Cobalt International Energy Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Cobalt International (CIE)

Cobalt International Energy (NYSE:CIE)

Q3 2013 Earnings Call

October 29, 2013 11:00 am ET

Executives

Joseph H. Bryant - Chairman and Chief Executive Officer

John P. Wilkirson - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

James W. Farnsworth - Chief Exploration Officer

Analysts

Ryan Todd - Deutsche Bank AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Al Stanton - RBC Capital Markets, LLC, Research Division

Richard M. Tullis - Capital One Securities, Inc., Research Division

John T. Malone - Mizuho Securities USA Inc., Research Division

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Operator

Good day, everyone, and welcome to Cobalt International Energy's Third Quarter 2013 Conference Call. Just a reminder, today's call is being recorded.

Before we get started, one housekeeping matter. This conference call includes forward-looking statements. The risk associated with forward-looking statements have been outlined in the earnings release and in Cobalt's SEC filings, and we incorporate these by reference for this call.

At this time, for opening remarks and introduction, I would like to turn the call over to the Chairman and Chief Executive Officer of Cobalt, Mr. Joe Bryant. Please go ahead, sir.

Joseph H. Bryant

Good morning, and thank you for joining Cobalt's third quarter 2013 financial and operational update call. Joining me on the call this morning are John Wilkirson, our Chief Financial Officer; and Jim Farnsworth, our chief exploration officer.

I'll begin the call with a few brief comments and then we'll turn the call over to John who will discuss our third quarter financial results. John will then turn the call over to Jim who will discuss the results of our Lontra and Mavinga discoveries that we announced this morning.

Early in 2013 we knew that this would be the busiest year in Cobalt's history, in terms of the number of impactful wells to be drilled. During this year, we have safely operated 3 deepwater drilling rigs and drilled significant exploration wells in the U.S. Gulf of Mexico and offshore Angola, while also participating in our first exploratory well offshore Gabon. Today, I'm happy to report that 3 of these 4 exploratory wells have resulted in successful discoveries. While it's too soon to discuss the scale, potential development or ultimate commerciality of these discoveries, I'm very encouraged that our exploration-based business model is delivering results, and should be for the foreseeable future. In our exploration results, reviewed over Cobalt's history, we have now drilled 11 unique exploration prospects in 3 global basins. Of these 11 prospects, 7 have yielded significant discoveries.

As a reminder, these discoveries include Shenandoah, Heidelberg and North Platte, in the Gulf of Mexico; Cameia, Mavinga, and Lontra in Angola; and Diaman in Gabon. This track record would be an extraordinary publisher for any company, and it's something that we are tremendously proud of for a company that, 8 years ago today, did not exist. Today, given our exploration success, I can say for the first time in our history that Cobalt has attained critical operating mass in 2 significant basins: Angola's Pre-salt and the Gulf of Mexico Deepwater. In addition to our already proven success, we have many more follow-on prospects in both basins already mapped and ready for drilling in the next few years. In addition, I believe we're on track to follow-up on our Diaman success in Gabon, with optimism and conviction that, that basin holds great promise as well.

Our strategy has always been too acquire large contiguous acreage positions, develop deep local knowledge while we explore for assets that aggregate into something of global exploration and economic significance. This is what we have done. The Shenandoah and North Platte as very large anchors in the Inboard Lower Tertiary in the Gulf of Mexico, and now with Cameia, Mavinga and Lontra in Angola's Kwanza basin. With this success, Cobalt will be active in these basins for decades to come.

This is a resounding evidence that our exploration machine is working, our technology is delivering as anticipated and our success is being driven by great people who are the Cobalt difference. Let me also be clear in another point. Cobalt has always, and will in the future, new grassroots exploration as our avenue into creating significant shareholder value.

Our business model is fairly simple in this regard. We will seek to recycle the cash flows generated from our production operations and our new exploration operations on a global scale.

Let me also say that I'm very proud of our team's unwavering refocus on safety and environmental protection in all of this year's drilling operation, which our team has executed without safety or environmental incident. These results are not happenstance, they reflect Cobalt's deep commitment to protecting people and the environment. It is a culture that we have build and consistently reinforce at Cobalt.

While Jim Farnsworth will have a lot more to say on a recent expiration success in a few minutes, let me now spend a few minutes discussing some non-exploration activities, beginning with the Heidelberg development project which was formally sanctioned by the partners in May of this year.

Anadarko, as operator, has indicated that it expects first production from the Heidelberg field in 2016. Cobalt owns a 9.375% working interest in Heidelberg. Of course, this development project is very important for Cobalt, as it represents our first revenue-producing operation.

At Cameia, in Angola, Cobalt has conducted a variety of subsurface evaluations, including simulations to help define and mature potential well locations for a number of development scenarios. In addition, we have acquired a new 3D Seismic survey over Cameia, which we are using to optimize our Phase I development well locations. We continue to mature our development approach and expect formal sanction of Cameia in 2014, followed by first production in 2017, assuming continued alignment with our partners, and Sonangol, among other things. Our current Phase I development project will consist of a 100,000- to 120,000-barrel a day facility. As a reminder, we own 40% working interest in, and operate, Cameia.

