XNYS:CIE Cobalt International Energy Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012

or

o

 

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

For the transition period from                    to                  

Commission file number: 001-34579

Cobalt International Energy, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  27-0821169
(I.R.S. Employer
Identification No.)

Cobalt Center
920 Memorial City Way, Suite 100
Houston, Texas

(Address of principal executive offices)

 

77024
(Zip code)

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 June 30, 2012: 410,595,026 shares.

   


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Cautionary Note Regarding Forward-Looking Statements

        This Quarterly Report on Form 10-Q contains estimates and forward-looking statements, principally in "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Many important factors, in addition to the factors described in our 2011 Annual Report on Form 10-K filed on February 21, 2012, may adversely affect our results as indicated in forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

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

    the discovery and development of oil and gas reserves;

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

    projected and targeted capital expenditures and other costs and commitments;

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

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

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

    changes in environmental laws or the implementation or interpretation of those laws;

    the costs and delays associated with complying with additional legislation and regulation of the oil and gas industry;

    our ability to obtain financing;

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

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

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

    competition;

    the volatility of oil prices;

    our ability to successfully develop our current prospects and to find, acquire or gain access to other prospects;

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

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

    military operations, terrorist acts, wars or embargoes;

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

    the cost and availability of adequate insurance coverage; and

    other risk factors discussed in the "Risk Factors" section of our 2011 Annual Report on Form 10-K filed on February 21, 2012.

        The words "believe," "may," "will," "aim," "estimate," "continue," "anticipate," "intend," "expect," "plan" and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and, except to the extent required by law, we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this Quarterly Report on Form 10-Q might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements.

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PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements.

COBALT INTERNATIONAL ENERGY, INC.

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

Condensed Consolidated Balance Sheets

 
  June 30, 2012   December 31, 2011  
 
  (Unaudited)
   
 
 
  ($ in thousands, except
per share data)

 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 242,070   $ 292,546  

Joint interest and other receivables

    50,964     56,983  

Prepaid expenses and other current assets

    24,841     22,214  

Inventory

    38,823     36,049  

Short-term restricted funds

    118,796     69,009  

Short-term investments

    842,198     858,293  
           

Total current assets

    1,317,692     1,335,094  

Property, plant, and equipment:

             

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

    928,185     861,955  

Other property and equipment, net of accumulated depreciation and amortization of $4,068 and $3,555, as of June 30, 2012 and December 31, 2011, respectively

    3,142     1,371  
           

Total property, plant, and equipment, net

    931,327     863,326  
           

Long-term restricted funds

    395,003     270,235  

Long-term investments

    81,854     47,232  

Other assets

    5,735     12,057  
           

Total assets

  $ 2,731,611   $ 2,527,944  
           

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Trade and other accounts payable

  $ 24,512   $ 71,186  

Accrued liabilities

    86,708     34,418  

Short-term contractual obligations

    49,019     132,465  
           

Total current liabilities

    160,239     238,069  
           

Long-term contractual obligations

    168,238     210,961  

Stockholders' Equity:

             

Common stock, $0.01 par value per share; 2,000,000,000 shares authorized, 406,488,531 and 387,531,630 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

    4,065     3,875  

Additional paid-in capital

    3,221,159     2,719,875  

Deficit accumulated during the development stage

    (822,090 )   (644,836 )
           

Total stockholders' equity

    2,403,134     2,078,914  
           

Total liabilities and stockholders' equity

  $ 2,731,611   $ 2,527,944  
           

   

See accompanying notes.

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

Condensed Consolidated Statements of Operations

(Unaudited)

 
   
   
   
   
  For the Period
November 10,
2005
(Inception)
Through
June 30,
2012
 
 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2012   2011   2012   2011  
 
  ($ in thousands except per share data)
 

Oil and gas revenue

  $   $   $   $   $  

Operating costs and expenses:

                               

Seismic and exploration

    12,006     4,813     29,355     7,253     357,945  

Dry hole expense and impairment

    111,355     2,506     116,679     5,019     221,326  

General and administrative

    18,482     13,038     33,322     24,656     251,301  

Depreciation and amortization

    312     179     513     363     4,068  
                       

Total operating costs and expenses

    142,155     20,536     179,869     37,291     834,640  
                       

Operating income (loss)

    (142,155 )   (20,536 )   (179,869 )   (37,291 )   (834,640 )

Other income:

                               

Interest income

    1,432     1,058     2,615     1,755     12,550  
                       

Total other income

    1,432     1,058     2,615     1,755     12,550  
                       

Net income (loss) before income tax

    (140,723 )   (19,478 )   (177,254 )   (35,536 )   (822,090 )

Income tax expense

                     
                       

Net income (loss)

  $ (140,723 ) $ (19,478 ) $ (177,254 ) $ (35,536 ) $ (822,090 )
                       

Basic and diluted income (loss) per share

  $ (0.35 ) $ (0.05 ) $ (0.44 ) $ (0.10 )      
                         

Basic and diluted weighted average common shares outstanding

    406,122,827     386,731,150     400,113,132     366,127,558        
                         

   

See accompanying notes.

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

Condensed Consolidated Statements of Changes in Partners' Capital and Stockholders' Equity

(Unaudited)

 
  General Partner   Class A
Limited
Partners
  Class B
Limited
Partners
  Class C
Limited
Partners
  Common
Stock
  Additional
Paid-in
Capital
  Accumulated
Deficit During
Development
Stage
  Total  
 
  ($ in thousands)
 

Balance, November 10, 2005 (Inception)

  $   $   $   $   $   $   $   $  

Class A limited partners' contributions

        1,256,738                         1,256,738  

Class B & C limited partners' equity compensation

            6,984     734                 7,718  

Common stock issued upon corporate reorganization

        (1,256,738 )   (6,984 )   (734 )   2,743     1,261,713          

Common stock issued at initial public offering, net of offering costs

                    630     806,629         807,259  

Common stock issued at private placement

                    32     42,156         42,188  

Common stock issued at the closing of the over-allotment portion of initial public offering, net of offering costs

                    80     101,176         101,256  

Common stock issued at public offering, net of costs

                    357     477,846         478,203  

Common stock issued for restricted stock and stock options

                    34     (34 )        

Equity based compensation

                        30,579         30,579  

Common stock withheld for taxes on equity based compensation

                    (1 )   (190 )       (191 )

Net income (loss)

                            (644,836 )   (644,836 )
                                   

Balance, December 31, 2011

                    3,875     2,719,875     (644,836 )   2,078,914  

Common stock issued at public offering, net of costs

                    181     489,307         489,488  

Common stock issued for restricted stock

                    9     (9 )        

Equity based compensation

                        11,988         11,988  

Exercise of stock options

                        168         168  

Common stock withheld for taxes on equity based compensation

                        (170 )       (170 )

Net income (loss)

                            (177,254 )   (177,254 )
                                   

Balance, June 30, 2012

  $   $   $   $   $ 4,065   $ 3,221,159   $ (822,090 ) $ 2,403,134  
                                   

        See accompanying notes.

