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Cobalt Hits Ch. 11, Seeks To Stall Securities Litigation

14 December 2017

Mired in $2.8 billion of funded debt and reeling from depressed oil and gas prices and ongoing shareholder litigation, exploration and production company Cobalt International Energy Inc. filed for Chapter 11 bankruptcy in Texas on Thursday with the expressed hope of driving a value-maximizing sale of its assets.

Houston-based Cobalt filed for bankruptcy with hopes of facilitating a restructuring capped off with a sale of the entire business, which includes oil fields in the Gulf of Mexico and off the coast of Angola and Gabon in West Africa.

The 12-year-old deep-water drilling company, which recently opted to defer multimillion-dollar interest payments to two groups of noteholders, said its woes were caused by a prolonged downturn in the exploration and production industry. Amid a three-year decline in oil prices, Cobalt said it was forced to hold off on drilling. It is currently producing oil from only one of its fields — an area located off the coast of Louisiana.

The company said in court papers that it attempted to raise capital in 2015 by selling its Angolan assets for $1.75 billion, but the deal ultimately fell through. Now faced with mounting debt liabilities and a handful of investor suits, including a consolidated class action stemming from the company's alleged bribery of Angolan officials, Cobalt said it wants to sell everything in bankruptcy.

“Cobalt intends to use the Chapter 11 process to overcome these impediments and drive their sale and restructuring efforts to conclusion with a value-maximizing transaction,” Chief Financial Officer David D. Powell said in a first-day court filing.

In tandem with filing its petition for bankruptcy, Cobalt also sued Thursday to halt an ongoing securities class action alleging it obtained access to its Angolan wells by partnering with shell companies that were owned by Angolan officials, putting the company at risk of enforcement action by the U.S. Securities and Exchange Commission and the U.S. Department of Justice. Cobalt additionally misrepresented the value of its wells after the company purportedly learned the wells contained little or no oil, the investors have contended.

Cobalt said that allowing the securities case to proceed would bleed the company of funds for creditor recoveries because it is forced to pay for the legal defense and indemnification of nondebtor defendants. In November alone, Cobalt paid $2.5 million in fees, Powell said.

In addition to the securities litigation, the company said it will also use its bankruptcy protections to pause a trio of shareholder derivative suits that each allege wrongdoing on the part of current and former officers and directors related to the company’s dealings in Angola. The shareholders in those suits accuse company executives of engaging in insider trading, failing to maintain adequate internal controls, making misrepresentations and omissions in financial disclosures and wasting corporate assets, among other claims.

Cobalt also noted that it is currently cooperating with an SEC investigation related to a 2011 production-sharing contract it made with Angolan state-run oil and gas company Sonangol.

While in bankruptcy, Cobalt said it plans on conducting business in the normal course and using its cash on hand to fund operations.

The company also said it has been engaged in “constructive discussions” with its secured and unsecured noteholders regarding a restructuring and proposed sale of Cobalt’s assets.

Cobalt is represented by James H.M. Sprayregen, Marc Kieselstein, Chad J. Husnick, Brad Weiland, Gabor Balassa and Stacy Pepper of Kirkland & Ellis LLP and by Zack A. Clement.

The case is In re: Cobalt International Energy Inc., case number 4:17-bk-36709, in the U.S. Bankruptcy Court for the Southern District of Texas.

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