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We may be required to pay a material cash sum to Whitton Petroleum Services Limited (“Whitton”) in connection with the closing
of the sale of our interests in Blocks 20 and 21 offshore Angola.
On February 13, 2009, we entered into a restated overriding royalty agreement (the “Royalty Agreement”) with Whitton.
Pursuant to the terms of the Royalty Agreement, in consideration for Whitton's consulting services in connection with Blocks 9, 20
and 21 offshore Angola and our business and operations in Angola, Whitton is to receive quarterly payments (measured in U.S.
Dollars) equal to 2.5% of the market price of our share of the crude oil produced in such quarter and not used in petroleum operations,
less the cost recovery crude oil, assuming the applicable government contract is a production sharing agreement. If the applicable
government contract is a risk services agreement and not a production sharing agreement (which is the case with respect to Blocks 9
and 21), pursuant to the Royalty Agreement, we have undertaken to agree with Whitton an economic model (the “RSA Economic
Model”) containing terms equivalent to those in such risk services agreement and using actual production and costs. The RSA
Economic Model has not yet been agreed with Whitton. If we assign all of our interests in such Blocks, Whitton may, depending on
the option we elect, have the right to receive the market value of its rights and obligations under the Royalty Agreement, based upon
the amount in cash a willing transferee of such rights and obligations would pay a willing transferor in an arm’s length transaction.
Given potential issues regarding how such market value of Whitton's rights and obligations under the Royalty Agreement could be
calculated, including, without limitation, outstanding issues related to the RSA Economic Model, the amount of any such payment that
could be owed to Whitton upon consummation of the sale of our interests in Blocks 20 and 21 offshore Angola is uncertain, but may
be significant. Resolution of any such payment may include an expert determination of such cash value payment. We can make no
assurance that any results from an expert determination process will be favorable to us. If we are ultimately required to pay a
significant sum under the Royalty Agreement, our business and financial condition could be adversely affected.
The conditional conversion feature of our 3.125% senior convertibles notes due 2024, if triggered, may adversely affect our
financial condition and operating results.
If the conditional conversion feature of our 3.125% senior convertibles notes due 2024 is triggered, holders of such notes will be
entitled to convert these notes at any time during specified periods outlined in the indenture governing such notes, at their option. If
one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our
common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion
obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert
their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of these
notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Conversions of the notes may adversely affect our financial condition and operating results.
Holders of notes will be entitled to convert the notes at their option at any time up until the maturity date, being December 1,
2019 for the 2.625% convertible senior notes due 2019 and May 15, 2024 for the 3.125% senior convertible notes due 2024. If one or
more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our
common stock (other than cash in lieu of any fractional share), we would be required to settle a portion or all of our conversion
obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert
their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the
notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the notes, could have a material effect
on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options, which we refer to as ASC 470-20,
an entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that
may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of
ASC 470-20 on the accounting for the notes is that the equity component is required to be included in the additional paid-in capital
section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component would be treated as original
issue discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record a greater
amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the
notes to their face amount over the term of the notes. We will report lower net income in our financial results because ASC 470-20
will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which
could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.
We may account for the notes utilizing the treasury stock method. The effect of this method is that the shares issuable upon
conversion of convertible securities are not included in the calculation of diluted earnings per share except to the extent that the
conversion value of such securities exceeds their principal amount. Under the treasury stock method, for diluted earnings per share
