Cobalt Annual Report 2015 - page 81

discounted at our credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is
accreted to its expected settlement value.
Inherent to the present value calculation are numerous estimates, assumptions and judgments, including the ultimate settlement
amounts, inflation factors, credit adjusted risk-free rates, timing of settlement and changes in the legal, regulatory, environmental and
political environments. To the extent future revisions to these assumptions impact the present value of the abandonment liability, we
will make corresponding adjustments to both the asset retirement obligation and the related oil and natural gas property asset balance.
Increases in the discounted abandonment liability resulting from the passage of time will be reflected as additional accretion in the
consolidated statement of operations.
Earnings (Loss) Per Share.
Basic earnings (loss) per share was calculated by dividing net income or loss applicable to
common shares by the weighted average number of common shares outstanding during the periods presented. Diluted earnings (loss)
per share incorporate the potential dilutive impact of our 2.625% convertible senior notes due 2019, our 3.125% convertible senior
notes due 2024, stock options, unvested restricted stock and restricted stock units outstanding during the periods presented, unless
their effect is anti-dilutive. In addition, we apply the if-converted method to our convertible debt instruments, the effect of which is
that conversion will not be assumed for purposes of computing diluted earnings (loss) per share if the effect would be anti-dilutive.
Equity-Based Compensation.
We account for stock-based compensation at fair value. We grant various types of stock-based
awards including stock options, restricted stock and performance-based awards. The fair value of stock option awards is determined
by using the Black-Scholes-Merton option-pricing model. For restricted stock awards with market conditions, the fair value of the
awards is measured using the asset-or-nothing option pricing model. Restricted stock awards without market conditions and the
performance-based awards are valued using the market price of our common stock on the grant date. We record compensation cost,
net of estimated forfeitures, on a straight-line basis for stock-based compensation awards over the requisite service period except for
performance-based awards. For performance-based awards, compensation cost is recognized over the requisite service period as and
when we determine that the achievement of the performance condition is probable, using the per-share fair value measured at grant
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about
our potential exposure to market risks. The term “market risks” refers to the risk of loss arising from changes in commodity prices,
interest rates, foreign currency exchange rates, and other relevant market risks. The disclosures are not meant to be precise indicators
of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of
how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments will be entered into for
purposes of risk management and not for speculation.
Due to the historical volatility of commodity prices, we may enter into various derivative instruments to manage our exposure to
volatility of commodity market prices. We may use options (including floors and collars) and fixed price swaps to mitigate the impact
of downward swings in commodity prices to our cash flow. All contracts will be settled with cash and would not require the delivery
of physical volumes to satisfy settlement. While in times of higher commodity prices this strategy may result in our having lower net
cash inflows than we would otherwise have if we had not utilized these instruments, management believes the risk reduction benefits
of such a strategy would outweigh the potential costs.
We may borrow under fixed rate and variable rate debt instruments that give rise to interest rate risk. Our objective in borrowing
under fixed or variable rate debt is to satisfy capital requirements while minimizing our costs of capital.
Item 8.
Financial Statements and Supplementary Data
The information required is included in this report as set forth in the “Index to Consolidated Financial Statements” on page F-1
to this Annual Report on Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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