Cobalt International Energy's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  Includes: CIE
by: SA Transcripts

Cobalt International Energy Inc. (NYSE:CIE)

F2Q11 Earnings Call

July 27, 2011 11:00 a.m. ET

Executives

Joseph Bryant – Chairman, CEO

John Wilkirson – Chief Financial Officer

Van P. Whitfield – EVP, Operations and Development

Analysts

Evan Calio – Morgan Stanley

Joseph Allman – JP Morgan

David Heikkinen - Tudor Pickering

Brian Singer – Goldman Sachs

Ed Westlake – Credit Suisse

Richard Tullis – Capital One

Operator

Good day everyone. And welcome to Cobalt International Energy’s Second Quarter 2011 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 risks associated with forward-looking statements have been outlined in the earnings release and in Cobalt’s SEC filings and will 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 CEO of Cobalt, Mr. Joe Bryant. Please go ahead, sir.

Joseph Bryant

Good morning, and thank you for joining us on Cobalt’s second quarter 2011 earnings and operational update call. Joining me on the call this morning is John Wilkirson, our Chief Financial Officer. I have a few brief comments before I turn the call over to John for a quick review of our financial results.

We focused all of our attention in the second quarter and five principle areas that we believe will deliver value to our shareholders. These include one, completing our success for follow-on stock offering, which provided Cobalt an even stronger balance sheet. Two, completing our operational readiness in Angola to start our initial Pre-salt exploration wells Bicaur and Cameia. Three, completing the goal change and responding to offer our eventual 40% working interest in Block 20. Four, submitting all required material for our North Platte and Ligurian Applications for permit to drill in the Gulf of Mexico. And five, continuing our efforts to minimize cash outlays while ensuring that we’re fully prepared to resume operations in the Gulf of Mexico in 2011. I’m happy to say that we were successful in each of these endeavors.

As you know, we launched our follow-on offering April 1st and closed the transaction on April 15th, having raised an additional $499 million before expenses.

I want to thank all of the shareholders who participated in this offering, including those of you who are new shareholders of our company. With our successful offering, we feel that we are well funded to execute our planned explorations and appraisal programs through the end of 2013.

In Angola, we were ready to begin our drilling program by the end of the second quarter but we’re not able to commence operations until July 14th, 2011 due to the late arrival of the Diamond Offshore Ocean Confidence drilling rig. On July 19th, we commenced our initial two well Pre-salt exploration drilling programs on Block 21, Offshore Angola by spreading the services levels, Bicuar Number 1 exploratory well.

On July 20th, after setting the 36 inch conductor casing and drilling approximately 200 meters of surface hole, we encountered an over-pressured water sand, resulting in a water flow with very limited quantities of natural gas. Those safety will involve other issues resulted from the sense of it. We are focused now on our abandonment procedures for the Bicuar Number 1 Exploratory well surface location.

Given the (lucrative) of encountering pressure at Water Sands and Angolan water, we have agreed with Sonangol’s that we would take our learning from this incident and re-examine our shallow hazard analysis of proposed Cameia and Bicuar drilling locations before we move the drilling rig to Cameia or a different surface location here in Bicuar.

Also in Angola, we completed all production sharing agreement negotiations of Sonangol, covering 40% working interest in Block 20. The negotiations went as expected with no surprises or deviations from the agreement terms that we had anticipated prior to the award of our interest. We have not yet closed this production sharing agreement and we are waiting on notification from Sonangol as to when closing will occur.

I want to emphasize that we’re in constant contact with Sonangol on this issue. And we’re absolutely confident that this agreement will close in the near future. However, I’m not in a position to forecast of any accuracy when that closing will occur. Let me point out that no money has been deposited or paid out and will not be until closing.

We’re especially proud of the progress that we made in the Gulf of Mexico in the second quarter and support of our plans to return to work in the very near future. On June 3rd, the BOEMRE approving the exploration plan for Cobalt’s Ligurian prospect, but as like (Baleia), the BOEMRE approved the exploration plan for additional locations in the North Platte prospect area.

