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EX-32.1 - EX-32.1 - Cobalt International Energy, Inc.cie-ex321_11.htm
EX-32.2 - EX-32.2 - Cobalt International Energy, Inc.cie-ex322_10.htm
EX-31.1 - EX-31.1 - Cobalt International Energy, Inc.cie-ex311_13.htm
EX-31.2 - EX-31.2 - Cobalt International Energy, Inc.cie-ex312_12.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

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 x  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 x  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

x

 

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 x

Number of shares of the registrant’s common stock outstanding at March 31, 2016: 415,073,274 shares.

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

1

 


 

 

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 2015 Annual Report on Form 10-K filed on February 22, 2016, may adversely affect our results as indicated in forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

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

 

·

the timing or occurrence of the closing of the sale of our interests in Block 20 and 21 offshore Angola;

 

·

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

 

·

volatility and recent severe declines in oil and gas prices;

 

·

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

 

·

lack or delay of partner, government and regulatory approvals related to our business or required pursuant to agreements we are party to;

 

·

changes in environmental, safety and health laws and regulations or the implementation or interpretation of those laws and regulations;

 

·

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

 

·

oil and gas production rates on our properties that are currently producing oil and gas;

 

·

projected and targeted capital expenditures and other costs and commitments;

 

·

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

 

·

our and our partners’ ability to obtain permits to drill and develop our properties in the U.S. Gulf of Mexico;

 

·

termination of or intervention in concessions, licenses, permits, rights or authorizations granted by the United States, Angolan and Gabonese governments to us;

 

·

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

 

·

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 oil and gas transportation and infrastructure;

 

·

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;

 

·

the cost and availability of adequate insurance coverage;

2

 


 

 

 

·

the results or outcome of any legal proceedings or investigations we may be subject to; 

 

·

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

 

·

other risk factors discussed in the “Risk Factors” section of our 2015 Annual Report on Form 10-K filed on February 22, 2016.

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

 


 

 

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

COBALT INTERNATIONAL ENERGY, INC.

 

 

4

 


 

 

Cobalt International Energy, Inc.

Condensed Consolidated Balance Sheets

 

 

 

March 31,

2016

(Unaudited)

 

 

December 31,

2015

 

 

 

($ in thousands, except

per share data)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

52,951

 

 

$

71,593

 

Restricted cash and cash equivalents

 

 

252,200

 

 

 

252,950

 

Joint interest and other receivables

 

 

37,070

 

 

 

54,709

 

Prepaid expenses and other current assets

 

 

35,507

 

 

 

43,881

 

Inventory

 

 

19,263

 

 

 

26,113

 

Short-term investments

 

 

701,716

 

 

 

885,994

 

Current assets held for sale

 

 

1,911,102

 

 

 

1,811,051

 

Total current assets

 

 

3,009,809

 

 

 

3,146,291

 

Property, plant, and equipment:

 

 

 

 

 

 

 

 

Oil and gas properties, successful efforts method of accounting, net of

   accumulated depletion of $2,825 and $0, as of March 31, 2016 and

   December 31, 2015, respectively

 

 

1,027,559

 

 

 

893,734

 

Other property and equipment, net of accumulated depreciation

   and amortization of $6,992 and $6,647, as of March 31, 2016 and

   December 31, 2015, respectively

 

 

4,803

 

 

 

2,202

 

Total property, plant, and equipment, net

 

 

1,032,362

 

 

 

895,936

 

Long-term restricted funds

 

 

9,053

 

 

 

 

Deferred income taxes

 

 

 

 

 

 

Other assets

 

 

15,759

 

 

 

18,992

 

Total assets

 

$

4,066,983

 

 

$

4,061,219

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Trade and other accounts payable

 

$

7,375

 

 

$

856

 

Accrued liabilities

 

 

156,671

 

 

 

126,323

 

Deferred Angola sales proceeds

 

 

250,000

 

 

 

250,000

 

Deferred income taxes

 

 

 

 

 

 

Current liabilities held for sale

 

 

233,797

 

 

 

250,839

 

Total current liabilities

 

 

647,843

 

 

 

628,018

 

Long-term debt

 

 

2,006,620

 

 

 

1,981,895

 

Asset retirement obligations

 

 

3,269

 

