Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Cobalt International Energy, Inc.Financial_Report.xls
EX-31.1 - EX-31.1 - Cobalt International Energy, Inc.a2221835zex-31_1.htm
EX-31.2 - EX-31.2 - Cobalt International Energy, Inc.a2221835zex-31_2.htm
EX-32.2 - EX-32.2 - Cobalt International Energy, Inc.a2221835zex-32_2.htm
EX-32.1 - EX-32.1 - Cobalt International Energy, Inc.a2221835zex-32_1.htm

Use these links to rapidly review the document
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION

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, 2014

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. Yes ý    No o

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

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

        Number of shares of the registrant's common stock outstanding at September 30, 2014: 412,536,865 shares.


Table of Contents


TABLE OF CONTENTS

1


Table of Contents

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 2013 Annual Report on Form 10-K filed on February 27, 2014, may adversely affect our results as indicated in forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

        Our estimates and forward-looking statements may be influenced by the following factors, among others:

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

    our liquidity and ability to finance our exploration, appraisal, development, and acquisition activities;

    lack or delay of partner, government and regulatory approvals related to our operations;

    projected and targeted capital expenditures and other costs and commitments;

    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;

    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;

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

    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 and gas prices;

    our ability to find, acquire or gain access to new prospects and renew our exploration portfolio;

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

    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, discoveries and appraisal and development projects;

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

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

2


Table of Contents

    the cost and availability of adequate insurance coverage;

    our ability to meet our obligations under the agreements governing our indebtedness; and

    other risk factors discussed in the "Risk Factors" section of our 2013 Annual Report on Form 10-K filed on February 27, 2014 and our Quarterly Report on Form 10-Q filed on August 6, 2014.

        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.

3


Table of Contents


PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

COBALT INTERNATIONAL ENERGY, INC.

4


Table of Contents


Cobalt International Energy, Inc.

Condensed Consolidated Balance Sheets

 
  September 30,
2014
(Unaudited)
  December 31,
2013
 
 
  ($ in thousands, except
per share data)

 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 168,980   $ 192,460  

Joint interest and other receivables

    180,864     124,639  

Prepaid expenses and other current assets

    14,485     55,857  

Inventory

    85,286     74,768  

Short-term restricted funds

    24,141     200,339  

Short-term investments

    1,568,295     1,319,380  
           

Total current assets

    2,042,051     1,967,443  

Property, plant, and equipment:

             

Oil and gas properties, successful efforts method of accounting, net of accumulated depletion of $-0-

    1,865,929     1,464,383  

Other property and equipment, net of accumulated depreciation and amortization of $7,629 and $4,394, as of September 30, 2014 and December 31, 2013, respectively

    12,594     11,892  
           

Total property, plant, and equipment, net

    1,878,523     1,476,275  
           

Long-term restricted funds

    125,444     104,496  

Long-term investments

    506,274     14,661  

Deferred income taxes

    28,158     17,061  

Other assets

    51,819     53,737  
           

Total assets

  $ 4,632,269   $ 3,633,673  
           
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Trade and other accounts payable

  $ 10,857   $ 131,428  

Accrued liabilities

    208,274     143,459  

Short-term contractual obligations

    48,978     49,019  

Deferred income taxes

    28,158     17,061  
           

Total current liabilities

    296,267     340,967  
           

Long-term debt

    1,908,007     1,035,980  

Long-term contractual obligations

    103,252     124,901  

Other long-term liabilities

    2,554     2,679  
           

Total long-term liabilities

    2,013,813     1,163,560  
           

Stockholders' Equity:

             

Common stock, $0.01 par value per share; 2,000,000,000 shares authorized, 407,095,514 and 406,949,839 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively

    4,071     4,069  

Additional paid-in capital

    4,129,176     3,641,936  

Accumulated deficit during the development stage

    (1,811,058 )   (1,516,859 )
           

Total stockholders' equity

    2,322,189     2,129,146  
           

Total liabilities and stockholders' equity

  $ 4,632,269   $ 3,633,673  
           
           

   

See accompanying notes.

5


Table of Contents


Cobalt International Energy, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2014   2013   2014   2013  
 
  ($ in thousands except per share data)
 

Oil and gas revenue

  $   $   $   $  

Operating costs and expenses:

                         

Seismic and exploration

    38,333     14,555     59,291     41,430  

Dry hole expense and impairment

    55,259     108,321     110,740     212,199  

General and administrative

    26,315     22,347     72,576     68,507  

Depreciation and amortization

    1,054     440     3,236     1,345  
                   

Total operating costs and expenses

    120,961     145,663     245,843     323,481  
                   

Operating income (loss)

    (120,961 )   (145,663 )   (245,843 )   (323,481 )

Other income (expense):

                         

Gain on sale of assets

                2,993  

Interest income

    1,895     1,465     4,274     4,610  

Interest expense

    (23,463 )   (15,802 )   (52,630 )   (51,027 )
                   

Total other income (expense)

    (21,568 )   (14,337 )   (48,356 )   (43,424 )
                   

Net income (loss) before income tax

    (142,529 )   (160,000 )   (294,199 )   (366,905 )

Income tax expense

                 
                   

Net income (loss)

  $ (142,529 ) $ (160,000 ) $ (294,199 ) $ (366,905 )
                   
                   

Basic and diluted income (loss) per share

  $ (0.35 ) $ (0.39 ) $ (0.72 ) $ (0.90 )
                   
                   

Basic and diluted weighted average common shares outstanding

    407,095,514     406,941,392     407,058,930     406,803,860  
                   
                   

   

See accompanying notes.

6


Table of Contents


Cobalt International Energy, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

 
  Common
Stock
  Additional
Paid-in
Capital
  Accumulated
Deficit
During
Development
Stage
  Total  
 
  ($ in thousands)
 

Balance, December 31, 2013

  $ 4,069   $ 3,641,936   $ (1,516,859 ) $ 2,129,146  

Common stock issued for restricted stock and stock options

    2     (2 )        

Equity based compensation

        23,102         23,102  

Exercise of stock options

        32         32  

Common stock withheld for taxes on equity based compensation

        (631 )       (631 )

Equity portion of debt, net of offering costs

        464,739         464,739  

Net income (loss)

            (294,199 )   (294,199 )
                   

Balance, September 30, 2014

  $ 4,071   $ 4,129,176   $ (1,811,058 ) $ 2,322,189  
                   
                   

   

See accompanying notes.

7


Table of Contents


Cobalt International Energy, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
  Nine Months Ended
September 30,
 
 
  2014   2013  
 
  ($ in thousands)
 

Cash flows provided from operating activities

             

Net income (loss)

  $ (294,199 ) $ (366,905 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

             

Depreciation and amortization

    3,236     1,345  

Dry hole expense and impairment of unproved properties

    110,740     212,199  

Gain on sale of assets

        (2,993 )

Equity based compensation

    23,102     18,795  

Amortization of premium (accretion of discount) on investments

    13,626     17,043  

Amortization of debt discount

    49,944     34,751  

Changes in operating assets and liabilities:

             

Joint interest and other receivables

    (56,214 )   (48,218 )

Inventory

    (14,635 )   (17,939 )

Prepaid expense and other current assets

    41,371     (2,482 )

Deferred charges and other

    36,023     (13,264 )

Trade and other accounts payable

    (63,276 )   (57,459 )

Accrued liabilities and other

    10,446     (14,856 )
           

Net cash provided by (used in) operating activities

    (139,836 )   (239,983 )
           

Cash flows from investing activities

             

Capital expenditures for oil and gas properties

    (70,639 )   (80,439 )

Capital expenditures for other property and equipment

    (460 )   (7,689 )

Exploratory wells drilling in process

    (482,811 )   (356,764 )

Proceeds from sale of oil and gas properties

        3,006  

Change in restricted funds

    43,696     90,372  

Proceeds from maturity of investment securities

    1,293,659     1,003,020  

Purchase of investment securities

    (1,936,269 )   (1,615,834 )
           

Net cash provided by (used in) investing activities

    (1,152,824 )   (964,328 )
           

Cash flows from financing activities

             

Proceeds from debt offering, net of costs

    1,269,778     (1,190 )

Proceeds from stock option exercises

    33     198  

Payments for common stock withheld for taxes on equity based compensation

    (631 )    
           

Net cash provided by (used in) financing activities

    1,269,180     (992 )
           

Net increase (decrease) in cash and cash equivalents

    (23,480 )   (1,205,303 )

Cash and cash equivalents, beginning of period

    192,460     1,425,815  
           

Cash and cash equivalents, end of period

  $ 168,980   $ 220,512  
           
           

Cash paid for interest

  $ 18,113   $ 16,502  

Non-Cash Disclosures

             

Changes in accrued capital expenditures

  $ (43,907 ) $ (92,534 )

Transfer of investment securities to and from restricted funds

  $ (155,105 ) $ 26  

   

See accompanying notes.

