uploads///CIE Q Leverage

Why Has Cobalt Energy’s Debt Level Reached a Critical Point?


Sep. 1 2016, Updated 9:04 a.m. ET

Cobalt International Energy’s debt trends

Cobalt International Energy’s (CIE) total debt increased between the end of 2013 and 2Q16. In 2Q16, the company’s total debt stood at ~$2.03 billion, 96% higher than its total debt of ~$1.04 billion at the end of 2013.

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Cobalt International Energy’s equity trend

One thing that did not work in Cobalt International Energy’s favor is its lack of production, which resulted in no revenue until 4Q15. Also, although CIE achieved its first production in 1Q16, production volumes are still small, resulting in low revenues in 1Q16 and 2Q16. Additionally, CIE has continued to pay expenses for exploration and drilling and non-cash impairment charges related to its proven reserves, and crude oil (USO) UWTI) (DWTI) and natural gas prices (UNG) (UGAZ) (DGAZ) prices have been lower.

All of these factors have resulted in continuous losses for Cobalt International Energy. Its retained earnings declined from approximately -$1.5 billion in 4Q13 to approximately -$3.0 billion in 2Q16. Due to this ~$1.5 billion decline in retained earnings, Cobalt International Energy’s total stockholders’ equity decreased from ~$2.1 billion in 4Q13 to ~$1.2 billion in 2Q16.

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Cobalt International Energy’s leverage trend

Due to the increase in its debt and decrease in stockholders’ equity, Cobalt International Energy’s total debt-to-equity ratio, or leverage, increased from ~49% in 4Q13 to ~170% in 2Q16. This is high compared with the leverage of other oil and gas companies. Peers Diamondback Energy (FANG), Gulfport Energy (GPOR), and WPX Energy (WPX) have debt-to-equity ratios of ~23%, ~43%, and ~87%, respectively.

A higher debt-to-equity ratio usually indicates a higher risk of default, because it might hint at some difficulty for a company to repay or service this debt through the assets the debt financed. Next, let’s take a look at how negative changes in Cobalt International Energy’s retained earnings have affected its stockholders’ equity.


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