 

 

3,167

 

Other long-term liabilities

 

 

1,966

 

 

 

2,002

 

Total long-term liabilities

 

 

2,011,855

 

 

 

1,987,064

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 2,000,000,000 shares authorized,

   409,731,943 and 408,740,182 issued and outstanding as of March 31, 2016

   and December 31, 2015, respectively

 

 

4,098

 

 

 

4,088

 

Additional paid-in capital

 

 

4,171,850

 

 

 

4,164,097

 

Accumulated deficit

 

 

(2,768,663

)

 

 

(2,722,048

)

Total stockholders’ equity

 

 

1,407,285

 

 

 

1,446,137

 

Total liabilities and stockholders’ equity

 

$

4,066,983

 

 

$

4,061,219

 

 

See accompanying notes.

 

 

5

 


 

 

Cobalt International Energy, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

 

($ in thousands, except per share data)

 

Oil and gas revenue:

 

 

 

 

 

 

 

 

Oil sales

 

$

1,611

 

 

$

 

Natural gas sales

 

 

25

 

 

 

 

Total oil and gas revenue

 

 

1,636

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Seismic and exploration

 

 

(1,254

)

 

 

14,067

 

Dry hole expense and impairment

 

 

(3,977

)

 

 

19,897

 

Lease operating expense

 

 

956

 

 

 

 

General and administrative

 

 

19,137

 

 

 

17,730

 

Accretion expense

 

 

102

 

 

 

 

Depreciation and amortization

 

 

3,170

 

 

 

412

 

Total operating costs and expenses

 

 

18,134

 

 

 

52,106

 

Operating income (loss)

 

 

(16,498

)

 

 

(52,106

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

1,338

 

 

 

1,660

 

Interest expense

 

 

(15,642

)

 

 

(20,020

)

Total other income (expense)

 

 

(14,304

)

 

 

(18,360

)

Net income (loss) from continuing operations before income tax

 

 

(30,802

)

 

 

(70,466

)

Income tax expense

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

(30,802

)

 

$

(70,466

)

Net income (loss) from discontinued operations, net of income tax

 

 

(15,813

)

 

 

(11,151

)

Net income (loss)

 

 

(46,615

)

 

 

(81,617

)

Basic and diluted income (loss) per share from continuing

   operations

 

$

(0.08

)

 

$

(0.17

)

Basic and diluted income (loss) per share from discontinued

   operations

 

$

(0.03

)

 

$

(0.03

)

Basic and diluted income (loss) per share

 

$

(0.11

)

 

$

(0.20

)

Basic and diluted weighted average common shares outstanding

 

 

409,260,489

 

 

 

408,508,154

 

 

See accompanying notes.

 

 

6

 


 

 

Cobalt International Energy, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated Deficit

 

 

Total

 

 

 

($ in thousands)

 

Balance, December 31, 2015

 

$

4,088

 

 

$

4,164,097

 

 

$

(2,722,048

)

 

$

1,446,137

 

Equity based compensation

 

 

 

 

 

7,763

 

 

 

 

 

 

7,763

 

Common stock issued for restricted stock and stock options

 

 

10

 

 

 

(10

)

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

 

(46,615

)

 

 

(46,615

)

Balance, March 31, 2016

 

$

4,098

 

 

$

4,171,850

 

 

$

(2,768,663

)

 

$

1,407,285

 

 

See accompanying notes.

 

 

7

 


 

 

Cobalt International Energy, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

 

 

($ in thousands)

 

Cash flows provided from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(46,615

)

 

$

(81,617

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,170

 

 

 

412

 

Accretion expense

 

 

102

 

 

 

 

Loss from discontinued operations

 

 

15,813

 

 

 

11,151

 

Dry hole expense and impairment of unproved properties

 

 

(3,977

)

 

 

19,897

 

Equity based compensation

 

 

7,763

 

 

 

5,843

 

Amortization of premium (accretion of discount) on investments

 

 

905

 

 

 

4,837

 

Amortization of debt discount and debt issuance costs

 

 

24,901

 

 

 

19,868

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Joint interest and other receivables

 

 

17,639

 

 

 

(15,756

)

Inventory

 

 

6,849

 

 

 

857

 

Prepaid expense and other current assets

 