8


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

General

        Cobalt International Energy, Inc. (the "Company") is an independent exploration and production company with operations in the deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa.

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

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements include the financial statements of Cobalt International Energy, Inc. and all of its wholly-owned subsidiaries. All significant intercompany transactions and amounts have been eliminated for all periods presented.

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be presented for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Recently Issued Accounting Standards

        In June 2014, the Financial Accounting Standards Board (the "FASB") amended Accounting Standard Codification Topic No. 915, Development Stage Entities (the "ASC Topic 915"), to remove the definition of a development stage entity from the Master Glossary of the ASC, thereby removing the financial reporting distinction between development stage entities and other reporting entities. The amendments eliminate the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows, and shareholder equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.

        These amendments and the other remaining disclosure requirements of the ASC Topic 915 should be applied retrospectively. For public business entities, ASC Topic 915 is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early application of ASC Topic 915 is permitted for any annual reporting period or interim period for which the entity's financial statements have not yet been issued or made for issuance. Upon adoption, entities will no longer present or disclose any information required by the ASC Topic 915. The Company elected to apply ASC Topic 915 early effective in the Form 10-Q for the quarter ended June 30, 2014 and other reports thereafter.

9


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

Use of Estimates

        The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by the Company include (i) accruals related to expenses, (ii) assumptions used in estimating fair value of equity based awards and the fair value of the liability component of the convertible senior notes and (iii) assumptions used in impairment testing. Although the Company believes these estimates are reasonable, actual results could differ from these estimates.

Investments

        The Company's policy on accounting for its investments, which consist entirely of debt securities, is based on the accounting guidance relating to "Accounting for Certain Investments in Debt and Equity Securities." The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as long-term investments. The debt securities are carried at amortized costs and classified as held-to-maturity securities as the Company has the positive intent and ability to hold them until they mature. The net carrying value of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the securities. Held-to-maturity securities are stated at amortized cost, which approximates fair market value as of September 30, 2014 and December 31, 2013. 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, 2014 and December 31, 2013, the Company has no OTTI in its debt securities.

Capitalized Interest

        For exploration and development projects that have not commenced production, interest is capitalized as part of the historical cost of developing and constructing assets. Capitalized interest is determined by multiplying the Company's weighted-average borrowing cost on debt by the average amount of qualifying costs incurred. Once an asset subject to interest capitalization is completed and placed in service, the associated capitalized interest is expensed through depreciation or impairment. See Note 7—Property, Plant, and Equipment and Note 9—Long-term Debt.

10


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

Earnings (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, outstanding stock options, the 2.625% convertible senior notes due 2019 and the 3.125% convertible senior notes due 2024, during the period, unless their effect is anti-dilutive. For the three months and nine months ended September 30, 2014, 8,643,212 shares of non-vested restricted stock, non-vested restricted stock units, outstanding stock options, the 2.625% convertible senior notes due 2019 and the 3.125% convertible senior notes due 2024, were excluded from the diluted income (loss) per share because they are anti-dilutive. For the three months and nine months ended September 30, 2013, 6,744,278 shares of non-vested restricted stock, non-vested restricted stock units, outstanding stock options and the 2.625% convertible senior notes due 2019 were excluded from the diluted income (loss) per share because they are anti-dilutive.

2. Cash and Cash Equivalents

        Cash and cash equivalents consisted of the following:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Cash at banks

  $ 29,546   $ 82,428  

Money market funds

    68,448     75,039  

Held-to-maturity securities(1)

    70,986     34,993  
           

  $ 168,980   $ 192,460  
           
           

(1)
These securities mature three months or less from the date of purchase.

3. Restricted Funds

        Restricted funds consisted of the following:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Short-term:

             

Collateral on letters of credit for Angola

  $ 24,141   $ 200,339  
           

  $ 24,141   $ 200,339  
           

Long-term:

             

Collateral on letters of credit for Angola

  $ 125,444   $ 104,496  
           

  $ 125,444   $ 104,496  
           

Total restricted funds(1)

  $ 149,585   $ 304,835  
           
           

(1)
As of September 30, 2014 and December 31, 2013, $149.6 million and $304.8 million, respectively, was held in a collateral account established to secure letters of credit issued

11


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

3. Restricted Funds (Continued)

    in support of the Company's contractually agreed work program obligations on Blocks 9, 20 and 21 offshore Angola. During the nine months ended September 30, 2014, restricted funds of $155.3 million were released to the Company in connection with completion of a portion of the agreed work program obligations on Block 20 and 21 offshore Angola and $24.1 million was reclassified from long-term restricted funds to short-term restricted funds in connection with the completion of the Company's agreed work program obligations on Block 9 offshore Angola. As of September 30, 2014 and December 31, 2013, the collateral in this account was invested in U.S. Treasury bills and Treasury notes purchased at discounts and at premiums, respectively, resulting in a net carrying value of $149.6 million and $304.8 million, respectively. The contractual maturities of these securities are within one year.

    4. 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. These are usually settled within 30 days of the invoice date. As of September 30, 2014 and December 31, 2013, the balance in joint interest and other receivables consisted of the following:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Partners in the U.S. Gulf of Mexico

  $ 4,520   $ 68,664  

Partners in West Africa(1)

    165,954     46,897  

Accrued interest on investment securities

    8,977     5,632  

Other

    1,413     3,446  
           

  $ 180,864   $ 124,639  
           
           

(1)
The amount of $166.0 million as of September 30, 2014 includes $7.2 million related to the Company's partners on Block 20 offshore Angola and $158.8 million related to the outstanding balance due from the Company's partner on Blocks 9 and 21 offshore Angola. Subsequent to September 30, 2014, the Company collected the $158.8 million outstanding balance due from the Company's partner on Blocks 9 and 21 on October 30, 2014.

12


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

5. Investments

        The Company's investments in held-to-maturity securities which are recorded at amortized cost and approximate fair market value, were as follows as of September 30, 2014 and December 31, 2013:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

U.S. Treasury bills

  $ 93,996   $ 304,834  

U.S. Treasury notes

    103,513      

Corporate securities

    1,403,540     856,002  

Commercial paper

    532,097     408,033  

U.S. Agency securities

    24,994      

Certificates of deposit

    137,000     105,000  
           

Total

  $ 2,295,140   $ 1,673,869  
           
           

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

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Cash and cash equivalents

  $ 70,986   $ 34,993  

Short-term investments

    1,568,295     1,319,380  

Short-term restricted funds

    24,141     200,339  

Long-term restricted funds

    125,444     104,496  

Long-term investments

    506,274     14,661  
           

  $ 2,295,140   $ 1,673,869  
           
           

        The contractual maturities of these held-to-maturity securities as of September 30, 2014 and December 31, 2013 were as follows:

 
  September 30, 2014   December 31, 2013  
 
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
 
 
  ($ in thousands)
 

Within 1 year

  $ 1,788,866   $ 1,788,866   $ 1,659,208   $ 1,659,208  

After 1 year

    506,274     506,274     14,661     14,661  
                   

  $ 2,295,140   $ 2,295,140   $ 1,673,869   $ 1,673,869  
                   
                   

6. Fair Value Measurements

        The fair values of the Company's cash and cash equivalents, joint interest and other receivables, short-term 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

13


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)

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, commercial paper, U.S. agency securities, corporate 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


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)

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

 
  Level 1   Level 2    
 
 
  Carrying
Value
  Fair
Value(1)
  Carrying
Value
  Fair
Value(1)
  Balance as of
September 30,
2014
 
 
  ($ in thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 29,546   $ 29,546   $   $   $ 29,546  

Money market funds

    68,448     68,448             68,448  

Commercial paper

            70,986     70,986     70,986  
                       

Subtotal

    97,994     97,994     70,986     70,986     168,980  
                       

Short-term restricted funds:

                               

U.S. Treasury notes

            24,141     24,141     24,141  
                       

Subtotal

            24,141     24,141     24,141  
                       

Short-term investments:

                               

U.S Treasury bills

            47,924     47,924     47,924  

Corporate bonds

            922,260     922,260     922,260  

Commercial paper

            461,111     461,111     461,111  

Certificates of deposits

            137,000     137,000     137,000  
                       

Subtotal

            1,568,295     1,568,295     1,568,295  
                       

Long-term restricted funds:

