impairment indicators to date that would require the Company to impair the unproved properties in Blocks 9, 20 and 21 offshore Angola and in the Diaba block offshore Gabon. Unproved oil and gas leases for properties in the U.S. Gulf of Mexico with carrying value greater than $1 million are assessed individually for impairment, based on the Company's current exploration plans, and an allowance for impairment is provided, if impairment is indicated. Leases that are individually less than $1.0 million in carrying value or are near expiration 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 2012 through 2020. As of September 30, 2012 and December 31, 2011, the balance for unproved leaseholds that were subject to amortization before impairment provision was $67.6 million and $65.1 million, respectively. The Company recorded lease impairment allowance of $2.3 million and $2.5 million for the three months ended September 30, 2012 and 2011, respectively, $57.8 million and $7.5 million for the nine months ended September 30, 2012 and 2011, respectively, and $76.2 million for the period November 10, 2005 (inception) through September 30, 2012.

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

18

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

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) for the nine months ended September 30, 2012 and for the year ended December 31, 2011:

	September 30, 2012			December 31, 2011
	($ in thousands)
Beginning of period	$	178,338		$	106,881
Addition to capitalized exploratory well cost pending determination of proved reserves
U.S. Gulf of Mexico:
Shenandoah #1 Exploratory Well		200			(53	)
Shenandoah #2 Appraisal Well		12,716			—
Shenandoah #2 Replacement Well		4,201			—
Heidelberg #1 Exploratory Well		(419	)		—
Heidelberg #2 Appraisal Well		—			5,999
Heidelberg #3 Appraisal Well		8,915			4,056
Heidelberg #3 Appraisal Well Side Track		4,108			—
Heidelberg Pre-Feed Study		343			—
Heidelberg Field Development		384			—
Ligurian #2 Exploratory Well		46,961			2,034
Criollo #1 Exploratory Well		—			(822	)
North Platte #1 Exploratory Well		26,066			—
West Africa:
Bicuar #1 Exploratory Well pre-spud costs(1)		(3,035	)		25,444
Cameia #1 Exploratory Well		33,958			71,405
Cameia #2 Appraisal Well		138,501			—
Cameia Early Development		553			—
Reclassifications to wells, facilities, and equipment based on determination of proved reserves		—			—
Amounts charged to expense(2)		(73,918	)		(36,606	)
End of period	$	377,872		$	178,338

(1)

The amount of $3,035 represents pre-spud mobilization and insurance costs allocated to the Bicuar #1 pre-salt exploratory well planned as one of two exploratory wells initially scheduled to be drilled offshore Angola. With the success of the Cameia #1 exploratory well, the drilling of the Cameia #2 appraisal well was substituted for the Bicuar #1 pre-salt exploratory well. Hence these costs were reallocated to the Cameia #2 appraisal well.

(2)

These amounts represent impairment charges on exploratory wells, including $4.1 million for the Heidelberg #3 sidetrack well, $8.1 million for the Ligurian #1 exploratory well, $49.0 million for the Ligurian #2 exploratory well and $12.7 million for the Shenandoah #2 appraisal well.

19

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

	Spud Year		September 30, 2012		December 31, 2011
			($ in thousands)
Cumulative costs:
U.S. Gulf of Mexico
Shenandoah #1 Exploratory Well		2008	$	69,667	$	69,468
Shenandoah #2 Appraisal Well		2012		—		—
Shenandoah #2 Replacement Well		2012		4,201		—
Heidelberg #1 Exploratory Well		2008		19,822		20,240
Heidelberg #3 Appraisal Well		2011		12,972		4,056
Heidelberg Pre-Feed Study		2012		343		—
Heidelberg Field Development		2012		384		—
Ligurian #1 Exploratory Well		2009		—		8,100
Ligurian #2 Exploratory Well		2011		—		2,034
North Platte #1 Exploratory Well		2012		26,066		—
West Africa:
Bicuar #1 Exploratory Well		2011		—		3,035
Cameia #1 Exploratory Well		2011		105,363		71,405
Cameia #2 Appraisal Well		2012		138,501		—
Cameia Early Development		2012		553		—
			$	377,872	$	178,338
Exploratory Well costs capitalized for a period greater than one year after completion of drilling (included in table above)			$	89,489	$	97,861

        As of September 30, 2012, capitalized exploratory well costs that have been suspended longer than one year are associated with the Shenandoah #1 and Heidelberg #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 September 30, 2012, no exploratory wells have been drilled by the Company offshore Gabon.