Additionally, during the second quarter, we submitted our final applications for permits to drill our APDs for both the North Platte and Ligurian. We were requested by the BOEMRE to provide a few additional points of clarification for our Ligurian APD, which we have now provided.

The various conversations we had with the BOE, we now believe that the only remaining outstanding item were finally ED approval for both North Platte and Ligurian, it is a costar certificate of compliance for the Ensco 8503 drilling rig. This certificate cannot be issued until the rig arrives back in the Gulf of Mexico.

As you are aware, we sublet the 8503 to Tullow for a well in Christiana. We are expecting the rig to be returned to us sometime late this quarter. The soothing success in security APDs for both Ligurian and North Platte, our drilling preference continues to be to drill Ligurian first followed by North Platte. We currently estimate that we will be able to start either well sometime in late September or early October.

Finally, in the Gulf of Mexico, we have initiated well planning process in order to trial the permit on our next exploration well which will tell us (organic) in our GEN prospects.

We’ve also continued to focus on our cash burn rates. The balance that we see is to minimize all unnecessary costs while at the same time investing money in key strategic areas including safety, people, data, one lead items and technology that will yield significant economic advantage as our business grows.

I will now turn the call over to John, for a few words on our financial results.

John Wilkirson

Thanks, Joe. With respect to the operating results for the second quarter, Cobalt's net loss was $19 million or $0.05 per basic and diluted share. Our cash expenditures excluding working capital changes for the quarter were $22 million, brought into the first quarter the major component of increased cash expenditures, with items related to preparing, to begin drilling operations offshore Angola.

We continue to operate through position and financial strength. Cobalt has no debt and over $1.6 billion of cash equivalents and investments including the net proceeds of approximately $478 million from our April equity offerings. As Joe mentioned, our liquidity position to revive the financial resources to execute our plans through 2013.

For the full year, our cash expenditures forecast, excluding working capital changes remained $325 million to $400 million including the forecasted cash expenditures associated with Block 20 offshore Angola. Most of this year’s Block 20 cash expenditures will be the first year of social bonus contributions to the entire closing of the production sharing agreement.

The expenditure forecast excludes the cash to collateralize our Block 20 work program letter of credit of about $210 million that after closing will be reported as restricted cash on our balance sheet. The full year forecast range depends principally on when Cobalt recommences Gulf of Mexico drilling activities in the second half of the year with the Ensco 8503 rig.

Excluding the Block 20, first year social bonus contribution payment, our estimate for third quarter cash expenditures, essentially the $75 million with the Angola drilling operations, being the primary use of cash. We estimate the gross cost to drill at Camiea and Bicaur 1 to be $80 million to $120 million gross each with our net cost share for each well being $50 million to $75 million.

We expect that our full year 2011 earnings will align with our cash expenditures excluding the Block 20, social bonus contribution payment that will be capitalized. The remaining cash expenditures and primary earnings uncertainty will be either the capitalization or expensing of the drilling cost associated with our Angola pre-salt wells.

In addition, we anticipate having approximately $20 million to $25 million of non-cash earnings-related items spread relatively evenly throughout the year. In conclusion we are well started and ready to execute exploration program.

With that I’ll turn the call back to Joe.

Joseph Bryant

Thanks John. We would now like to open the call for any questions that you might have. Operator.

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions). One moment please while we pause for our first question.

Our first question come from Evan Calio, with Morgan Stanley, please proceed with your question.

Evan Calio – Morgan Stanley

Good morning guys, how are you doing?

Joseph Bryant

Good morning, Evan.

Evan Calio – Morgan Stanley

Yeah, maybe we could refresh you know, West African timing given today’s news, I mean, the recent opening remarks appear less ambiguous then in the press release on timing, I know you have to wait for Sonangol’s approval, yet is it your intent to move as soon as possible to the Cameia location and so we, now if we see a spot there in, you know, the August timeframe?

Joseph Bryant

Let me answer that question this way that if I step back and look at our Angola drilling on a programmatic basis between the two wells Baleia and Break Water, we had roughly in a successful case which we still anticipate about 240 days for the two wells and you know, I certainly had a expectation that we will get both those wells done in 240 days from say last week sometime.

