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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 March 31, 2015

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 March 31, 2015: 414,414,019 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 2014 Annual Report on Form 10-K filed on February 23, 2015, may adversely affect our results as indicated in forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits hereto completely and with the understanding that our actual future results may be materially different from what we expect.

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

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

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

    oil and gas prices;

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

    projected and targeted capital expenditures and other costs and commitments;

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

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

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

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

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

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

    competition;

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

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

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

    the availability and cost of developing appropriate infrastructure around and transportation to our prospects, discoveries and appraisal and development projects;

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

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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;

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

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

    other risk factors discussed in the "Risk Factors" section of our 2014 Annual Report on Form 10-K filed on February 23, 2015.

        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.

Condensed Consolidated Balance Sheets

 
  March 31,
2015
(Unaudited)
  December 31,
2014
 
 
  ($ in thousands, except per share data)
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 354,803   $ 258,721  

Joint interest and other receivables

    29,531     59,974  

Prepaid expenses and other current assets

    30,367     14,497  

Inventory

    83,518     94,674  

Short-term restricted funds

    22,538     45,062  

Short-term investments

    1,525,072     1,530,206  

Total current assets

    2,045,829     2,003,134  

Property, plant, and equipment:

             

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

    2,085,074     1,920,979  

Other property and equipment, net of accumulated depreciation and amortization of $10,319 and $8,977, as of March 31, 2015 and December 31, 2014, respectively

    10,103     11,382  

Total property, plant, and equipment, net

    2,095,177     1,932,361  

Long-term restricted funds

    82,419     105,051  

Long-term investments

    65,624     326,047  

Deferred income taxes

    30,995     30,334  

Other assets

    63,690     53,936  

Total assets

  $ 4,383,734   $ 4,450,863  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Trade and other accounts payable

  $ 36,660   $ 8,010  

Accrued liabilities

    216,436     214,972  

Short-term contractual obligations

    107,994     50,285  

Deferred income taxes

    30,995     30,334  

Total current liabilities

    392,085     303,601  

Long-term debt

    1,949,293     1,928,528  

Long-term contractual obligations

    1,381     101,945  

Other long-term liabilities

    2,483     2,523  

Total long-term liabilities

    1,953,157     2,032,996  

Stockholders' Equity:

             

Common stock, $0.01 par value per share; 2,000,000,000 shares authorized, 408,508,529 and 408,505,079 issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

    4,085     4,085  

Additional paid-in capital

    4,143,646     4,137,803  

Accumulated deficit during the development stage

    (2,109,239 )   (2,027,622 )

Total stockholders' equity

    2,038,492     2,114,266  

Total liabilities and stockholders' equity

  $ 4,383,734   $ 4,450,863  

   

See accompanying notes.

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Cobalt International Energy, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 
  Three Months Ended March 31,  
 
  2015   2014  
 
  ($ in thousands except per
share data)

 

Oil and gas revenue

  $   $  

Operating costs and expenses:

             

Seismic and exploration

    17,769     8,976  

Dry hole expense and impairment

    19,897     13,041  

General and administrative

    24,249     24,169  

Depreciation and amortization

    1,342     1,107  

Total operating costs and expenses

    63,257     47,293  

Operating income (loss)

    (63,257 )   (47,293 )

Other income (expense):

             

Interest income

    1,660     945  

Interest expense

    (20,020 )   (10,567 )

Total other income (expense)

    (18,360 )   (9,622 )

Net income (loss) before income tax

    (81,617 )   (56,915 )

Income tax expense

         

Net income (loss)

  $ (81,617 ) $ (56,915 )

Basic and diluted income (loss) per share

  $ (0.20 ) $ (0.14 )

Basic and diluted weighted average common shares outstanding

    408,508,154     407,001,208  

   

See accompanying notes.

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Cobalt International Energy, Inc.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

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

Balance, December 31, 2014

  $ 4,085   $ 4,137,803   $ (2,027,622 ) $ 2,114,266  

Equity based compensation

        5,843         5,843  

Net income (loss)

            (81,617 )   (81,617 )

Balance, March 31, 2015

  $ 4,085   $ 4,143,646   $ (2,109,239 ) $ 2,038,492  

   

See accompanying notes.

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Cobalt International Energy, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
  Three Months Ended
March 31,
 
 
  2015   2014  
 
  ($ in thousands)
 

Cash flows provided from operating activities

             

Net income (loss)

  $ (81,617 ) $ (56,915 )

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

             

Depreciation and amortization

    1,342     1,107  

Dry hole expense and impairment of unproved properties

    19,897     13,041  

Equity based compensation

    5,843     8,257  

Amortization of premium (accretion of discount) on investments

    4,800     4,230  

Amortization of debt discount

    19,868     12,352  

Changes in operating assets and liabilities:

             

Joint interest and other receivables

    30,443     46,223  

Inventory

    11,035     (4,487 )

Prepaid expense and other current assets

    (15,870 )   27,348  

Deferred charges and other

    (9,518 )   5,094  

Trade and other accounts payable

    18,744     (116,091 )

Accrued liabilities and other

    (22,147 )   (25,832 )

Net cash provided by (used in) operating activities

    (17,180 )   (85,673 )

Cash flows from investing activities

             

Capital expenditures for oil and gas properties

    (42,855 )   (42,855 )

Capital expenditures for other property and equipment

    (63 )   (291 )

Exploratory wells drilling in process

    (149,733 )   (85,307 )

Change in restricted funds

    (855 )   43,659  

Proceeds from maturity of investment securities

    372,350     519,205  

Purchase of investment securities

    (65,582 )   (388,797 )

Net cash provided by (used in) investing activities

    113,262     45,614  

Cash flows from financing activities

             

Proceeds from stock option exercises

        33  

Payments for common stock withheld for taxes on equity based compensation

        (630 )

Net cash provided by (used in) financing activities

        (597 )

Net increase (decrease) in cash and cash equivalents

    96,082     (40,656 )

Cash and cash equivalents, beginning of period

    258,721     192,460  

Cash and cash equivalents, end of period

  $ 354,803   $ 151,804  

Cash paid for interest

  $   $  

Non-Cash Disclosures

             

Changes in accrued capital expenditures

  $ (8,716 ) $ 29,959  

Transfer of investment securities to and from restricted funds

  $ 46,049   $ 42,672  

   

See accompanying notes.