 

8,375

 

 

 

(14,971

)

Deferred charges and other

 

 

3,057

 

 

 

(11,815

)

Trade and other accounts payable

 

 

3,421

 

 

 

969

 

Accrued liabilities and other

 

 

31,414

 

 

 

(25,753

)

Net cash provided by (used in) operating activities—continuing operations

 

 

72,817

 

 

 

(86,078

)

Net cash provided by (used in) operating activities—discontinued operations

 

 

(50,815

)

 

 

68,898

 

Net cash provided by (used in) operating activities

 

 

22,002

 

 

 

(17,180

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures for other property and equipment

 

 

(2,946

)

 

 

(23

)

Exploratory wells drilling in process

 

 

(130,678

)

 

 

(51,645

)

Change in restricted funds

 

 

(8,302

)

 

 

(46,049

)

Proceeds from maturity of investment securities

 

 

570,582

 

 

 

372,350

 

Purchase of investment securities

 

 

(387,209

)

 

 

(65,582

)

Net cash provided by (used in) investing activities—continuing operations

 

 

41,447

 

 

 

209,051

 

Net cash provided by (used in) investing activities—discontinued operations

 

 

(82,091

)

 

 

(176,941

)

Net cash provided by (used in) investing activities

 

 

(40,644

)

 

 

32,110

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(18,642

)

 

 

14,930

 

Cash and cash equivalents, beginning of period

 

 

71,593

 

 

 

246,705

 

Cash and cash equivalents, end of period

 

$

52,951

 

 

$

261,635

 

Cash paid for interest

 

$

208

 

 

$

 

Non-cash disclosures

 

 

 

 

 

 

 

 

Changes in accrued capital expenditures

 

$

5,791

 

 

$

(8,716

)

Transfer of investment securities to and from restricted funds

 

$

22,641

 

 

$

46,049

 

 

See accompanying notes.

8

 


 

 

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.

On August 22, 2015, Cobalt International Energy Angola Ltd., a wholly-owned subsidiary of the Company, executed a purchase and sale agreement with Sociedade Nacional de Combustíveis de Angola—Empresa Pública (“Sonangol”) for the sale by the Company to Sonangol of the entire issued and outstanding share capital of its indirect wholly-owned subsidiaries CIE Angola Block 20 Ltd. and CIE Angola Block 21 Ltd., which respectively hold the Company’s 40% working interest in each of Block 20 and Block 21 offshore Angola (the “Angola Transaction”). The Angola Transaction is subject to Angolan government approvals. On February 29, 2016, the Company relinquished its working interest in Block 9. The Company’s working interests in Blocks 20 and 21 offshore Angola have been classified as “held for sale” on the consolidated balance sheet. The results of operations associated with Blocks 9, 20 and 21 offshore Angola have been presented as discontinued operations in the accompanying consolidated statement of operations. Historically, the Company’s Angolan subsidiaries constituted a significant portion of its West Africa segment. The Company’s operations in Gabon, which are deemed immaterial, have been combined with its United States segment and are reported as one segment.

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, 2015.

Correction of Immaterial Errors

The accompanying unaudited condensed financial statements for the three months ended March 31, 2016 include a reduction of impairment charges related to the Heidelberg field totaling approximately $8.5 million related to the prior year. The amounts were not deemed material with respect to such prior year or the anticipated results and the trend of earnings for fiscal year 2016.

9

 


 

 

Recently Issued Accounting Standards

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Subtopic 842).  Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.  However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet.  ASU 2016-02 also will require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases.  These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.  ASU 2016-02 does not apply for leases for oil and gas properties, but does apply to equipment used to explore and develop oil and gas resources.  The Company’s current operating leases that will be impacted by ASU 2016-02 when it is effective are leases for office space in Houston, although ASU 2016-02 may impact the accounting for leases related to operations equipment depending on the term of the lease.  The Company currently does not have any leases classified as financing leases.  ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and is to be applied using the modified retrospective approach.  The Company has not yet fully determined or quantified the effect ASU 2016-02 will have on the Company’s financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 (“ASU 2016-09”), Compensation – Stock Compensation (Subtopic 718).  The objective of ASU 2016-09 is for simplification involving several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted.  The Company has not yet fully determined or quantified the effect ASU 2016-09 will have on the Company’s financial statements. 