At Shenandoah, we anticipate that Anadarko, as operator, will spud an additional operational well in mid-2014. We own a 20% working interest in Shenandoah and we understand that first oil for Shenandoah should be anticipated in 2017 or '18, or thereabouts.

At North Platte, we acquired a 3D Seismic survey, covering approximately 1,350 square miles over the greater North Platte area. Our initial processing of this 3D seismic data is underway. The 3D seismic survey is designed to further improve the subsoiled imaging over our North Platte discovery, as well as several other Inboard Lower tertiary prospects in the greater North Platte area in which we own interest.

Work is also ongoing on a number of other studies that will help us define and evaluate our development options for North Platte. We own a 60% working interest in, and operate, North Platte. And based on our current views, we believe the field could be producing by the end of the decade.

Finally, we announced in August that we had executed a drilling contract with Rowan Reliance Limited, an affiliate of Rowan Companies PLC for the Rowan Reliance, a new build ultra-deepwater dynamically positioned drill ship that will support our Gulf of Mexico drilling campaign. Rowan Reliance drill ship will be capable of operating in water depths of up to 12,000 feet and drilling to measured depths of up to 40,000 feet. The contract provides for a 3-year commitment and expected to begin in early 2015, drilling North Platte appraisal wells and Inboard Lower Tertiary prospects that we operate in the greater North Platte area.

I'd now like to turn the call over to John for discussion of our third quarter financial results, after which, John will pass the call over to Jim. Go ahead, John.

John P. Wilkirson

Thanks, Joe, and good morning, everyone.

Our balance sheet remains strong, with liquidity at the end of the third quarter of over $2 billion. As of September 30, we had just over $1.6 billion of unrestricted cash and investments, with just under $400 million of cash and investments designated for future operations held in escrow and collateralizing letters of credit. In addition, and not reported in our balance sheet, is the drilling promote fund from $109 million, our Gulf of Mexico program with TOTAL.

As reported in this morning's press release, 2013 third quarter Cobalt's net loss was $160 million or $0.36 per basic and diluted share. Of this, $94 million or $0.23 per share are impairment charges related to the drilling of the Ardennes #1 well in the Gulf of Mexico and its associated leases.

In the third quarter, our accrued capital and operating expenditures were approximately $290 million. Of this, over $200 million was spent on drilling-related activity. For the first 9 months, our expenditures totaled approximately $670 million. We now expect our full-year expenditures will end up between $850 million and $950 million.

Given current expectations, our planned exploration and development activities, our balance sheet liquidity will carry us through 2014 and well into 2015.

I will now turn the call over to Jim will discuss our third quarter well results.

James W. Farnsworth

Thanks, John, and good morning, everyone.

As Joe said, 2013 has been the most active year drilling in Cobalt's history. We drilled important prospects in each of our operating basins and are, today, announcing additional important successes.

In Angola, we announced today that Lontra #1 well, located on Block 20, has reached its total depth, and the results of the drilling and evaluation program confirm an oil and gas discovery. Further evaluation, including a drill stem test is proceeding and will be required to assess Lontra's potential. We anticipate being able to discuss the Lontra #1 discovery in more detail prior to year-end.

Upon completion of the testing operations, we plan to mobilize the Petroserv SSV Catarina drilling rig to the Orca #1 pre-salt exploratory well, which will test the prospects we formally call Baleia. The Orca prospect is located in Block 20, approximately 15 miles to the Northeast of the Lontra prospect.

I'm also very pleased to report that the Cobalt-operated Mavinga #1 well, in Block 21, is also a pre-salt discovery. Cobalt has a 40% working interest in Mavinga. The Mavinga #1 pre-salt exploratory well is located approximately 8 miles northwest of Cobalt's Cameia field. The primary objective of the Mavinga #1 well was to test a carbonate mound structure, similar to that found in Cobalt's 2012 Cameia discovery. The well penetrated the mound objective off the crest of the structure and discovered approximately 100 feet of net pay. Both the mound reservoir and the oil quality appears to be very similar in nature to Cameia. Successful mini drill stem testing of the hydrocarbons, reservoir description tool sampling and full log evaluation of the hydrocarbon water zones indicates the presence of a productive mound at Mavinga. We estimate a potential gross oil comp of up to 650 feet at the crest of the Mavinga structure, updip from the Mavinga #1 well.

Cobalt conducted a conventional stem test, or DST, of the mound structure. Efforts to establish a sustained flow rate from the tested intervals were not successful however, and Cobalt is in the early stages of assessing the operational issues associated with the tests. Based upon the production of oil from the many drill stem tests, we are confident of the productivity of the mound zone at Mavinga #1. Additional drilling will be required to confirm the ultimate growth thickness of the mound and its reservoir quality however. We expect that the Mavinga discovery will be tied back to, and be part of, the planned Cameia development complex, also in Block 21.

Operations of Mavinga #1 are now complete, and the Ocean Confidence drilling rig has mobilized to the Bicuar #1A pre-salt exploratory well located south of Cobalt's Cameia and Mavinga discoveries on Block 21. The Bicuar #1A well's primary objective will be to test the hydrocarbon potential of the deeper stratigraphic intervals in Bicuar that are situated along the Mavinga, Cameia pre-salt trend on Block 21. We expect to be able to announce the Bicuar #1a well results in the first half of 2014. I'll remind you that Cobalt operates Bicuar with a 40% working interest.