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

General

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

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

Basis of Presentation

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

        The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("GAAP") for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, the condensed consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be presented for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.

Recently Issued Accounting Standards

        In April 2015, the FASB amended Accounting Standard Codification Subtopic No. 835-30, Interest—Imputation of Interest (the "ASC Subtopic 835-30"). The amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. The amendments under ASC Subtopic 835-30 are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. However, early adoption is permitted for financial statements that have not been previously issued. The Company expects to comply with the amendments to ASC Subtopic 830-30 for its financial statements at its effective date beginning after December 15, 2015.

Use of Estimates

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

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

in impairment testing. Although the Company believes these estimates are reasonable, actual results could differ from these estimates.

Investments

        The Company's policy on accounting for its investments, which consist entirely of debt securities, is based on the accounting guidance relating to "Accounting for Certain Investments in Debt and Equity Securities." The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as long-term investments. The debt securities are carried at amortized costs and classified as held-to-maturity securities as the Company has the positive intent and ability to hold them until they mature. The net carrying value of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity over the life of the securities. Held-to-maturity securities are stated at amortized cost, which approximates fair market value as of March 31, 2015 and December 31, 2014. Income related to these securities is reported as a component of interest income in the Company's condensed consolidated statement of operations. See Note 5—Investments.

        Investments are considered to be impaired when a decline in fair value is determined to be other-than-temporary. The Company conducts a regular assessment of its debt securities with unrealized losses to determine whether securities have other-than-temporary impairment ("OTTI"). This assessment considers, among other factors, the nature of the securities, credit rating or financial condition of the issuer, the extent and duration of the unrealized loss, market conditions and whether the Company intends to sell or whether it is more likely than not that the Company will be required to sell the debt securities. As of March 31, 2015 and December 31, 2014, the Company has no OTTI in its debt securities.

Capitalized Interest

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

Earnings (Loss) Per Share

        Basic income (loss) per share was calculated by dividing net income or loss applicable to common shares by the weighted average number of common shares outstanding during the periods presented. The calculation of diluted income (loss) per share should include the potential dilutive impact of non-vested restricted shares, non-vested restricted stock units, outstanding stock options, the 2.625% convertible senior notes due 2019 and the 3.125% convertible senior notes due 2024, during the period, unless their effect is anti-dilutive. For the three months ended March 31, 2015, 10,085,521 shares of non-vested restricted stock, non-vested restricted stock units, outstanding stock options, the shares underlying the 2.625% convertible senior notes due 2019 and the 3.125% convertible senior notes due 2024, were excluded from the diluted income (loss) per share because they are anti-dilutive. For the

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting Policies (Continued)

three months ended March 31, 2014, 8,606,462 shares of non-vested restricted stock, non-vested restricted stock units, outstanding stock options and the shares underlying the 2.625% convertible senior notes due 2019 were excluded from the diluted income (loss) per share because they are anti-dilutive.

2. Cash and Cash Equivalents

        Cash and cash equivalents consisted of the following:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Cash at banks

  $ 121,512   $ 57,750  

Money market funds

    111,310     122,218  

Held-to-maturity securities(1)

    121,981     78,753  

  $ 354,803   $ 258,721  

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

3. Restricted Funds

        Restricted funds consisted of the following:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Short-term:

             

Collateral on letters of credit for Angola

  $ 22,538   $ 45,062  

  $ 22,538   $ 45,062  

Long-term:

             

Collateral on letters of credit for Angola

  $ 82,419   $ 105,051  

  $ 82,419   $ 105,051  

Total restricted funds(1)

  $ 104,957   $ 150,113  

(1)
As of March 31, 2015, $105.0 million was held in a collateral account established to secure letters of credit issued in support of the Company's contractually agreed work program obligations on Blocks 9 and 20 offshore Angola. As of December 31, 2014, $150.1 million was held in a collateral account established to secure letters of credit issued in support of the Company's contractually agreed work program obligations on Blocks 9, 20 and 21 offshore Angola. As of March 31, 2015 and December 31, 2014, the collateral in this account was invested in U.S. Treasury notes purchased at discounts and at premiums, respectively, resulting in a net carrying value of $105.0 million and $150.1 million, respectively. The contractual maturities of these securities are within one year.

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

4. Joint Interest and Other Receivables

        Joint interest and other receivables result primarily from billing shared costs under the respective operating agreements to the Company's partners. These are usually settled within 30 days of the invoice date. As of March 31, 2015 and December 31, 2014, the balance in joint interest and other receivables consisted of the following:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Partners in the U.S. Gulf of Mexico

  $ 22,603   $ 3,274  

Partners in West Africa

        46,312  

Accrued interest on investment securities

    6,674     7,663  

Other

    254     2,725  

  $ 29,531   $ 59,974  

5. Investments

        The Company's investments in held-to-maturity securities which are recorded at amortized cost and approximate fair market value, were as follows as of March 31, 2015 and December 31, 2014:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

U.S. Treasury bills

  $ 46,054   $ 46,064  

U.S. Treasury notes

    104,957     104,049  

Corporate securities

    1,152,688     1,321,261  

Commercial paper

    358,728     483,534  

U.S. Agency securities

    24,997     24,996  

Certificates of deposit

    130,210     105,215  

Total

  $ 1,817,634   $ 2,085,119  

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

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Cash and cash equivalents

  $ 121,981   $ 78,753  

Short-term investments

    1,525,072     1,530,206  

Short-term restricted funds

    22,538     45,062  

Long-term restricted funds

    82,419     105,051  

Long-term investments

    65,624     326,047  

  $ 1,817,634   $ 2,085,119  

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

5. Investments (Continued)

        The contractual maturities of these held-to-maturity securities as of March 31, 2015 and December 31, 2014 were as follows:

 
  March 31, 2015   December 31, 2014  
 
  Carrying
Value
  Estimated
Fair Value
  Carrying
Value
  Estimated
Fair Value
 
 
  ($ in thousands)
 