                               

U.S. Treasury bills

            46,071     46,071     46,071  

U.S. Treasury notes

            79,373     79,373     79,373  
                       

Subtotal

            125,444     125,444     125,444  
                       

Long-term investments:

                               

U.S Agency securities

            24,994     24,994     24,994  

Corporate bonds

            481,280     481,280     481,280  
                       

Subtotal

            506,274     506,274     506,274  
                       

Total

  $ 97,994   $ 97,994   $ 2,295,140   $ 2,295,140   $ 2,393,134  
                       
                       

15


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)

 

 
  Level 1   Level 2    
 
 
  Carrying
Value
  Fair
Value(1)
  Carrying
Value
  Fair
Value(1)
  Balance as of
December 31,
2013
 
 
  ($ in thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 82,428   $ 82,428   $   $   $ 82,428  

Money market funds

    75,039     75,039             75,039  

Commercial paper

            9,993     9,993     9,993  

Certificate of deposits

                25,000     25,000     25,000  
                       

Subtotal

    157,467     157,467     34,993     34,993     192,460  
                       

Short-term restricted funds:

                               

U.S. Treasury notes

            200,339     200,339     200,339  
                       

Subtotal

            200,339     200,339     200,339  
                       

Short-term investments:

                               

Corporate bonds

            848,307     848,307     848,307  

Commercial paper

            391,073     391,073     391,073  

Certificates of deposits

            80,000     80,000     80,000  
                       

Subtotal

            1,319,380     1,319,380     1,319,380  
                       

Long-term restricted funds:

                               

U.S. Treasury notes

            104,496     104,496     104,496  
                       

Subtotal

            104,496     104,496     104,496  
                       

Long-term investments:

                               

Commercial paper

            6,967     6,967     6,967  

Corporate bonds

            7,694     7,694     7,694  
                       

Subtotal

            14,661     14,661     14,661  
                       

Total

  $ 157,467   $ 157,467   $ 1,673,869   $ 1,673,869   $ 1,831,336  
                       
                       

(1)
As of September 30, 2014 and December 31, 2013, the Company did not record any OTTI on these assets.

16


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. 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,
2014
  December 31,
2013
 
 
   
  ($ in thousands)
 

Oil and Gas Properties:

                 

Proved properties:

                 

Well and development costs

      $ 152,314   $ 92,579  
               

Total proved properties

        152,314     92,579  
               

Unproved properties:

                 

Oil and gas leasehold

        767,669     754,894  

Less: accumulated valuation allowance

        (163,622 )   (160,913 )
               

        604,047     593,981  

Exploration wells in process

        1,109,568     777,823  
               

Total unproved properties

        1,713,615     1,371,804  
               

Total oil and gas properties, net

        1,865,929     1,464,383  
               

Other Property and Equipment:

                 

Computer equipment and software

  3     5,535     5,115  

Office equipment and furniture

  3 - 5     2,140     2,132  

Vehicles

  3     265     265  

Leasehold improvements

  3 - 10     2,488     2,456  

Running tools and equipment

  3     9,795     6,318  
               

        20,223     16,286  

Less: accumulated depreciation and amortization

        (7,629 )   (4,394 )
               

Total other property and equipment, net

        12,594     11,892  
               

Property, plant, and equipment, net

      $ 1,878,523   $ 1,476,275  
               
               

        The Company recorded $1.0 million and $0.4 million of depreciation and amortization expense for the three months ended September 30, 2014 and 2013, respectively, and $3.2 million and $1.3 million for the nine months ended September 30, 2014 and 2013, respectively.

Proved Oil and Gas Properties

        The Heidelberg project was formally sanctioned for development in mid-2013. As a result of the project sanction, the Company reclassified its Heidelberg exploration well costs to proved property well and development costs and these costs will be amortized when the related proved developed reserves are produced. As of September 30, 2014, the well and development costs consist of $31.4 million relating to exploration well costs for the Heidelberg #1 exploration well and Heidelberg #3 appraisal well and $120.9 million for costs associated with field development. As of December 31, 2013, the well and development costs consist of $31.6 million relating to exploration well costs for the Heidelberg #1 exploration well and Heidelberg #3 appraisal well and $61.0 million for costs associated with field development.

17


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

Unproved Oil and Gas Properties

        As of September 30, 2014 and December 31, 2013, the Company has the following unproved property acquisition costs, net of valuation allowance on the consolidated balance sheets:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

U.S. Gulf of Mexico:

             

Individual oil and gas leaseholds with carrying value greater than $1 million          

  $ 322,394   $ 328,128  

Individual oil and gas leaseholds with carrying value less than $1 million

    87,404     68,895  
           

    409,798     397,023  

Accumulated valuation allowance & impairment

    (161,122 )   (160,913 )
           

    248,676     236,110  
           

West Africa:

             

Blocks 9, 20 and 21 offshore Angola

    355,876     355,876  

Diaba Block offshore Gabon

    1,995     1,995  
           

    357,871     357,871  

Accumulated impairment

    (2,500 )    
           

    355,371     357,871  
           

Total oil and gas leasehold

  $ 604,047   $ 593,981  
           
           

Capitalized Exploration Well Costs

        If an exploration well provides evidence as to the existence of sufficient quantities of hydrocarbons to justify evaluation for potential development, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer than one year in certain areas (generally, deepwater and international locations) depending upon, among other things, (i) the amount of hydrocarbons discovered, (ii) the outcome of planned geological and engineering studies, (iii) the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan and (iv) the requirement for government sanctioning in international locations before proceeding with development activities.

18


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

        The following tables reflect the Company's net changes in and the cumulative costs of capitalized exploration well costs (excluding any related leasehold costs):

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Beginning of period

  $ 777,823   $ 451,024  

Additions to capitalized exploration

             

U.S. Gulf of Mexico:

             

Exploration well costs

    91,169     154,877  

Capitalized interest

    4,471     3,928  

West Africa:

             

Exploration well costs

    297,403     457,608  

Capitalized interest

    31,085     12,271  

Reclassifications to wells, facilities, and equipment based on determination of proved reserves

        (38,446 )

Amounts charged to expense(1)

    (92,383 )   (263,439 )
           

End of period

  $ 1,109,568   $ 777,823  
           
           

(1)
The amount of $92.4 million for the nine months ended September 30, 2014 represents $55.2 million of impairment charges related to wells drilled in the U.S. Gulf of Mexico and $37.2 million of impairment charges related to wells drilled offshore Angola during the nine months ended September 30, 2014. The Company expects to record additional impairment charges of approximately $15.0 million to $18.0 million during the fourth quarter of 2014 in connection with the wells impaired during the third quarter of 2014.

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Cumulative costs:

             

U.S. Gulf of Mexico

             

Exploration well costs

  $ 240,699   $ 204,707  

Capitalized interest

    8,400     3,928  

West Africa

             

Exploration well costs

    817,113     556,917  

Capitalized interest

    43,356     12,271  
           

  $ 1,109,568   $ 777,823  
           
           

Well costs capitalized for a period greater than one year after completion of drilling (included in table above)

  $ 676,117   $ 399,775  
           
           

        As of September 30, 2014, capitalized exploration well costs that have been suspended longer than one year are associated with the Company's Shenandoah, North Platte, Cameia, Lontra, Mavinga and Diaman discoveries. Capitalized exploration well costs associated with our Orca and Bicuar discoveries

19


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

have been suspended for less than one year. These well costs are suspended pending ongoing evaluation including, but not limited to, results of additional appraisal drilling, well-test analysis, additional geological and geophysical data and approval of a development plan. Management believes these discoveries 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 discoveries, the associated costs will be expensed at that time. The Heidelberg discovery has been sanctioned for development and the Heidelberg capitalized exploration and appraisal well costs were reclassified to development costs in 2013.

8. Other Assets

        As of September 30, 2014 and December 31, 2013, the balance in other assets consisted of the following:

 
  September 30,
2014
  December 31,
2013
 
 
  (in thousands)
 

Debt issue cost(1)

  $ 37,572   $ 20,983  

Long-term portion of prepaid shorebase leases

    2,579     3,241  

Rig costs(2)

    7,410     11,153  

Long-term accounts receivable(3)

        17,923  

Other

    4,258     437  
           

  $ 51,819   $ 53,737  
           
           

(1)
As of September 30, 2014, the $37.6 million in debt issue costs was related to the issuance of the Company's 2.625% convertible senior notes due 2019 and the Company's 3.125% convertible senior notes due 2024, as described in Note 9. As of December 31, 2013, the $21.0 million in debt issue costs was related to the issuance of the Company's 2.625% convertible senior notes due 2019 as described in Note 9. These debt issue costs are amortized over the life of the notes using the effective interest method.