It's worth restating that the 5 wells that now have been drilled into the northern Kwanza pre-salt basin, these being Cameia #1, Cameia #2, Azul #1 and now Mavinga #1 and Lontra #1, each has been successful in finding hydrocarbons. This is a remarkable and highly unusual start to exploration of an immense new basin.

With regard to our third quarter well results in August, we announced that the TOTAL Gabon-operated Diaman #1B exploratory well, located in our Diaba block, offshore Gabon, was successful in discovering approximately 160 to 180 feet of net hydrocarbons in the objective pre-salt formations. We were pleased to report Diaman #1B well was the first test of the pre-salt in Deepwater Gabon, and successfully confirmed the existence of a working petroleum system, including a salt field and high-quality reservoirs in our Diaba block. We are working with our Diaba partners to conduct a full analysis of the Diaman well results in order to determine a future exploratory and appraisal drilling plans on the Diaba block, in which we own a 21.25% working interest.

Also in August, we announced that we had reached a total objective depth of 36,552 feet in the Cobalt-operated Ardennes #1 exploratory well in the Deepwater Gulf of Mexico. While the well test at both the Miocene and Inboard Lower Tertiary objectives, unfortunately did not find commercial hydrocarbons and was subsequently plugged and abandoned. The Ardennes well was drilled with the Ensco 8503 drilling rig and was the deepest well drilled to date into Deepwater Gulf of Mexico.

Once Ardennes operations were finalized, we moved the Ensco 8503 to drill our Aegean #1 exploratory well, which is targeting Inboard Lower tertiary horizons. We expect to announce the Aegean #1 result sometime in the first half of 2014. Cobalt operates Aegean with a 6% working interest.

Let me start down the path of exploring the deep waters of West Africa and the Gulf of Mexico. One of my key concerns was whether early success could be repeated. Would one discovery in each basin lead to more discoveries? We developed a deep set of options in our portfolio, with that portfolio matured, the drillable valuable prospects. And finally, would it be possible to have the kind of success rates that industry has experienced in the Brazil pre-salt. While it's still too early to say what the ultimate success rates will be in the pre-salt West Africa or in the Inboard Lower tertiary in the Gulf of Mexico, I am very encouraged by the trend we are now seeing.

I'll leave you with a few final points. Cobalt has identified over 20 undrilled structures and prospects on our Angola blocks alone. If you add in our inventory in Gabon and the Gulf of Mexico, we clearly have a lot of work ahead of us. As Joe mentioned earlier, the exploration machine is clearly working. We are now applying the same approach, people and technologies that has been so successful in West Africa and the Gulf of Mexico, the new exploration ventures. We will continue to focus on areas that fit our business model and play to our strengths in search of the next great exploration play.

I will now turn the call back over to Joe.

Joseph H. Bryant

Thank you, John and Jim. I'm now going to open the call up for any questions that you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ryan Todd with Deutsche Bank.

Ryan Todd - Deutsche Bank AG, Research Division

I realized that you don't have all the data you're looking for yet. But any thoughts on, initially, what you've seen? Even if it's not an actual number, but relative to predrill expectations on net pay or reservoir quality.

Joseph H. Bryant

Ryan, you may have cut off early in your question. Could you repeat it so we got the whole thing?

Ryan Todd - Deutsche Bank AG, Research Division

Sorry. I was just looking for any initial thoughts you might have, relative to predrill expectations, in terms of what you've seen so far on net pay thickness or reservoir quality at Lontra.

Joseph H. Bryant

Sure. I'll let Jim handle that.

James W. Farnsworth

Yes. Well, just like at the same stage at Cameia, where it's still early days on our analysis of the Lontra data, and we expect to kind of review in more detail once we have the tests done. I will say, at Lontra, we are very encouraged by the reservoir quality we've seen. And as you may recall, reservoir quality was one of the key issues, key risks, frankly, that we saw prior to joining Lontra.

Ryan Todd - Deutsche Bank AG, Research Division

And the move to Orca, relative to drilling an appraisal well at Lontra. Can you walk through what the thought process was there?

James W. Farnsworth

Well, I think the primary thought process is that that's a great-looking prospect. And like all of our contracts in Angola, we have an obligation to drill a set number of exploration wells, and that's the next logical place to go, given the results we think we have at Lontra thus far.

Joseph H. Bryant

And we might add that, based on a recent seismic work, it certainly looks like a very large prospect in the block.

James W. Farnsworth

Yes. Thanks, Joe. As Joe was referring to, as we acquired a new survey over Block 20, and which has been of extremely high-quality -- and obviously we've been reevaluating that's in terms of the re-ranking all prospects. And Orca looks like an extremely attractive large prospect. And as you may recall, we believe that the Baleia #1 well was drilled back in the '90s, tested the edge of that structure.

Ryan Todd - Deutsche Bank AG, Research Division

Right. Yes. I guess. So there's nothing that you saw at Lontra that would make it less interesting to drill an appraisal well, it's the relative excitement of what you've seen so far at Orca?

James W. Farnsworth

Yes. I think also just being able to make sure we had the appropriate amount of time to design the best possible well to follow on at Lontra.