Within 1 year

  $ 1,647,053   $ 1,647,053   $ 1,759,072   $ 1,759,072  

After 1 year

    170,581     170,581     326,047     326,047  

  $ 1,817,634   $ 1,817,634   $ 2,085,119   $ 2,085,119  

6. Fair Value Measurements

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

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

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

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

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)

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

 
  Level 1   Level 2    
 
 
  Carrying
Value
  Fair
Value(1)
  Carrying
Value
  Fair
Value(1)
  Balance as of
March 31,
2015
 
 
  ($ in thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 121,512   $ 121,512   $   $   $ 121,512  

Money market funds

    111,310     111,310             111,310  

Commercial paper

            121,981     121,981     121,981  

Subtotal

    232,822     232,822     121,981     121,981     354,803  

Short-term restricted funds:

                               

U.S. Treasury notes

            22,538     22,538     22,538  

            22,538     22,538     22,538  

Short-term investments:

                               

U.S. government agency securities

            24,997     24,997     24,997  

U.S Treasury bills

            46,054     46,054     46,054  

Corporate bonds

            1,087,064     1,087,064     1,087,064  

Commercial paper

            236,747     236,747     236,747  

Certificates of deposits

            130,210     130,210     130,210  

Subtotal

            1,525,072     1,525,072     1,525,072  

Long-term restricted funds:

                               

U.S. Treasury notes

            82,419     82,419     82,419  

Subtotal

            82,419     82,419     82,419  

Long-term investments:

                               

Corporate bonds

            65,624     65,624     65,624  

Subtotal

            65,624     65,624     65,624  

Total

  $ 232,822   $ 232,822   $ 1,817,634   $ 1,817,634   $ 2,050,456  

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

6. Fair Value Measurements (Continued)


 
  Level 1   Level 2    
 
 
  Carrying
Value
  Fair
Value(1)
  Carrying
Value
  Fair
Value(1)
  Balance as of
December 31,
2014
 
 
  ($ in thousands)
 

Cash and cash equivalents:

                               

Cash

  $ 57,750   $ 57,750   $   $   $ 57,750  

Money market funds

    122,218     122,218             122,218  

Commercial paper

            70,524     70,524     70,524  

Corporate bonds

                8,229     8,229     8,229  

Subtotal

    179,968     179,968     78,753     78,753     258,721  

Short-term restricted funds:

                               

U.S. Treasury bills

            45,062     45,062     45,062  

Subtotal

            45,062     45,062     45,062  

Short-term investments:

                               

U.S. Agency securities

            24,996     24,996     24,996  

Corporate bonds

            986,985     986,985     986,985  

Commercial paper

            413,010     413,010     413,010  

Certificates of deposit

            105,215     105,215     105,215  

Subtotal

            1,530,206     1,530,206     1,530,206  

Long-term restricted funds:

                               

U.S. Treasury bills

            1,002     1,002     1,002  

U.S. Treasury notes

            104,049     104,049     104,049  

Subtotal

            105,051     105,051     105,051  

Long-term investments:

                               

Corporate bonds

            326,047     326,047     326,047  

Subtotal

            326,047     326,047     326,047  

Total

  $ 179,968   $ 179,968   $ 2,085,119   $ 2,085,119   $ 2,265,087  

(1)
As of March 31, 2015 and December 31, 2014, the Company did not record any OTTI on these assets.

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment

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

 
  Estimated
Useful Life
(Years)
  March 31,
2015
  December 31,
2014
 
 
   
  ($ in thousands)
 

Oil and Gas Properties:

                 

Proved properties:

                 

Well and development costs

      $ 229,170   $ 183,221  

Total proved properties

        229,170     183,221  

Unproved properties:

                 

Oil and gas leasehold

        743,079     762,518  

Less: accumulated valuation allowance

        (194,384 )   (211,224 )

        548,695     551,294  

Exploration wells in process

        1,307,209     1,186,464  

Total unproved properties

        1,855,904     1,737,758  

Total oil and gas properties, net

        2,085,074     1,920,979  

Other Property and Equipment:

                 

Computer equipment and software

  3     5,727     5,672  

Office equipment and furniture

  3 - 5     2,140     2,139  

Vehicles

  3     265     265  

Leasehold improvements

  3 - 10     2,495     2,488  

Running tools and equipment

  3     9,795     9,795  

        20,422     20,359  

Less: accumulated depreciation and amortization

        (10,319 )   (8,977 )

Total other property and equipment, net

        10,103     11,382  

Property, plant, and equipment, net

      $ 2,095,177   $ 1,932,361  

        The Company recorded $1.3 million and $1.1 million of depreciation and amortization expense for the three months ended March 31, 2015 and 2014, respectively.

Proved Oil and Gas Properties

        The Heidelberg project was formally sanctioned for development in mid-2013. As a result of the project sanction, the Company reclassified its Heidelberg exploration well costs to proved property well and development costs and these costs will be amortized when the related proved developed reserves are produced. During the quarter ended March 31, 2015, the Company assigned its 9.375% ownership interest in the Heidelberg prospect to its indirect wholly-owned subsidiary, Cobalt GOM #1, LLC ("GOM #1"). As a result, the carrying value of the costs capitalized for all the Heidelberg projects as of March 31, 2015 were transferred to GOM #1. GOM #1 was established to secure the Heidelberg assets for future debt instruments to fund the Heidelberg development project. As of March 31, 2015,

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

the well and development costs consist of $89.6 million relating to exploration, appraisal and development well costs and $139.6 million for costs associated with field development. As of December 31, 2014, the well and development costs consist of $51.1 million relating to exploration, appraisal and development well costs and $132.1 million for costs associated with field development.