(2)
As of September 30, 2014 and December 31, 2013, the $7.4 million and $11.2 million, respectively, relate to costs associated with the long-term mobilization and the regulatory acceptance testing of the SSV Catarina drilling rig which is currently drilling in West Africa, and costs relating to the Rowan Reliance drilling rig which is currently under construction and scheduled for delivery in early 2015. These costs are or will be amortized over the term of the drilling rig contracts.

(3)
As of December 31, 2013, the $17.9 million of long-term accounts receivable was related to a 3.75% cost interest disputed by one of our former partners on Block 9 and 21 offshore Angola. On October 30, 2014, the Company collected the entire balance due from the Company's partner on Block 9 and 21 as of September 30, 2014, including amounts related to the aforementioned disputed interest. As of September 30, 2014 the receivable balance related to the aforementioned disputed interest was included in current assets—See (1) of Note 4—Joint Interest Receivable.

20


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt

        As of September 30, 2014, the Company's long-term debt consists of the 2.625% convertible senior notes due 2019 issued on December 17, 2012 (the "2.625% Notes") and the 3.125% convertible senior notes due 2024 issued on May 13, 2014 (the "3.125% Notes", and, collectively with the 2.625% Notes, the "Notes") as follows:

2.625% Convertible Senior Notes due 2019

        On December 17, 2012, the Company issued $1.38 billion aggregate principal amount of the 2.625% Notes. The 2.625% Notes are the Company's senior unsecured obligations and interest is payable semi-annually in arrears on June 1 and December 1 of each year. The 2.625% Notes will mature on December 1, 2019, unless earlier repurchased or converted in accordance with the terms of the 2.625% Notes. The 2.625% Notes may be converted at the option of the holder at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the maturity date, in multiples of $1,000 principal amount. The 2.625% Notes are convertible at an initial conversion rate of 28.023 shares of common stock per $1,000 principal amount, representing an initial conversion price of approximately $35.68 per share for a total of approximately 38.7 million underlying shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the 2.625% Notes, but will not be adjusted for any accrued and unpaid interest except in limited circumstances. Upon conversion, the Company's conversion obligation may be satisfied, at the Company's option, in cash, shares of common stock or a combination of cash and shares of common stock.

3.125% Convertible Senior Notes due 2024

        On May 13, 2014, the Company issued $1.3 billion aggregate principal amount of the 3.125% Notes. The 3.125% Notes are the Company's senior unsecured obligations and rank equal in right of payment to the 2.625% Notes. Interest on the 3.125% Notes is payable semi-annually in arrears on May 15 and November 15 of each year. The 3.125% Notes will mature on May 15, 2024, unless earlier repurchased, converted or redeemed in accordance with the terms of the Notes. Prior to November 15, 2023, the 3.125% Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2014 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a 30 consecutive trading-day period ending on, and including, the last trading day of the immediately preceding fiscal quarter exceeds $30.00 on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period (the "3.125% Notes Measurement Period") in which the trading price per $1,000 principal amount of notes for each trading day of the 3.125% Notes Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (3) if the Company calls all or any portion of the 3.125% Notes for redemption, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the related redemption date; or (4) upon the occurrence of specified distributions or the occurrence of specified corporate events. On or after November 15, 2023, the 3.125% Notes may be converted at the option of the holder at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the stated maturity date, in multiples of $1,000 principal amount. As of September 30, 2014, none of the conditions allowing holders of the 3.125% Notes to convert had been met.

21


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

        The 3.125% Notes are convertible at an initial conversion rate of 43.3604 shares of common stock per $1,000 principal amount, representing an initial conversion price of approximately $23.06 per share for a total of approximately 56.4 million underlying shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as defined in the indenture governing the 3.125% Notes, but will not be adjusted for any accrued and unpaid interest except in limited circumstances. Upon conversion, the Company's conversion obligation may be satisfied, at the Company's option, in cash, shares of common stock or a combination of cash and shares of common stock.

        Holders of the Notes who convert their Notes in connection with a "make-whole fundamental change", as defined in the indenture governing these Notes, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, as defined in the indenture governing the Notes, holders of the Notes may require the Company to repurchase for cash all or a portion of their Notes equal to $1,000 or a multiple of $1,000 at a fundamental change repurchase price equal to 100% of the principal amount of Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.

        Upon the occurrence of an Event of Default, as defined within the indenture governing the Notes, the trustee or the holders of at least 25% in aggregate principal amount of the Notes then outstanding may declare 100% of the principal of, and accrued and unpaid interest on, all the Notes to be due and payable immediately.

        In accordance with accounting guidance relating to, "Debt with Conversion and Other Options", the Company separately accounts for the liability and equity conversion components of the Notes due to the Company's option to settle the conversion obligation in cash. The fair value of the Notes excluding the conversion feature at the date of issuance was calculated based on the fair value of similar non-convertible debt instruments. The resulting value of the conversion option of the Notes was recognized as a debt discount and recorded as additional paid-in capital on the Company's consolidated balance sheets. Total debt issue cost on the Notes was allocated to the liability component and to the equity component of the Notes accordingly. The debt discount and the liability component of the debt issue costs are amortized over the term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs were approximately 8.40% and 8.97% on the 2.625% Notes and the 3.125% Notes, respectively, based on the Company's estimated non-convertible borrowing rate as of the date the Notes were issued. Since the Company incurred losses for all periods, the impact of the conversion option would be anti-dilutive to the earnings per share and therefore was not included in the calculation.

22


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

        The carrying amounts of the liability components of the Notes were as follows:

 
  September 30, 2014   December 31, 2013  
 
  Principal
Amount
  Unamortized
discount(1)
  Carrying
Amount
  Principal
Amount
  Unamortized
discount
  Carrying
Amount
 
 
  ($ in thousands)
 

Carrying amount of liability component

                                     

2.625% Notes

  $ 1,380,000   $ (308,002 ) $ 1,071,998   $ 1,380,000   $ (344,020 ) $ 1,035,980  

3.125% Notes

    1,300,000     (463,991 )   836,009              
                           

Total

  $ 2,680,000   $ (771,993 ) $ 1,908,007   $ 1,380,000   $ (344,020 ) $ 1,035,980  
                           
                           

(1)
Unamortized discount will be amortized over the remaining life of the Notes which is 5.25 years for the 2.625% Notes and 9.75 years for the 3.125% Notes.

        The carrying amounts of the equity components of the Notes were as follows:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Debt discount relating to value of conversion option

  $ 866,340   $ 390,540  

Debt issue costs

    (20,185 )   (9,124 )
           

Total

  $ 846,155   $ 381,416  
           
           

        Fair Value    The fair value of the Notes excluding the conversion feature was calculated based on the fair value of similar non-convertible debt instruments since an observable quoted price of the Notes or a similar asset or liability is not readily available. As of September 30, 2014 and December 31, 2013, the fair values of the Notes were as follows:

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

2.625% Notes

  $ 1,324,000   $ 1,227,000  

3.125% Notes

    981,000      
           

Total

  $ 2,305,000   $ 1,227,000  
           
           

        As of September 30, 2014, the Company had $27.4 million in accrued interests on the Notes.

        For the three months ended September 30, 2014 and 2013, the interest expense, net of capitalized amount, relating to the Notes was $23.5 million and $15.8 million, respectively. For the nine months ended September 30, 2014 and 2013, the interest expense, net of capitalized amount, relating to the Notes was $52.6 million and $51.0 million, respectively.

        As of September 30, 2014 and December 31, 2013, the debt discounts associated with the 2.625% Notes and the 3.125% Notes resulted in the recognition of $271.6 million and $121.0 million of

23


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

deferred tax liability, respectively. The Company is in an overall net deferred tax assets position with a full valuation allowance. Therefore, the Company has determined that it is more likely than not that all of the deferred tax assets will not be realized.

10. Contractual Obligations

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

 
  September 30,
2014
  December 31,
2013
 
 
  ($ in thousands)
 

Short-term Contractual Obligations:

             

Social obligation payments for Block 9, offshore Angola

  $ 109   $ 150  

Social obligation payments for Block 21, offshore Angola

    300     300  

Social obligation and bonus payments for Block 20, offshore Angola(1)

    48,569     48,569  
           

  $ 48,978   $ 49,019  
           
           

Long-term Contractual Obligations:

             

Social and work program obligation payments for Block 9, offshore Angola

  $ 22,265   $ 669  

Social obligation payments for Block 21, offshore Angola

    991     1,381  

Social obligation and bonus payments for Block 20, offshore Angola(1)

    79,996     122,851  
           

  $ 103,252   $ 124,901  
           
           

(1)
The total amount of social obligation payments for Block 20 has been capitalized.

