Case Document 280 Filed in TXSB on 01/24/18 Page 1 of 11

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1 Case Document 280 Filed in TXSB on 01/24/18 Page 1 of 11 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION ) In re: ) Chapter 11 ) COBALT INTERNATIONAL ENERGY, INC., et al., 1 ) Case No (MI) ) Debtors. ) (Jointly Administered) ) DEBTORS OMNIBUS REPLY IN SUPPORT OF DEBTORS MOTION FOR ENTRY OF AN ORDER (I) AUTHORIZING PERFORMANCE UNDER SETTLEMENT AGREEMENT, (II) APPROVING SETTLEMENT AGREEMENT, AND (III) GRANTING RELATED RELIEF The above-captioned debtors and debtors in possession (collectively, the Debtors ) hereby submit this reply in support of the Debtors Motion for Entry of an Order (I) Authorizing Performance Under Settlement Agreement, (II) Approving Settlement Agreement, and (III) Granting Related Relief [Docket No. 127] (the Motion ) 2 and in response to the limited objections filed by filed by Sociedade Nacional de Combustíveis de Angola Empresa Pública and Sonangol Pesquisa e Produção, S.A (collectively, Sonangol ) [Docket No. 234], and the creditors committee [Docket No. 245], and respectfully state as follows. Introduction 1. As set forth in the Motion, Cobalt has successfully secured a global settlement of issues between Cobalt and Sonangol, the state oil and gas company of the Republic of Angola. The proposed settlement is a hard-fought, good-faith compromise that delivers a $500 million 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, are: Cobalt International Energy, Inc. (1169); Cobalt International Energy GP, LLC (7374); Cobalt International Energy, LP (2411); Cobalt GOM LLC (7188); Cobalt GOM # 1 LLC (7262); and Cobalt GOM # 2 LLC (7316). The Debtors service address is: 920 Memorial City Way, Suite 100, Houston, Texas Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Motion. KE

2 Case Document 280 Filed in TXSB on 01/24/18 Page 2 of 11 settlement payment to Cobalt, resolves all outstanding disputes between Cobalt and Sonangol regarding the failed sale of Cobalt s Angola assets to Sonangol that are currently pending in two separate international arbitrations, and secures Cobalt s consensual exit from Angola by transitioning Cobalt s Angola assets to Sonangol. 2. The Sonangol settlement represents a significant benefit to the Debtors estates, including $500 million in incremental cash to monetize assets otherwise mired in years of uncertain arbitration and the settlement of all obligations and debts between the parties. This benefit ultimately will inure to all of the Debtors stakeholders. Claims and/or defenses (if any) with respect to the settlement proceeds are expressly preserved under a revised proposed order. The Debtors respectfully submit that the proposed settlement is well within the range of reasonableness, particularly when factoring in the time, expense, and risk in continuing to pursue the arbitrations and in enforcing any ultimate award. The settlement is an appropriate use of estate assets and a sound exercise of the Debtors business judgment and should be approved. 3. There are no substantive objections to the settlement or the Settlement Agreement. Indeed, none of the filed objections argue that the key terms of the settlement should not be approved, and none cites a single case. On the other hand, the Debtors key creditor stakeholders all support the relief requested. (And even the creditors committee s objection states the committee is not questioning the amount of the proposed settlement. (Committee Obj. 2 n.4.)) 4. None of the limited objections received should offer any obstacle to the Court s approving the Settlement Agreement. The objections filed by the committee and Sonangol raise the following issues: The committee maintains that it cannot support the relief requested in the Motion until it receives further information, including with respect to alternatives to the settlement and the calculation and distribution of settlement proceeds. (Committee Obj 1.) 2