In April 2015, Financial Accounting Standards Board (FASB) amended Accounting Standard Codification Subtopic No. 835-30, Interest—Imputation of Interest (the “ASC Subtopic 835-30”). The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. The amendments under ASC Subtopic 835-30 are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of ASU 2015-03 resulted in $32.9 million of unamortized debt issuance costs reclassified from long-term assets to a reduction in long-term liabilities as of December 31, 2015. The Company elected to continue to report unamortized debt issuance costs related to its Borrowing Base Facility Agreement as a long-term asset. The adoption of ASU 2015-03 did not affect the statements of operations or the statements of cash flows. See Note 9 for additional information.

In July 2015, the FASB issued Accounting Standards Update (ASU) 2015-11, "Accounting for Inventory" (ASU 2015-11), which requires entities to measure most inventory at lower of cost or net realizable value. ASU 2015-11 defines net realizable value as "the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation." ASU 2015-11 is effective prospectively for interim and annual periods beginning after December 15, 2016. The Company adopted the amendments to ASC 2015-11 on January 1, 2016. The adoption of ASC 2015-11 did not have material impact on the Company’s financial statements.

In August 2014, the FASB issued a new standard related to the disclosure of uncertainties about an entity's ability to continue as a going concern (ASU 2014-15). The new standard will explicitly require management to assess an entity's ability to continue as a going concern every reporting period and to provide related footnote disclosures in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016, with early adoption permitted. Adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Summary and Amendments That Create Revenue from Contracts and Customers (Subtopic 606).  ASU 2014-09 amends and replaces current revenue recognition requirements, including most industry-specific guidance.  The revised guidance establishes a five step approach to be utilized in determining when, and if, revenue should be recognized.  ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017.  Upon application, an entity may elect one of two methods, either restatement of prior periods presented or recording a cumulative adjustment in the initial period of application.  The Company has not determined the effect ASU 2014-09 will have on the recognition of its

10

 


 

 

revenue, if any, nor has the Company determined the method the Company will utilize upon adoption, which would be in the first quarter of 2018.

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 cost, which approximates fair market value as of March 31, 2016 and December 31, 2015 and are classified as held-to-maturity 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. 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 March 31, 2016 and December 31, 2015, the Company has no OTTI in its debt securities.

Property, Plant, and Equipment 

The Company uses the “successful efforts” method of accounting for its oil and gas properties. Acquisition costs for unproved leasehold properties and costs of drilling exploration wells are capitalized pending determination of whether proved reserves can be attributed to the areas as a result of drilling those wells. Under the successful efforts method of accounting, proved leasehold costs are capitalized and amortized over the proved developed and undeveloped reserves on a units-of-production basis. Successful drilling costs, costs of development and developmental dry holes are capitalized and amortized over the proved developed reserves on a units-of-production basis. When circumstances indicate that proved oil and gas properties may be impaired, the Company compares expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the unamortized capitalized cost of the asset. If the expected undiscounted future cash flows, based on the Company's estimate of future crude oil and natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income Approach described in the Fair Value Measurement Topic of the ASC. Significant unproved leasehold costs are capitalized and are not amortized, pending an evaluation of their exploration potential. Unproved leasehold costs are assessed periodically to determine if an impairment of the cost of individual properties has occurred. Factors taken into account for impairment analysis include results of the technical studies conducted, lease terms and management’s future exploration plans. The cost of impairment is charged to expense in the period in which it occurs. Costs incurred for exploration dry holes, geological and geophysical work (including the cost of seismic data), and delay rentals are charged to expense as incurred. Costs of other property and equipment are depreciated on a straight-line basis based on their respective useful lives.