11. Seismic and Exploration Expenses

        Seismic and exploration expenses consisted of the following:

 
  Three Months
Ended September 30,
  Nine Months
Ended September 30,
 
 
  2014   2013   2014   2013  
 
  ($ in Thousands)
 

Seismic costs

  $ 7,886   $ 13,461   $ 12,774   $ 34,548  

Leasehold delay rentals

    1,125     944     5,547     4,050  

Drilling rig and other exploration expense

    29,322     150     40,970     2,832  
                   

  $ 38,333   $ 14,555   $ 59,291   $ 41,430  
                   
                   

24


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

12. Equity Based Compensation

        The Company accounts for stock-based compensation at fair value. The Company grants various types of stock-based awards including stock options, restricted stock and performance-based awards. The fair value of stock option awards is determined using the Black-Scholes-Merton option-pricing model. For restricted stock awards with market conditions, the fair value of the awards is measured using the asset-or-nothing option pricing model. Restricted stock awards without market conditions and the performance-based awards are valued using the market price of the Company's common stock on the grant date. The Company records compensation cost, net of estimated forfeitures, for stock-based compensation awards over the requisite service period except for performance-based awards. For performance-based awards, compensation cost is recognized over the requisite service period as and when the Company determines that the achievement of the performance condition is probable, using the per-share fair value measured at grant date. During the nine months ended September 30, 2014, the Company granted a total of 1,212,417 shares of restricted stock and 812,055 stock options to employees. During the nine months ended September 30, 2014, the Company also granted 18,308 shares of common stock as retainer awards to non-employee directors who elected to be compensated by stock in lieu of cash payments.

        The Company recorded equity based compensation expense, net of forfeitures, of $7.8 million and $6.5 million for the three months ended September 30, 2014 and 2013, respectively, and $23.1 million and $18.8 million for the nine months ended September 30, 2014 and 2013, respectively.

13. Segment Information

        The Company currently has two geographic operating segments. The operating segments are focused in the deepwater U.S. Gulf of Mexico and offshore West Africa. The following tables provide the geographic operating segment information for the three and nine months ended September 30, 2014 and 2013:

 
  United States   West Africa   Total  
 
  ($ in thousands)
 

Three months ended September 30, 2014

                   

Operating costs and expense

  $ 45,208   $ 75,753   $ 120,961  
               

Operating income (loss)

    (45,208 )   (75,753 )   (120,961 )
               

Other income (expense)

                (21,568 )
                   

Net income (loss)

              $ (142,529 )
                   
                   

Additions to Property and Equipment, net(1)

  $ 61,532   $ 59,345   $ 120,877  
               
               

Three months ended September 30, 2013

                   

Operating costs and expense

  $ 122,995   $ 22,668   $ 145,663  
               

Operating income (loss)

    (122,995 )   (22,668 )   (145,663 )
               

Other income (expense)

                (14,337 )
                   

Net income (loss)

              $ (160,000 )
                   
                   

Additions to Property and Equipment, net(1)

  $ 1,329   $ 148,262   $ 149,591  
               
               

25


Table of Contents


Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

13. Segment Information (Continued)

 

 
  United States   West Africa   Total  
 
  ($ in thousands)
 

Nine months ended September 30, 2014

                   

Operating costs and expense

  $ 126,739   $ 119,104   $ 245,843  
               

Operating income (loss)

    (126,739 )   (119,104 )   (245,843 )
               

Other income (expense)

                (48,356 )
                   

Net income (loss)

              $ (294,199 )
                   
                   

Additions to Property and Equipment, net(1)

  $ 111,895   $ 290,353   $ 402,248  
               
               

Nine months ended September 30, 2013

                   

Operating costs and expense

  $ 167,817   $ 155,664   $ 323,481  
               

Operating income (loss)

    (167,817 )   (155,664 )   (323,481 )
               

Other income (expense)

                (43,424 )
                   

Net income (loss)

              $ (366,905 )
                   
                   

Additions to Property and Equipment, net(1)

  $ 93,657   $ 230,212   $ 323,869  
               
               

(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.

14. Contingencies

        The Company is not currently party to any legal proceedings. However, from time to time the Company may be subject to various lawsuits, claims and proceedings that arise in the normal course of business, including employment, commercial, environmental, safety and health matters. It is not presently possible to determine whether any such matters will have a material adverse effect on the Company's consolidated financial position, results of operations, or liquidity.

15. Other Matters

        As previously disclosed, the Company is currently subject to a formal order of investigation issued in 2011 by the SEC related to its operations in Angola. On August 4, 2014, the Company received a Wells Notice from the Staff of the SEC with respect to such investigation. On September 24, 2014, the Company responded to the Wells Notice in the form of a Wells Submission. The Company is unable to predict the outcome of the SEC's investigation or any action that the SEC may decide to pursue.

26


Table of Contents

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, 2013.

Overview

        We are an independent exploration and production company with operations in the deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. Since our founding in 2005, our oil-focused, below-salt exploration efforts have been successful in each of our three operating areas, resulting in nine discoveries out of the fifteen exploration prospects drilled. These nine discoveries consist of North Platte, Heidelberg and Shenandoah in the U.S. Gulf of Mexico; Cameia, Lontra, Mavinga, Bicuar and Orca offshore Angola; and Diaman offshore Gabon. In addition, we have an interest in the Yucatan discovery in the U.S. Gulf of Mexico. As of December 31, 2013, we had 7.9 million barrels of oil and 3.4 billion cubic feet of gas of net proved undeveloped reserves, all of which is attributed to the Heidelberg field.

Third Quarter 2014 Operational Highlights

    U.S. Gulf of Mexico

    With respect to our Heidelberg project, the operator has drilled the first field development well. The hull has recently arrived in the U.S. Gulf of Mexico, and the topsides and subsea infrastructure remain on schedule to be fabricated and installed on time to support initial production in the first half of 2016. We own a 9.375% working interest in the Heidelberg project.

    We are participating as a non-operator in the Shenandoah #3 appraisal well, which will further appraise our Shenandoah discovery located in the Inboard Lower Tertiary horizons of the U.S. Gulf of Mexico. The initial appraisal well on our Shenandoah discovery encountered more than 1,000 net feet of oil pay in multiple high quality Inboard Lower Tertiary-aged reservoirs with no identified oil/water contact in any productive zone encountered. We expect results from the Shenandoah #3 appraisal well in late 2014 or early 2015. We have a 20% working interest in the Shenandoah discovery.

    We are participating as a non-operator in the drilling of the Anchor prospect, which will target Inboard Lower Tertiary horizons and a secondary Miocene horizon in the U.S. Gulf of Mexico. We expect results from an exploration well on the Anchor prospect in the first quarter of 2015. We have a 20% working interest in the Anchor prospect.

    The first appraisal well at Yucatan reached total depth of 33,838 feet in the third quarter and encountered approximately 57 gross feet of pay in Lower Tertiary oil bearing sands down-dip of the initial discovery. The well results and data acquired are currently being evaluated and the operator has transitioned the project over to its appraisal team. The Yucatan discovery is located approximately three miles south of the Shenandoah discovery. We have a 5.34% working interest in the Yucatan discovery.

    We expect to take delivery of the Rowan Reliance, a new-build, ultra-deepwater dynamically positioned drillship, in the U.S. Gulf of Mexico in early 2015. Following the satisfactory completion of certain deepwater acceptance procedures, we will utilize the Rowan Reliance to

27


Table of Contents

      drill our North Platte #2 appraisal well, which we expect to spud in the first quarter of 2015. We have a 60% working interest in our North Platte discovery.

    West Africa

    The results of the Cameia #3 appraisal well on Block 21 offshore Angola, which included a drill stem test, were successful and consistent with pre-drill expectations. We plan to utilize the Cameia #3 well as a field development well. We are working with Sonangol to obtain approval of the integrated field development plan as well as financing for the use of a floating production, storage and offloading vessel (FPSO) to be used at the Cameia field. We expect formal sanction of the Cameia project in late 2014 or early 2015 and the award of major project facilities, including the FPSO and subsea trees and manifolds, umbilicals, risers and flowlines by the first quarter of 2015. Delays in obtaining necessary Sonangol approvals or financing for the Cameia FPSO could delay the award of such project facilities and our target of 2017 first oil production. We are the operator of the Cameia project and hold a 40% working interest.

