Cobalt Annual Report 2015 - page 77

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the closing of the Angola Transaction. We expect that our existing cash on hand plus proceeds from the closing of the Angola
Transaction will be sufficient to fund our current operations for the foreseeable future.
On May 29, 2015, Cobalt GOM #1 LLC, our indirect, wholly-owned subsidiary, entered into a Borrowing Base Facility
Agreement (the “Facility Agreement”) with Société Générale, as administrative agent, and certain other lenders. The Facility
Agreement provides for a limited recourse senior secured reserve-based term loan facility with a current borrowing base of $150
million. We have not borrowed any amounts under the Facility Agreement. We expect the next redetermination of the borrowing base
for this loan facility will occur in March 2016. Please see “Item 1A. Risk Factors—The borrowing base under our Heidelberg reserve-
based loan facility will likely be substantially reduced in the near future, which could negatively impact our funding for future
development drilling at Heidelberg.”
For the year ended December 31, 2015, we did not generate any revenue from oil and gas production, although we commenced
initial production from our Heidelberg project in January 2016. Until substantial production is achieved, our primary sources of
liquidity are expected to be cash on hand, the proceeds from the closing of the Angola Transaction, funds available to us under the
Facility Agreement, proceeds from any future reserve-based lending arrangements, equity and debt financings, and asset-based
ventures and asset monetizations.
We expect to incur substantial expenditures and generate significant operating losses as we:
progress our North Platte, Shenandoah and Anchor discoveries toward project sanction;
continue development drilling activities on the Heidelberg field with the aim to increase its oil and gas production over
time;
selectively conduct exploration drilling on our current U.S. Gulf of Mexico acreage;
pursue new acreage opportunities in the U.S. Gulf of Mexico; and
incur expenses related to operating as a public company and compliance with regulatory requirements.
Our future financial condition and liquidity will be impacted by, among other factors, the timing or occurrence of the closing of
the Angola Transaction, the production rates achieved from our Heidelberg project, our ability to obtain financing or refinance
existing indebtedness, oil and gas prices, the number of commercially viable hydrocarbon discoveries made and the quantities of
hydrocarbons discovered, the speed with which we can bring such discoveries to production, whether and to what extent we invest in
additional oil leases and concessional licenses, and the actual cost of exploration, appraisal and development of our prospects. We may
also seek additional funding through equity and debt financings. Additional funding may not be available to us on acceptable terms or
at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our existing stockholders. For example,
if we raise additional funds by issuing additional equity securities, further dilution to our existing stockholders will result. Funds
available to us under existing or future reserve-based lending arrangements, including the Facility Agreement, may decrease in
connection with periodic redeterminations of the value of the oil and gas reserves pledged pursuant to such lending arrangements. If
we are unable to obtain or maintain funding on a timely basis or on acceptable terms, we may be required to significantly curtail our
exploration, appraisal and development activities. Please see “Item 1A. Risk Factors—Our business plan requires substantial
additional capital, which we may be unable to raise on acceptable terms in the future, which may in turn limit our ability to execute
our development projects and achieve production, conduct exploration activities or renew our exploration portfolio.”
Royalty Agreement
On February 13, 2009 we entered into a restated overriding royalty agreement (the “Royalty Agreement”) with Whitton
Petroleum Services Limited (“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
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