Ryan Todd - Deutsche Bank AG, Research Division

Okay. I guess, was there anything that you learned -- I mean, that you've seen on the Lontra result, at this point, that has an implication for your thoughts on Orca or is it still the same as before?

James W. Farnsworth

The main implication, as I mentioned, we found very good quality reservoir at Lontra, which encourages us for the entire block, including Orca.

Operator

Our next question comes from Evan Calio with Morgan Stanley.

Evan Calio - Morgan Stanley, Research Division

I guess, my first question is on Lontra. And not really to split your hairs here, on the language, but I know in the 2 prior locations where you had log data at Cameia and Shenandoah, but no DST, you provided color. In those instances, it was very encouraging. Both wells turned out to be very good, and there it was in the release. But, I guess I just heard you say you were encouraged but you didn't provide any color, I guess on slide 18 it is, in your release. I mean, am I kind of reading too much into the absences? Is the government a regulator here, on what you can't say or do you really have a different read based upon the log data versus where you were at the same time for those other 2 wells?

James W. Farnsworth

I think we are, actually, being consistent with how we manage the news out of Cameia, where at this same stage we chose, I think for the right reasons, to wait til after we had the test to provide more kind of data that you're looking for right now. So, while we're always working with our partners, the government, to ensure the data gets out when we all want it to come out. This is a case where we were actually following the same approach we did at Cameia.

Evan Calio - Morgan Stanley, Research Division

Okay. So, I mean, is it similar to say -- because you did make that disclosure, I think, in 2 different presentations, and that's why I'm just try to see if you're sending the same signal or if it's different here.

Joseph H. Bryant

Not sure. This is the way I think of this, is that at Cameia, that was kind of the first well in the basin, really for us, and a first significant well. And when we announced those results in, I think, December of '11 I think, we said we were very encouraged but the wanted to get a test off to make sure that our initial analysis was right. And then, if you kind of fast forward, we saw the same kind of rock in Cameia #2. And then we, as Jim mentioned, we've seen essentially the same reservoir petroleum system in Mavinga that we saw in Cameia. So we have very high confidence that those petroleum systems, from the hydrocarbon to themselves, to the rocks and the deliverability, is very consistent. What we're seeing on Lontra is the rock is slightly different, we think. We've got a lot of core that's being analyzed. But it is a different reservoir phase and I don't want you to read into that, that it is different in a bad way. We're actually pleasantly surprised with what we think the reservoir quality is at Lontra. But until we can actually get a drill stim test stem test done, and collaborate and corroborate all of the data that we've got in that area of the basin, the wise thing to do is to tell you that we're sure we have hydrocarbons there, oil and gas, and that we need to get a drill stem test off to tell you more. Does that help?

Evan Calio - Morgan Stanley, Research Division

That is very helpful. And then, Tim, with regard to that test, I mean is it the same equipment used from Mavinga? Is that on location? Any color on when you'd expect to commence a DST.

Joseph H. Bryant

The equipment is very similar. What's different on this test is the rig itself. And so we can do some things different because we have a lot more rig capacity to conduct a test here versus Cameia, and we're working through all that right now. And as we've said -- you all know, I'm wrong every time I predict anything, but I think the safest thing to do is to tell you we're at the stage now, where we're preparing for the test. Now, generally, that takes some time, and we'll try and get you some more data as soon as we have it, to be sure what it means.

Evan Calio - Morgan Stanley, Research Division

Great. And if I could, just one last one. On Mavinga. You mentioned, in the press release, it's expected to be a tieback to Cameia. Could you discuss your thresholds in terms of discovery size as a standalone development versus a tieback? And maybe any color in terms of why the well is so far off-structure. Did your kind of view, where that crest is, change? And I'll leave it at that.

John P. Wilkirson

Sure, let me handle that one. We had 2 objectives in the well. At the mound, which we think looks very similar to the Cameia mound, and a deeper syn-rift section. So we've positioned the well in order to, hopefully, optimally drill both those sections. And so the deeper the zone was not successful. Though we saw hydrocarbons, the reservoir quality was not we were hoping for. But the mound, we did test. We did evaluate the well. And as I mentioned, it looks very similar to what we've seen at Cameia, both terms of the oil quality and reservoir quality. Kind of threshold economics. The structure is smaller than Cameia. We believe the accumulation is smaller than Cameia, and therefore, that drives our comments around a likely tieback to Cameia complex. In addition, we did actually see an oil/water contact at Mavinga, which we have yet to see in Cameia. And that effectively delineates, at least on the extreme sides of the structure, the scale of the potential accumulation there.

John P. Wilkirson

Back to one of your questions about the reservoir, because Joe did describe a property, that Cameia and Mavinga have a lot of similarities in that they are both mound structures. And so we've got, now, 3 wells in that type of facies. A lot of experience with that. What we had anticipated at Lontra was a different type of reservoir facies, that was more similar to what has been seen in the Campos Basin and the Santos Basin in Brazil. And so this was an important test for us, but it was also a new test of a different facies. And so that's why we want to be careful that we understand the implications of what we found. I will emphasize, we're very optimistic about the reservoir quality we have seen at Lontra.

Evan Calio - Morgan Stanley, Research Division

I mean, did that different facies drive part of your decision to drill Orca next? Meaning that you want to study more, to understand the Lontra West location or is it just, as you mentioned before, you're very encouraged on the prospectivity at Orca?