10. Other Assets

        Costs associated with the mobilization and equipment upgrades of the Ensco 8503 drilling rig and subsea containment were deferred in other assets. In January 2012, the Company started amortizing these costs to the respective exploratory wells over the term of the Ensco 8503 drilling contract. These costs are capitalized to oil and gas properties as exploratory drilling costs. For the three and nine months ended September 30, 2012, the costs capitalized to oil and gas properties totaled $3.0 million and $8.9 million, respectively. As of September 30, 2012 and December 31, 2011, the remaining costs

20

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

10. Other Assets (Continued)

associated with the Ensco 8503 drilling rig and subsea containment in other assets were $2.8 million and $12.1 million, respectively.

11. Contractual Obligations

        The short-term and long-term contractual obligations consist of the following:

	September 30, 2012		December 31, 2011
	($ in thousands)
Short-term Contractual Obligations:
Social obligation payments for Block 9, offshore Angola	$	150	$	1,300
Social obligation payments for Block 21, offshore Angola		300		2,600
Social obligation and bonus payments for Block 20, offshore Angola		48,569		128,565
	$	49,019	$	132,465
Long-term Contractual Obligations:
Social obligation payments for Block 9, offshore Angola	$	848	$	800
Social obligation payments for Block 21, offshore Angola		1,684		1,600
Social obligation and bonus payments for Block 20, offshore Angola		165,706		208,561
	$	168,238	$	210,961

12. Other Long-Term Liabilities

        Other long-term liabilities consist of deferred portion of rents for office building leases that are being amortized on a straight-line basis over the terms of these leases. As of September 30, 2012, the deferred portion of these rental payments was $1.6 million.

13. Stockholders' Equity

        On April 15, 2011, the Company issued 35,650,000 shares of its common stock at a public offering price of $14.00 per share.

        On December 21, 2011, the Company withheld and cancelled an aggregate amount of 13,763 shares of its common stock, at a price of $13.85 per share, to satisfy tax withholding obligations of certain of its employees that arose upon the lapse of restrictions on restricted stock.

21

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

13. Stockholders' Equity (Continued)

        On January 15, 2012, the Company withheld the issuance of an aggregate amount of 9,127 shares of its common stock, at a price of $18.74 per share, to satisfy tax withholding obligations of certain of its officers that arose upon the distribution of deferred stock compensation.

        On February 29, 2012, the Company issued 18,050,000 shares of common stock at a public offering price of $28.00 per share.

14. Seismic and Exploration Expenses

        Seismic and exploration expenses consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
									For the Period November 10, 2005 (Inception) through September 30, 2012
	2012		2011		2012		2011
	($ in Thousands)
Seismic data costs	$	4,592	$	1,325	$	29,933	$	5,016	$	304,158	(1)
Leasehold delay rentals		1,184		1,029		4,062		3,879		30,832
Drilling rig acceptance and other expense		551		2,403		1,687		3,115		29,282	(2)
	$	6,327	$	4,757	$	35,682	$	12,010	$	364,272

(1)

These amounts for the period November 10, 2005 (inception) through September 30, 2012 reflect a recovery of $25.1 million of past seismic costs incurred by the Company from its joint venture partners in 2009 and 2010.

(2)

The amounts for the period November 10, 2005 (inception) through September 30, 2012 includes approximately $13.5 million in force majeure expenses resulting from suspension of drilling activities in the U.S. Gulf of Mexico during 2010 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.

15. 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 restricted stock units (RSUs) 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 RSU 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 RSU awards. For RSU 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.

22

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

15. Equity Based Compensation (Continued)

        On February 24, 2012, the Company amended certain terms and conditions of its RSU award agreement which resulted in the Company using the fair value of its common stock as of the date of such amendments to recognize the equity based compensation expense for the RSUs that vested during the first quarter of 2012.

        The following table summarizes grant, vesting and forfeiture information about the Company's restricted stock and restricted stock units from December 31, 2011 to September 30, 2012:

	Number of shares relating to Restricted Stock			Weighted Average Grant Date Fair Value Per Share		Number of shares relating Restricted Stock Units			Weighted Average Grant Date Fair Value Per Unit
Non-vested at December 31, 2011		4,599,783		$	11.27		198,838		$	12.45
Granted		426,710		$	27.16		—			—
Vested		(709,290	)	$	12.31		(74,537	)	$	30.50
Forfeited or expired		(305,781	)	$	12.18		(15,026	)	$	30.50
Non-vested at September 30, 2012		4,011,422		$	12.93		109,275		$	30.50
Weighted-average period remaining		2.1 years					1.3 years
Unrecognized compensation ($ in thousands)	$	26,326				$	**

**

The RSUs will vest in amounts of up to 200% of the target amount of 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. Compensation cost will be recognized as and when the performance conditions are satisfied or when the Company determines that the achievement of the performance condition is probable. For the nine months ended September 30, 2012, the Company recognized $2.7 million of stock compensation for the RSUs based on the performance targets achieved from the success of the Cameia #1 exploratory well and approved by the Compensation Committee during the first quarter of 2012.