3 Case Document 280 Filed in TXSB on 01/24/18 Page 3 of 11 Sonangol s objection makes clear that the settlement must be implemented in accordance with Angolan law. (Sonangol Objection 4, 8.) 5. The Debtors have also discussed the Motion with other key stakeholders and parties in interest that contacted the Debtors with informal responses, including the Debtors secured and unsecured noteholder groups and Whitton Petroleum Services Limited (a party to an overriding royalty agreement related to the Angola assets). 6. To resolve the issues raised in these objections and informal responses, the Debtors engaged in discussions with the objecting parties and other key stakeholders to forge consensus. To that end, the Debtors propose the following negotiated additions to the proposed form of order: 5. Nothing in this Order limits, extinguishes, determines or otherwise modifies the rights and obligations of Whitton Petroleum Services Limited ( Whitton ) or any other parties under that certain Overriding Royalty Agreement Relating to Blocks Located Offshore Angola (the Whitton ORA ), 3 and all rights under the Whitton ORA are hereby preserved. Nothing in this Order shall constitute an assumption or rejection of the Whitton ORA. 6. Notwithstanding the preservation of rights set forth in the immediately preceding paragraph, upon (and in no event before) the payment in full in cash by Sonangol of the $500 million in settlement payments pursuant to the Settlement Agreement: (a) the transition of interests in the Angola assets to Sonangol will constitute an assignment of its Percentage Interest in Blocks 20 and 21 under Section 8.1 of the Whitton ORA (the Assignment ); (b) immediately upon the Assignment, Cobalt will be deemed to have made an irrevocable election by notice in writing by Cobalt to Whitton that it has elected to pay Whitton the Cash Value in accordance with Clause 8.1(c) of the Whitton ORA; (c) the Cash Value shall be expressly agreed or determined in accordance with Clause 8.8 of the Whitton ORA; and (d) the 15-day negotiation period referred to in Clause 8.8 shall be deemed to have commenced. For the avoidance of doubt, neither this Order nor any action prior to the payment in full in cash by Sonangol of the $500 million in settlement payments shall constitute an election under Clause 8.1 of the Whitton ORA, and no such election shall be effective until such 3 Capitalized terms used in this paragraph and the paragraph immediately following and not otherwise defined in this Order or the Motion shall have the meanings ascribed to them in the Whitton ORA. 3

4 Case Document 280 Filed in TXSB on 01/24/18 Page 4 of 11 payment. 7. To the extent that any additional definitive documents are necessary to implement paragraph 7 of the Settlement Agreement, the Debtors will file any such documents with the Court, and any such documents will be consistent in all material respects with the Settlement Agreement. Parties in interest shall have 7 days to object to the additional definitive documents on any grounds, and if a timely objection is filed, the Court will conduct a hearing on the definitive documents after notice to creditors and parties in interest. Notwithstanding the immediately preceding sentence, nothing in this Order shall require any party to the Settlement Agreement to enter into any additional definitive documents. 8. Nothing in this Order limits, extinguishes, determines, or otherwise modifies Cobalt s rights to access and use any and all data and information, including but not limited to seismic data, reservoir data, and other intellectual property transferred to Sonangol or in Sonangol s possession, necessary to calculate the Cash Value under the Whitton ORA (the Cash Value Information ). If for any reason, at any time, Cobalt asserts that it lacks the Cash Value Information necessary to calculate the Cash Value, Cobalt shall nonetheless be required to proceed with calculating the Cash Value as set forth in Clause 8.1, and cooperate in the calculation of the Cash Value with information available to it. Moreover, Cobalt shall be required to disclose the Cash Value Information in its possession to Whitton and any independent experts and/or tribunals engaged to determine the Cash Value for the limited purpose of determining the Cash Value as set forth in Clause 8.1 of the Whitton ORA. 9. The Debtors shall cause the $500 million settlement payment or any portion thereof actually received from Sonangol to be deposited into a segregated depository account located in the United States established and maintained by the Angolan Subsidiaries. Nothing in this Order shall enlarge, abridge, or otherwise modify any interested party s rights, claims, and/or defenses with respect to the settlement payment, or any security interest or lien in the underlying assets or settlement payment or proceeds, which security interests and liens, if any, shall attach to any such payment or proceeds. No distributions or transfers shall be made from the segregated depository account absent further order of this Court. Based on the foregoing, and for the reasons set forth below, the Debtors believe that the Settlement Agreement should be approved, that the Debtors should be authorized to cause their applicable subsidiaries to consummate the settlement, and that the Court enter the revised 4