James W. Farnsworth

I mean, the direct answer is, it's is such a large structure and we're thinking about where do we put the next 8.5 inch hole on such a massive structure. We want to make sure we do it in the right place. Simple as that.

Joseph H. Bryant

And I'll just play along there. And the other thing we keep coming back to, and what's happened in the last several months as the team is working through these multiple prospects that Jim referred to, we get more and more enthused about the potential of Orca. And so we're clearly interested in understanding that prospect's potential. At the same time as we're wanting to make sure we get an appraisal well in the right place on the Lontra structure.

Operator

Our next question comes from Ed Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

It's always nice to get a little bit of extra data for the geologists. So I'm sure they're going to working hard. So just some simple questions you might not be able to answer on Lontra. I mean, were you able to determine a gross pay? Obviously, net to gross might be difficult at this point.

James W. Farnsworth

We think we have, but again, we're looking to the test to confirm that.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And was the reservoir, in terms of the overall structure as opposed the reservoir quality, was it more complex or was it similar to the predrill? Sort of seemed like sort of one zone that you were going for.

Joseph H. Bryant

It was pretty consistent with what our expectations were.

Edward Westlake - Crédit Suisse AG, Research Division

Right. And then gas versus oil. Obviously, I think, on the call this morning, BP were saying this is a potentially large discovery. Obviously, it may be a bit gassier relative to, perhaps, some of the other plays. And obviously the PSE terms don't necessarily we have exposure for how to monetize the gas. But, presumably, that provides some drive as well to the reservoir, which may improve the recovery of the oil. Maybe just talk a bit about how you're thinking about the gas to oil ratios that you've seen and how that might impact your view of the development, I know, again, very early stage.

Joseph H. Bryant

Ed, I'll try that. First of all, you're right. The PSE that we have -- not only we, but virtually everybody else -- does not include gas rights. The issue here is that we know there is some gas in this structure, and we know there is oil in this structure. What I would say this is not is a nonassociated gas field. At least, that's our current view. So this is not a big gas field. It is an oilfield plus a very complex gas field based on the preliminary data we have. Notwithstanding that, it does appear to be a significant discovery.

Joseph H. Bryant

And the other thing that's interesting here is that Lontra itself is not that far offshore and it's not that far from an unmet gas demand in Angola that I think, ultimately, it's in not only the country's interest, Senegal's interest, but the contractor's interest, being BP, Cobalt, et cetera, to monetize all products that we've discovered there. That'll be the subject of further discussions after we define what's there and we work with all of the partners and the concessionaire in terms of how to monetize all of the products efficiently and effectively. Does that help?

Edward Westlake - Crédit Suisse AG, Research Division

That is very helpful. And then a very small one. It looks like Mavinga, the aerial extent, will be smaller than the sort of predrill estimates a little bit, just in terms of reading the presentations. Do you have a sort of an updated thought perhaps about the aerial extent at Mavinga?

John P. Wilkirson

I don't at this point, but I think your reading is accurate.

Operator

Our next question comes from Brian Singer with Goldman Sachs.

Brian Singer - Goldman Sachs Group Inc., Research Division

Just a little bit more on the wordsmithing. Because you, in the past, in Angola, have tempered your comments prior to drill stem test. But since you've twice now called Lontra a significant discovery, can you just expand a little bit more on what is the justification there at this point? Because I believe that is different than pre the drill stem test at Cameia, where you did talk about encouragement. I don't believe you call it a significant discovery, and maybe talk about how you define what is defined as significant.

James W. Farnsworth

Okay. I think it goes back to the scale of the footprint of Lontra structure is very large. So, obviously, when you make a discovery there, almost by definition, it's going to be significant. I can't speak for Joe, but that's how I would describe it. And then as I mentioned, we're encouraged by the reservoir characteristics as well. But we're holding our judgment until we have the test done, which again will hopefully be done by the end of the year.

Brian Singer - Goldman Sachs Group Inc., Research Division

I guess, does having knowledge of Cameia and Mavinga help in having the confidence that you have a discovery here? Or if you would've seen the exact same thing, if you would have drilled this well first in 2011, before drilling Cameia, would you have had the same confidence in calling this a discovery or significant discovery at that point?

James W. Farnsworth

Well, I think we clearly have learned a lot through Cameia and Mavinga, both in terms of how the reservoir's set up and hydrocarbons look like on logs. Having said that, if we had drilled Lontra first and had the same results, it would clearly have been a significant discovery. That would have been our interpretation.

Brian Singer - Goldman Sachs Group Inc., Research Division

Great. And then 2 last quick ones. First, have you seen the oil/water contact at Lontra?

Joseph H. Bryant

Brian, that's one of the questions that's going around in our heads right now. One interpretation is, yes, we've seen oil/water contact, but we need to do some testing to be clear on that.

Brian Singer - Goldman Sachs Group Inc., Research Division

Okay. And lastly, does what you've seen at Mavinga, does that at all change how you're thinking about the size or extending the size of the Cameia facility or would the resource of Mavinga essentially being produced after Cameia's done at the same -- or extend the rate of the facility that its current expectation before it declines?