        A total of 33,204 restricted stock unit awards were granted to non-employee directors during the nine months ended September 30, 2012 for annual retainers. As of September 30, 2012, the Company has granted a cumulative total of 137,945 restricted stock units to non-employee directors. During the three and nine months ended September 30, 2012, the Company also granted 2,767 and 9,184 shares of common stock, respectively, as retainer awards to non-employee directors who elected to be compensated by stock in lieu of cash payments.

        Non-Qualified Stock Options.    The Company grants non-qualified stock options to employees at an exercise price equal to the market value of the Company's common stock on the grant date. The non-qualified stock option awards granted in December 2010 have contractual terms of 10 years and vest ratably at year end over the four year service period from date of grant. The non-qualified stock option awards granted in February 2012 have contractual terms of 10 years and are scheduled to vest on December 31, 2014.

23

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

15. Equity Based Compensation (Continued)

        The fair value of each stock option granted is determined using the Black-Scholes-Merton option-pricing model based on several assumptions. These assumptions are based on management's best estimate at the time of grant. The Company used the following weighted average of each assumption based on the grants issued during the nine months ended September 30, 2012 (there were no new stock options granted in 2011):

	2012
Expected Term in Years		6.50
Expected Volatility		54.92	%
Expected Dividends		0	%
Risk-Free Interest Rate		0.46	%

        The Company estimates expected volatility based on its historical stock price since the IPO in December 2009. The Company estimates the expected term of its option awards based on the vesting period and average remaining contractual term, referred to as the "simplified method". The Company uses this method to provide a reasonable basis for estimating its expected term based on a lack of sufficient historical employee exercise data on stock option awards.

        A summary of the stock options activities for the nine months ended September 30, 2012 is presented below:

	Number of Stock Options			Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value ($ in thousands)
Outstanding at January 1, 2012		1,133,960		$	12.45		8.9
Granted		457,704		$	30.50		9.4
Exercised		(22,076	)	$	12.45		8.2
Forfeited or expired		(129,397	)	$	16.16
Outstanding at September 30, 2012		1,440,191		$	17.85		8.5	$	9,909
Vested as of September 30, 2012		283,490		$	12.45		8.2	$	2,784
Exercisable at September 30, 2012		261,420		$	12.45		8.2	$	2,567

        The weighted-average grant-date fair value of stock options granted during the nine months ended September 30, 2012 was $17.92 per option, using the Black-Scholes option-pricing model. As of September 30, 2012, $9.4 million of total unrecognized compensation cost related to stock option is expected to be recognized over a weighted-average period of 2.2 years.

24

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

15. Equity Based Compensation (Continued)

        The table below summarizes the equity-based compensation costs, net of forfeitures, recognized for the three and nine months ended September 30, 2012 and 2011, and for the period November 10, 2005 (inception) through September 30, 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
									For the Period November 10, 2005 (Inception) through September 30, 2012
	2012		2011		2012		2011
	($ in thousands)
Restricted stock:
Employees	$	3,238	$	3,156	$	10,391	$	9,424	$	43,606
Non-employee directors		242		242		727		561		2,039
Stock options:
Employees		1,092		460		2,750		1,381		4,692
Restricted stock units (performance-based)		90		—		2,782		—		2,782
Deferred stock compensation(1)		—		—		—		—		1,828
	$	4,662	$	3,858	$	16,650	$	11,366	$	54,947

(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. The deferred amounts were distributed to these executive officers on January 15, 2012 in the form of 121,637 shares of the Company's common stock.

16. Segment Information

        As described inNote 1, "Organization and Operations", the Company currently has two geographic operating segments for its exploratory operations. The operating segments are focused in the United

25

Cobalt International Energy, Inc.
(a Development Stage Enterprise)

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

16. Segment Information (Continued)

States and offshore West Africa. The following tables provide the geographic operating segment information for the three and nine months ended September 30, 2012 and 2011:

	United States			West Africa			Total
	($ in thousands)
Three months ended September 30, 2012
Operating costs and expense	$	(32,593	)	$	(7,960	)	$	(40,553	)
Interest income		1,337			2			1,339
Net income (loss)	$	(31,256	)	$	(7,958	)	$	(39,214	)
Additions to Property and Equipment, net(1)	$	42,851		$	51,946		$	94,797
Three months ended September 30, 2011
Operating costs and expense	$	(21,870	)	$	(26,372	)	$	(48,242	)
Interest income		1,253			2			1,255
Net income (loss)	$	(20,617	)	$	(26,370	)	$	(46,987	)
Additions to Property and Equipment, net(1)	$	(11,033	)	$	24,664		$	13,631