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

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
  Six Months Ended
June 30,
  For the Period
November 10, 2005
(Inception)
Through
June 30, 2012
 
 
  2012   2011  
 
  ($ in thousands)
 

Cash flows provided from operating activities

                   

Net income (loss)

  $ (177,254 ) $ (35,536 ) $ (822,090 )

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

                   

Depreciation and amortization

    513     363     4,068  

Dry hole expense and impairment of unproved properties

    116,679     5,019     221,326  

Equity based compensation

    11,988     7,507     50,284  

Amortization of premium (accretion of discount) on investment securities

    8,956     4,276     25,147  

Other

            558  

Changes in operating assets and liabilities:

                   

Joint interest and other receivables

    15,633     (6,420 )   (42,968 )

Inventory

    (2,774 )   (5,581 )   (38,823 )

Prepaid expense and other assets

    (3,695 )   1,522     (30,576 )

Trade and other accounts payable

    (46,673 )   (6,638 )   24,512  

Accrued liabilities and other

    (5,927 )   (3,516 )   34,793  
               

Net cash provided by (used in) operating activities

    (75,164 )   (39,004 )   (573,769 )
               

Cash flows from investing activities

                   

Capital expenditures for oil and gas properties

    (122,851 )       (826,957 )

Capital expenditures for other property and equipment

    (2,284 )   (489 )   (7,210 )

Exploratory wells drilling in process

    (128,012 )   (6,237 )   (392,383 )

Proceeds from sale of oil and gas properties

            339,001  

Change in restricted cash

    3,228     (609 )   (336,903 )

Proceeds from maturity of investment securities

    536,595     726,799     2,051,425  

Purchase of investment securities

    (751,474 )   (1,270,381 )   (3,185,515 )
               

Net cash provided by (used in) investing activities

    (464,798 )   (550,917 )   (2,358,542 )
               

Cash flows from financing activities

                   

Capital contributions prior to IPO—Class A limited partners

            1,256,180  

Proceeds from initial public offering, net of costs

            950,702  

Proceeds from public offering, net of costs

    489,488     478,317     967,692  

Payments for common stock withheld for taxes on equity based compensation

    (170 )       (361 )

Proceeds from stock option exercise

    168         168  
               

Net cash provided by (used in) financing activities

    489,486     478,317     3,174,381  
               

Net increase (decrease) in cash and cash equivalents

    (50,476 )   (111,604 )   242,070  

Cash and cash equivalents, beginning of period

    292,546     302,720      
               

Cash and cash equivalents, end of period

  $ 242,070   $ 191,116   $ 242,070  
               

Non-Cash Disclosures

                   

Capital expenditures in liabilities

  $ 269,172   $   $ 269,172  

Transfer of investment securities to and from restricted funds

  $ 179,310   $   $ 179,310  

   

See accompanying notes.

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

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Operations

Organization

        Cobalt International Energy, Inc. (the "Company") was incorporated pursuant to the laws of the State of Delaware in August 2009 to become a holding company for Cobalt International Energy, L.P. (the "Partnership"). The Partnership is a Delaware limited partnership formed on November 10, 2005, by funds affiliated with Goldman, Sachs & Co., Riverstone Holdings LLC and The Carlyle Group as well as members of the Partnership's management team, collectively constituting Class A limited partners. In 2006, funds affiliated with KERN Partners Ltd. and certain limited partners in such funds affiliated with KERN Partners Ltd, were admitted as Class A limited partners. In 2007, First Reserve Corporation and Four Winds Consulting were admitted as Class A limited partners.

        A corporate reorganization occurred concurrently with the completion of the initial public offering ("IPO") on December 21, 2009. All the outstanding interests of the Partnership were exchanged for 283,200,000 shares of the Company's common stock and as a result the Partnership became wholly-owned by the Company. The shares of CIP GP Corp., the general partner of the Partnership were contributed by certain of the Class A limited partners holding such shares to the Company for no consideration. Prior to reorganization, the Company was not subject to federal or state income taxes. Upon completion of the corporate reorganization, the Company became subject to federal and state income taxes.

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

Operations

        The Company is an independent, oil-focused exploration and production company with a world-class below salt prospect inventory in the deepwater of the U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. All of the Company's prospects are oil-focused. Offshore Angola, the Company has drilled as operator the Cameia #1 exploratory well on Block 21 which resulted in the Cameia pre-salt oil discovery, and the Cameia #2 appraisal well. In the U.S. Gulf of Mexico, the Company has drilled as operator three exploratory wells (Ligurian #1 and #2 and Criollo #1), and participated as non-operator in three exploratory wells (Heidelberg #1, Shenandoah #1 and Firefox #1) and two appraisal wells (Heidelberg #2 and Heidelberg #3). These drilling efforts have resulted in the Heidelberg and Shenandoah oil discoveries. The Company is currently drilling as operator the North Platte #1 exploratory well and participating as a non-operator in the Shenandoah #2 appraisal well. The Company continues to mature high impact prospects in its portfolio for upcoming exploratory drilling in both the deepwater of the U.S. Gulf of Mexico and the deepwater offshore Angola and Gabon. In addition, the Company will progress its existing discoveries toward development and production through follow-on appraisal drilling and pre-development planning activities.

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

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies

Basis of Presentation

        The accompanying condensed unaudited consolidated financial statements include the financial statements of Cobalt International Energy, Inc. and all of its wholly owned subsidiaries. All significant intercompany transactions and amounts have been eliminated. Because the Company is a development stage enterprise, it has presented its financial statements in accordance with FASB Accounting Standards Codification (ASC) No. 915 "Development Stage Entities."

        The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the condensed unaudited consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be presented for the entire year. These condensed unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

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

Recently Adopted Accounting Standards

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

Income (Loss) Per Share

        Basic income (loss) per share was calculated by dividing net income or loss applicable to common shares by the weighted average number of common shares outstanding during the periods presented. The calculation of diluted income (loss) per share should include the potential dilutive impact of non-vested restricted shares, non-vested restricted stock units and outstanding stock options during the

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

period, unless their effect is anti-dilutive. For the three months and six months ended June 30, 2012, 5,693,908 shares of non-vested restricted stock, non-vested restricted stock units and outstanding stock options, respectively, were excluded from the diluted income (loss) per share because they are anti-dilutive. For the three months and six months ended June 30, 2011, 6,609,478 shares of non-vested restricted stock, non-vested restricted stock units and outstanding stock options, respectively, were excluded from the diluted income (loss) per share because they are anti-dilutive.

Investments

        The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as long-term investments. Debt securities are carried at amortized costs and classified as held-to-maturity securities as the Company has the positive intent and ability to hold them until they mature. The net carrying value of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the securities. Held-to-maturity securities are stated at amortized cost, which approximates fair market value as of June 30, 2012 and December 31, 2011. Income related to these securities is reported as a component of interest income in the Company's condensed consolidated statement of operations. See Note 5—Investments.

        Investments are considered to be impaired when a decline in fair value is determined to be other-than-temporary. The Company conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have other-than-temporary impairment ("OTTI"). This assessment considers, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, market conditions and whether the Company intends to sell or whether it is more likely than not that the Company will be required to sell the debt securities. As of June 30, 2012 and December 31, 2011, the Company has no OTTI in its debt securities.