Unproved Oil and Gas Properties

        As of March 31, 2015 and December 31, 2014, the Company has the following unproved property acquisition costs, net of valuation allowance on the consolidated balance sheets:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

U.S. Gulf of Mexico:

             

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

  $ 301,292   $ 320,731  

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

    83,916     83,916  

    385,208     404,647  

Accumulated valuation allowance & impairment

    (191,884 )   (208,724 )

    193,324     195,923  

West Africa:

             

Blocks 9, 20 and 21 offshore Angola(1)

    355,876     355,876  

Diaba Block offshore Gabon

    1,995     1,995  

    357,871     357,871  

Accumulated impairment

    (2,500 )   (2,500 )

    355,371     355,371  

Total oil and gas leasehold

  $ 548,695   $ 551,294  

(1)
In 2010, the Company acquired a license to explore for, develop and produce oil from Block 21 offshore Angola by executing a Risk Service Agreement ("Block 21 RSA") with Sonangol. The Block 21 RSA governs the Company's 40% working interest in and operatorship of Block 21 offshore Angola and forms the basis of the Company's exploration, development and production operations on this block. The Block 21 RSA provides for an initial exploration period of five years, which expired on March 1, 2015. The Company has applied for an extension of the initial exploration period for Block 21 to enable the Company to continue its exploration efforts, however, this extension is currently pending approval by Sonangol and the Angola Ministry of Petroleum.

Capitalized Exploration Well Costs

        If an exploration well provides evidence as to the existence of sufficient quantities of hydrocarbons to justify evaluation for potential development, drilling costs associated with the well are initially capitalized, or suspended, pending a determination as to whether a commercially sufficient quantity of proved reserves can be attributed to the area as a result of drilling. This determination may take longer

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

than one year in certain areas (generally, deepwater and international locations) depending upon, among other things, (i) the amount of hydrocarbons discovered, (ii) the outcome of planned geological and engineering studies, (iii) the need for additional appraisal drilling activities to determine whether the discovery is sufficient to support an economic development plan and (iv) the requirement for government sanctioning in international locations before proceeding with development activities.

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

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Beginning of period

  $ 1,186,464   $ 777,823  

Additions to capitalized exploration

             

U.S. Gulf of Mexico:

             

Exploration well costs

    23,943     143,431  

Capitalized interest

    3,544     6,965  

West Africa:

             

Exploration well costs

    96,739     379,461  

Capitalized interest

    13,697     44,243  

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

         

Amounts charged to expense(1)

    (17,178 )   (165,459 )

End of period

  $ 1,307,209   $ 1,186,464  

(1)
The amount of $17.2 million for the three months ended March 31, 2015 represents primarily impairment charges related to the North Platte #2 appraisal well and additional charges on exploratory wells which were impaired in 2014. The North Platte #2 appraisal well was plugged and abandoned due to a seal failure in the riser connection system. The well was at a depth of 20,701 feet when the problem with the riser was detected. The Company is continuing to assess what additional impairment charges or other liabilities, including any environmental liabilities, might be incurred in future periods related to the North Platte #2 appraisal well and what costs may be recouped from the drilling contractor.

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

7. Property, Plant, and Equipment (Continued)

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Cumulative costs:

             

U.S. Gulf of Mexico

             

Exploration well costs

  $ 290,650   $ 283,885  

Capitalized interest

    14,438     10,894  

West Africa

             

Exploration well costs

    930,573     835,171  

Capitalized interest

    71,548     56,514  

  $ 1,307,209   $ 1,186,464  

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

  $ 900,003   $ 775,379  

        As of March 31, 2015, capitalized exploration well costs that have been suspended longer than one year are associated with the Company's Shenandoah, North Platte, Cameia, Bicuar, Lontra, Orca, Mavinga and Diaman discoveries. These well costs are suspended pending ongoing evaluation including, but not limited to, results of additional appraisal drilling, well-test analysis, additional geological and geophysical data and approval of a development plan. Management believes these discoveries exhibit sufficient indications of hydrocarbons to justify potential development and is actively pursuing efforts to fully assess them. If additional information becomes available that raises substantial doubt as to the economic or operational viability of these discoveries, the associated costs will be expensed at that time. The Heidelberg discovery has been sanctioned for development and the Heidelberg capitalized exploration and appraisal well costs were reclassified to development costs in 2013.

8. Other Assets

        As of March 31, 2015 and December 31, 2014, the balance in other assets consisted of the following:

 
  March 31,
2015
  December 31,
2014
 
 
  (in thousands)
 

Debt issue cost(1)

  $ 35,822   $ 36,708  

Long-term portion of prepaid shorebase leases

    1,909     2,244  

Rig costs(2)

    25,959     14,984  

  $ 63,690   $ 53,936  

(1)
As of March 31, 2015, the $35.8 million in debt issue costs was related to the issuance of the Company's 2.625% convertible senior notes due 2019 and the Company's 3.125% convertible senior notes due 2024, as described in Note 9. As of December 31, 2014, the $36.7 million in debt issue costs included $18.5 million and $18.2 million in costs related to the issuance of the Company's 2.625% convertible senior notes due 2019 and the

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

8. Other Assets (Continued)

    Company's 3.125% convertible senior notes due 2024, respectively, as described in Note 9. These debt issue costs are amortized over the life of the notes using the effective interest method.

(2)
As of March 31, 2015 and December 31, 2014, the $26.0 million and $15.0 million, respectively, relate to costs associated with the long-term mobilization and the regulatory acceptance testing of the SSV Catarina drilling rig which is currently drilling in West Africa, and costs relating to the Rowan Reliance drilling rig which is currently drilling in U.S. Gulf of Mexico. These costs are amortized over the term of the respective drilling rig contracts.