	United States			West Africa			Total
	($ in thousands)
Nine months ended September 30, 2012
Operating costs and expense	$	(189,171	)	$	(31,252	)	$	(220,423	)
Interest income		3,950			5			3,955
Net income (loss)	$	(185,221	)	$	(31,247	)	$	(216,468	)
Additions to Property and Equipment, net(1)	$	(7,438	)	$	170,235		$	162,797
Nine months ended September 30, 2011
Operating costs and expense		(50,260	)		(35,273	)		(85,533	)
Interest income		3,007			3			3,010
Net income (loss)		(47,253	)		(35,270	)		(82,523	)
Additions to Property and Equipment, net(1)	$	(15,119	)	$	30,304		$	15,185

(1)

These amounts are net of accumulated allowance for impairment on oil and gas properties and accumulated depreciation and amortization on other property and equipment

17. 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.

26

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, 2011.

Overview

        We are an independent, oil-focused exploration and production company with an extensive below salt prospect inventory in the deepwater of the U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. All of our prospects are oil-focused. Offshore Angola, we have drilled as operator the Cameia #1 exploratory well on Block 21, which resulted in the Cameia pre-salt discovery, and the Cameia #2 appraisal well. In the U.S. Gulf of Mexico, we have drilled as operator three exploratory wells (Ligurian #1 and #2 and Criollo #1), and participated as non-operator in three exploratory wells (Heidelberg #1, Shenandoah #1 and Firefox #1) and two appraisal wells (Heidelberg #2 and Heidelberg #3). These drilling efforts have resulted in the Heidelberg and Shenandoah discoveries. We are currently drilling as operator the North Platte #1 exploratory well and participating as a non-operator in an appraisal well on the Shenandoah prospect. We continue to mature what we believe are the most promising prospects in our portfolio for upcoming exploratory drilling in both the deepwater of the U.S. Gulf of Mexico and the deepwater offshore Angola and Gabon. In addition, we plan to develop and produce our current discoveries.

Third Quarter 2012 Operational Highlights

•

On July 3, 2012, we spud the North Platte #1 exploratory well on Garden Banks Block 959 in the U.S. Gulf of Mexico. The North Platte #1 exploratory well is located in the heart of the emerging inboard Lower Tertiary play in which we believe we hold a dominant position with numerous follow-on inboard Lower Tertiary exploratory prospects. We expect well results in late 2012. We are the operator of the North Platte #1 exploratory well and have a 60% working interest in the prospect.

•

During the third quarter, the Shenandoah #2 appraisal well encountered mechanical problems early in the drilling process prior to reaching any of the targeted horizons and is currently being re-drilled, which we refer to as the Shenandoah #2R appraisal well, with a planned total depth of 32,000 feet.

•

On July 31, 2012, we provided an update on the status of our Cameia #2 appraisal well located in Block 21 offshore Angola. The objectives of the Cameia #2 appraisal well were to (i) better define the areal extent of the Cameia discovered resources, (ii) determine an oil-water contact deeper on the Cameia structure than the lowest known oil observed in the Cameia #1 exploratory well and (iii) test deeper oil potential in untested zones in the Cameia field. Based on our preliminary wireline logging results, our Cameia #2 well was successful on the first and second objectives and evaluation is ongoing to determine the potential of the deeper reservoir target. The well was drilled approximately 3.5 kilometers (2.2 miles) south from the Cameia #1 exploratory well to the total depth of 5,475 meters (17,963 feet). Logging results have (i) confirmed the presence of a large hydrocarbon accumulation in what is a high quality reservoir and (ii) confirmed lowest known oil to be at least 135 meters (440 feet) deeper than that which was observed in the Cameia #1 exploratory well. In pursuit of the third objective, analysis of data obtained from drilling operations and wireline logging indicates hydrocarbon

27

charge and pressure separation from the uphole reservoir section in the deepest reservoir target. We were preparing to conduct a production drill stem test to determine the reservoir potential, if any, of the lowest newly discovered zone in the Cameia structure, when the Dynamic Positioning System on the Ocean Confidence drilling rig malfunctioned. Due to the continued malfunction of the Dynamic Positioning System on the Ocean Confidence drilling rig, we released the drilling rig to Diamond Offshore Drilling for repairs on September 24, 2012. We continue our efforts to source an alternative drilling rig to perform the Cameia #2 production test at the earliest possible time. Until either an additional rig is contracted or the Ocean Confidence drilling rig is fit for duty and returned to us, we will be unable to conduct the production test. Given these uncertainties, we may not be able to announce the results of the production test by year end. There have been no environmental or safety issues resulting from the malfunction of this system, and none are anticipated.