3. Cash and Cash Equivalents

        Cash and cash equivalents consisted of the following:

 
  June 30, 2012   December 31, 2011  
 
  (in thousands)
 

Cash at banks

  $ 31,785   $ 2,992  

Money market funds

    99,782     104,805  

Held-to-maturity securities(1)

    110,503     184,749  
           

  $ 242,070   $ 292,546  
           

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

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

4. Restricted Funds

        Restricted funds consisted of the following:

 
  June 30, 2012   December 31, 2011  
 
  (in thousands)
 

Short-term:

             

Ocean Confidence escrow account

  $ 10,808   $ 10,804  

Collateral on letters of credit for Angola

    17,656     53,322  

Ensco 8503 escrow account

    90,332     4,883  
           

  $ 118,796   $ 69,009  
           

Long-term:

             

Ensco 8503 escrow account

  $ 90,332   $ 181,159  

Collateral on letters of credit for Angola

    303,952     88,358  

Other vendor restricted funds

    719     718  
           

  $ 395,003   $ 270,235  
           

5. Investments

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

 
  June 30, 2012   December 31, 2011  
 
  (in thousands)
 

U.S. Treasury securities

  $ 350,500   $ 379,618  

Corporate bonds

    738,307     535,846  

Commercial paper

    390,216     369,432  

U.S. government agency securities

    28,718     71,856  

Municipal bonds

    22,057     42,193  

Certificates of deposit

    7,005     12,500  
           

Total

  $ 1,536,803   $ 1,411,445  
           

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

 
  June 30, 2012   December 31, 2011  
 
  (in thousands)
 

Cash and cash equivalents

  $ 110,503   $ 184,749  

Short-term investments

    842,198     858,293  

Short-term restricted funds

    107,988     53,322  

Long-term restricted funds

    394,260     267,849  

Long-term investments

    81,854     47,232  
           

  $ 1,536,803   $ 1,411,445  
           

13


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

5. Investments (Continued)

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

 
  June 30, 2012   December 31, 2011  
 
  Amortized
Cost
  Estimated
Fair
Value
  Amortized
Cost
  Estimated
Fair
Value
 
 
  ($ in thousands)
 

Within 1 year

  $ 1,454,949   $ 1,454,949   $ 1,364,213   $ 1,364,213  

After 1 year

    81,854     81,854     47,232     47,232  
                   

  $ 1,536,803   $ 1,536,803   $ 1,411,445   $ 1,411,445  
                   

6. Fair Value Measurements

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

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

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

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

14


Table of Contents


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

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    
 
 
  Balance
as of
June 30,
2012
 
 
  Amortized
Cost
  Fair Value(1)   Amortized
Cost
  Fair Value(1)  
 
  ($ in Thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 31,785   $ 31,785   $   $   $ 31,785  

Money market funds

    99,782     99,782             99,782  

Commercial paper

            110,503     110,503     110,503  
                       

Subtotal

    131,567     131,567     110,503     110,503     242,070  
                       

Short-term restricted funds:

                               

Money market funds

    10,808     10,808             10,808  

U.S. Treasury bills

            17,656     17,656     17,656  

U.S. Treasury notes

            90,332     90,332     90,332  
                       

Subtotal

    10,808     10,808     107,988     107,988     118,796  
                       

Short-term investments:

                               

U.S. government agency securities

            28,718     28,718     28,718  

Corporate bonds

            504,705     504,705     504,705  

Municipal bonds

            22,057     22,057     22,057  

Commercial paper

            279,713     279,713     279,713  

Certificate of deposits

            7,005     7,005     7,005  
                       

Subtotal

            842,198     842,198     842,198  
                       

Long-term restricted funds:

                               

Cash

    719     719             719  

Money market Funds

    24     24             24  

U.S. Treasury bills

            89,677     89,677     89,677  

U.S. Treasury notes

            152,835     152,835     152,835  

Corporate bonds

            151,748     151,748     151,748  
                       

Subtotal

    743     743     394,260     394,260     395,003  
                       

Long-term investments:

                               

Corporate bonds

            81,854     81,854     81,854  
                       

Subtotal

            81,854     81,854     81,854  
                       

Total

  $ 143,118   $ 143,118   $ 1,536,803   $ 1,536,803   $ 1,679,921  
                       

15


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)


 
  Level 1   Level 2    
 
 
  Balance
as of
December 31,
2011
 
 
  Amortized
Cost
  Fair Value(1)   Amortized
Cost
  Fair Value(1)  
 
  ($ in Thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 2,992   $ 2,992   $   $   $ 2,992  

Money market funds

    104,805     104,805             104,805  

Commercial paper

            172,249     172,249     172,249  

Certificate of deposits

            12,500     12,500     12,500  
                       

Subtotal

    107,797     107,797     184,749     184,749     292,546  
                       

Short-term restricted funds:

                               

Cash

    4,883     4,883             4,883  

Money market funds

    10,804     10,804             10,804  

U.S. Treasury bills

            53,322     53,322     53,322  
                       

Subtotal

    15,687     15,687     53,322     53,322     69,009  
                       

Short-term investments:

                               

U.S. Treasury bills

            112,507     112,507     112,507  

U.S. Government agency securities

            40,000     40,000     40,000  

Corporate bonds

            466,411     466,411     466,411  

Municipal bonds

            42,193     42,193     42,193  

Commercial paper

            197,182     197,182     197,182  
                       

Subtotal

            858,293     858,293     858,293  
                       

Long-term restricted funds:

                               

Cash

    718     718             718  

Money market funds

    1,668     1,668             1,668  

U.S. Treasury bills

            40,597     40,597     40,597  

U.S. Treasury notes

            173,192     173,192     173,192  

Corporate bonds

            54,060     54,060     54,060  
                       

Subtotal

    2,386     2,386     267,849     267,849     270,235  
                       

Long-term investments:

                               

U.S. Government agency securities

            31,856     31,856     31,856  

Corporate bonds

            15,376     15,376     15,376  
                       

Subtotal

            47,232     47,232     47,232  
                       

Total

  $ 125,870   $ 125,870   $ 1,411,445   $ 1,411,445   $ 1,537,315  
                       

(1)
As of June 30, 2012 and December 31, 2011, the Company did not record any OTTI on these assets.

16


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Joint Interest and Other Receivables

        Joint interest and other receivables result primarily from billing shared costs under the respective operating agreements to the Company's partners. As of June 30, 2012 and December 31, 2011, the balance due primarily from the Company's partners in the U.S. Gulf of Mexico and West Africa totaled $43.8 million and $46.7 million, respectively. These are usually settled within 30 days of the invoice date. In addition, other receivables which primarily include accrued interest on investment securities were $7.2 million and $10.3 million as of June 30, 2012 and December 31, 2011, respectively.

8. Inventory

        Inventories consist of various tubular and wellhead products that are used in the Company's drilling programs. The products are stated at the lower of cost or market. Cost is determined on the weighted average method and consists of purchase price and other directly attributable costs.