Joseph H. Bryant

Ye.s Really, the Cameia size is not so much -- the Cameia facility size is not so much a resource question as it is a question of how big these facilities can be built in an efficient way. And that's why you're seeing so many of these FPSOs in the, call it 80,000- to 100,000-barrel a day capacity. Because, generally, on the ships that this equipment is put on, that's about the maximum size of the facility that can fit there. So we wouldn't want to change that because then you start building the spoke ships and hulls and facilities which becomes one-off kind of things, as opposed to design one, build many, which is the current state of the FPSO market. So we see Mavinga as great news and that it adds resource to what we think will be a highly economic development at Cameia in a very, very efficient way.

Operator

Our next question comes from Al Stanton with RBC.

Al Stanton - RBC Capital Markets, LLC, Research Division

I've got a couple of questions. But I just wanted to go back the answer to that Lontra question just now. When you say you need to look at the oil/water contact, when you say drill stem test, are you talking about just one test or are you talking about a campaign of tests?

James W. Farnsworth

Right now we're not talking about a campaign of tests. And keep in mind, these tests are very, very expensive. $50 million or so. So they take a long time to do so. That's part of the engineering and subsurface work that we do, Al, as we try and design that test where we can maximize all of the information we get out of it. And of course, we clearly always want to stay away from water zones if at all possible.

Al Stanton - RBC Capital Markets, LLC, Research Division

That kind of feeds into my second question in terms of the cost. I mean, the time to drill the wells isn't coming to down and I assume seen the costs aren't coming down there either. So in terms of the learning curve and the drilling experience, what are your projections for the well cost next year?

James W. Farnsworth

Too early to talk about that, but will be able to talk about that later on when we talk about our 2014 plans. Let me also address the premise of your question. And just like in Brazil, where the well costs have dropped dramatically, from well #1 to where they are today, we're drilling these wells significantly faster, which means cheaper. Because principally of our mud systems and our drill bit that we're able to use that didn't exist when we started a few years ago. So we will be able to, I think, have some good news on that front, that we're going to get these well costs down significantly from where they are today.

Al Stanton - RBC Capital Markets, LLC, Research Division

And then can I just finish then with a question for the geologist, in terms of the Mavinga cross section. Is it close to spilling in any direction, maybe into the page? And then with respect to that, where are the structures getting charged from? Is it from the West?

James W. Farnsworth

Well, the spill point, as you see on Page 19, if you drew a horizontal line across from the one side of the salt to the other side of the salt, that would effectively be the spill point. So we're updip of the spill point. In terms of where it's charged from, we can only speculate since we can't actually track molecules or ore, but it's probably coming both at the West and from the East.

Al Stanton - RBC Capital Markets, LLC, Research Division

Right. And then, sorry, just one final one, coming back to the point about the spill point. I mean, are any of the structures you drilled so far able to spill?

James W. Farnsworth

Well, we believe the Cameia is still to spill and perhaps beyond spill. The actual -- emphasize how important it is that now we've drilled a number of structures here now, between ourselves and the industry, and they've all contained hydrocarbons. And that's a pretty unusual start to the exploration of basins.

Operator

Our next question comes from Richard Tullis with Capital One.

Richard M. Tullis - Capital One Securities, Inc., Research Division

Most of my questions have already been answered, but just going back to Cameia, Joe. With the project expected to be sanctioned next year and the facility range already designed, what's the estimated reserves in the discovery based on your data to date?

Joseph H. Bryant

We've always been absolutely clear on this point that we've talked about threshold reserves for the project being in the 200-million to 250-million barrel range. All of our work, thus far, confirms that as the threshold. Until we actually sanction the project and have anything else to talk about, that's where we're confident.

Richard M. Tullis - Capital One Securities, Inc., Research Division

Okay. So nothing has changed on any subsequent data evaluation?

Joseph H. Bryant

Not a final answer, in terms of our threshold. A lot changed in terms of this parameter and that parameter, but when you aggregate it all together, the answer is the same.

Richard M. Tullis - Capital One Securities, Inc., Research Division

Okay. And should you decide to expand your presence into other basins, what areas would be highest on your preferred list?

Joseph H. Bryant

Well, frankly, I'm not prepared to discuss exactly where we would be going. But I would say we will try to play out to our strengths. And I think our strengths are in understanding deepwater systems and imaging around complex structures. So that kind of circum-Atlantic basin is probably a pretty good place to start.

Operator

Our next question comes from John Malone with Mizuho Securities.

John T. Malone - Mizuho Securities USA Inc., Research Division

Just a quick couple on Mavinga. The drill stem test, your slide says it's operational issues. So you've ruled out sort of reservoir issues as being the problem with the drill stem test?

Joseph H. Bryant

Yes. I think we specifically said operational, because we think it may well have been an incompatibility issue with our simulation fluids, our drilling mud system and the cement system we had in the well. That's kind of our first priority in terms of understanding what happened. In fact, what we have seen in the well was reservoir that was very similar in nature to what we've seen in Cameia, and that's what has given us confidence that as we go updip into the top of the structure. We'll most likely see a very similar type of -- not only hydrocarbon but reservoir and reservoir performance that we saw at Cameia.

John T. Malone - Mizuho Securities USA Inc., Research Division

Do you think that net pay of 100 feet will stick and as you head towards the crest or is that sort of what you'd expect across the mound?

Joseph H. Bryant

No, I'd expect that to thicken.