So, I don't anticipate the overall program timing to split at all. I do you know, hope that we are over the Cameia drilling sooner than later. I hate to preempt you know, any conversation that we are having with Sonangol in terms of whether it's, this week or next week, but I would certainly be hopeful that it's not much longer than a few weeks, but you know, I can't promises that, at this point in time I am optimistic that you know, we get over there sooner than later.

Evan Calio – Morgan Stanley

So, that's a good news. And then, we think, you know, post again you know it today, I mean, the plans to return the three slots return to Bicuar, is it possible to drill another target if Bicuar, you know, the water wells and produce doubt or weren't you, you know, upon review you see more broadly associated risk in this large structure. Are you limited from going to you know, another, you know, the enclosed, entirely Block 20, you know, going to launch or going to some other prospect in a large inventory?

Joseph Bryant

Evan, I think it’s a general question. This water flow at Bicaur and then growing opportunities for us at Bicaur, the answer to that is not equivocally, no. You know, the offsets the surface how we drill that were actually completed in this plan. They were not at an optimal location that we wanted to drill the prospect from, but I don’t want to leave anybody the question that this water sand condemns our ability to test Bicuar and tested soon or rather than later i.e., in the Cameia. We will obviously conduct this surface of operations in a different way next time.

But, you know, on a equivocal plan as of today are to monitor this way for few more days maybe to Cameia drill to TV tested and move back to Bicaur at a different surface location and test that prospect.

Evan Calio – Morgan Stanley

That’s great. And then, just maybe lastly and more general question, you know, if you could you know, maybe oil pressured sands going to water production, the shallow water hazard, you know, maybe any idea of just understand how common this is or other wells in the Cuanza basin that experiences risk and how we should maybe you know, think about it, you know, going forward? Thanks.

Joseph Bryant

That’s a very good question. Just about everywhere offshore in the world, you worry about shallow water hazards. I frankly don’t know, you wouldn’t worry about them. But we did an expensive shallow water hazard analysis at this location as we do in every location including Cameia. And the good news is that this sand is absolutely seen on our shallow hazard, it actually came in or we drilled into I would say, really within inches of where we saw it on our survey data. What we were wrong was that the two offset wells that we had and the general circa at 10 kilometers or so away, both drilled into the sand and it was depleted in the circulation in the sand rather than a cloak. At the same time, there were two top march on the sea floor surface adjacent to this which are strong indications that the sand has effectively blown out or depleted when you see those top march all over on the sea floor, all over the world. So, you know, the stake we made, as we took all of that data which was pretty accurate data and said, by all intends and purposes, they shouldn’t be a depleted surface water sand and it wasn’t. And you know, I think the good news is that the drilling team on the rig, the drilling team in Angola and the backup team here in Houston responded like through chance and they got the situation under control and everybody out farms away and responded to it like anybody in the world could. Whilst disappointing you know the follow on sequence of events that happened just like it should.

Evan Calio – Morgan Stanley

Great, that is very helpful. I will leave it there for others, thank you.

Joseph Bryant

Thanks, Evan.

Operator

Our next question comes to Jo Allman with JP Morgan. Please proceed with the question.

Joseph Allman – JP Morgan

Thank you, good morning everybody. Joe, is your expectation now to not be the best drilling between Bicuar and Cameia?

Joseph Bryant

Yeah, I would say that is absolutely the case simply because we will want to really think long and hard about where the next surface hole is that require and we wouldn’t want to wait on that to get over to Cameia. You know, our plan A is get the rigs over to come back at rather TD and by that use that time to re-plan a surface hole for Bicuar.

Joseph Allman – JP Morgan

Okay, that’s helpful. And as of right now what precautions or what adjustments you are planning on making when you drill Cameia and then when you go back and drill Bicuar?