•

On July 30, 2012, we executed a drilling contract, which is subject to formal Sonangol approval, with an affiliate of Petroserv S.A. for the SSV Catarina, a new-build, sixth-generation semi-submersible drilling rig that will support our Angolan pre-salt drilling campaign. The drilling contract provides for a firm three-year commitment, expected to begin in the first quarter of 2013, at a day rate of approximately $600,000 and two one-year extension options at day rates to be mutually agreed. Such rates are subject to standard reimbursement and escalation contractual provisions. The drilling contract further requires us to pay up to approximately $45 million for mobilization, demobilization and certain rig modifications.

Third Quarter 2012 Financial Highlights

•

We recorded a net loss of approximately $39.2 million, a 17% decrease from the third quarter of 2011. Total operating expenses were approximately $40.6 million, a 16% decrease from the third quarter of 2011. The decrease of $7.8 million in net loss for the third quarter was primarily attributed to the increase of $31.8 million in dry hole expense charge recorded for the Criollo #1 exploratory well, Bicuar #1 exploratory well and allowance for impairment of unproved leasehold properties during the third quarter of 2011 as compared to $15.0 million in dry hole expense charge and allowance for impairment recorded for the Shenandoah #2 appraisal well during the third quarter of 2012.

•

Total expenditures, excluding changes in working capital, were approximately $128.9 million and $487.2 million, respectively, for the three and nine months ended September 30, 2012.

•

Including our existing cash and investments on hand and restricted cash as of September 30, 2012, we have approximately $1.5 billion of liquidity.

Results of Operations

        We operate our business in two geographic segments: the United States and West Africa. The discussion of the results of operations and the period-to-period comparisons presented below for each operating segment and our consolidated operations analyzes our historical results. The following discussion may not be indicative of future results.

28

Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

	Three Months Ended September 30,
	2012			2011			Increase (Decrease)			%
	($ in thousands)
United States Segment:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		5,072			2,366			2,706			114	%
Dry hole expense and impairment		15,041			10,703			4,338			41	%
General and administrative		12,270			8,642			3,628			42	%
Depreciation and amortization		210			159			51			32	%
Total operating costs and expenses		32,593			21,870			10,723			49	%
Operating income (loss)		(32,593	)		(21,870	)		10,723			49	%
Other income:
Interest income		1,337			1,253			84			7	%
Total other income		1,337			1,253			84			7	%
Net income (loss) before income tax		(31,256	)		(20,617	)		10,639			52	%
Income tax expense (benefit)		—			—			—			—
Net income (loss)	$	(31,256	)	$	(20,617	)	$	10,639			52	%
West Africa Segment:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		1,255			2,391			(1,136	)		(48	)%
Dry hole expense and impairment		—			21,137			(21,137	)		(100	)%
General and administrative		6,646			2,817			3,829			136	%
Depreciation and amortization		59			27			32			119	%
Total operating costs and expenses		7,960			26,372			(18,412	)		(70	)%
Operating income (loss)		(7,960	)		(26,372	)		(18,412	)		(70	)%
Other income:
Interest income		2			2			—			—
Total other income		2			2			—			—
Net income (loss) before income tax		(7,958	)		(26,370	)		(18,412	)		(70	)%
Income tax expense (benefit)		—			—			—			—
Net income (loss)	$	(7,958	)	$	(26,370	)	$	(18,412	)		(70	)%
Consolidated Operations:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		6,327			4,757			1,570			33	%
Dry hole expense and impairment		15,041			31,840			(16,799	)		(53	)%
General and administrative		18,916			11,459			7,457			65	%
Depreciation and amortization		269			186			83			45	%
Total operating costs and expenses		40,553			48,242			(7,689	)		(16	)%
Operating income (loss)		(40,553	)		(48,242	)		(7,689	)		(16	)%
Other income:
Interest income		1,339			1,255			84			7	%
Total other income		1,339			1,255			84			7	%
Net income (loss) before income tax		(39,214	)		(46,987	)		(7,773	)		(17	)%
Income tax expense (benefit)		—			—			—
Net income (loss)	$	(39,214	)	$	(46,987	)	$	(7,773	)		(17	)%

29

United States Segment:

        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 September 30, 2012 and 2011, respectively.