9. Long-term Debt

        As of March 31, 2015, the Company's long-term debt consists of the 2.625% convertible senior notes due 2019 issued on December 17, 2012 (the "2.625% Notes") and the 3.125% convertible senior notes due 2024 issued on May 13, 2014 (the "3.125% Notes", and, collectively with the 2.625% Notes, the "Notes") as follows:

2.625% Convertible Senior Notes due 2019

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

3.125% Convertible Senior Notes due 2024

        On May 13, 2014, the Company issued $1.3 billion aggregate principal amount of the 3.125% Notes. The 3.125% Notes are the Company's senior unsecured obligations and rank equal in right of payment to the 2.625% Notes. Interest on the 3.125% Notes is payable semi-annually in arrears on May 15 and November 15 of each year. The 3.125% Notes will mature on May 15, 2024, unless earlier repurchased, converted or redeemed in accordance with the terms of the Notes. Prior to November 15, 2023, the 3.125% Notes are convertible only under the following circumstances: (1) during any fiscal quarter commencing after March 31, 2015 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a 30 consecutive trading-day period ending on, and including, the last trading day of the immediately

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

preceding fiscal quarter exceeds $30.00 on each applicable trading day; (2) during the five business-day period after any five consecutive trading-day period (the "3.125% Notes Measurement Period") in which the trading price per $1,000 principal amount of notes for each trading day of the 3.125% Notes Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; (3) if the Company calls all or any portion of the 3.125% Notes for redemption, at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the related redemption date; or (4) upon the occurrence of specified distributions or the occurrence of specified corporate events. On or after November 15, 2023, the 3.125% Notes may be converted at the option of the holder at any time prior to 5:00 p.m., New York City time, on the second scheduled trading day immediately preceding the stated maturity date, in multiples of $1,000 principal amount. As of March 31, 2015, none of the conditions allowing holders of the 3.125% Notes to convert had been met.

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

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

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

        In accordance with accounting guidance relating to, "Debt with Conversion and Other Options", the Company separately accounts for the liability and equity conversion components of the Notes due to the Company's option to settle the conversion obligation in cash. The fair value of the Notes excluding the conversion feature at the date of issuance was calculated based on the fair value of similar non-convertible debt instruments. The resulting value of the conversion option of the Notes was recognized as a debt discount and recorded as additional paid-in capital on the Company's consolidated balance sheets. Total debt issue cost on the Notes was allocated to the liability component and to the equity component of the Notes accordingly. The debt discount and the liability component of the debt issue costs are amortized over the term of the Notes. The effective interest rate used to amortize the debt discount and the liability component of the debt issue costs were approximately 8.40% and 8.97% on the 2.625% Notes and the 3.125% Notes, respectively, based on the Company's estimated non-convertible borrowing rate as of the date the Notes were issued. Since the Company incurred

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

losses for all periods, the impact of the conversion option would be anti-dilutive to the earnings per share and therefore was not included in the calculation.

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

 
  March 31, 2015   December 31, 2014  
 
  Principal
Amount
  Unamortized
discount(1)
  Carrying
Amount
  Principal
Amount
  Unamortized
discount
  Carrying
Amount
 
 
  ($ in thousands)
 

Carrying amount of liability component

                                     

2.625% Notes

  $ 1,380,000   $ (282,764 ) $ 1,097,236   $ 1,380,000   $ (295,509 ) $ 1,084,491  

3.125% Notes

    1,300,000     (447,943 )   852,057     1,300,000     (455,963 )   844,037  

Total

  $ 2,680,000   $ (730,707 ) $ 1,949,293   $ 2,680,000   $ (751,472 ) $ 1,928,528  

(1)
Unamortized discount will be amortized over the remaining life of the Notes which is 4.75 years for the 2.625% Notes and 9.25 years for the 3.125% Notes.

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

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Debt discount relating to value of conversion option

  $ 866,340   $ 866,340  

Debt issue costs

    (20,185 )   (20,185 )

Total

  $ 846,155   $ 846,155  

        Fair Value The fair value of the Notes excluding the conversion feature was calculated based on the fair value of similar non-convertible debt instruments since an observable quoted price of the Notes or a similar asset or liability is not readily available (level 2). As of March 31, 2015 and December 31, 2014, the fair values of the Notes were as follows:

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

2.625% Notes

  $ 1,363,000   $ 1,361,000  

3.125% Notes

    1,086,000     1,047,000  

Total

  $ 2,449,000   $ 2,408,000  

        As of March 31, 2015, the Company had $27.0 million in accrued interest on the Notes.

        For the three months ended March 31, 2015 and 2014, the interest expense, net of capitalized amount, relating to the Notes was $20.0 million and $10.6 million, respectively.

        As of March 31, 2015 and December 31, 2014, the debt discounts associated with the 2.625% Notes and the 3.125% Notes resulted in the recognition of $234.0 million and $264.3 million of

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

9. Long-term Debt (Continued)

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

10. Contractual Obligations

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

 
  March 31,
2015
  December 31,
2014
 
 
  ($ in thousands)
 

Short-term Contractual Obligations:

             

Social obligation payments for Block 9, offshore Angola

  $ 21,875   $ 560  

Social obligation payments for Block 21, offshore Angola

    409     1,156  

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

    85,710     48,569  

  $ 107,994   $ 50,285  

Long-term Contractual Obligations:

             

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

  $   $ 21,875  

Social obligation payments for Block 21, offshore Angola

    1,381     74  

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

        79,996  

  $ 1,381   $ 101,945  

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

11. Seismic and Exploration Expenses

        Seismic and exploration expenses consisted of the following:

 
  Three Months
Ended March 31,
 
 
  2015   2014  
 
  ($ in Thousands)
 

Seismic costs

  $ 12,205   $ 3,349  

Leasehold delay rentals

    1,391     1,291  

Drilling rig and other exploration expense

    4,173     4,336  

  $ 17,769   $ 8,976  

12. Equity Based Compensation

        The Company accounts for stock-based compensation at fair value. The Company grants various types of stock-based awards including stock options, stock appreciation rights, restricted stock and

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

12. Equity Based Compensation (Continued)

performance-based awards. The fair value of stock option awards is determined using the Black-Scholes-Merton option-pricing model. For restricted stock awards with market conditions, the fair value of the awards is measured using the Monte Carlo pricing model. Restricted stock awards without market conditions are valued using the market price of the Company's common stock on the grant date. The Company records compensation cost, net of estimated forfeitures, for stock-based compensation awards over the requisite service period except for performance-based awards.

        During the three months ended March 31, 2015, the Company granted a total of 3,169,028 shares of restricted stock and 746,268 stock options to employees which include 379,746 shares of restricted stock and 746,268 stock options with both service and market conditions granted to three senior officers under the terms of their employment agreements. During the three months ended March 31, 2015, the Company also granted 12,021 shares of common stock as retainer awards to non-employee directors who elected to be compensated by stock in lieu of cash payments.

