Cobalt in dispute with Sonangol over Angolan assets

Oil exploration company Cobalt International Energy is in dispute with the Angolan state-owned oil company Sonangol over impairment charges related to its assets in Angola. 

Cobalt on Tuesday reported a net loss of $1.87 billion for the fourth quarter of 2016, compared to a net loss of $486.8 million for the fourth quarter of 2015.

Included in the current quarter and full year results is an impairment charge of $1.69 billion related to the company’s Angolan assets.

Cobalt is the operator, with 40% interest, of two blocks offshore Angola — 20 and 21— covering a combined 2.4 million acres.

According to the company, of the $1.69 billion impairment recorded, $1.63 billion was impaired in accordance with Accounting Standards Codification 932, Extractive Activities – Oil and Gas (ASC 932) which requires, among other things, that “sufficient progress” be made with respect to oil and natural gas projects in order to avoid the requirement to expense previously capitalized exploratory or appraisal well costs.

Cobalt said that, given Sonangol’s failure to date to grant the extensions of certain exploration and development milestones that Cobalt believes Sonangol is required to grant Cobalt under the purchase and sale agreement executed in August 2015, the procedures of ASC 932 require Cobalt to record a full impairment of its Angolan assets at this time.

To remind, Sonangol in August 2015 agreed to buy all of Cobalt’s 40% participating interest in Blocks 21/09 and 20/11 offshore Angola for $1.75 billion. A year later, it became evident that the deal was unlikely to close as the pair agreed for Cobalt to market its interest in the offshore blocks in order to sell them to a third party.

Back to the current situation, Cobalt noted that this impairment represents previously capitalized exploratory and appraisal well and other costs. The impairment is not associated with, nor is it indicative of, what Cobalt believes to be the intrinsic or fair market value of its Angolan assets, the company emphasized.

Given Sonangol’s failure to date to grant the extensions, Cobalt on March 8 submitted a notice of dispute to Sonangol under the agreement. If Sonangol does not timely resolve this matter to Cobalt’s satisfaction, Cobalt said it intends to move forward with arbitration.

While Cobalt will continue to fulfill its obligations as operator of Blocks 20 and 21, Cobalt does not plan to make any material investments in Angola until this matter is resolved to its satisfaction, the company said.

Timothy J. Cutt, Cobalt’s Chief Executive Officer said, “The accounting rules are mechanical and required us to impair our Angolan assets at this time. This is an accounting result and not a reflection of what we believe these assets are worth to Cobalt. While it is clear that our sale process has been negatively impacted by the uncertainty surrounding the extensions, it is also clear that Sonangol’s preference is for Cobalt to present potential buyers to Sonangol to finalize and grant the extensions. While we continue to work the sales process, we must also continue to work to protect our rights and thus have formally notified Sonangol of our dispute. We hope to resolve things amicably with Sonangol but will be ready for arbitration as well.”

The company also said on Tuesday it expects its capital expenditures to be approximately $275 million in 2017, which excludes general and administrative expenses and interest expense. Capital expenditures are primarily attributable to operated activities at North Platte and non-operated activities at Shenandoah, Anchor and Heidelberg.

Total 2017 cash outlays are currently expected to be between $550 million and $650 million, net revenue is expected to be approximately $50 million, leaving Cobalt with an expected cash balance at year end 2017 of approximately $350 million to $450 million excluding any Sonangol receipts or payments.

Offshore Energy Today Staff