9. Property, Plant, and Equipment

        Property, plant, and equipment is stated at cost less accumulated depreciation/amortization and consisted of the following:

 
  Estimated
Useful Life
(Years)
  June 30,
2012
  December 31,
2011
 
 
   
  ($ in Thousands)
 

Oil and Gas Properties:

                   

Unproved oil and gas properties

        $ 701,892   $ 701,892  

Less: accumulated allowance for impairment

          (73,751 )   (18,275 )
                 

          628,141     683,617  

Exploratory wells in process

          300,044     178,338  
                 

Total oil and gas properties, net

          928,185     861,955  

Other Property and Equipment:

                   

Computer equipment and software

    3     3,542     2,847  

Office equipment and furniture

    3 - 5     1,221     1,114  

Vehicles

    3     194     129  

Leasehold improvements

    3 - 10     2,253     836  
                 

          7,210     4,926  

Less: accumulated depreciation and amortization

          (4,068 )   (3,555 )
                 

Total other property and equipment, net

          3,142     1,371  
                 

Property, plant, and equipment, net

        $ 931,327   $ 863,326  
                 

        The Company recorded $0.3 million, $0.2 million, $0.5 million, $0.4 million and $4.1 million of depreciation and amortization expense for the three months ended June 30, 2012 and 2011, the six months ended June 30, 2012 and 2011, and for the period November 10, 2005 (inception) through June 30, 2012, respectively.

17


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

Unproved Oil and Gas Properties

        On December 20, 2011, the Company acquired a 40% working interest in Block 20 offshore Angola for a total consideration of $347.1 million, of which $337.1 million is contractually scheduled to be paid over five years commencing in January 2012. In addition to the Block 20 interests, the Company has $10.8 million of unproved property acquisition costs relating to its 40% interests in Blocks 9 and 21 offshore Angola and its 21.25% interest in the Diaba block offshore Gabon. The Company also has $270.2 million of unproved property acquisition costs, net of allowance for impairment, relating to its U.S. Gulf of Mexico properties. As of June 30, 2012 and December 31, 2011, the Company has a net total of $628.1 million and $683.6 million, respectively, of unproved property acquisition costs on the condensed consolidated balance sheets.

        Acquisition costs of unproved leasehold properties are assessed for impairment during the holding period and transferred to proved oil and gas properties to the extent associated with successful exploration activities. There are no impairment indicators to date that would require the Company to impair the unproved properties in Blocks 9 and 21 offshore Angola and in the Diaba block offshore Gabon. Unproved oil and gas leases for properties in the U.S. Gulf of Mexico with carrying value greater than $1 million are assessed individually for impairment, based on the Company's current exploration plans, and an allowance for impairment is provided, if impairment is indicated. Leases that are individually less than $1.0 million in carrying value or are near expiration are amortized on a group basis over the average terms of the leases, at rates that provide for full amortization of leases upon lease expiration. These leases have expiration dates ranging from 2012 through 2020. As of June 30, 2012 and December 31, 2011, the balance for unproved leaseholds that were subject to amortization before impairment provision was $64.8 million and $65.1 million, respectively. For the three and six months ended June 30, 2012 and 2011, and for the period November 10, 2005 (inception) through June 30, 2012, the Company recorded $52.5 million, $2.5 million, $55.5 million, $5 million, and $73.8 million, respectively, as an allowance for impairment on its unproved leasehold properties which are reflected in dry hole expense and impairment in accompanying condensed consolidated statements of operations.

Capitalized Exploratory Well Costs

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

18


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

        The following table reflects the Company's net changes in and the cumulative costs of capitalized exploratory well costs (excluding any related leasehold costs) for the six months ended June 30, 2012 and for the year ended December 31, 2011:

 
  June 30,
2012
  December 31,
2011
 
 
  ($ in thousands)
 

Beginning of period

  $ 178,338   $ 106,881  

Addition to capitalized exploratory well cost pending determination of proved reserves

             

U.S. Gulf of Mexico:

             

Shenandoah #1 Exploratory Well

    210     (53 )

Shenandoah #2 Appraisal Well

    1,195      

Heidelberg #1 Exploratory Well

    (422 )    

Heidelberg #2 Appraisal Well

        5,999  

Heidelberg #3 Appraisal Well

    7,985     4,056  

Heidelberg #3 Appraisal Well Side Track

    4,108      

Heidelberg Pre-Feed Study

    1,000      

Ligurian #2 Exploratory Well

    46,961     2,034  

Criollo #1 Exploratory Well

        (822 )

North Platte #1 Exploratory Well

    3,688      

West Africa:

             

Bicuar #1 Exploratory Well pre-spud costs(1)

    (3,035 )   25,444  

Cameia #1 Exploratory Well

    33,958     71,405  

Cameia #2 Appraisal Well

    86,223      

Cameia Early Development

    1,038      

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

         

Amounts charged to expense(2)

    (61,203 )   (36,606 )
           

End of period

  $ 300,044   $ 178,338  
           

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

19


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Property, Plant, and Equipment (Continued)

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

 

 
  Spud
Year
  June 30,
2012
  December 31,
2011
 
 
   
  ($ in thousands)
 

Cumulative costs:

                   

U.S. Gulf of Mexico

                   

Shenandoah #1 Exploratory Well

    2008   $ 69,678   $ 69,468  

Shenandoah #2 Appraisal Well

    2012     1,195      

Heidelberg #1 Exploratory Well

    2008     19,818     20,240  

Heidelberg #3 Appraisal Well

    2011     12,041     4,056  

Heidelberg Pre-Feed Study

    2012     1,000      

Ligurian #1 Exploratory Well

    2009         8,100  

Ligurian #2 Exploratory Well

    2011         2,034  

North Platte #1 Exploratory Well

    2012     3,688      

West Africa:

                   

Bicuar #1 Exploratory Well

    2011         3,035  

Cameia #1 Exploratory Well

    2011     105,363     71,405  

Cameia #2 Appraisal Well

    2012     86,223      

Cameia Early Development

    2012     1,038      
                 

        $ 300,044   $ 178,338  
                 

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

        $ 89,496   $ 97,861  
                 

        As of June 30, 2012, capitalized exploratory well costs that have been suspended longer than one year are associated with the Shenandoah #1 and Heidelberg #1 projects. These exploratory well costs are suspended pending ongoing evaluation including, but not limited to, results of additional appraisal drilling, well-test analysis, additional geological and geophysical data and approval of a development plan. Management believes these projects exhibit sufficient indications of hydrocarbons to justify potential development and is actively pursuing efforts to fully assess them. If additional information becomes available that raises substantial doubt as to the economic or operational viability of these projects, the associated costs will be expensed at that time.

        As of June 30, 2012, no exploratory wells have been drilled by the Company offshore Gabon.

10. Other Assets

        Costs associated with the mobilization and equipment upgrades of the Ensco 8503 drilling rig and subsea containment were deferred in other assets. In January 2012, the Company started amortizing these costs to the respective exploratory wells over the term of the Ensco 8503 drilling contract. These costs are capitalized to oil and gas properties as exploratory drilling costs. For the three and six months ended June 30, 2012, the costs capitalized to oil and gas properties totaled $2.9 million and

20


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

10. Other Assets (Continued)

$5.9 million, respectively. As of June 30, 2012 and December 31, 2011, the remaining costs associated with the Ensco 8503 drilling rig and subsea containment in other assets were $5.7 million and $12.1 million, respectively.