11

 


 

 

Asset Retirement Obligation

The Company expects to have significant obligations under its lease agreements and federal regulation to remove its equipment and restore land or seabed at the end of oil and natural gas production operations. These asset retirement obligations (“ARO”) are primarily associated with plugging and abandoning wells and removing and disposing of offshore oil and natural gas platforms. Estimating the future restoration and removal cost is difficult and requires the Company to make estimates and judgments because most of the removal obligations are many years in the future and contracts and regulation often have vague descriptions of what constitutes removal. Asset removal technologies and cost are constantly changing, as are regulatory, political, environmental, safety and public relations considerations. The Bureau of Ocean Energy Management (“BOEM”) has proposed updated financial assurance requirements for offshore oil and gas leases in connection with operators’ decommissioning and abandonment liabilities for facilities in the U.S. Gulf of Mexico.  The Company expects the final requirements to be issued soon, and the Company may need to post additional financial assurances, including surety bonds, in connection with its operations or otherwise satisfy certain financial tests in order to comply.  Such requirements may increase the Company’s costs of operating in the U.S. Gulf of Mexico.  Pursuant to the accounting guidance relating to “Assets Retirement Obligations”, the Company is required to record a separate liability for the discounted present value of its asset retirement obligations, with an offsetting increase to the related oil and natural gas properties representing asset retirement costs on the balance sheet. The cost of the related oil and natural gas asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate.

Inherent to the present value calculation are numerous estimates, assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted risk-free rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the present value of the abandonment liability, the Company will make corresponding adjustments to both the asset retirement obligation and the related oil and natural gas property asset balance. Increases in the discounted abandonment liability resulting from the passage of time will be reflected as additional accretion expense in the consolidated statement of operations.

The following summarizes the changes in the asset retirement obligation for the three months ended March 31, 2016:

 

 

 

March 31,

2016

 

 

 

($ in thousands)

 

Beginning of period

 

$

3,167

 

Liabilities incurred

 

 

 

Accretion

 

 

102

 

End of period

 

$

3,269

 

 

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.

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 includes the potential dilutive impact 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 during the period, unless their effect is anti-dilutive. For the three months ended March 31, 2016, 10,211,590 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 calculation because they were anti-dilutive. For the three months ended March 31, 2015, 10,085,521 shares of non-vested restricted

12

 


 

 

stock, non-vested restricted stock units, outstanding stock options and 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.

 

 

2. Cash and Cash Equivalents

Cash and cash equivalents consisted of the following:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Cash at banks

 

$

37,968

 

 

$

33,173

 

Held-to-maturity securities(1)

 

 

14,983

 

 

 

38,420

 

 

 

$

52,951

 

 

$

71,593

 

 

(1)

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

 

 

3. Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consisted of the following:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Angolan sale proceeds

 

$

250,000

 

 

$

250,000

 

American Express Bank pledge agreement

 

 

 

 

 

750

 

Citibank commercial card agreement

 

 

2,200

 

 

 

2,200

 

Total restricted funds(1)

 

$

252,200

 

 

$

252,950

 

 

(1)

Pursuant to the purchase and sale agreement governing the Angola Transaction, the Company received the First Payment of $250 million during the quarterly period ended September 30, 2015. See Note 10—Angola Transaction. These funds are contractually restricted by the purchase and sale agreement pending the closing of the Angola Transaction. In addition, as of March 31, 2016, approximately $2.2 million was held in collateral accounts established to pledge funds for security of obligations under the Citibank Commercial Card Agreement. As of March 31, 2016, the Angolan sales proceeds and collateral in these accounts were invested in cash, certificates of deposit, commercial paper, and money market funds, resulting in a net carrying value of approximately $252.2 million. The contractual maturities of these securities are within ninety days.

 

 

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 March 31, 2016 and December 31, 2015, the balance in joint interest, revenue, and other receivables consisted of the following:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Partners in the U.S. Gulf of Mexico

 

$

33,833

 

 

$

50,766

 

Revenue receivable

 

 

1,150

 

 

 

 

Accrued interest on investment securities

 

 

1,597

 

 

 

3,567

 

Other

 

 

490

 

 

 

376

 

 

 

$

37,070

 

 

$

54,709

 

 

 

13

 


 

 

5. Investments

The Company’s investments in held-to-maturity securities, which are recorded at cost which approximates fair market value, were as follows as of March 31, 2016 and December 31, 2015:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Corporate securities

 

$

183,839

 

 

$

492,955

 

Commercial paper

 

 

677,878

 

 

 

604,986

 

U.S. Treasury securities

 

 

9,053

 

 

 

 

Certificates of deposit

 

 

10,000

 

 

 

20,750

 

Total

 

$

880,770

 

 

$

1,118,691

 

 

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

 