        The Company recorded equity-based compensation expense, net of forfeitures, of $5.8 million and $8.3 million for the three months ended March 31, 2015 and 2014, respectively.

        On February 20, 2015, the Company issued a total of 1,526,835 stock appreciation rights ("SARs") under the Company's Long Term Incentive Plan (the "Plan") to the Company's officers, using the market price at the time of issuance of $8.87 per share. The SARs will vest with respect to one-third (1/3) of the underlying shares on each anniversary of the grant date over the next three years and may be settled, at the Company's discretion, by issuance of the Company's shares or by cash or by a combination of the Company's shares and cash based on the fair market value of the shares on date of exercise. The fair value of a SAR is determined using the Black-Scholes-Merton option-pricing model which at the date of grant was $4.53 per SAR. The Company accounts for the SAR awards as compensation cost and records a corresponding liability based on the fair value of the SARs at the end of each reporting period. As of March 31, 2015, the fair value of each SAR increased to $4.80, resulting in an increase in the aggregate fair value of the SARs of $0.3 million using the Black-Scholes-Merton option-pricing model. For the three months ended March 31, 2015, the Company recognized $0.3 million in compensation expense relating to the SAR awards.

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Cobalt International Energy, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

(Unaudited)

13. Segment Information

        The Company currently has two geographic operating segments. The operating segments are focused in the deepwater U.S. Gulf of Mexico and offshore West Africa. The following tables provide the geographic operating segment information for the three months ended March 31, 2015 and 2014:

 
  United
States
  West
Africa
  Total  
 
  ($ in thousands)
 

Three months ended March 31, 2015

                   

Operating costs and expense

  $ 51,741   $ 11,516   $ 63,257  

Operating income (loss)

    (51,741 )   (11,516 )   (63,257 )

Other income (expense)

                (18,360 )

Net income (loss)

              $ (81,617 )

Additions to Property and Equipment, net(1)

  $ 164,343   $ 308,774   $ 473,117  

Three months ended March 31, 2014

                   

Operating costs and expense

  $ 31,027   $ 16,266   $ 47,293  

Operating income (loss)

    (31,027 )   (16,266 )   (47,293 )

Other income (expense)

                (9,622 )

Net income (loss)

              $ (56,915 )

Additions to Property and Equipment, net(1)

  $ 21,376   $ 122,888   $ 144,264  

(1)
These amounts are net of accumulated allowance for impairment on oil and gas properties and accumulated depreciation and amortization on other property and equipment.

14. Contingencies

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

15. Other Matters

        As previously disclosed, in November 2011 a formal order of investigation was issued by the SEC related to our operations in Angola. In August 2014, we received a Wells Notice from the SEC related to this investigation. In January 2015, we received a termination letter from the SEC advising us that the SEC's FCPA investigation has concluded and the Staff does not intend to recommend any enforcement action by the SEC. This letter formally concluded the SEC's investigation. We continue to cooperate with the Department of Justice ("DOJ") with regard to its ongoing parallel investigation. We are unable to predict the outcome of the DOJ's ongoing investigation or any action that the DOJ may decide to pursue.

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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, 2014.

Overview

        We are an independent exploration and production company with operations in the deepwater U.S. Gulf of Mexico and offshore Angola and Gabon in West Africa. Since our founding in 2005, our oil-focused, below-salt exploration efforts have been successful in each of our three operating areas, resulting in ten discoveries out of the seventeen exploration prospects drilled. These ten discoveries consist of North Platte, Heidelberg, Shenandoah and Anchor in the U.S. Gulf of Mexico; Cameia, Lontra, Mavinga, Bicuar and Orca offshore Angola; and Diaman offshore Gabon. In addition, we have an interest in the Yucatan discovery in the U.S. Gulf of Mexico. As of December 31, 2014, we had 8.4 million barrels ("MMBbls") of oil and 3.7 billion cubic feet ("Bcf") of gas of net proved undeveloped reserves, all of which is attributed to the Heidelberg field.

First Quarter 2015 Operational Highlights

    U.S. Gulf of Mexico

    With respect to our Heidelberg project, development drilling and production facility construction continue and remain on schedule to support initial production in the first half of 2016. The Heidelberg production facility is designed to produce up to 80,000 barrels of oil per day ("BOPD") and 80 million cubic feet per day ("MMCFD") of gas. We own a 9.375% non-operated working interest in the Heidelberg project.

    Drilling operations concluded on the Shenandoah #3 appraisal well, which evaluated the same well-developed reservoir sands 1,500 feet down-dip and 2.3 miles east of the Shenandoah #2 well, which encountered more than 1,000 net feet of oil pay in excellent quality, Inboard Lower Tertiary-aged reservoirs. The Shenandoah #3 well found an expanded geologic reservoir section and confirmed excellent reservoir qualities. The well also enabled the projection of oil/water contacts based on pressure data, and reduced the uncertainty of the resource range. The Shenandoah #4 appraisal well is anticipated to be spud in the second quarter of 2015. This well is expected to confirm the lateral sand quality, continuity and stratigraphy of reservoirs found in the Shenandoah #2 well. The Shenandoah #4 well is located approximately 800' updip and 0.7 miles northwest of the Shenandoah #2 well. We own a 20% non-operated working interest in the Shenandoah project.

    On January 6, 2015, we announced that the initial exploration well on our Anchor prospect had been drilled to a total depth of 33,749 feet and encountered significant high quality oil pay in multiple Inboard Lower Tertiary horizons. The Anchor discovery is located approximately 140 miles from the Louisiana coast in 5,183 feet of water. Chevron, as operator, plans to conduct additional appraisal drilling at Anchor in 2015. We own a 20% non-operated working interest in the Anchor discovery unit.

    We spud the North Platte #2 appraisal well with the Rowan Reliance drillship in early February 2015. On April 9, 2015 we announced that the North Plate #2 appraisal well had been plugged and abandoned due to a seal failure in the riser connection system. The well was at a depth of

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      20,701 feet when the problem with the riser was detected. The well was permanently abandoned prior to reaching any geological targets. On April 23, 2015, we spud the North Platte #3 appraisal well and continue to expect well results in the second half of 2015. Our North Platte #1 discovery well was drilled in 2012 and encountered over 550 net feet of oil pay in multiple high-quality Inboard Lower Tertiary reservoirs. We own a 60% working interest in our North Platte discovery.