11. Contractual Obligations

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

 
  June 30,
2012
  December 31,
2011
 
 
  ($ in thousands)
 

Short-term Contractual Obligations:

             

Social obligation payments for Block 9, offshore Angola

  $ 150   $ 1,300  

Social obligation payments for Block 21, offshore Angola

    300     2,600  

Social obligation and bonus payments for Block 20, offshore Angola

    48,569     128,565  
           

  $ 49,019   $ 132,465  
           

Long-term Contractual Obligations:

             

Social obligation payments for Block 9, offshore Angola

  $ 848   $ 800  

Social obligation payments for Block 21, offshore Angola

    1,684     1,600  

Social obligation payments for Block 20, offshore Angola

    165,706     208,561  
           

  $ 168,238   $ 210,961  
           

12. Stockholders' Equity

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

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

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

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

21


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

13. Seismic and Exploration Expenses

        Seismic and exploration expenses consisted of the following:

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
  For the Period
November 10,
2005 (Inception)
through
June 30, 2012
 
 
  2012   2011   2012   2011  
 
  ($ in Thousands)
 

Seismic data costs(1)

  $ 10,128   $ 2,935   $ 25,341   $ 3,691   $ 299,815  

Leasehold delay rentals

    1,469     1,815     2,878     2,850     29,398  

Drilling rig acceptance and other expense(2)

    409     63     1,136     712     28,732  
                       

  $ 12,006   $ 4,813   $ 29,355   $ 7,253   $ 357,945  
                       

(1)
These amounts for the period November 10, 2005 (inception) through June 30, 2012 reflect a recovery of $25.1 million of past seismic costs incurred by the Company from its joint venture partners.

(2)
The amounts for the period November 10, 2005 (inception) through June 30, 2012 includes approximately $13.5 million in force majeure expenses resulting from suspension of drilling activities in the U.S. Gulf of Mexico during 2010 as a result of the explosion and sinking of the Deepwater Horizon drilling rig in the U.S. Gulf of Mexico, the resulting oil spill and the regulatory response thereto.

14. Equity Based Compensation

        The Company accounts for stock-based compensation at fair value. The Company grants various types of stock-based awards including stock options, restricted stock and restricted stock units (RSUs) awards. The fair value of stock option awards is determined using the Black-Scholes-Merton option-pricing model. For restricted stock awards with market conditions, the fair value of the awards is measured using the asset-or-nothing option pricing model. Restricted stock awards without market conditions and the RSU awards are valued using the market price of the Company's common stock on the grant date. The Company records compensation cost, net of estimated forfeitures, for stock-based compensation awards over the requisite service period except for RSU awards. For RSU awards, compensation cost is recognized over the requisite service period as and when the Company determines that the achievement of the performance condition is probable, using the per-share fair value measured at grant date.

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

22


Table of Contents


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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

14. Equity Based Compensation (Continued)

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

 
  Number of
shares
relating to
Restricted
Stock
  Weighted
Average
Grant Date
Fair Value
Per Share
  Number of
shares
relating
Restricted
Stock Units
  Weighted
Average
Grant Date
Fair Value
Per Unit
 

Non-vested at December 31, 2011

    4,599,783   $ 11.27     198,838   $ 12.45  

Granted

    335,310   $ 28.42          

Vested

    (646,054 ) $ 12.70     (74,537 ) $ 30.50  

Forfeited or expired

    (182,546 ) $ 12.08     (12,836 ) $ 30.50  
                       

Non-vested at June 30, 2012

    4,106,493   $ 12.40     111,465   $ 30.50  
                       

Weighted-average period remaining

    2.3 years           1.5 years        
                       

Unrecognized compensation ($ in thousands)

  $ 29,303         $ **        
                       

**
The RSUs will vest in amounts of up to 200% of the target amount of shares of common stock, on the applicable vesting dates and contingent upon the recipient's continued service at such vesting dates and based upon the achievement of successful drilling results as defined in the RSU award agreement. Compensation cost will be recognized as and when the performance conditions are satisfied or when the Company determines that the achievement of the performance condition is probable. For the six months ended June 30, 2012, the Company recognized $2.7 million of stock compensation for the RSUs based on the performance targets achieved from the success of the Cameia #1 exploratory well and approved by the Compensation Committee during the first quarter of 2012.

        A total of 33,204 restricted stock unit awards were granted to non-employee directors during the six months ended June 30, 2012 for annual retainers. As of June 30, 2012, the Company has granted a cumulative total of 137,945 restricted stock units to non-employee directors. During the three and six months ended June 30, 2012, the Company also granted 2,249 and 6,417 shares of common stock, respectively, as retainer awards to non-employee directors who elected to be compensated by stock in lieu of cash payments.

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

        The fair value of each stock option granted is determined using the Black-Scholes-Merton option-pricing model based on several assumptions. These assumptions are based on management's best estimate at the time of grant. The Company used the following weighted average of each assumption

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

14. Equity Based Compensation (Continued)

based on the grants issued during the six months ended June 30, 2012 (there were no new stock options granted in 2011):

 
  2012  

Expected Term in Years

    6.50  

Expected Volatility

    54.92 %

Expected Dividends

    0 %

Risk-Free Interest Rate

    0.46 %

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

        A summary of the stock options activities for the period ended June 30, 2012 is presented below:

 
  Number of
Stock
Options
  Weighted
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Term (years)
  Aggregate
Intrinsic Value
($ in thousands)
 

Outstanding at January 1, 2012

    1,133,960   $ 12.45     8.4        

Granted

    457,704   $ 30.50     9.7        

Exercised

    (13,518 ) $ 12.45            

Forfeited or expired

    (102,196 ) $ 14.99            
                         

Outstanding at June 30, 2012

    1,475,950   $ 17.87     9.0   $ 34,685  
                         

Vested as of June 30, 2012

    283,490   $ 12.45     9.0   $ 3,133  
                         

Exercisable at June 30, 2012

    269,972   $ 12.45     9.0   $ 2,983  
                         

        The weighted-average grant-date fair value of stock options granted during the six months ended June 30, 2012 was $17.92 per option, using the Black-Scholes option-pricing model. As of June 30, 2012, $11.6 million of total unrecognized compensation cost related to stock option is expected to be recognized over a weighted-average period of 2.5 years.

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

14. Equity Based Compensation (Continued)

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

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
  For the Period
November 10,
2005 (Inception)
through
June 30, 2012
 
 
  2012   2011   2012   2011  
 
  ($ in thousands)
 

Restricted stock:

                               

Employees

  $ 4,155   $ 3,138   $ 7,152   $ 6,268   $ 40,367  

Non-employee directors

    243     176     485     319     1,796  

Stock options:

                               

Employees

    1,089     307     1,658     920     3,600  

Restricted stock units (performance-based)

    (134 )       2,693         2,693  

Deferred stock compensation(1)

                    1,828  
                       

  $ 5,353   $ 3,621   $ 11,988   $ 7,507   $ 50,284  
                       

(1)
In December 2008, the Company adopted a deferred compensation plan and provided certain executive officers the opportunity to defer under the Plan all or a portion of their salary and/or annual bonus for 2009. Amounts deferred under the Plan generally are deemed to be invested in a money market account prior to the IPO and shares of the Company's common stock following the IPO. The deferred amounts were distributed to these executive officers on January 15, 2012 in the form of 121,637 shares of the Company's common stock.