Joseph Bryant

Yeah, first question that, first of all the nature of the surface hazards at Cameia are completely different and they have a completely different sizes of signature what we have seen at Bicaur. So, you know, the territory is completely different number 1, we are not taking that as granted though we are re-looking at all of that again and retesting our hypothesis on what could be there. We are also considering a belt and suspenders approach which would include for example drilling a palatal to make sure that there are no pressured sands in that surface hole occasion and we have finalized that plan yet, but it’s you know it’s not unlikely that we will do something like that and let me say one thing I will say is that when we did the shallow hazard analysis and of course we have third parties involved in all of this work as there is we can tell the last time any one in Angola has drilled into a pressured shallow hazard sand it’s about 30 years ago in 1981.

And just think of all the wells that have been drilled since then and that was about 500 kilometers away from here. So you know, that’s no excuse that we thought we have done our homework, we felt that we understood the risks and we just happened to drill in the one place the better pressured water sand and we will deal it.

Joseph Allman – JP Morgan

Okay that’s very helpful and then for you John, when we look at your press release it was like your cash flow from investing for the first half was about $551 million, 450-460 million that being in the second quarter. Could you layout for us what exactly that is?

John Wilkirson

Sure, what you have seen is the effect of the proceeds from the all on equity offering that was completed in April. It is invested into short term securities and so it is not just hitting on our balance sheet as unutilized cash from an accounting standpoint which of these investments are cash or cash equivalent.

Joseph Allman – JP Morgan

Okay, that’s very helpful, thank you. And then, in terms of when we look at the 2012 John, do you expect that you will have to need some more money in 2012 based on what you vision is suspending and if so do you think it would be in the form of some high yield offering or equity what do you think about that?

John Wilkirson

Well, we suspect that the potential will be looking for opportunities, but you know, what the nature of the vehicle would be of strictly punishing that purely are on a program obviously we have enough cash from the balance sheet, there is no doubt at the day to be able to manage the exploration program that we envision for the next two to two and a half years. But, hopefully we cost this out to the new term and we are looking at ways to define that going forward, but best talking on the success we would have.

Joseph Allman – JP Morgan

John, could you describe what the options would be for financing success?

John Wilkirson

I think there is a variety of different types of options, but there is a potential for equity as well as the different types of, we could look into different types of debt, it is the function of what the market availability is and the costs of those particular vehicle for big so it is premature at this point to be pretty much beyond that.

Joseph Allman – JP Morgan

Okay, It is very helpful. Thank you.

Operator

Our next question comes from David Heikkinen with Tudor Pickering . Please proceed with your question.

David Heikkinen - Tudor Pickering

Good morning, just I am thinking about your Gulf of Mexico program and Ensco 8503 how is that rig performing for Cobalt currently?

John Wilkirson

Fantastic question David and also I’m missed it and did this thing with Van Withfield on the call as well today and great (leeway) in the left hand to talk about. How the (inaudible) and reference to the question as Joe said the 8503 is a new rig is probably performing as well, if not better than any new rig, I’ve seen on a measure that we usually use of nonproductive time, in the single digits probably less than 5% on the rig was just as phenomenal. So, the issues, if you say their issue on more was the actual drilling objectives, but definitely not performance of the rig.

David Heikkinen - Tudor Pickering

Okay. And then, so you don’t see any reason why the rig wouldn’t get through the coast guard certification once sailing back to the gulf?

John Wilkirson

No, not at all, as a matter of fact, as you recall, this would be the fourth of the 8500 series of rigs working in the Gulf of Mexico and the other three rigs are currently working, they had no problems obtaining those certificates, we did a pre-inspection before it over well for (inaudible) we are confident that will be a short duration exercise.

David Heikkinen - Tudor Pickering

Okay. And then, thinking about well timing and just thoughts around high dense as well, can you just walk us through time to drill each well including these next two Gulf of Mexico wells, kind of outlining through 2012, it sounds like –?

Van Whitfield

Again, this is Van Whitfield. What we are looking at, at least for both our North Platte as we are drilling prospects, we’ve estimated it will take about six months of time to drill them and when you look at both RDs and GMs which was the next two wells that the roles that we previously identified, they will be very similar at depth in timing for those two wells. So, as I think, it means a perspective with the four wells that we’ve got plan and laid out that’s pretty close the two year cycle or program that we would be marking once the rig returns to the gulf.