5 Case Document 280 Filed in TXSB on 01/24/18 Page 5 of 11 proposed form of order and overrule (to the extent necessary) the limited objections. Argument I. The Settlement Should Be Approved and the Motion Granted. 7. As set forth in the Motion, a court may approve a proposed settlement as long as it is fair, reasonable, and in the best interest of the estate. See In re Age Ref. Inc., 801 F.3d 530, 540 (5th Cir. 2015). In determining whether a proposed settlement is fair, the court should look at the settlement as a whole, rather than the particular issues that are in dispute. Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968). The Settlement Agreement represents a fair and reasonable compromise that is in the best interest of the Debtors estates because the benefits of the settlement outweigh its costs after considering the probability of success in litigating the claim, the complexity and likely duration of litigation and related expenses and inconvenience, and all other factors bearing on the wisdom of the compromise, including the interests of the creditors and the extent to which the settlement is the product of an arms-length negotiation. II. The Committee s Limited Objection Ignores the Substantial Efforts the Debtors Have Made to Educate the Committee Regarding the Settlement and Should Be Overruled. 8. The committee s principal complaint in its objection that it does not have enough information to evaluate the settlement falls flat in the face of the Debtors extraordinary efforts to provide the committee with informal diligence and discussions as well as formal discovery. And the committee s attempt to second-guess the Debtors business judgment in determining to cause their subsidiaries to enter into the settlement Agreement should be disregarded. 9. More specifically, the committee s objection claims it needs additional information with respect to the following (Committee Obj. 1): the impact of potential Whitton royalty claims (a specific claim issue not relevant to the overall evaluation of the settlement); 5

6 Case Document 280 Filed in TXSB on 01/24/18 Page 6 of 11 the flow of settlement funds into the Debtors estates (premature in the face of yet-tocome potential expenses associated with the Debtors subsidiaries exit from Angola); information on the feasibility of any alternative sale transactions (an avenue the Debtors have already pursued and concluded is not viable for reasons stated in the Motion); and information on the Sonangol arbitration and the potential future collection of any award (one component of the general uncertainty of success in litigation considered and explained by the Debtors in the Motion and substantial diligence and discovery materials). 10. The Debtors have provided the committee with significant access to information and people to facilitate its due diligence. For example, the Debtors have: produced at least 1,052 documents consisting of 5,061 pages to the committee and continue to provide additional documents; participated in numerous conference calls, correspondence, and other meetings with the committee and its advisors; hosted a meeting between members of the Cobalt senior management team and the committee on January 11, 2018 to discuss the merits of the Settlement Agreement and related process; and made Richard A. Smith, Senior Vice President, Strategy and Business Development at Cobalt, available for a deposition on the settlement. 11. To the extent that the committee s objection questions the reasonableness of the settlement and the Debtors sound business judgment, it should be overruled. The Debtors reiterate that the deal embodied in the Settlement Agreement is far and away the best available given the circumstances. The arbitration proceedings imposed significant costs by diverting time and monetary resources in the months leading up to the Debtors chapter 11 filing, and the settlement provides the greatest amount of certainty available in the amount and timing of payments. If Cobalt were to continue to pursue its claims, there would be no certainty of success in such highly complex arbitrations. Despite Cobalt s belief that the Angolan Subsidiaries would prevail, if the Angolan Subsidiaries pursued these claims through to an arbitral award, under the current 6