15. Segment Information

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

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

15. Segment Information (Continued)

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

 
  United States   West Africa   Total  
 
  ($ in thousands)
 

Three months ended June 30, 2012

                   

Operating costs and expense

  $ (135,531 ) $ (6,624 ) $ (142,155 )

Interest income

    1,430     2     1,432  
               

Net income (loss)

  $ (134,101 ) $ (6,622 ) $ (140,723 )
               

Additions to Property and Equipment, net(1)

  $ (72,635 ) $ 61,403   $ (11,232 )
               

Three months ended June 30, 2011

                   

Operating costs and expense

  $ (14,778 ) $ (5,758 ) $ (20,536 )

Interest income

    1,056     2     1,058  
               

Net income (loss)

  $ (13,722 ) $ (5,756 ) $ (19,478 )
               

Additions to Property and Equipment, net(1)

  $ (1,750 ) $ 5,585   $ 3,835  
               

 

 
  United States   West Africa   Total  
 
  ($ in thousands)
 

Six months ended June 30, 2012

                   

Operating costs and expense

  $ (156,578 ) $ (23,291 ) $ (179,869 )

Interest income

    2,612     3     2,615  
               

Net income (loss)

  $ (153,966 ) $ (23,288 ) $ (177,254 )
               

Additions to Property and Equipment, net(1)

  $ (49,979 ) $ 118,290   $ 68,311  
               

Six months ended June 30, 2011

                   

Operating costs and expense

  $ (28,390 ) $ (8,901 ) $ (37,291 )

Interest income

    1,753     2     1,755  
               

Net income (loss)

  $ (26,637 ) $ (8,899 ) $ (35,536 )
               

Additions to Property and Equipment, net(1)

  $ (4,086 ) $ 5,640   $ 1,554  
               

(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

16. 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

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

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

16. Contingencies (Continued)

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.

17. Subsequent Events

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

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" and the other matters set forth in this Quarterly Report on Form 10-Q. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

        We are an independent, oil-focused exploration and production company with a world-class below salt prospect inventory in the deepwater of the U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. All of our prospects are oil-focused. Offshore Angola, we have drilled as operator the Cameia #1 exploratory well on Block 21 which resulted in the Cameia pre-salt oil discovery, and the Cameia #2 appraisal well. In the U.S. Gulf of Mexico, we have drilled as operator three exploratory wells (Ligurian #1 and #2 and Criollo #1), and participated as non-operator in three exploratory wells (Heidelberg #1, Shenandoah #1 and Firefox #1) and two appraisal wells (Heidelberg #2 and Heidelberg #3). These drilling efforts have resulted in the Heidelberg and Shenandoah oil discoveries. We are currently drilling as operator the North Platte #1 exploratory well and participating as a non-operator in the Shenandoah #2 appraisal well. We continue to mature high impact prospects in our portfolio for upcoming exploratory drilling in both the deepwater of the U.S. Gulf of Mexico and the deepwater offshore Angola and Gabon. In addition, we will progress our existing discoveries toward development and production through follow-on appraisal drilling and pre-development planning activities.

Second Quarter 2012 Operational Highlights

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

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

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      provisions. The drilling contract further requires us to pay up to approximately $45 million for mobilization, demobilization and certain rig modifications.

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

    On June 29, 2012, the Shenandoah #2 appraisal well was spud by its operator. This well will appraise the Shenandoah inboard Lower Tertiary oil discovery, made in 2009, where more than 300 feet of net oil pay was discovered. We expect well results in late 2012. We have a 20% working interest in the Shenandoah prospect.

    On June 20, 2012, we participated in the U.S. Gulf of Mexico Central Lease Sale and were the high bidder on ten blocks, which represented a total net bid amount of approximately $17 million. Through these acquisitions, we will expand our U.S. Gulf of Mexico asset inventory by adding two new prospects and by adding adjacent blocks to two of our existing prospects.

    On June 12, 2012, we announced that our Ligurian #2 exploratory well had reached total objective depth after having drilled through all the targeted Miocene formations. The well did not encounter commercial hydrocarbons and it was subsequently plugged and abandoned.

    In early May 2012, we completed the acquisition of approximately 4,200 square kilometers of 3-D seismic data on Block 20 offshore Angola and are currently processing this data. We plan to spud the Lontra #1 exploratory well on Block 20 in 2013.

    On April 27, 2012, we executed a letter agreement with a subsidiary of Diamond Offshore Company that extends the Ocean Confidence drilling contract by allowing us to use the Ocean Confidence drilling rig for an incremental additional well slot, meaning that we are able to use the Ocean Confidence to drill two more wells offshore Angola. In return for this additional well slot, we agreed to release the Ocean Confidence to another operator to drill one well offshore Congo following operations on our Cameia #2 appraisal well. We expect this offshore Congo well, including mobilization and demobilization, will take approximately 120 days to drill, after which the Ocean Confidence will return to Angola to drill two wells for us. Our first well will be at a rate of $375,000 per day and the second well will be at a rate of $430,000 per day.

Second Quarter 2012 Financial Highlights

    We recorded a net loss of approximately $140.7 million, a 622.5% increase from the second quarter of 2011. Total operating expenses were approximately $142.2 million, a 592.2% increase from the second quarter of 2011. The increase of $121.2 million in net loss for the second quarter was primarily attributed to the increase of $58.9 million in dry hole expense charge recorded for the Heidelberg #3 sidetrack, Ligurian #1 and #2 exploratory wells, an increase in allowance for impairment of unproved leasehold properties of $50.0 million for our Ligurian prospect, and certain other prospects, an increase of $7.2 million for the purchase of seismic data over prospects in the U.S. Gulf of Mexico and an increase of $5.1 million in general and administrative expenses.

    Total expenditures, excluding changes in working capital, were approximately $124 million and $358 million, respectively, for the three and six months ended June 30, 2012.

    Including our existing cash and investments on hand and restricted cash as of June 30, 2012, we have approximately $1.7 billion of liquidity.

Results of Operations

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

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

 
  Three Months Ended June 30,  
 
  2012   2011   Increase
(Decrease)
  %  
 
  ($ in thousands)
 

United States Segment:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    10,570     2,666     7,904     296.5 %

Dry hole expense and impairment

    111,355     2,506     108,849     4345.5 %

General and administrative

    13,336     9,443     3,893     41.2 %

Depreciation and amortization

    270     163     107     65.6 %
                   

Total operating costs and expenses

    135,531     14,778     120,753     817.1 %
                   

Operating income (loss)

    (135,531 )   (14,778 )   120,753     817.1 %

Other income:

                         

Interest income

    1,430     1,056     374     35.4 %
                   

Total other income

    1,430     1,056     374     35.4 %
                   

Net income (loss) before income tax

    (134,101 )   (13,722 )   120,379     877.3 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (134,101 ) $ (13,722 ) $ 120,379     877.3 %
                   

West Africa Segment:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    1,436     2,147     (711 )   (33.1 )%

Dry hole expense and impairment

                 

General and administrative

    5,146     3,595     1,551     43.1 %

Depreciation and amortization

    42     16     26     162.5 %
                   

Total operating costs and expenses

    6,624     5,758     866     15.0 %
                   

Operating income (loss)