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended September 30, 2012 and 2011:

        Seismic and exploration.    Seismic and exploration costs increased by $2.7 million during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The increase was due to an increase of $3.6 million for the purchase of seismic data over certain of our prospects in the U.S. Gulf of Mexico and a $0.2 million increase in leasehold delay rentals, offset by the decrease of $1.1 million in other exploration expenses primarily consisting of standby costs for the Ensco drilling rig incurred during the three months ended September 30, 2011. The seismic and exploration costs incurred for the three months ended September 30, 2012 consisted of (i) $3.7 million incurred for seismic data acquisition for the U.S. Gulf of Mexico, (ii) $1.2 million incurred for leasehold delay rentals and (iii) $0.2 million of other exploration costs.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $4.3 million during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The increase is due to impairment of unproved leasehold properties and dry hole expense written off against exploratory wells as reflected in the following table:

	Three Months Ended September 30,
	2012		2011		Increase (Decrease)
	($ in thousands)
Impairment of Unproved Leasehold:
Amortization of leasehold costs with carrying value under $1 million	$	2,325	$	2,506	$	(181	)
Dry hole Expense:
Criollo #1 Exploratory well		—		8,197		(8,197	)
Shenandoah #2 Appraisal well		12,716		—		12,716
	$	15,041	$	10,703	$	4,338

        General and administrative.    General and administrative costs increased by $3.6 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011. The increase in general and administrative costs during this period was attributed to a $2.4 million increase in staff related expenses which includes equity compensation, a $2.1 million increase in legal and other consulting fees, a $2.2 million increase in office related expenses, offset by an increase of $3.1 million in recoveries from partners due to the increase in drilling activities.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

        Other income.    Other income did not materially change from the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

        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.

30

West Africa Segment:

        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 September 30, 2012 and 2011, respectively.

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended September 30, 2012 and 2011:

        Seismic and exploration.    Seismic and exploration costs decreased by $1.1 million during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The decrease was due to a $0.2 million decrease in seismic data costs and technical studies for offshore West Africa and a $0.9 million decrease in other costs incurred during the three months ended September 30, 2011. The seismic and exploration costs incurred for the three months ended September 30, 2012 consisted of (i) $0.9 million for seismic data acquisition and processing for offshore West Africa, and (ii) $0.4 million for other exploration costs.

        Dry hole expense and impairment.    The decrease of $21.1 million in dry hole expense and impairment during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011, was due to $21.1 million of dry hole expense charge on the Bicuar #1 exploratory well during the three months ended September 30, 2011.

        General and administrative.    General and administrative costs increased by $3.8 million for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011. The increase is attributed to a $1.1 million increase in office rent and staff housing, a $0.9 million increase in office related expense in Angola and a $1.8 million increase in our share of overhead and technical charges due to increased drilling activities offshore Angola.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.

        Other income.    Other income did not change during the three months ended September 30, 2012, as compared to the three months ended September 30, 2011.

        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.

31

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

	Nine Months Ended September 30,
	2012			2011			Increase (Decrease)			%
	($ in thousands)
United States Segment:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		21,805			7,020			14,785			211	%
Dry hole expense and impairment		131,720			15,722			115,998			738	%
General and administrative		34,999			27,021			7,978			30	%
Depreciation and amortization		647			497			150			30	%
Total operating costs and expenses		189,171			50,260			138,911			276	%
Operating income (loss)		(189,171	)		(50,260	)		138,911			276	%
Other income:
Interest income		3,950			3,007			943			31	%
Total other income		3,950			3,007			943			31	%
Net income (loss) before income tax		(185,221	)		(47,253	)		137,968			292	%
Income tax expense (benefit)		—			—			—			—
Net income (loss)	$	(185,221	)	$	(47,253	)		137,968			292	%
West Africa Segment:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		13,877			4,990			8,887			178	%
Dry hole expense and impairment		—			21,137			(21,137	)		(100	)%
General and administrative		17,240			9,094			8,146			90	%
Depreciation and amortization		135			52			83			160	%
Total operating costs and expenses		31,252			35,273			(4,021	)		(11	)%
Operating income (loss)		(31,252	)		(35,273	)		(4,021	)		(11	)%
Other income:
Interest income		5			3			2			67	%
Total other income		5			3			2			67	%
Net income (loss) before income tax		(31,247	)		(35,270	)		(4,023	)		(11	)%
Income tax expense (benefit)		—			—			—			—
Net income (loss)	$	(31,247	)		(35,270	)		(4,023	)		(11	)%
Consolidated Operations:
Oil and gas revenue	$	—		$	—		$	—			—
Operating costs and expenses:
Seismic and exploration		35,682			12,010			23,672			197	%
Dry hole expense and impairment		131,720			36,859			94,861			257	%
General and administrative		52,239			36,115			16,124			45	%
Depreciation and amortization		782			549			233			42	%
Total operating costs and expenses		220,423			85,533			134,890			158	%
Operating income (loss)		(220,423	)		(85,533	)		134,890			158	%
Other income:
Interest income		3,955			3,010			945			31	%
Total other income		3,955			3,010			945			31	%
Net income (loss) before income tax		(216,468	)		(82,523	)		133,945			162	%
Income tax expense (benefit)		—			—			—			—
Net income (loss)	$	(216,468	)	$	(82,523	)		133,945			162	%

32

United States Segment:

        Oil and gas revenue.    We have not yet commenced oil production. Therefore, we did not realize any oil and gas revenue during the nine months ended September 30, 2012 and 2011, respectively.

