Cobalt’s Angola Worries Are Not Going Away

By Akpelu Paul Kelechi

Cobalt International Energy may have a day in a United States court over its operations in Angola. Five months after the U.S Securities and Exchange Commission notified the company it will bring an enforcement action against it over its Angolan operations, a law firm has followed up with a class action suit around the same issues. The short of it is that US authorities feel that Cobalt had erred in going into a partnership with Angolan companies in which top Angolan bureaucrats –who are themselves the regulators-hold concealed interest.

US Law firm Pomerantz LLP Energy alleges that Cobalt made false and/or misleading statements and/or failed to disclose that: (1) the Company conducted certain business activities in its Angolan operations in violation of the Foreign Corrupt Practices Act; and (2) as a result of the foregoing, the Company’s financial statements were materially false and misleading at all relevant times.

Cobalt has noted time and again that it had no say in determining what company would partner with it, when the Angolan government awarded it interests in Blocks 9 and 21, offshore Angola in 2008. The partners in the Blocks were Nazaki Oil and Gas and Alper Limited, companies in which Angolan public officials, including Manuel Vincente – at the time President of Sonangol, the state hydrocarbon company – have concealed equity. Weeks after Securities and Exchange Commission brought the notice of enforcement action, Cobalt declared in a regulatory filing that Nazaki Oil and Gaz, and Alper Oil had transferred their interests in the venture operated by Cobalt to Sonangol, Angola’s state-owned oil company.

Cobalt made the following statement:

On August 26, 2014, Cobalt International Energy, Inc. (including its subsidiaries, the “Company”) received documentation confirming that Nazaki Oil and Gaz (“Nazaki”) and Alper Oil Limitada (“Alper”) are no longer members of the contractor group of Blocks 9 and 21 offshore Angola. Pursuant to a series of Executive Decrees passed by the Republic of Angola, the working interests previously held by Nazaki and Alper in Blocks 9 and 21 have been transferred to and are now held by Sonangol Pesquisa e Produção, S.A. (“Sonangol P&P”). As a result, the Company no longer has any relationship with Nazaki or Alper.

The contractor groups for Blocks 9 and 21 offshore Angola now consist only of Sonangol P&P (60% working interest) and the Company (40% working interest). The obligation of the Company to carry and pay for Alper’s 10% working interest terminated immediately with the transfer of Alper’s interest to Sonangol P&P pursuant to the terms of the Company’s 2010 agreements with Alper. As a result, the Company’s paying interest in these blocks has been from 62.5% to 52.5% during the initial exploration period, with Sonangol P&P being obligated to pay the remaining 47.5%. In addition, all historical costs of the Company’s carry of Alper will be recouped by the Company from Sonangol P&P’s share of production revenues from these blocks. The Company continues to expect formal sanction of the Cameia project in late 2014 or early 2015 and production from the Cameia project in 2017. The composition and paying interests of the contractor group for Block 20 remain unchanged.

Pomerantz LLP disclosed on January 2, 2015 that it had filed a class action lawsuit against Cobalt and certain of its officers in United States District Court, Southern District of Texas on behalf of a class consisting of all persons or entities who purchased Cobalt securities between February 21, 2012 and August 4, 2014, inclusive (the “Class Period”). This class action seeks to recover damages against Defendants for alleged violations of the federal securities laws under the Securities Exchange Act of 1934.

 On the 3rd of December 2013, the Company’s share value dropped from $22.23 per share to $17.51 per share, a loss of about $4.72 per share after it was revealed that the Lontra well held large amount of gas, as opposed to previously held predictions of 900MMBOE. The well is located in Block 20 in the Kwanza Basin and was drilled to a depth of 4,195 meters. “It flowed 2,500 barrels of gas condensate and 39 million cubic feet of gas per day during tests”, the company said in a statement. However, gas content in Angola discoveries could offset the value of oil because foreign investors cannot market gas under the nation’s production-sharing agreements.

Eight months later, on August 5, 2014, the Securities and Exchange Commission issued a Wells Notice recommending an enforcement for the possible violation of securities laws against Cobalt International Energy for partnering with Shell companies in Angola that were partially owned by high-level Angolan officials just so they can gain access to its Angolan wells. This news caused a further nose-diving of the company’s stock value to $14.22 per share.

It would seem that 2014 had more revelations for Cobalt than discoveries because in the early days of November, it was once again revealed that the Loengo well, located in Block 9 (4000 sq km), offshore Benguela Basin at water depths that ranges between 50 to 1,000 meters, had neither oil nor gas despite the bold claims that the company made that it was rich in both oil and gas. This revelation once again dragged down the already falling company’s stock price by $1.21 to close at $10.07 by November 4. The defendants have been accused of making false and/or misleading statements, as well as having failed to disclose material adverse facts about the Company’s business, operations, and prospects; leading the Company’s financial statements to be materially false and misleading at all relevant times.

Cobalt International Energy is an independent, oil-focused exploration and production company with operations offshore Angola and Gabon in West Africa but it is only its Angolan operations that was served with a class action lawsuit. The Class Action Fairness Act of 2005 lays out the criteria for cases that fall under federal jurisdiction: Any class action lawsuit in which claims exceed $5 million, as well as any case involving plaintiffs or defendants (over 100 people) from many different states (called diversity jurisdiction).

Unless an individual who falls within the defined scope of the class opts out of the class action, he/she cannot sue individually as they are automatically included in the case and are bounded by the final judgment. More so, the judge hearing the case will have to order that all potential plaintiffs be notified of the class action by mail, newspaper advertisements, even TV commercials, depending on how broad the scope of the class is.

To this end, if you are a shareholder who purchased Cobalt securities during the Class Period and you wish to serve as a lead plaintiff in this class action, you must petition the Court by February 2, 2015. Your ability to share in any recovery doesn’t require that you serve as a lead plaintiff.

The class includes individuals or entities who acquired:

• Cobalt securities on the open market;
• Cobalt’s common stock pursuant and/or traceable to registered public offerings conducted on or about February 23, 2012, January 16, 2013 and May 8, 2013;
• Cobalt’s 2.65% Convertible Senior Notes due 2019, pursuant and/or traceable to the registered public offering conducted on or about December 12, 2012; and/or
• Cobalt’s Convertible Senior Notes due 2024, pursuant and/or traceable to the registered public offering conducted on or about May 8, 2014 (collectively, the “Offerings”).