John T. Malone - Mizuho Securities USA Inc., Research Division

And then the unsuccessful -- the deeper horizons you saw, are those analogous, and Mavinga, to the ones you sign Cameia in second drill stem test? And what is that -- if so, what does that mean for the rest of Block 21 deeper horizons? Are you sort of ruling that out now?

James W. Farnsworth

No, I don't think so. Just to remind everyone. What we saw in Cameia #2, the deep zone, was what appeared to be a porous and permeable reservoir that did not have trapped hydrocarbons. And we did not see that in the Mavinga #1 well, but we did see indications of hydrocarbons down there. So, obviously, we need to find a place where we put those 2 together. And between the 2 wells, we're encouraged to continue to explore, not only Block 21 but also Block 20 for deep reservoirs.

John T. Malone - Mizuho Securities USA Inc., Research Division

And then last question. You're guiding up annual CapEx guidance, as a reference on the slide to Block 20 obligations as part of it. Can you guys elaborate on that a little bit?

John P. Wilkirson

This is John Wilkirson. That's associated with our ongoing obligations we have on Block 20 that are part of the original award of the Block.

Operator

[Operator Instructions] Our next question comes from Curtis Trimble from Global Hunter.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I was wondering, at this point, if you could talk maybe about lessons learned at Lontra and any applicability to Lontra West, in either the drill test, et cetera.

Joseph H. Bryant

I'll let, maybe Jim, talk about any geology lessons learned. But I think that we've learned a lot, and I can't overestimate how much drilling these wells has taught us, in terms of how to actually get these wells to TD. So, yes, we could spend hours and hours talking about lessons learned operationally, what kind of mud you need, what kind of bits and what kind of penetration rates, what we learned from logs. I said to someone the other day that what we know today versus what we knew 2 years ago is just staggering in terms of this basin. So almost every day around here, we learn something new and put it in our lessons learned file. But it'd be far too expensive to talk about here. Jim, do you have...

James W. Farnsworth

Yes, I'll just touch on the geology. One of the benefits of the new 3D survey is that we thought we saw a characteristic on the seismic data, which would imply high quality reservoir. That's where we located the first well on Lontra. We see that same characteristic in Orca, and so that's given us greater confidence that if we drill that same type of seismic signature, we should see high quality reservoir. The Lontra West well was actually targeted at something different and so we don't know yet what that facies will mean, but it's also one of the reasons we want to go to test that same facies at Orca, it's because it looks so good at Lontra. Anything else, Curtis?

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Yes. It's just kind of hit back at Orca, in kind of how the prior experience from the '96 success, the Baleia and 87 meters of discovered pay there. Similar structure or features what you saw at Lontra, at Baleia, or do you have information on that? How did the success or the data you've got from Baleia influence plans or expectations for seismic, et cetera, at Orca?

James W. Farnsworth

Well, obviously, when you have a well that's drilled on the edge of the structure with oil in it, it influences our thoughts on the structure. That, in combination with the new seismic data, has opened our eyes to the potential of Orca. So we had -- prior, we just had this well with some indications of oil. But now we can put it in context, both in terms of the structural scale and the likely reservoir facies. And so we can see a distinct difference between where Baleia was drilled and where we're going to drill our Orca #1 well, which we think -- what we're asserting is we think the reservoir quality will be even better at the Orca #1 well than what the previous operator saw back in 1996 at Baleia.

Operator

Our next question comes from Joe Allman from JPMorgan.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Joe, when you guys are talking about a discovery, whether in a press release or when you're just talking about on the conference call and whatnot, do you mean commercial discoveries or might you also mean sometimes technical discovery that may or may not be commercial?

Joseph H. Bryant

My threshold for commercial discovery is pretty simple in the sense that when we sanction a project, it's commercial and we're going to invest in the development of the project. And so, in our case, we clearly have one of those, that's Heidelberg, and we've got another one marching towards commercial discovery, that's Cameia, and we probably have a couple of more there right behind it. When I say discovery, I mean we have reason to believe that there's measurable quantities of hydrocarbons in the well, that we will chase and pursue and appraise and invest to find out what's there. That's different than a well that you drill and may have some gas shows or oil shows, and we look at each other and we say, we're walking away from that, as we've done in a few wells, because we do not believe that's a discovery. So I think we've always been very consistent. Anything that we called a discovery has been a discovery and is moving towards appraisal, development, and eventually, production. Maybe Jim would like to add in on that.

James W. Farnsworth

Yes. Just to confirm what Joe said. I mean, when we talk about discovery, internally, we're not talking about things we have a whiff of gas or small amount of hydrocarbons of any type. We're looking at it as a feature where we think we have clear potential for commercial discovery. But we have not gotten to that point yet, of seeing it as commercial, and that will require more work, including the DST we're preparing to perform over the next few weeks.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Okay, now that's helpful. And then on Lontra, specifically, what evaluations did you do there? And at the same time can you just talk about the evaluations you did besides the mini drill stem test, the evaluations you did at Mavinga?