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the nine months ended September 30, 2012 and 2011:

        Seismic and exploration.    Seismic and exploration costs increased by $14.8 million during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The increase was due to an increase of $16.4 million for the purchase of seismic data on certain of our prospects in the U.S. Gulf of Mexico, a $0.2 million increase in leasehold delay rentals, offset by a decrease of $1.8 million in rig related charges. The seismic and exploration costs incurred for the nine months ended September 30, 2012 consisted of (i) $17.0 million incurred for seismic data acquisition in the U.S. Gulf of Mexico, (ii) $4.1 million for leasehold delay rentals and (iii) $0.7 million of other exploration costs.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $116.0 million during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The increase is due to impairment of unproved leasehold properties and dry hole expense written off against exploratory wells as reflected in the following table:

	Nine Months Ended September 30,
	2012		2011		Increase (Decrease)
	($ in thousands)
Impairment of Unproved Leasehold:
Ligurian prospect	$	41,861	$	—	$	41,861
Other leasehold(1)		8,298		—		8,298
Amortization of leasehold costs with carrying value under $1 million		7,642		7,525		117
Dry hole Expense:
Criollo #1 exploratory well		—		8,197		(8,197	)
Ligurian #1 exploratory well		8,100		—		8,100
Ligurian #2 exploratory well		48,994		—		48,994
Heidelberg #3 appraisal well side track		4,109		—		4,109
Shenandoah #2 Appraisal well		12,716		—		12,716
	$	131,720	$	15,722	$	115,998

(1)

Other leasehold includes certain unproved oil and gas leases for properties in the U.S. Gulf of Mexico with carrying value greater than $1 million that we have no exploration activity planned, based on our three-year exploration plan, during the remaining term of the leases.

        General and administrative.    General and administrative costs increased by $8.0 million during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The increase in general and administrative costs during this period was attributed to a $9.6 million increase in staff related expenses which includes equity compensation, a $4.8 million increase in legal and other consulting fees, a $4.9 million increase in office related expenses, offset by an increase of $11.3 million in recoveries from partners due to the increase in drilling activities.

33

        Depreciation and amortization.    Depreciation and amortization did not materially change from the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.

        Other income.    Other income increased by $0.9 million for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The increase was due to an increase in 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.

West Africa Segment:

        Oil and gas revenue.    We have not yet commenced oil production. Therefore, we did not realize any oil and gas revenue during the nine months ended September 30, 2012 and 2011, respectively.

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the nine months ended September 30, 2012 and 2011:

        Seismic and exploration.    Seismic and exploration costs increased by $8.9 million during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011. The increase was due to the acquisition of seismic data on Block 20 offshore Angola. The seismic and exploration costs incurred for the nine months ended September 30, 2012 consisted of (i) $12.9 million incurred for seismic data acquisition and processing for offshore West Africa, and (ii) $1.0 million for other exploration costs.

        Dry hole expense and impairment.    The decrease of $21.1 million in dry hole expense and impairment during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011 was due to $21.1 million of dry hole expense charge on the Bicuar #1 exploratory well during the nine months ended September 30, 2011.

        General and administrative.    General and administrative costs increased by $8.1 million for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011. The increase was attributed to a $1.4 million increase in office rent and staff housing, a $0.4 million increase in other office related expenses in Angola and a $6.3 million increase in our share of overhead and technical charges due to increased drilling activities offshore Angola.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.

        Other income.    Other income did not change during the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011.

        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 or we have proved reserves. With respect to our Cameia pre-salt discovery, we are currently conducting pre-development activities and planning for a phased development approach. We currently estimate first oil and cash flow from Cameia during 2016, assuming continued alignment with our partners and the concessionaire, among other things. Our confidence in conducting pre-development activities and progressing our Cameia discovery toward

34

development is based on the fact that the drilling results from our Cameia #1 exploratory well far exceeded our pre-drill estimates on feet of pay, reservoir rock properties, flow characteristics and fluid properties. Furthermore, our Cameia #2 appraisal well demonstrated lateral continuity within the reservoir originally encountered by our Cameia #1 exploratory well and provided additional assurance of sufficient areal extent to support our plans to proceed with the evaluation of development options.