7 Case Document 280 Filed in TXSB on 01/24/18 Page 7 of 11 schedule, these claims would not be fully adjudicated until the end of next year. At the same time, Cobalt would need to devote significant management time and monetary resources, which would be better devoted to its core business and the pending chapter 11 proceedings. Following an arbitral award, the Angolan Subsidiaries may also face significant risk with enforcing this award against a foreign, government-owned entity. And even if enforceable, the award could be structured over a longer time horizon. This settlement allows Cobalt to monetize its claims against Sonangol and its Angola assets now something that is otherwise impossible given the timeline for the arbitrations and the inability to effectively market the Angola assets to third parties without extensions of the underlying concessions. 12. In addition, the committee s requests for information regarding the Whitton claim have no bearing on the reasonableness of the settlement. The amount that Whitton may claims is simply one of multiple interests that could be asserted against the settlement proceeds once received. Further information on Whitton s interest sheds no light on the fundamental question of whether the Debtors exercised sound business judgment by causing the Angolan Subsidiaries to enter into the Settlement Agreement. The proposed order provides that no distributions or transfers of these settlement proceeds shall be made without further order from the Court and establishes the process (consistent with the Whitton agreement) to determine what might be owed under the contract. 13. The committee has no basis or authority to claim the settlement is unreasonable or anything but a sound exercise of business judgment. As discussed above, the Debtors have made every effort to ensure that the settlement has been transparent and have gone to great lengths to ensure that the committee has information on all aspects of the process. Other constituencies, including the first lien indenture trustee, the ad hoc group of first lien noteholders, the second lien 7

8 Case Document 280 Filed in TXSB on 01/24/18 Page 8 of 11 indenture trustee, the ad hoc group of second lien noteholders, and the ad hoc group of unsecured noteholders, have expressed support for the Settlement Agreement as well. And the Debtors submit that all other aspects of the committee s objection are resolved through the revised form of order. III. Sonangol s Limited Objection 14. Sonangol s limited objection seeks Court oversight and approval as the parties draft and execute the definitive documents contemplated by the Settlement Agreement. (See Sonangol Objection 4 8.) The rights Sonangol asserts in its objection are expressly contemplated in and accommodated by the Settlement Agreement, and its belt-and-suspenders-style objection is no bar to approval of the settlement. 15. To be clear, the Debtors do not believe that any additional documentation is necessary to consummate the settlement. However, to the extent that it is necessary to enter into definitive documentation (e.g., a simple bill of sale or deed), the Debtors will execute the documentation pursuant to the terms of the Settlement Agreement and will ensure that such documentation is entirely consistent with the Settlement Agreement. Pursuant to the revised proposed form of the order, the Debtors will also file any documentation with the court and offer parties seven days to raise any objection to such documents. 16. The Debtors are committed to taking any and all steps necessary to effectuate the settlement. The Debtors expect Sonangol to do the same including by adhering to its payment obligations and the payment deadlines agreed in the Settlement Agreement. As mentioned above, the Debtors have worked to revise the proposed form of order to address the stakeholders concerns. The Debtors believe that the revised order adequately addresses the concerns raised by Sonangol. 8

9 Case Document 280 Filed in TXSB on 01/24/18 Page 9 of 11 Conclusion 17. Based on the foregoing, the Debtors request that the Court overrule the objections to the extent necessary, authorize performance under the Settlement Agreement, and grant such related relief as this Court deems just and proper. [Remainder of page intentionally left blank.] 9

10 Case Document 280 Filed in TXSB on 01/24/18 Page 10 of 11 Houston, Texas Dated: January 24, 2018 /s/ Zack A. Clement Zack A. Clement (Texas Bar No ) ZACK A. CLEMENT PLLC 3753 Drummond Street Houston, Texas Telephone: (832) and- James H.M. Sprayregen, P.C. (admitted pro hac vice) Marc Kieselstein, P.C. (admitted pro hac vice) Chad J. Husnick, P.C. (admitted pro hac vice) Brad Weiland (admitted pro hac vice) W. Benjamin Winger (admitted pro hac vice) Laura Krucks (admitted pro hac vice) KIRKLAND & ELLIS LLP KIRKLAND & ELLIS INTERNATIONAL LLP 300 North LaSalle Street Chicago, Illinois Telephone: (312) Facsimile: (312) Co-Counsel to the Debtors and Debtors in Possession

11 Case Document 280 Filed in TXSB on 01/24/18 Page 11 of 11 Certificate of Service I certify that on January 24, 2018, I caused a copy of the foregoing document to be served by the Electronic Case Filing System for the United States Bankruptcy Court for the Southern District of Texas. /s/ Zack A. Clement Zack A. Clement