Joseph H. Bryant

Well, it's really the same suite of evaluations we've been using at Cameia. So there's cores, rotary sidewall cores, there's conventional cores. There's a full suite of electric logs, including imaging logs, and all the conventional logging tools that you can possibly imagine and some that are relatively new as well. So we've taken the same evaluation approach to Lontra and Mavinga that we have at Cameia. It goes back to the earlier question about what have we've learned from drilling those wells, and what we've learned is it takes every single bit of analysis, including a DST, to understand what you have in a carbonate reservoir like this.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

So do your data give you enough to talk about the gross and the net pay at Lontra?

James W. Farnsworth

Not at this point. But I think, by that time we have the DST, we should be there.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Okay, got you. And then, Lontra, how far are you from the crest at Lontra?

James W. Farnsworth

I don't remember the lateral distance. Apologize. It's not that far.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

I'm sorry, Jimmy, did you say not that far?

Joseph H. Bryant

I would add though that as we know, from last several years, the shape of the Lontra structure is much different than the shape of the Mavinga, the Cameia, the core structure. So you're not going to see the basalt closures, as prominent at Lontra, but we've always said that.

James W. Farnsworth

I may have misunderstood the question. Were you asking how far off Mavinga's crest or Lontra crest?

Joseph D. Allman - JP Morgan Chase & Co, Research Division

No, I actually have the same question for both, but my question was on Lontra itself.

James W. Farnsworth

Okay. Well, Lontra, as Joe mentioned, Lontra's a different type of structure, and it's big and broad and doesn't have the same structural leaf that either Mavinga our Cameia has. So I just don't know the lateral distance between the well location and the absolute crests. But they are fundamentally different type of structures.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Okay. So the same question for Mavinga. So how far you away from the crest at Mavinga?

James W. Farnsworth

Unfortunately, I got the same answer. I don't know exactly how far away it is. It's one of those questions I did not anticipate.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Okay. And back to Lontra for one second. So, Joe, you were indicating that Lontra is primarily an oilfield with complex gas. Could you just elaborate on that, please?

Joseph H. Bryant

I didn't say it's primarily an oilfield. What I've said is -- I hope I've said is that we know there is oil in Lontra and we know there is some gas in Lontra. But what we don't know is the splits between the oil and the gas, and exactly where it is in the structure at this point, and that's why we need to do some more work.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Got you, okay. Okay, and then at Mavinga, I guess you gave data about that 650 feet of gross column at the crest. What can we take from that data based on the other data you gave us in the press release? So you gave a 650-feet gross potential column, a 100 feet in net pay. So what was your intention of including that data and what are we supposed to interpret from that?

Joseph H. Bryant

Well, if you look at the diagram, Page 19, what I was trying to do there is -- and I've kind of stippled in red where we believe the mound is. And that mound, as I mentioned, looks very similar in nature to what we've seen at Cameia. And so while we don't know what the net to gross would be at the top of the structure, by inference, at looking at Cameia, we'd expect a very high net to gross, 70% plus.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

Okay, that's helpful. Then I think you said that you might have found the oil/water contact at Lontra. Can you just clarify that? And what about at Mavinga?

Joseph H. Bryant

Again, we're too early at Lontra to be specific on that, and I think Jim said, at Mavinga -- I'll let him answer.

James W. Farnsworth

Yes, we do have an oil/water contact at Mavinga.

Joseph D. Allman - JP Morgan Chase & Co, Research Division

But at Lontra, there's one interpretation that, yes, you have hit the oil/water contact?

James W. Farnsworth

We're looking at those evaluations right now. And I hate to be vague, but we really do want to have that test information before we understand and can describe where any contacts are.

Operator

Our next question comes from Michael Glick with Johnson Rice.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Just one quick question. As we look towards 2014, is it safe to assume you guys will maintain a 2-rig continuous program in Angola?

Joseph H. Bryant

That's our current plan. Of course, we'll start off the year with a 2-rig program, being the Ocean Confidence, which is drilling Bicuar now and the Catarina, which is under a long-term contract. And we're in discussions and tossing around options, what rig we would backfill the Ocean Confidence with next year, but we have nothing to announce on that.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

And would you most likely keep 1 rig in Block 20 and another in Block 21?

Joseph H. Bryant

No, I can't say that simply because, well, it's like you heard us today, we'll put the rigs where they have the most impact on our portfolio. And so, between Blocks 9, 20 and 21, we'll put the rigs where we need to put them.

Michael A. Glick - Johnson Rice & Company, L.L.C., Research Division

Got you. And then just one question, kind of on the fiscal terms. Block 20 development areas are ring-fenced, in terms of cash flows, and Block 21 is block-specific?

John P. Wilkirson

Yes, that's correct.

Joseph H. Bryant

Thanks Michael. I think there are no more questions in the queue, so let me wrap up the call here. It's right at an hour. I certainly want to wrap up by saying that we're very pleased to be able to share with you these highly-anticipated well results today, and overall success that Cobalt has had in moving our portfolio forward. In 8 short years, we do believe we've built an exceptional team of professionals, working in both Houston and Luanda. We've amassed an outstanding acreage inventory in both of our offshore below-salt basins. We've announced 3 important discoveries in the Gulf of Mexico and 4 in West Africa. We're already pursuing our next wave of exploration opportunities. As Jim mentioned, our balance sheet is strong. We are very proud of these results and we look forward to creating more good results in the future. And I do want to thank everybody for your continued confidence in Cobalt. So thank you for joining us today. You all have a safe day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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