    West Africa

    The results of the Orca #2 appraisal well on Block 20 offshore Angola, which included a drill stem test, were successful and confirmed the presence of a large oil accumulation in the Sag section of the Pre-salt and the discovery of oil in the deeper Synrift reservoir of the Pre-salt. We are the operator of the Orca project and hold a 40% working interest.

    We spud the Cameia #4 well in the first quarter of 2015, which we intend to utilize as a production well. Following drilling operations on Cameia #4, we expect to maintain an ongoing drilling program at Cameia for the remainder of 2015. We expect to achieve formal project sanction of Cameia by year-end 2015, and first production from Cameia will likely occur in 2018. The occurrence and timing of project sanction and first production from Cameia are subject to obtaining adequate financing and the approval of a revised integrated field development plan by Sonangol and the Angola Ministry of Petroleum. We are the operator of and hold a 40% working interest in the Cameia project. Our partner in the Cameia project is Sonangol Pesquisa e Produção, S.A. ("Sonangol P&P"), with a 60% working interest.

First Quarter 2015 Financial Highlights

    We recorded a net loss of approximately $81.6 million, an 43% increase from the first quarter of 2014. Total operating expenses were approximately $63.3 million, a 34% increase from the first quarter of 2014. The increase in operating expenses for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014, was primarily attributed to $17.8 million in seismic costs and $19.9 million in dry hole and impairment charges during the three months ended March 31, 2015.

    Capital and operating expenditures were approximately $190.7 million for the three months ended March 31, 2015.

    Including our existing cash and investments on hand and restricted cash as of March 31, 2015, we have approximately $2.1 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 March 31, 2015 Compared to the Three Months Ended March 31, 2014

 
  Three Months Ended March 31,  
 
  2015   2014   Increase
(Decrease)
  %  
 
  ($ in thousands)
 

United States Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    13,780     2,437     11,343     465 %

Dry hole expense and impairment

    19,897     12,881     7,016     54 %

General and administrative

    17,652     15,261     2,391     16 %

Depreciation and amortization

    412     448     (36 )   (8 )%

Total operating costs and expenses

    51,741     31,027     20,714     67 %

Operating income (loss)

    (51,741 )   (31,027 )   20,714     67 %

West Africa Segment:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    3,989     6,539     (2,550 )   (39 )%

Dry hole expense and impairment

        160     (160 )   (100 )%

General and administrative

    6,597     8,908     (2,311 )   (26 )%

Depreciation and amortization

    930     659     271     41 %

Total operating costs and expenses

    11,516     16,266     (4,750 )   (29 )%

Operating income (loss)

    (11,516 )   (16,266 )   (4,750 )   (29 )%

Consolidated Operations:

                         

Oil and gas revenue

  $   $   $     %

Operating costs and expenses:

                         

Seismic and exploration

    17,769     8,976     8,793     98 %

Dry hole expense and impairment

    19,897     13,041     6,856     53 %

General and administrative

    24,249     24,169     80     0 %

Depreciation and amortization

    1,342     1,107     235     21 %

Total operating costs and expenses

    63,257     47,293     15,964     34 %

Operating income (loss)

    (63,257 )   (47,293 )   15,964     34 %

Other income (expense):

                         

Interest income

    1,660     945     715     76 %

Interest expense

    (20,020 )   (10,567 )   9,453     89 %

Total other income (expense)

    (18,360 )   (9,622 )   8,738     91 %

Net income (loss) before income tax

    (81,617 )   (56,915 )   24,702     43 %

Income tax expense (benefit)

                 

Net income (loss)

  $ (81,617 ) $ (56,915 ) $ 24,702     43 %

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 March 31, 2015 and 2014, respectively.

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        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended March 31, 2015 and 2014:

        Seismic and exploration.    Seismic and exploration costs increased by $11.3 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The increase was primarily attributed to the acquisition of $9.5 million in seismic data in the eastern U.S. Gulf of Mexico and offshore Canada under our new venture strategic program, $1.3 million of reprocessing costs on seismic data on various U.S. Gulf of Mexico prospects which we have a working interest and a $0.5 million increase in delay rental and other exploration costs during the three months ended March 31, 2015.

        Dry hole expense and impairment.    Dry hole expense and impairment increased by $7.0 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The increase is reflected in the following table:

 
  Three Months Ended March 31,  
 
  2015   2014   Increase
(Decrease)
 
 
  ($ in thousands)
 

Impairment of Unproved Leasehold:

                   

Amortization of leasehold with carrying value under $1 million

  $ 2,597   $ 2,397   $ 200  

U.S. Gulf of Mexico leasehold

        7,264     (7,264 )

Dry Hole Expense:

                   

Aegean #1 exploration well

    (19 )   3,220     (3,239 )

Anchor #1 exploration well

    560         560  

North Platte #2 appraisal well

    16,905         16,905  

Shenandoah VSP

    247         247  

Shenandoah bypass core #3

    (372 )       (372 )

Yucatan #2 exploration well

    (141 )       (141 )

Other Impairments:

                   

Obsolete inventory

    120         120  

  $ 19,897   $ 12,881   $ 7,016  

        General and administrative.    General and administrative costs increased by $2.4 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The increase of $2.4 million was attributable to an increase of $3.4 million in salary and stock compensation, driven in part by our personnel growth and an increase of $0.9 million in legal fees, all of which were offset by an increase of $1.4 million in recoveries from partners for overhead and technical service charges pursuant to applicable joint operating agreements and a $0.5 million decrease in consulting fees and office support expenses.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended March 31, 2015, as compared to the three months ended March 31, 2014.

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 March 31, 2015 and 2014, respectively.

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        Operating costs and expenses.    Our operating costs and expenses consisted of the following during the three months ended March 31, 2015 and 2014:

        Seismic and exploration.    Seismic and exploration costs decreased by $2.6 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The decrease of $2.6 million was primarily attributed to the decrease $2.1 million of seismic costs and $0.5 million in other exploration costs in Angola. During the three months ended March 31, 2015, we incurred $0.7 million in seismic costs as compared to $2.8 million incurred during the three months ended March 31, 2014.