    We spud the Loengo #1 exploration well on Block 9 offshore Angola in August 2014. The Loengo #1 exploration well reached total depth on October 8, 2014 and did not encounter commercial hydrocarbons. The well has subsequently been plugged and abandoned. We hold a 40% working interest in Loengo. The Petroserv Catarina drilling rig has moved to the Mupa #1 exploration well on Block 21 offshore Angola. We have a 40% working interest in the Mupa prospect.

    On August 26, 2014, we received documentation confirming that Nazaki Oil and Gaz ("Nazaki") and Alper Oil Limitada ("Alper") are no longer members of the contractor group of Blocks 9 and 21 offshore Angola. Pursuant to a series of Executive Decrees passed by the Republic of Angola, the working interests previously held by Nazaki and Alper in Blocks 9 and 21 have been transferred to and are now held by Sonangol Pesquisa e Produção, S.A. ("Sonangol P&P"). As a result, we no longer have any relationship with Nazaki or Alper. The contractor groups for Blocks 9 and 21 offshore Angola now consist only of Sonangol P&P (60% working interest) and the Company (40% working interest). Our obligation to carry and pay for Alper's 10% working interest terminated immediately with the transfer of Alper's interest to Sonangol P&P pursuant to the terms of our 2010 agreements with Alper. As a result, our paying interest in these blocks has been reduced from 62.5% to 52.5% during the initial exploration period, with Sonangol P&P being obligated to pay the remaining 47.5%. In addition, all historical costs of our carry of Alper will be recouped by us from Sonangol P&P's share of production revenues from these blocks. The composition and paying interests of the contractor group for Block 20 remain unchanged.

Third Quarter 2014 Financial Highlights

    We recorded a net loss of approximately $142.5 million, an 11% decrease from the third quarter of 2013. Total operating expenses were approximately $121.0 million, a 17% decrease from the third quarter of 2013. The decrease in operating expenses for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, was primarily attributed to $108.3 million in dry hole and impairment charges during the three months ended September 30, 2013.

    Capital and operating expenditures were approximately $189.3 million for the three months ended September 30, 2014.

    Including our existing cash and investments on hand and restricted cash as of September 30, 2014, we have approximately $2.4 billion of liquidity.

28


Table of Contents

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.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

 
  Three Months Ended September 30,  
 
  2014   2013   Increase
(Decrease)
  %  
 
  ($ in thousands)
 

United States Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    9,587     13,459     (3,872 )   (29 )%

Dry hole expense and impairment

    17,410     95,417     (78,007 )   (82 )%

General and administrative

    17,801     13,818     3,983     29 %

Depreciation and amortization

    410     301     109     36 %
                   

Total operating costs and expenses

    45,208     122,995     (77,787 )   (63 )%
                   

Operating income (loss)

    (45,208 )   (122,995 )   (77,787 )   (63 )%

West Africa Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    28,746     1,096     27,650     2523 %

Dry hole expense and impairment

    37,849     12,904     24,945     193 %

General and administrative

    8,514     8,529     (15 )   0 %

Depreciation and amortization

    644     139     505     363 %
                   

Total operating costs and expenses

    75,753     22,668     53,085     234 %
                   

Operating income (loss)

    (75,753 )   (22,668 )   53,085     234 %

Consolidated Operations:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    38,333     14,555     23,778     163 %

Dry hole expense and impairment

    55,259     108,321     (53,062 )   (49 )%

General and administrative

    26,315     22,347     3,968     18 %

Depreciation and amortization

    1,054     440     614     140 %
                   

Total operating costs and expenses

    120,961     145,663     (24,702 )   (17 )%
                   

Operating income (loss)

    (120,961 )   (145,663 )   (24,702 )   (17 )%

Other income (expense):

                         

Interest income

    1,895     1,465     430     29 %

Interest expense

    (23,463 )   (15,802 )   7,661     48 %
                   

Total other income (expense)

    (21,568 )   (14,337 )   7,231     50 %
                   

Net income (loss) before income tax

    (142,529 )   (160,000 )   (17,471 )   (11 )%

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (142,529 ) $ (160,000 ) $ (17,471 )   (11 )%
                   
                   

29


Table of Contents

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, 2014 and 2013, respectively.

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended September 30, 2014 and 2013:

        Seismic and exploration.    Seismic and exploration costs decreased by $3.9 million during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The decrease was primarily attributed to incurring $12.5 million for 3-D seismic data covering several blocks associated with the Shenandoah prospect during the three months ended September 30, 2013, and incurring $7.9 million on primarily 2-D seismic data licenses for blocks in central and eastern U.S. Gulf of Mexico during the three months ended September 30, 2014. This resulted in the decrease of $4.6 million in seismic costs during the three months ended September 30, 2014 which was offset by the increase of $0.7 million in delay rentals and other exploration expenses.

        Dry hole expense and impairment.    Dry hole expense and impairment decreased by $78.0 million during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The decrease is reflected in the following table:

 
  Three Months Ended
September 30,
 
 
  2014   2013   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Ardennes prospect

      $ 29,122   $ (29,122 )

Amortization of leasehold with carrying value under $1 million

    2,774     2,179     595  

Dry Hole Expense:

                   

Ardennes #1 exploration well

        64,116     (64,116 )

Aegean #1 exploration well

    710         710  

Anchor #1 exploration well

    9,780         9,780  

Yucatan #2 exploration well

    3,806         3,806  

Other Impairments:

                   

Obsolete inventory

    340         340  
               

  $ 17,410   $ 95,417   $ (78,007 )
               
               

        General and administrative.    General and administrative costs increased by $4.0 million during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase of $4.0 million was attributable to an increase of $2.0 million in salary and stock compensation, driven in part by our personnel growth, an increase of $1.8 million in office support expenses, a decrease of $3.0 million in recoveries from partners for overhead and technical service charges pursuant to applicable joint operating agreements, all of which were offset by a $2.8 million decrease in legal and consulting fees.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

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, 2014 and 2013, respectively.

30


Table of Contents

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended September 30, 2014 and 2013:

        Seismic and exploration.    Seismic and exploration costs increased by $27.7 million during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase was attributed primarily to an increase of $6.7 million in other exploration expenses associated with support vessel standby costs and shorebase personnel and equipment costs and an increase of $21.9 million in exploration costs associated with Block 9 drilling obligations, all of which were offset by the decrease of $0.9 million in seismic costs during the three months ended September 30, 2014.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $24.9 million during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. The increase is reflected in the following table:

 
  Three Months Ended
September 30,
 
 
  2014   2013   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Block 9 prospect

  $ 2,500   $   $ 2,500  

Dry Hole Expense:

                   

Cameia #2 drill stem test

    147     384     (237 )

Mavinga #1 exploration well

        12,520     (12,520 )

Loengo #1 exploration well

    35,202         35,202  
               

  $ 37,849   $ 12,904   $ 24,945  
               
               

        General and administrative.    General and administrative costs did not materially change from the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended September 30, 2014, as compared to the three months ended September 30, 2013.

Consolidated:

        Other income (expense).    Other income (expense) increased by $7.2 million during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013. The increase was due primarily to additional interest expense resulting from the 3.125% convertible senior notes due 2024 issued in May 2014 during the three months ended September 30, 2014.

        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


Table of Contents

Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

 
  Nine Months Ended September 30,  
 
  2014   2013   Increase
(Decrease)
  %  
 
  ($ in thousands)
 

United States Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    16,650     23,622     (6,972 )   (30 )%

Dry hole expense and impairment

    71,034     100,246     (29,212 )   (29 )%

General and administrative

    37,778     43,014     (5,236 )   (12 )%

Depreciation and amortization

    1,277     935     342     37 %
                   

Total operating costs and expenses

    126,739     167,817     (41,078 )   (24 )%
                   

Operating income (loss)

    (126,739 )   (167,817 )   (41,078 )   (24 )%

West Africa Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    42,641     17,808     24,833     139 %

Dry hole expense and impairment

    39,706     111,953     (72,247 )   (65 )%

General and administrative

    34,798     25,493     9,305     37 %

Depreciation and amortization

    1,959     410     1,549     378 %
                   

Total operating costs and expenses

    119,104     155,664     (36,560 )   (23 )%
                   

Operating income (loss)

    (119,104 )   (155,664 )   (36,560 )   (23 )%

Consolidated Operations:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    59,291     41,430     17,861     43 %

Dry hole expense and impairment

    110,740     212,199     (101,459 )   (48 )%

General and administrative

    72,576     68,507     4,069     6 %

Depreciation and amortization

    3,236     1,345     1,891     141 %
                   

Total operating costs and expenses

    245,843     323,481     (77,638 )   (24 )%
                   

Operating income (loss)

    (245,843 )   (323,481 )   (77,638 )   (24 )%

Other income (expense):

                         

Gain on sale of assets

        2,993     (2,993 )   (100 )%

Interest income

    4,274     4,610     (336 )   (7 )%

Interest expense

    (52,630 )   (51,027 )   1,603     3 %
                   

Total other income (expense)

    (48,356 )   (43,424 )   4,932     11 %
                   

Net income (loss) before income tax

    (294,199 )   (366,905 )   (72,706 )   (20 )%

Income tax expense (benefit)

                %
                   

Net income (loss)

  $ (294,199 ) $ (366,905 ) $ (72,706 )   (20 )%
                   
                   

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, 2014 and 2013, respectively.