David Heikkinen - Tudor Pickering

And just AFVs for those in that touch timeframe as far as the range you would expect? Both drills, dry hole and then fully completing and if you had a drill testing along those lines?

Van Whitfield

Well, I think, the easiest way to look at it would be, if you just figure the speed right now with that rig is approximately $1 million a day.

David Heikkinen - Tudor Pickering

Okay.

Van Whitfield

So, I think that would be pretty close.

David Heikkinen - Tudor Pickering

Okay.

Van Whitfield

The other thing that should go out, you know, our goals will be impacted by both the networking interest and the just one based alliance with TOTAL.

David Heikkinen - Tudor Pickering

Yeah. And then just onto back to Angola as part of each of those wells is kind of an 80 to 120 day well. So, they came up with 240 day timeframe, we’ve somewhere in the 40 to 80 days of cushion, built into that schedule that here we think about being a little sort of all of this, lot of flow into the 240 day timeframe as contingency is that –?

Van Whitfield

That’s exactly right, the 120 day range has testing, so we’ve got so flexible with (GNA) and ensure that we got enough time not only to give it rigs and that to be the testing. So yeah, we’re pretty confident we’ll fit in that time range.

David Heikkinen - Tudor Pickering

All right. That’s helpful. Thanks guys.

Operator

Our next question comes from Brian Singer with Goldman Sachs. Please proceed with your question.

Brian Singer – Goldman Sachs

Thanks, good morning.

Joseph Bryant

Good morning, Brian.

Brian Singer – Goldman Sachs

Going back to the Bicaur 1 well, to the extent that the shallow that you already encountered there is over pressured more widely over the Bicuar prospect area, what would be the cost impact be to these measures that would allow you to continue to test Bicuar at a different surface location?

Van Whitfield

This is Van Whitfield again, when you look at that, I think, you know, it’s got a normal practice that we would drill and put our surface pipe and using sea water. But in this case as you identify it we’ll have to let out – and so what I would say the incremental exposure might be, would be the need for one additional casing through the shallower, that we would set above this zone and then we would proceed. It's really early to say exactly the TOTAL program changes, but if we assume that’s the case we’re going to be looking at incremental 3 to 4 days to run that pipe and get it set and we would pursue the drilling.

Our well cost in Angola are averaging definitely between 500 and a million dollars a day. So it’s a lower price range, so you could figure, just say roughly 5 days in that range, incremental.

Brian Singer – Goldman Sachs

Great. Thank you. And that’s helpful. And then secondly, more probably can you give us any more color on the seismic work or reprocessing you have done in recent months in Angola without any conclusions as it relates to the Pre-salt and your location selection?

Joseph Bryant

Certainly, can do that. This is Joe again. We’ve made tremendous progress in the last several months, I think across the board in West Africa both in terms of the definition that we see in Block 21 and the cost activity of that block as we continue to reprocess more of the three seismic that we’ve been working with over the past several years. At the same time as we had to finish all of our 3D acquisition on Block 9 and we’re just now working through the reprocessing on that and beginning to understand both the Post-salt and the Pre-salt, post activity on Block 9. And I think as we’ve said in the past, we’ve some well locations picked by the end of this year and hopefully growing in Block 9 sometime next year.

At the same time as soon as we get the Block 20 PSA signed, we’re all lined up to begin our 3D seismic acquisition there almost instantaneously. And then, I would hope that we can be growing in Block 20, I am going to say 18 months to two years after we signed that PSA later this year I hope. I think not last but certainly not least the 6,000 square kilometers 3D seismic there would have done in Diaba as well end to it three processing and I just can’t contain my enthusiasm for what we’re seeing there below salt, it looks like all of the structures that we saw on the 2D are conforming to the 3D which is an incredibly positive signal. So then, in another words the big structure that we anticipated to be there based on what we’ve seen there, over there. And, I can’t say they’re going to be full oil, but I can say that’s like the structure over there. We’re also encouraged by, there has been a couple of smallish Pre-salt discovery announced in the past few months east of our block in Bicaur which is certainly encouraging in the Pre-salt at there. So, I think despite the recent set back in Bicuar, we’ve not lost one bit of enthusiasm for the ultimate to come over West African Pre-salt position which we believe is pre-eminent in the industry.