        Dry hole expense and impairment.    Dry hole expense and impairment did not materially change for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.

        General and administrative.    General and administrative costs decreased by $2.3 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The decrease of $2.3 million was primarily attributed to a $0.5 million decrease in staff costs in Angola and a $1.8 million decrease in other office related expenses.

        Depreciation and amortization.    Depreciation and amortization did not materially change from the three months ended March 31, 2015, as compared to the three months ended March 31, 2014.

Consolidated:

        Other income (expense).    Other income (expense) increased by net expenses of $8.7 million during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The increase was due primarily to additional interest expense during the three months ended March 31, 2015 resulting from the 3.125% convertible senior notes due 2024 issued in May 2014. During the three months ended March 31, 2014, the interest expense included only the 2.625% convertible senior notes due 2019 issued in December 2012.

        Income tax expense/benefit.    Income Tax Expense: No income tax 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

        Our Heidelberg project was sanctioned in mid-2013, and the operator currently estimates first production from Heidelberg in the first half of 2016. With respect to our Cameia project, given the current industry environment, we are reviewing the project design concept and projected capital expenditures in order to optimize the cost and scale of the Cameia development and production facilities prior to formal project sanction. Throughout 2015, we intend to continue pursuing project cost reductions in light of the current weakness in the market for goods and services utilized in major offshore development projects. We remain committed to progressing the Cameia development towards project sanction and production, and, to that end, we spud the first of several planned Cameia development wells in the first quarter of 2015. We expect to achieve formal project sanction of Cameia by year-end 2015, and first production from Cameia will likely occur in 2018. The occurrence and timing of project sanction and first production from Cameia is subject to obtaining adequate financing and the approval of a revised integrated field development plan by Sonangol and the Angola Ministry of Petroleum.

        Until substantial production is achieved, our primary sources of liquidity are expected to be cash on hand, amounts paid pursuant to the terms of our Total alliance and funds from any future equity and debt financings, asset-based ventures and asset monetizations.

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

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

    continue our exploration activity on our existing acreage;

    seek the renewal of our worldwide exploration portfolio in locations applicable to our deepwater and below-salt exploration strength; and

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

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

        As of March 31, 2015, we had approximately $2.1 billion in liquidity, which includes cash and cash equivalents, short-term restricted cash, short-term investments, long-term restricted cash and long-term investments. This amount does not include amounts Total is obligated to pay us pursuant to the terms of our U.S. Gulf of Mexico alliance. We expect to expend approximately $800 to $900 million for our capital and operating expenditures in 2015. Given our exploration success, our focus has now shifted towards selectively developing our discoveries with the aim to turn them into production. Thus, we currently expect to allocate approximately 80% of our planned 2015 capital and operating expenditure budget toward project appraisal and development activities. Our capital and operating expenditures were approximately $190.7 million for the three months ended March 31, 2015. Our capital and operating expenditures exclude interest payments, Angolan social contributions and items amortized in future years' operations. We expect to use approximately $150 million for these items in 2015. We expect that our existing cash on hand will be sufficient to fund our planned exploration and appraisal drilling program and development activities at current working interests through at least 2016.

        On February 19, 2015 we executed a commitment letter with Société Générale and certain of its affiliates for a limited recourse $150 million senior secured reserve-based loan facility to fund the majority of our share of the remaining Heidelberg field development costs. It is anticipated that the facility will be further syndicated. The commitments are subject to the negotiation and execution of definitive loan documentation and other customary conditions.

        We are currently pursuing certain asset-based ventures and monetizations to fund our long-term project appraisal, development and exploration activities. We may also seek additional funding through equity and debt financings. Additional funding, including funding through any asset-based venture or monetization, may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our existing stockholders. For example, if we raise additional funds by issuing additional equity securities, further dilution to our existing stockholders will result. If we are unable to obtain funding on a timely basis or on acceptable terms, we may be required to significantly curtail our exploration, appraisal and development activities. Any asset-based venture or monetization may also require us to relinquish rights to some of our development projects or exploration prospects which we would otherwise develop on our own, or with a majority working interest.

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    Cash Flows:

 
  Three Months Ended
March 31,
 
 
  2015   2014  
 
  ($ in thousands)
 

Net cash provided by (used in):

             

Operating Activities

  $ (17,180 ) $ (85,673 )

Investing Activities

    113,262     45,614  

Financing Activities

        (597 )

        Operating activities.    Net cash of $17.2 million and $85.7 million used in operating activities during the three months ended March 31, 2015 and 2014, respectively, were primarily related to cash payments for seismic and exploration expenses incurred in the U.S. Gulf of Mexico and West Africa.

        Investing activities.    Net cash provided by investing activities for the three months ended March 31, 2015 was $113.3 million compared to $45.6 million for the three months ended March 31, 2014. The increase in net cash provided by investing activities for the three months ended March 31, 2015 was primarily attributed to a decrease in the purchase of investment securities. During the three months ended March 31, 2015, we purchased a total of $65.6 million of investment securities compared to $388.8 million during the three months ended March 31, 2014.

        Financing activities.    We had no material financing activities during the three months ended March 31, 2015 and 2014. The $0.6 million used in financing activities for the three months ended March 31, 2014 relates to payments for common stock withheld for taxes on equity-based compensation.

Critical Accounting Policies

        Our significant accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K for the year ended December 31, 2014. 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 2014 Annual Report on Form 10-K for the year ended December 31, 2014.

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.

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        There were no changes in our internal control over financial reporting during the quarter ended March 31, 2015 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

        There have been no material changes in the information provided under Part I, Item 3. "Legal Proceedings" in our 2014 Annual Report on Form 10-K for the year ended December 31, 2014.

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, 2014.

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

        None.

Item 3.    Defaults Upon Senior Securities

        None.

Item 4.    Mine Safety Disclosures

        Not applicable.

Item 5.    Other Information

        None.

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.

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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: May 5, 2015

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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.

35