32


Table of Contents

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the nine months ended September 30, 2014 and 2013:

        Seismic and exploration.    Seismic and exploration costs decreased by $7.0 million during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The decrease was primarily attributed to incurring $19.5 million of 3-D seismic data associated with the Shenandoah prospect during the nine months ended September 30, 2013, and incurring $9.3 million of primarily 2-D seismic data covering blocks in central and eastern U.S. Gulf of Mexico during the nine months ended September 30, 2014. This resulted in the decrease of $10.2 million in seismic costs during the three months ended September 30, 2014 which was offset by the increase of $1.4 million in delay rentals and $1.8 million in other exploration expenses.

        Dry hole expense and impairment.    Dry hole expense and impairment decreased by $29.2 million during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The decrease is reflected in the following table:

 
  Nine Months Ended September 30,  
 
  2014   2013   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Ardennes prospect

  $   $ 29,122   $ (29,122 )

Other leasehold

    7,509         7,509  

Amortization of leasehold with carrying value under $1 million

    7,709     7,008     701  

Dry Hole Expense:

                   

Ardennes #1 exploration well

        64,116     (64,116 )

Aegean #1 exploration well

    3,929         3,929  

Anchor #1 exploration well

    35,547         35,547  

Yucatan #2 exploration well

    15,700         15,700  

Other Impairments:

                   

Obsolete inventory

    640         640  
               

  $ 71,034   $ 100,246   $ (29,212 )
               
               

        General and administrative.    General and administrative costs decreased by $5.2 million during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The decrease in general and administrative costs is attributed to an increase of $6.6 million in staff related costs including equity compensation, and a $3.6 million increase in office support costs, offset by a decrease of $2.5 million in certain consultant and contractor expenses, a decrease of $2.7 million in legal fees and an increase of $10.2 million in recoveries from partners for overhead and technical service charges pursuant to applicable joint operating agreements.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013.

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, 2014 and 2013, respectively.

33


Table of Contents

        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the nine months ended September 30, 2014 and 2013:

        Seismic and exploration.    Seismic and exploration costs increased by $24.8 million during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase was due primarily to an increase of $13.3 million in other exploration costs associated with standby costs of certain support vessels and shorebase equipment and personnel following the release of the Ocean Confidence drilling rig and the ongoing operations of the SSV Catarina drilling rig, an increase of $21.9 million in exploration costs associated with Block 9 drilling obligations and an increase of $1.2 million in freight costs, all of which were offset by decrease of $11.6 million in seismic costs during the nine months ended September 30, 2014.

        Dry hole expense and impairment.    Dry hole and impairment expenses decreased by $72.2 million during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. The decrease is reflected in the following table:

 
  Nine Months Ended September 30,  
 
  2014   2013   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Block 9 prospect

  $ 2,500   $   $ 2,500  

Dry Hole Expense:

                   

Cameia #2 drill stem test

    2,004     82,367     (80,363 )

Diaman #1 exploration well

        17,066     (17,066 )

Mavinga #1 exploration well

        12,520     (12,520 )

Loengo #1 exploration well

    35,202         35,202  
               

  $ 39,706   $ 111,953   $ (72,247 )
               
               

        General and administrative.    General and administrative costs increased by $9.3 million for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase is attributed to an $11.3 million increase in technical support from corporate office and a $0.5 million increase in the Luanda staff related costs, offset by a decrease of $1.3 million in Luanda office support expenses and a decrease of $1.2 million in certain consultant and contractor expenses.

        Depreciation and amortization.    Depreciation and amortization increased by $1.5 million from the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase was due primarily to the depreciation of the $9.8 million in running tools and equipment of which $6.3 million were purchased in 2013 and $3.6 million were transferred from the drilling rigs.

Consolidated:

        Other income (expense).    Other income (expense) increased by $4.9 million during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013. The increase was due primarily to additional interest expense resulting from the 3.125% convertible senior notes due 2024 issued in May 2014 during the nine months ended September 30, 2014.

        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.

34


Table of Contents

Liquidity and Capital Resources

        Our Heidelberg project was sanctioned in mid-2013, and the operator currently estimates first production from Heidelberg in the first half of 2016. We continue to advance our Cameia project through the project development life-cycle. On February 28, 2014, we submitted a formal declaration of commercial discovery to Sonangol with respect to our Cameia discovery. On May 28, 2014, we submitted the integrated field development plan for our Cameia project on Block 21 offshore Angola for approval by Sonangol and the Angola Ministry of Petroleum. We are working with Sonangol to obtain approval of the integrated field development plan as well as financing for the use of an FPSO to be used at the Cameia field. We expect formal sanction of the Cameia project in late 2014 or early 2015 and the award of major project facilities, including the FPSO and subsea trees and manifolds, umbilicals, risers and flowlines by the first quarter of 2015. Delays in obtaining necessary Sonangol approvals or financing for the Cameia FPSO could delay the award of such project facilities and our target of 2017 first oil production from the Cameia project.

        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 any future equity and debt financings, asset-based ventures and asset monetizations.

        We expect to incur substantial expenditures and generate significant operating losses as we continue to:

    evaluate each of our discoveries through project appraisal and potential development towards first production and cash flow;

    continue our exploration activity on our existing acreage;

    seek the renewal of our worldwide exploration portfolio in locations applicable to our deepwater and below-salt exploration strength; 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, our ability to obtain financing, oil and gas prices, the success of our project development and exploration efforts, 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, 2014, we had approximately $2.4 billion in liquidity, which includes cash and cash equivalents, short-term restricted cash, short-term investments, long-term restricted cash and long-term investments. This amount does not include amounts Total is obligated to pay us pursuant to the terms of our U.S. Gulf of Mexico alliance. We expect to expend approximately $750 to $850 million for our capital and operating expenditures in 2014. Our capital and operating expenditures were approximately $189.3 million and $559.4 million for the three and nine months ended September 30, 2014, respectively. Our capital and operating expenditures exclude interest payments, Angolan social contributions and items amortized in future years' operations. We expect that our existing cash on hand will be sufficient to fund our planned exploration and appraisal drilling program and development activities at current working interests through at least mid-2016.

        We are currently pursuing certain asset-based ventures and monetizations to fund our long-term project appraisal, development and exploration activities. We may also seek additional funding through equity and debt financings. Additional funding, including funding through any asset-based venture or monetization, 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

35


Table of Contents

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 our exploration, appraisal and development activities. Any asset-based venture or monetization may also require us to relinquish rights to some of our development projects or exploration prospects which we would otherwise develop on our own, or with a majority working interest.

    Cash Flows:

 
  Nine Months Ended
September 30,
 
 
  2014   2013  
 
  ($ in thousands)
 

Net cash provided by (used in):

             

Operating Activities

  $ (139,836 ) $ (239,983 )

Investing Activities

    (1,152,824 )   (964,328 )

Financing Activities

    1,269,180     (992 )

        Operating activities.    Net cash of $139.8 million and $240.0 million used in operating activities during nine months ended September 30, 2014 and 2013, respectively, were primarily related to cash payments for seismic and exploration expenses incurred in the U.S. Gulf of Mexico and West Africa.

        Investing activities.    Net cash used in investing activities for the nine months ended September 30, 2014 was $1.2 billion, compared with net cash used in investing activities of $964.3 million for the nine months ended September 30, 2013. The net cash used in investing activities for the nine months ended September 30, 2014 was primarily related to the investment of the $1.3 billion net proceeds from the issuance of our 3.125% convertible senior notes due 2024. The net cash used in investing activities for the nine months ended September 30, 2013 were primarily related to the investment of the $1.35 billion net proceeds from the issuance of our 2.625% convertible senior notes due 2019.