    (6,624 )   (5,758 )   866     15.0 %

Other income:

                         

Interest income

    2     2          
                   

Total other income

    2     2          
                   

Net income (loss) before income tax

    (6,622 )   (5,756 )   866     15.0 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (6,622 ) $ (5,756 ) $ 866     15.0 %
                   

Consolidated Operations:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    12,006     4,813     7,193     149.5 %

Dry hole expense and impairment

    111,355     2,506     108,849     4343.5 %

General and administrative

    18,482     13,038     5,444     41.8 %

Depreciation and amortization

    312     179     133     74.3 %
                   

Total operating costs and expenses

    142,155     20,536     121,619     592.2 %
                   

Operating income (loss)

    (142,155 )   (20,536 )   121,619     592.2 %

Other income:

                         

Interest income

    1,432     1,058     374     35.4 %
                   

Total other income

    1,432     1,058     374     35.4 %
                   

Net income (loss) before income tax

    (140,723 )   (19,478 )   121,245     622.5 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (140,723 ) $ (19,478 ) $ 121,245     622.5 %
                   

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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 June 30, 2012 and 2011, respectively.

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

        Seismic and exploration.    Seismic and exploration costs increased by $7.9 million during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The increase was primarily due to an increase of $8.6 million for the purchase of seismic data over certain of our prospects in the U.S. Gulf of Mexico, a decrease of $0.3 million in lease rental costs and a decrease of $0.4 million in rig related charges. The seismic and exploration costs incurred for the three months ended June 30, 2012 consisted of (i) $8.9 million incurred for seismic data acquisition for the U.S. Gulf of Mexico, (ii) $1.5 million incurred for leasehold delay rentals and (iii) $0.2 million of other exploration costs.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $108.8 million during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The increase is due to impairment of unproved leasehold properties and dry hole expense written off against exploratory wells as reflected in the following table:

 
  Three Months Ended June 30,  
 
  2012   2011   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Ligurian prospect

  $ 41,861   $   $ 41,861  

Other leasehold(1)

    8,298         8,298  

Amortization of leasehold with carrying value under $1 million

    2,303     2,506     (203 )

Dry hole Expense:

                   

Ligurian #1 exploratory well

    8,100         8,100  

Ligurian #2 exploratory well

    48,994         48,994  

Heidelberg #3 Appraisal Well Side Track

    1,799         1,799  
               

  $ 111,355   $ 2,506   $ 108,849  
               

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

        General and administrative.    General and administrative costs increased by $3.9 million during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The increase in general and administrative costs during this period was primarily attributed to a $3.6 million increase in staff related expenses which includes equity compensation, a $1.9 million increase in legal and other consulting fees, a $1.7 million increase in office related expenses, offset by an increase of $3.3 million in recoveries from partners due to the increase in operating activity.

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

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        Other income.    Other income increased by $0.4 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The increase was due to an increase in interest recognized on investment securities.

        Income tax expense/benefit.    No income tax benefit has been reflected since a full valuation allowance has been established against the deferred tax asset that would have been generated as a result of the operating results.

West Africa Segment:

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

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

        Seismic and exploration.    Seismic and exploration costs decreased by $0.7 million during the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The decrease was primarily due to a $0.9 million decrease in seismic data costs for the Diaba Block offshore Gabon and other technical studies incurred during the three months ended June 30, 2011 offset by a $0.2 million increase in other exploration costs. The seismic and exploration costs incurred for the three months ended June 30, 2012 consisted of (i) $1.2 million incurred for seismic data acquisition and processing for offshore West Africa, and (ii) $0.2 million for other exploration costs.

        Dry hole expense and impairment.    No dry hole or impairment charges were incurred during the periods ending June 30, 2012 or June 30, 2011.

        General and administrative.    General and administrative costs increased by $1.6 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The increase is primarily attributed to a $2.6 million increase in office support costs, offset by a decrease of $1.0 million in rotation personnel costs.

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

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

        Income tax expense/benefit.    No income tax benefit has been reflected since a full valuation allowance has been established against the deferred tax asset that would have been generated as a result of the operating results.

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Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 
  Six Months Ended June 30,  
 
  2012   2011   Increase
(Decrease)
  %  
 
  ($ in thousands)
 

United States Segment:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    16,733     4,653     12,080     259.6 %

Dry hole expense and impairment

    116,679     5,019     111,660     2224.8 %

General and administrative

    22,730     18,380     4,350     23.7 %

Depreciation and amortization

    436     338     98     29.0 %
                   

Total operating costs and expenses

    156,578     28,390     128,188     451.5 %
                   

Operating income (loss)

    (156,578 )   (28,390 )   128,188     451.5 %

Other income:

                         

Interest income

    2,613     1,753     860     49.1 %
                   

Total other income

    2,613     1,753     860     49.1 %
                   

Net income (loss) before income tax

    (153,965 )   (26,637 )   127,328     478.0 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (153,965 ) $ (26,637 ) $ 127,328     478.0 %
                   

West Africa Segment:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    12,622     2,600     10,022     385.5 %

Dry hole expense and impairment

                 

General and administrative

    10,592     6,276     4,316     68.8 %

Depreciation and amortization

    77     25     52     208.0 %
                   

Total operating costs and expenses

    23,291     8,901     14,390     161.7 %
                   

Operating income (loss)

    (23,291 )   (8,901 )   14,390     161.7 %

Other income:

                         

Interest income

    2     2          
                   

Total other income

    2     2          
                   

Net income (loss) before income tax

    (23,289 )   (8,899 )   14,390     161.7 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (23,289 ) $ (8,899 ) $ 14,390     161.7 %
                   

Consolidated Operations:

                         

Oil and gas revenue

  $   $   $      

Operating costs and expenses:

                         

Seismic and exploration

    29,355     7,253     22,102     304.7 %

Dry hole expense and impairment

    116,679     5,019     111,660     2224.8 %

General and administrative

    33,322     24,656     8,666     35.2 %

Depreciation and amortization

    513     363     150     41.3 %
                   

Total operating costs and expenses

    179,869     37,291     142,578     382.3 %
                   

Operating income (loss)

    (179,869 )   (37,291 )   142,578     382.3 %

Other income:

                         

Interest income

    2,615     1,755     860     49.0 %
                   

Total other income

    2,615     1,755     860     49.0 %
                   

Net income (loss) before income tax

    (177,254 )   (35,536 )   141,718     398.8 %

Income tax expense (benefit)

                 
                   

Net income (loss)

  $ (177,254 ) $ (35,536 )   141,718     398.80 %
                   

33


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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 six months ended June 30, 2012 and 2011, respectively.