Brian Singer – Goldman Sachs

Thank you.

Operator

Our next question comes from Ed Westlake with Credit Suisse. Please proceed with your question.

Ed Westlake – Credit Suisse

Hi. Our questions have been answered. Thank you very much.

Joseph Bryant

Thank you, Ed.

Operator

(Operator Instruction). Our next question comes from Richard Tullis with Capital One. Please proceed with your question.

Richard Tullis – Capital One

Thank you. Good morning. Just a couple of questions that haven’t been hit on yet. Joe, can you remind us the size of the two prospects that you are targeting now in West Africa, the growth on risk potential in Bicaur and Cameia?

Joseph Bryant

We always quoted both the Bicuar and Cameia being well over a billion barrels.

Richard Tullis – Capital One

Were you looking at Bicuar as being the amount larger than Cameia?

Joseph Bryant

To be honest, at this point, it’s you know, it’s difficult to say, we just need to drill the wells and find out how big they are. And you know, before I get the bit in the ground in the pre-salt I hate to guess with you because, you know, there are several different kinds of reservoirs we’re testing in both Bicuar and Cameia, you know, there is somewhat similar, but somewhat different. So, it’s just time to drill wells and find out how big they are.

Richard Tullis – Capital One

Sure. That’s helpful. You may have mentioned this and I missed it, but what do you plan to drill after these two wells are done in West Africa?

Joseph Bryant

That’s a great question. We talk a lot about that internally and I think with success we’ll be working at follow on or appraisal drilling on one or both of these structures. In addition to that, we have identified numerous additional structures on Block 21 that we would want to drill. And at the same time as I mentioned we see some very interesting things in Block 9 and again, in terms of West Africa drilling in general, we would, we hope that we’re drilling in Diaba sometime in 2012 as well. You know, we just have a lot of options, I would also point out that, you know, we feel pretty good about where the industry is and West Africa pre-salt right now, it seems like everybody is talking about, what we’ve been talking about for five years.

When you look all the way up on the coast, people are talking about their pre-salt drilling plans, I would encourage all of you to look not only what Cobalt is doing, but what other operators are doing in terms of their pre-salt drilling, you know, from all the way from north to south because that will inform everybody’s drilling plans based on what the industry finds there not just Cobalt.

Richard Tullis – Capital One

Okay. Thanks very much, that’s all I have today.

Joseph Bryant

Okay. Thanks for your interest.

Operator

We have a follow up question from David Heikkinen with Tudor Pickering, please proceed with your question.

David Heikkinen – Tudor Pickering

I was just curious, thinking about the bond. Did you all have seismic over the harvest discoveries and kind of thinking about any ties or correlation to your prospects or have you thought about that? They’re obviously much smaller, but –

Joseph Bryant

Yeah, we have 2D seismic, but I would say to with any degree of specificity at all, what we did do, though, was we did shoot our seismic, we expanded our seismic off of our block to an elf discovery that was made in 1982, I believe we tested about 1,250 barrels a day. So, we covered with our 3D seismic, we covered that 1982 discovery, so you could tie that actual successful well into our seismic in Diaba.

David Heikkinen – Tudor Pickering

That’s helpful. All right, thanks. I was just curious.

Operator

There are no further questions in queue at this time, I would like to turn the call back over to management for closing comments.

Joseph Bryant

Great. Thank you all for your interest and for your questions today. I think second half of the year is shaping up in a very positive way for us here at Cobalt. Well shortly, we have two drilling rigs operating in both the Angola and Gulf of Mexico testing world class prospects by anyone’s measure. We anticipate closing on Block 20 and beginning our seismic acquisition there, shortly thereafter as I mentioned. We are very excited about the pre-salt prospect that we see in Diaba. And we think all of this work will position us very well for an active 2012 in which we expect activity in all of our West African blocks and drilling several operating and non operated blocks and prospects of Gulf of Mexico. So again, let me thank all of you for your interest in Cobalt, as always if you have any questions, don’t hesitate to get in touch with John or myself.

Thanks again and have a good 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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