        With respect to our non-operated U.S. Gulf of Mexico discoveries, the operator has publicly indicated that it expects first production from the Heidelberg field in 2016 and first production for the Shenandoah field, assuming appraisal success, in 2017.

        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 offshore Angola and Gabon, including increased industry costs in the U.S. Gulf of Mexico resulting from the Deepwater Horizon incident;

•

develop our discoveries which we determine to be commercially viable;

•

purchase and analyze seismic data in order to assess current prospects and identify future prospects;

•

opportunistically invest in additional oil leases and concessional licenses in our focus areas; 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.

        As of September 30, 2012, we had approximately $1.5 billion in liquidity, which includes cash and cash equivalents, short-term restricted funds, short-term investments, long-term restricted funds and long-term investments. This amount does not include the Total carry, of which approximately $110 million remains available to us, or any success payments of up to $180 million Total is obligated to pay us pursuant to the terms of our U.S. Gulf of Mexico alliance. We expect to expend approximately $550 to $650 million for our ongoing operations and general corporate purposes in 2012. Our total expenditures, excluding changes in working capital, were approximately $128.9 million and $487.2 million, respectively, for the three and nine months ended September 30, 2012. We expect that our existing cash on hand will be sufficient to fund our planned exploration and appraisal drilling program at least 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

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to some of our prospects which we would otherwise develop on our own, or with a majority working interest.

Cash Flows

	Nine Months Ended September 30,
	2012			2011
	($ in thousands)
Net cash provided by (used in):
Operating Activities	$	(134,647	)	$	(35,544	)
Investing Activities		(520,543	)		(552,740	)
Financing Activities		489,414			478,204

        Operating activities.    Net cash used in operating activities for the nine months ended September 30, 2012 was $134.6 million compared with net cash used in operating activities of $35.5 million for the nine months ended September 30, 2011. The increase was attributed primarily to increased drilling activities in the U.S. Gulf of Mexico and offshore Angola.

        Investing activities.    Net cash used in investing activities for the nine months ended September 30, 2012 was $520.5 million, compared with net cash used in investing activities of $552.7 million for the nine months ended September 30, 2011. The net cash used in investing activities for the nine months ended September 30, 2012 was primarily attributed to the investment of proceeds from the follow-on public offering of our common stock that closed on February 29, 2012 and capital expenditures relating to the Ligurian #2 and North Platte #1 exploratory wells in the U.S. Gulf of Mexico and the Cameia #2 appraisal well offshore Angola.

        Financing activities.    Net cash provided by financing activities for the nine months ended September 30, 2012 was $489.4 million, compared with $478.2 million, for the nine months ended September 30, 2011. The increase results from a greater amount of net proceeds from our public offering of our common stock that closed on February 29, 2012 than our public offering of our common stock that closed on April 15, 2011.

Critical Accounting Policies

        Our significant accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011. Also refer to the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.

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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 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

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 September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

        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.

Item 1A.    Risk Factors

        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, 2011.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

        None.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Mine Safety Disclosures

        Not applicable.

Item 5.    Other Information

        None.

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Item 6.    Exhibits

Exhibit Number		Description of Document
	10.1*+	Offshore Drilling Contract between CIE Angola Block 21 Ltd. and Universal Energy Resources, Inc., dated July 30, 2012
	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
	101.INS**	XBRL Instance Document
	101.SCH**	XBRL Schema Document
	101.CAL**	XBRL Calculation Linkbase Document
	101.DEF**	XBRL Definition Linkbase Document
	101.LAB**	XBRL Labels Linkbase Document
	101.PRE**	XBRL Presentation Linkbase Document

*

Filed herewith.

**

Furnished herewith.

+

Confidential treatment requested as to certain portions, which portions have been provided separately to the Securities and Exchange Commission.

38

SIGNATURES

        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
	By:	/s/ JOHN P. WILKIRSON Name: John P. Wilkirson Title:    Executive Vice President and             Chief Financial Officer
Dated: October 30, 2012

39

EXHIBIT INDEX

Exhibit Number		Description of Document
	10.1*+	Offshore Drilling Contract between CIE Angola Block 21 Ltd. and Universal Energy Resources, Inc., dated July 30, 2012
	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
	101.INS**	XBRL Instance Document
	101.SCH**	XBRL Schema Document
	101.CAL**	XBRL Calculation Linkbase Document
	101.DEF**	XBRL Definition Linkbase Document
	101.LAB**	XBRL Labels Linkbase Document
	101.PRE**	XBRL Presentation Linkbase Document

*

Filed herewith.

**

Furnished herewith.

+

Confidential treatment requested as to certain portions, which portions have been provided separately to the Securities and Exchange Commission.

40