        Financing activities.    Net cash provided by financing activities for the nine months ended September 30, 2014 was $1.3 billion, compared with $1.0 million used in financing activities for the nine months ended September 30, 2013. The $1.3 billion provided by financing activities for the nine months ended September 30, 2014 relates to the net proceeds from the issuance of our 3.125% convertible senior notes due 2024. The $1.0 million used in financing activities for the nine months ended September 30, 2013 relates to payments of debt issue costs associated with our 2.625% convertible senior notes due 2019.

Critical Accounting Policies

        Our significant accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for the year ended December 31, 2013. Also refer to the Notes to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        There have been no material changes in market risk from the information provided under Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" in our 2013 Annual Report on Form 10-K for the year ended December 31, 2013.

36


Table of Contents


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, 2014 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.

        As previously disclosed, we are currently subject to a formal order of investigation issued in 2011 by the SEC related to our operations in Angola. See the discussion under the caption "Risk Factors—We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, and any determination that we violated the U.S. Foreign Corrupt Practices Act could have a material adverse effect on our business" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for more information.

        On August 4, 2014, we received a Wells Notice from the Staff of the SEC with respect to such investigation. On September 24, 2014, we responded to the Wells Notice in the form of a Wells Submission. We are unable to predict the outcome of the SEC's investigation or any action that the SEC may decide to pursue.

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, 2013 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 other than the following.

An epidemic of the Ebola virus disease is ongoing in West Africa and may adversely affect our business operations and financial condition.

        An epidemic of the Ebola virus disease is ongoing in certain countries of West Africa, although no cases have been reported in our areas of operations, including Angola or Gabon. A substantial number of deaths have been reported by the World Health Organization ("WHO") in other West African countries, and the WHO has declared it a global health emergency. It is impossible to predict the effect and potential spread of the Ebola virus in West Africa and around the world.

37


Table of Contents

        Should the Ebola virus continue to spread, including to the areas in which we have assets or operations, or not be satisfactorily contained, our exploration, development and production plans for our operations could be delayed, or interrupted after commencement. Any changes to these operations could significantly increase costs of operations. Our operations in West Africa require contractors and personnel to travel to and from the area as well as the unhindered transportation of equipment and oil and gas production. Such operations also rely on infrastructure, contractors and personnel in West Africa. Several countries have announced travel bans to certain West African countries. If bans are extended to the countries in which we have assets or operations, including Angola and Gabon, or contractors or personnel refuse to travel there, our business, results of operations, and any future cash flow could be adversely affected. In addition, costs associated with obtaining services in West Africa could be significantly higher than planned due to fears of the Ebola virus epidemic, which may also have an adverse effect on our business, results of operations, and any future cash flow.

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

        On November 3, 2014, the Company entered into an employment agreement with each of Mr. James W. Farnsworth, the Company's Executive Vice President and Chief Exploration Officer, and Mr. James H. Painter, the Company's Executive Vice President, Execution and Appraisal. Each of Mr. Farnsworth's and Mr. Painter's new employment agreement supersedes the employment agreement previously entered into between the executive and the Company that was scheduled to expire on December 21, 2014, except with respect to certain transfer restrictions on equity received at the time of the Company's initial public offering, which transfer restrictions remain in place pursuant to their terms until December 21, 2014. Except as described below, the terms of each executive's employment agreement are substantially similar to the terms of his prior employment agreement, which terms are summarized in the Company's proxy statement filed on March 14, 2014.

        The initial term of each employment agreement is effective until December 31, 2016, subject to an earlier termination of employment, with automatic renewals for successive annual one-year periods unless either the executive or the Company informs the other party of his or its intention not to renew the employment agreement. Pursuant to the terms of each employment agreement, the executive agrees to participate in the succession planning for his position, as directed by the Company's chief executive officer.

        Each employment agreement provides for the continuation of the executive's annual base salary in an amount that is not less than the base salary amount that the executive currently receives ($700,000), subject to increase at the discretion of the Company's board of directors or a committee thereof, and an annual bonus target amount that is not less than the executive's current annual bonus target amount, which is equal to 75% of his base salary. On an annual basis, each executive will be eligible to receive equity incentive awards under the Company's Long Term Incentive Plan.

        In addition, in consideration for each executive entering into new one-year post-employment restrictions against competition and solicitation and other restrictive covenants, each employment

38


Table of Contents

agreement provides that subject to the executive's continued employment until December 31, 2016, any of the executive's time-vesting awards of restricted stock, restricted stock units and stock options that remain outstanding as of December 31, 2016, will fully vest on December 31, 2016; provided that the resulting vested shares may not be transferred by the executive (other than in connection with the payment of taxes) until the regularly scheduled vesting dates set forth in the applicable award agreement and during which time the vested shares will remain subject to forfeiture in the event of the executive's violation of his restrictive covenants.

        Unlike the executives' prior employment agreements, the executives' new employment agreements do not provide for a "gross-up" of any golden parachute excise taxes imposed under Internal Revenue Code Section 4999 on any payments or benefits that the executive may receive in connection with a change in control of the Company. In addition, each employment agreement provides that any compensation paid to the executive that is subject to recovery under any law or applicable regulation or listing requirement will be subject to deduction and clawback as may be required pursuant to the law, regulation or listing requirement.

        Each employment agreement also provides for the grant to each executive on January 15, 2015 and January 15, 2016 of a special performance vesting equity award granted pursuant to the terms of the Company's Long Term Incentive Plan. Each award will have a target value of $2,000,000. Each target award will be awarded 50% in the form of performance vesting stock options and 50% in the form of performance vesting restricted stock. Vesting of the stock option awards and the restricted stock awards will require satisfaction of both a service condition and a performance condition. The service condition under each award will be satisfied on December 31, 2016, subject to the executive's continued employment through such date. The performance condition will be satisfied subject to the attainment of a $23.06 closing share price of the Company's common stock for a period of at least 20 out of 30 continuous days on which the shares are quoted or traded at any time during the ten-year term of each award.

        In addition, on November 3, 2014, the Company and Mr. Van P. Whitfield, the Company's Executive Vice President and Chief Operating Officer, entered into a one-year extension of Mr. Whitfield's existing employment agreement. The extension of Mr. Whitfield's employment agreement is effective until December 31, 2015, subject to an earlier termination of employment, with the possibility of further extensions upon the Company's and Mr. Whitfield's mutual agreement. The terms of Mr. Whitfield's employment agreement are summarized in the Company's proxy statement filed on March 14, 2014.

        In connection with and pursuant to the terms of the extension of Mr. Whitfield's employment agreement, on January 15, 2015 Mr. Whitfield will receive a special performance vesting equity award granted pursuant to the terms of the Company's Long Term Incentive Plan. The award will have a target value of $2,000,000 and will be awarded 50% in the form of performance vesting stock options and 50% in the form of performance vesting restricted stock. Vesting of the stock option award and the restricted stock award will require satisfaction of both a service condition and a performance condition. The service condition under each award will be satisfied on December 31, 2015, subject to the executive's continued employment through such date. The performance condition will be satisfied subject to the attainment of a $23.06 closing share price of the Company's common stock for a period of at least 20 out of 30 continuous days on which the shares are quoted or traded at any time during the ten-year term of each award.

        In addition, in consideration for Mr. Whitfield renewing his one-year post-employment restrictions against competition and solicitation and other restrictive covenants, the extension of Mr. Whitfield's employment agreement provides that subject to his continued employment until December 31, 2015, any of Mr. Whitfield's time-vesting awards of restricted stock, restricted stock units and stock options that remain outstanding as of December 31, 2015, will fully vest on December 31, 2015; provided that

39


Table of Contents

the resulting vested shares may not be transferred by him (other than in connection with the payment of taxes) until the regularly scheduled vesting dates set forth in the applicable award agreement and during which time the vested shares will remain subject to forfeiture in the event of Mr. Whitfield's violation of his restrictive covenants.

Item 6.    Exhibits

Exhibit
Number
  Description of Document
  31.1 * Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

 

31.2

*

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934

 

32.1

*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2

*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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.

40


Table of Contents


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: November 4, 2014

41


Table of Contents


EXHIBIT INDEX

Exhibit
Number
  Description of Document
  31.1 * Certification of the Chief Executive Officer pursuant to Rule 13a- 14(a)/15d-14(a) of the Securities Exchange Act of 1934
        
  31.2 * Certification of the Chief Financial Officer pursuant to Rule 13a- 14(a)/15d-14(a) of the Securities Exchange Act of 1934
        
  32.1 * Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
        
  32.2 * Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
        
  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.

42