 

 

March 31,

2016

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Cash and cash equivalents

 

$

14,983

 

 

$

38,420

 

Short-term investments

 

 

701,716

 

 

 

885,994

 

Restricted cash and cash equivalents

 

 

155,018

 

 

 

194,277

 

Long-term restricted funds

 

 

9,053

 

 

 

 

 

 

$

880,770

 

 

$

1,118,691

 

 

The contractual maturities of these held-to-maturity securities as of March 31, 2016 and December 31, 2015 were as follows:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

 

($ in thousands)

 

Within 1 year

 

$

880,770

 

 

$

880,770

 

 

$

1,118,691

 

 

$

1,118,691

 

After 1 year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

880,770

 

 

$

880,770

 

 

$

1,118,691

 

 

$

1,118,691

 

 

 

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 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

 


 

 

The following tables summarize the Company’s significant financial instruments measured on a recurring basis as categorized by the fair value measurement hierarchy:

 

 

 

Level 1

 

 

Level 2

 

 

Balance as of

 

 

 

Carrying

Value

 

 

Fair

Value(1)

 

 

Carrying

Value

 

 

Fair

Value(1)

 

 

March 31,

2016

 

 

 

($ in thousands)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

37,968

 

 

$

37,968

 

 

$

 

 

$

 

 

$

37,968

 

Money market funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

14,983

 

 

 

14,983

 

 

 

14,983

 

Subtotal

 

 

37,968

 

 

 

37,968

 

 

 

14,983

 

 

 

14,983

 

 

 

52,951

 

Restricted cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

97,182

 

 

 

97,182

 

 

 

 

 

 

 

 

 

97,182

 

Commercial paper

 

 

 

 

 

 

 

 

65,971

 

 

 

65,971

 

 

 

65,971

 

Corporate bonds

 

 

 

 

 

 

 

 

89,047

 

 

 

89,047

 

 

 

89,047

 

Certificates of deposit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal

 

 

97,182

 

 

 

97,182

 

 

 

155,018

 

 

 

155,018

 

 

 

252,200

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

 

 

 

94,792

 

 

 

94,792

 

 

 

94,792

 

Commercial paper

 

 

 

 

 

 

 

 

596,924

 

 

 

596,924

 

 

 

596,924

 

Certificates of deposit

 

 

 

 

 

 

 

 

10,000

 

 

 

10,000

 

 

 

10,000

 

Subtotal

 

 

 

 

 

 

 

 

701,716

 

 

 

701,716

 

 

 

701,716

 

Long-term restricted funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 

 

 

 

 

 

9,053

 

 

 

9,053

 

 

 

9,053

 

Subtotal

 

 

 

 

 

 

 

 

9,053

 

 

 

9,053

 

 

 

9,053

 

Total

 

$

135,150

 

 

$

135,150

 

 

$

880,770

 

 

$

880,770

 

 

$

1,015,920

 

 

15

 


 

 

 

 

Level 1

 

 

Level 2

 

 

Balance as of

 

 

 

Carrying

Value

 

 

Fair

Value(1)

 

 

Carrying

Value

 

 

Fair

Value(1)

 

 

December 31,

2015

 

 

 

($ in thousands)

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

33,173

 

 

$

33,173

 

 

$

 

 

$

 

 

$

33,173

 

Money market funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

 

38,420

 

 

 

38,420

 

 

 

38,420

 

Subtotal

 

 

33,173

 

 

 

33,173

 

 

 

38,420

 

 

 

38,420

 

 

 

71,593

 

Restricted cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

58,673

 

 

 

58,673

 

 

 

 

 

 

 

 

 

58,673

 

Commercial paper

 

 

 

 

 

 

 

 

188,517

 

 

 

188,517

 

 

 

188,517

 

Corporate bonds

 

 

 

 

 

 

 

 

5,010

 

 

 

5,010

 

 

 

5,010

 

Certificates of deposit

 

 

 

 

 

 

 

 

750

 

 

 

750

 

 

 

750

 

Subtotal

 

 

58,673

 

 

 

58,673

 

 

 

194,277

 

 

 

194,277

 

 

 

252,950

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

 

 

 

487,946

 

 

 

487,946

 

 

 

487,946

 

Commercial paper