Cobalt International Energy, Inc. (NYSE: CIE) an independent exploration and production company, announced  that the U.S. Justice Department has closed its ongoing investigation into the company’s Angola operations involving the Foreign Corrupt Practices Act.

The DOJ probe was the last remaining FCPA investigation by any U.S. regulatory agency into CIE’s Angolan operations, with no regulatory action taken against the company. By virtue of this, CIE is expected to monetize its Angola Assets. This move, if materialized, is expected to provide short term liquidity and financial flexibility to the company.

The company’s liquidity deteriorated significantly in the past as it is burning through cash. Pressure on liquidity intensified further due to delays in materialization of asset monetization plans and no commercial production/operational cash inflow for the company. This has constrained financial flexibility and liquidity. These conditions manifested higher capital requirements for CIE and resulted into high reliance on incremental funding and external cash flows.

Description

Cobalt International Energy, Inc. (NYSE: CIE) is an independent exploration and production company active in the deep-water U.S. Gulf of Mexico and offshore West Africa. CIE was formed in 2005 and is headquartered in Houston, Texas.

CIE had not yet begun commercial production until last January. It had spent almost a decade in raising funds to finance its deep-water exploration and development initiatives. In the process, CIE’s balance sheet has become extremely leveraged, but in order to prove the funnelling & bring some of the company’s discoveries to production, it has continued exploring and establishing commercial viabilities.

However, even projects which are fundamentally viable will cause liquidity challenges and would have a constrained impact on the business of the company until it reaches up to the production levels.

Notwithstanding CIE’s pre-operative stage, Anadarko Petroleum’s (NYSE: APC) Heidelberg project delivered first oil in mid-January, which is a facility that CIE owns a 9.375% stake. Anadarko discovered Heidelberg in 2009 and began constructing the production platform in 2013 before finally producing oil last year.

While Heidelberg has performed as expected, it only supplied CIE with $13.7 million in cash flow from operations through the first nine months of the year.

Given high costs of developing offshore fields, CIE planned to live off its Angolan assets in 2015 for $1.75 billion. However, that deal could not be implemented, impacting its financial flexibility as CIE continued to burn through cash. Because of that, CIE had to obtain high-cost funding so it could have a bit more liquidity. It completed a debt exchange and financing transaction that raised $500 million of liquidity and pushed out half of its $1.38 billion in debt by another four years. The company also offered creditors 30 million shares of its common stock, which diluted existing shareholders by 7%.

CIE is burning through cash as it continues to appraise its acreage position, which means it will need to access outside funding to continue operating. This is likely to lead to significant dilution. The financial position of the company has impacted its equity performance as well. The shares have fallen by around 70 percent during 2016 and have declined another 22.8% during January 2017.

CIE’s present and future expenses are much higher than its expected cash flow. At its current spending rate, it has about a year’s worth of internal funding left. That likely means more debt or equity dilution over the medium term.

 

Key Risk Factors & Stock Influences

Some key influences that might govern future stock price performance include:

• Future developments that may, individually or collectively, adversely impact the company’s plan to begin commercial production. CIE’s inability to begin commercial operations as per expectations, may negatively impact the overall business & financial risk profile of the company.
• The company is expected to witness significant liquidity pressure due to its already highly leveraged capital structure and capital intensive operations, involving a longer gestation period. In addition, additional funding or refinancing pressures will increase for CIE on account of weak systemic liquidity.
• The company raised $500 million so the unrestricted cash balance now is in the range of $900 million. However, it would need significant incremental capital to finance upcoming operations. CIE’s present liquidity is just sufficient for another year.  Future equity issuances will dilute the share price significantly.
• Company’s ability to monetize the positive developments in its Angola leases. More financing moves will be necessary if the company could not translate it into a favorable situation.
• The company’s ability to timely service its debt obligation is expected to remain a critical contingency over the medium term. Constrained liquidity and aggressive capital structure will continue to impinge the credit risk profile of the company,

 

 

 

Earnings Review

CIE announced a net loss from continuing operations of $213.7 million, or $0.52 per basic and diluted share for the third quarter of 2016, compared to a net loss from continuing operations of $49.7 million, or $0.12 per basic and diluted share, for the third quarter of 2015. The increase in loss is mainly attributable to the Rowan contract amendment of $95.9 million and the additional write off associated with the Goodfellow exploration well of $42.0 million, which together resulted in a $0.34 per share loss during the quarter.

The full year expected capital expenditures for continuing operations is likely to be between $525-575 million in 2016.

The company had more than $400 million of unrestricted cash on the balance sheet and after its latest financing moves it is around $900 million. There is some production income as well, but that is presently negligible.

Here it is imperative to note that these positive developments at the Angola Assets may not be completely sufficient to support the financial need of the company.

Any asset sale would just be a temporary comfort for CIE because, given its pre-operative nature, the company would need significant ongoing funding to sustain its development projects. Because of that, it will need to continue seeking outside capital to finance expansion. That funding could come from additional asset sales, more debt, or further dilution.

The company’s shares opened at $.82 on February 13, 2016. The current RSI is 25.85

Summary

Asset sales will not lead to the desired full value until oil prices are higher and any significant equity offering could further dilute existing investors and adversely impact the stock price. Should the Angola Assets developments continue to proceed in a positive direction, CIE is expected to witness an immediate recovery in its liquidity. Also, this would partially mitigate the present financial challenges of the company.

 

 

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