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Cobalt International Energy Inc Reports Operating Results (10-Q)

November 12, 2010 | About:
10qk

10qk

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Cobalt International Energy Inc (CIE) filed Quarterly Report for the period ended 2010-09-30.

Cobalt International Energy Inc has a market cap of $3.9 billion; its shares were traded at around $10.96 . CIE is in the portfolios of George Soros of Soros Fund Management LLC, HOTCHKIS & WILEY of HOTCHKIS & WILEY Capital Management LLC, Mario Gabelli of GAMCO Investors.

Highlight of Business Operations:

On November 9, 2010, we entered into a special standby rate and potential suspension agreement (the "Standby Agreement") with ENSCO Offshore Company ("Ensco") in which we obtained a special reduced standby rate of $210,000 per day, plus other amortized costs, for the Ensco 8503 drilling rig. This special reduced standby rate will be applicable upon delivery and our acceptance of the Ensco 8503 drilling rig, which we currently expect to occur in early 2011, for up to one year after such time or, if earlier, until we are able to resume drilling operations in the U.S. Gulf of Mexico, subject to certain limitations. Our original two year term for use of the Ensco 8503 is not affected by the Standby Agreement and such term is expected to commence at the conclusion of the term of the Standby Agreement. The special reduced standby rate will be paid directly from the $186.0 million that was placed in an escrow account established in December, 2009 as a guarantee of our performance of our contract with Ensco related to the Ensco 8503 drilling rig. In addition, we are seeking additional opportunities to further reduce our costs associated with the Ensco 8503 drilling rig. On August 10, 2010, we entered into a like-kind exchange agreement with Shell Offshore Inc. ("Shell") and TOTAL in which we assigned a 22.5% interest in Keathley Canyon blocks 163 and 207 to Shell in return for Shell assigning to us a 37.5% interest in Keathley Canyon block 162. Concurrently, TOTAL assigned a 15% interest in Keathley Canyon blocks 163 and 207 to Shell in return for Shell assigning to it a 25% interest in Keathley Canyon block 162. Keathley Canyon blocks 162, 163 and 207 comprise our Aegean prospect, in which we now have a 37.5% interest. TOTAL and Shell have a 25% and 37.5% interest, respectively. Concurrently with entering into the exchange agreement, we also executed the related joint operating agreement in which we were named the operator of these blocks. On August 7, 2010, the Ocean Monarch drilling rig was released back to Anadarko Petroleum Corporation ("Anadarko"), not having spud our North Platte #1 exploratory well. See "Rig ContractsOcean Monarch Drilling Rig." West Africa:

We recorded a net loss of approximately $35.2 million. Expenditures were $28.9 million, consisting primarily of seismic acquisition costs and general and administrative related expenses. Expenditures were $105.4 million for the nine months ended 25

As discussed in "Impact of the U.S. Gulf of Mexico Oil Spill," we do not know when we will be able to resume any drilling operations in the U.S. Gulf of Mexico and, therefore, we do not know when we will be able to use the Ensco 8503 drilling rig. In an effort to mitigate payments associated with a drilling rig we cannot use, we entered into negotiations with Ensco to obtain a special reduced standby rate for the Ensco 8503 drilling rig. On November 9, 2010, we concluded such negotiations and entered into the Standby Agreement with Ensco in which we obtained a special reduced standby rate of $210,000 per day, plus other amortized costs, for the Ensco 8503 drilling rig. This special reduced standby rate will be applicable upon delivery and our acceptance of the Ensco 8503 drilling rig, which we currently expect to occur in early 2011, for up to one year after such time or, if earlier, until we are able to resume drilling operations in the U.S. Gulf of Mexico, subject to certain limitations. Our original two year term for use of the Ensco 8503 drilling rig is not affected by the Standby Agreement and such term is expected to commence at the conclusion of the term of the Standby Agreement. The special reduced standby rate will be paid directly from the $186.0 million that was placed in an escrow account established in December, 2009 as a guarantee of our performance of our contract with Ensco related to the Ensco 8503 drilling rig. In addition, we are seeking additional opportunities to further reduce our costs associated with the Ensco 8503 drilling rig.

Seismic and exploration. Seismic and exploration costs increased by $12.7 million during the three months ended September 30, 2010, as compared to the three months ended September 30, 2009. The increase in seismic and exploration costs during this period was primarily due to (i) a $9.8 million increase in seismic and exploration costs incurred in the U.S. Gulf of Mexico and for West Africa and (ii) a $2.9 million accrual for force majeure costs related to the drilling rig and other equipment and services which were to be used to drill the North Platte #1 exploratory well that was suspended as a result of the Deepwater Horizon incident. The $20.2 million of seismic and exploration costs incurred during the three months ended September 30, 2010 consisted of (i) $12.5 million and $3.8 million incurred for seismic data acquisition and processing for the Gulf of Mexico and offshore West Africa, respectively, (ii) $1.0 million for leasehold delay rentals and (iii) $2.9 million relating to force majeure expense.

Dry hole expense and impairment. Dry hole expense and impairment for the three months ended September 30, 2010 includes charges of $0.6 million for pre-spud costs for exploratory wells. In addition, for the three months ended September 30, 2010, we recorded an allowance of $2.3 million against future impairment on the carrying value of our unproved leasehold properties.

General and administrative. General and administrative costs increased by $4.8 million during the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. The increase in general and administrative costs during this period was primarily attributed to a $3.7 million increase in costs related to equity-based compensation and staff additions, a $1.9 million increase in office related support expenses, offset by a decrease of $0.8 million in legal and other fees.

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