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

        Seismic and exploration.    Seismic and exploration costs increased by $12.1 million during the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The increase was primarily due to an increase of $12.8 million for the purchase of seismic data over certain of our prospects in the U.S. Gulf of Mexico, and a decrease of $0.7 million in rig related charges. The seismic and exploration costs incurred for the six months ended June 30, 2012 consisted of (i) $13.3 million incurred for seismic data acquisition in the U.S. Gulf of Mexico, (ii) $2.9 million for leasehold delay rentals and (iii) $0.5 million of other technical study costs.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $111.7 million during the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The increase is due to impairment of unproved leasehold properties and dry hole expense written off against exploratory wells as reflected in the following table:

 
  Six Months Ended June 30,  
 
  2012   2011   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Ligurian prospect

  $ 41,861   $   $ 41,861  

Other leasehold(1)

    8,298         8,298  

Amortization of leasehold with carrying value under $1 million

    5,317     5,019     298  

Dry hole Expense:

                   

Ligurian #1 exploratory well

    8,100         8,100  

Ligurian #2 exploratory well

    48,994         48,994  

Heidelberg #3 Appraisal Well Side Track

    4,109         4,109  
               

  $ 116,679   $ 5,019   $ 111,660  
               

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

        General and administrative.    General and administrative costs increased by $4.4 million during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase in general and administrative costs during this period was primarily attributed to a $7.1 million increase in staff related expenses which includes equity compensation, a $2.6 million increase in legal and other consulting fees, a $2.8 million increase in office related expenses, offset by an increase of $8.1 million in recoveries from partners due to the increase in operating activity.

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

        Other income.    Other income increased by $0.9 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase was due to an increase in interest recognized on investment securities.

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        Income tax expense/benefit.    No income tax benefit has been reflected since a full valuation allowance has been established against the deferred tax asset that would have been generated as a result of the operating results.

West Africa Segment:

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

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

        Seismic and exploration.    Seismic and exploration costs increased by $10.0 million during the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The increase was primarily due to the acquisition of seismic data on Block 20 offshore Angola. The seismic and exploration costs incurred for the six months ended June 30, 2012 consisted of (i) $12.1 million incurred for seismic data acquisition and processing for offshore West Africa, and (ii) $0.5 million for other technical studies.

        Dry hole expense and impairment.    No dry hole or impairment charges were incurred during the six months ended June 30, 2012 and 2011.

        General and administrative.    General and administrative costs increased by $4.3 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase was attributed primarily to a $5.5 million increase in office support costs, offset by a $1.2 million decrease in rotation personnel costs.

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

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

        Income tax expense/benefit.    No income tax benefit has been reflected since a full valuation allowance has been established against the deferred tax asset that would have been generated as a result of the operating results.

Liquidity and Capital Resources

        We are a development stage enterprise and will continue to be so until commencement of substantial production from our oil properties or we have proved reserves. With respect to our Cameia pre-salt oil discovery, we are currently preparing a phased development approach and we estimate first oil and cash flow from Cameia during 2016, assuming continued alignment with our partners and the concessionaire, among other things. With respect to our non-operated U.S. Gulf of Mexico discoveries, the operator has publicly indicated that it expects first production from the Heidelberg field in 2016 and first production for the Shenandoah field, assuming appraisal success, in 2017. Until substantial production is achieved, our primary sources of liquidity are expected to be cash on hand, amounts paid pursuant to the terms of our Total alliance and funds from future equity and debt financings, asset sales and farm-out arrangements.

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

    conduct our current exploration and appraisal drilling program in the U.S. Gulf of Mexico and offshore Angola and Gabon, including increased industry costs in the U.S. Gulf of Mexico resulting from the Deepwater Horizon incident;

    develop our discoveries which we determine to be commercially viable;

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

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

    incur expenses related to operating as a public company and compliance with regulatory requirements.

        Our future financial condition and liquidity will be impacted by, among other factors, the success of our exploration and appraisal drilling program, the number of commercially viable hydrocarbon discoveries made and the quantities of hydrocarbons discovered, the speed with which we can bring such discoveries to production, whether and to what extent we invest in additional oil leases and concessional licenses, and the actual cost of exploration, appraisal and development of our prospects.

        As of June 30, 2012, we had approximately $1.7 billion in liquidity, which includes cash and cash equivalents, short-term restricted funds, short-term investments, long-term restricted funds and long-term investments. This amount does not include the Total carry, of which approximately $151 million remains available to us, or any success payments of up to $180 million Total is obligated to pay us pursuant to the terms of our U.S. Gulf of Mexico alliance. We expect to expend approximately $550 to $650 million for our ongoing operations and general corporate purposes in 2012. Total expenditures, excluding changes in working capital, were approximately $124 million and $358 million, respectively, for the three and six months ended June 30, 2012. We expect that our existing cash on hand will be sufficient to fund our planned exploration and appraisal drilling program at least through the end of 2013. However, we may require additional funds earlier than we currently expect in order to execute our strategy as planned. We may seek additional funding through asset sales, farm-out arrangements and equity and debt financings. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our existing stockholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing stockholders will result. If we are unable to obtain funding on a timely basis or on acceptable terms, we may be required to significantly curtail one or more of our exploration and appraisal drilling programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our prospects which we would otherwise develop on our own, or with a majority working interest.

Cash Flows

 
  Six Months Ended
June 30,
 
 
  2012   2011  
 
  ($ in thousands)
 

Net cash provided by (used in):

             

Operating Activities

  $ (75,164 ) $ (39,004 )

Investing Activities

    (464,798 )   (550,917 )

Financing Activities

    489,486     478,317  

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        Operating activities.    Net cash used in operating activities for the six months ended June 30, 2012 was $75.2 million compared with net cash used in operating activities of $39.0 million for the six months ended June 30, 2011. The increase was attributed primarily to increased drilling activities in both the U.S. Gulf of Mexico and West Africa.

        Investing activities.    Net cash used in investing activities for the six months ended June 30, 2012 was $464.8 million compared with net cash used in investing activities of $550.9 million for the six months ended June 30, 2011. The net cash used in investing activities for the six months ended June 30, 2012 was primarily attributed to the investment of proceeds from the follow-on public offering of our common stock that closed on February 29, 2012 and capital expenditures relating to the Ligurian #2 exploratory well in the U.S. Gulf of Mexico and the Cameia #2 appraisal well offshore Angola.

        Financing activities.    Net cash provided by financing activities for the six months ended June 30, 2012 was $489.5 million compared with $478.3 million for the six months ended June 30, 2011. The increase is the result of the follow-on public offering of our common stock that closed February 29, 2012.

Critical Accounting Policies

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        There have been no material changes in market risk from the information provided under Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4.    Controls and Procedures

        We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rules 13a-15 and 15d-15 as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.

        There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II—OTHER INFORMATION

Item 1.    Legal Proceedings

        We are not currently party to any legal proceedings. However, from time to time we may be subject to various lawsuits, claims and proceedings that arise in the normal course of business, including employment, commercial, environmental, safety and health matters. It is not presently possible to

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Table of Contents

determine whether any such matters will have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

Item 1A.    Risk Factors

        There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

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

        None.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Mine Safety Disclosures

        Not applicable.

Item 5.    Other Information

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

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.

**
Furnished herewith.

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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: July 31, 2012

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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.

**
Furnished herewith.


XNYS:CIE Cobalt International Energy Inc Quarterly Report 10-Q Filling

Cobalt International Energy Inc XNYS:CIE Stock - Get Quarterly Report SEC Filing of Cobalt International Energy Inc XNYS:CIE stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:CIE Cobalt International Energy Inc Quarterly Report 10-Q Filing - 6/30/2012
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