OREANDA-NEWS. S&P Global Ratings today affirmed its 'CCC+' unsolicited corporate credit rating on Houston-based Cobalt Energy International Inc. (CIE) and revised the outlook to negative from stable.

At the same time, we affirmed our 'CCC-' issue-level rating on the company's convertible senior notes. The recovery rating on this debt is '6', indicating our expectation of negligible (0%-10%) recovery in the event of default.

"We are revising the outlook on CIE to negative based on our view that the company could face a material liquidity shortfall in late 2017 absent asset sales or a significant reduction in capital spending," said S&P Global Ratings credit analyst Kevin Kwok. "We have also revised our assessment of liquidity to less than adequate," he added.

On Aug. 22, 2016, the purchase and sale agreement between CIE and the Angolan national oil company, Sonangol, was automatically terminated on the one-year deadline as the requisite Angolan government approvals were not received. CIE will be required to return the initial $250 million payment made by Sonangol in 2015. CIE and Sonangol jointly agreed that the company would market its 40% working interest in each of Block 20 and 21 to third parties. Sonangol currently holds a 30% and 60% working interest in Block 20 and 21, respectively. The company has begun marketing its Angolan assets to interested third parties.

Our 'CCC+' corporate rating reflects Cobalt's unsustainable leverage and its reliance on the success of its exploration and development program to improve its financial standing. Currently, the company has limited production, revenues, and proved reserves.

The negative rating outlook on CIE reflects the possibility that we could lower the rating if we believed the company would face a material liquidity shortfall within the next 12 months. We estimate that cash on hand will be sufficient to cover capital expenditures, interest expense, and operating costs over the next year, but that the company will need to execute additional asset sales, raise other external capital, or significantly reduce capital spending in 2017 to avoid a material liquidity shortfall. Cobalt has begun marketing its Angolan assets to interested third parties.

We could lower the rating if liquidity deteriorated such that we expected a material deficit within 12 months, or if we no longer expected the company to be able to meet its obligations. This would most likely occur if the company were unable to sell its Angolan assets to a third party, or if it did not significantly reduce capital expenditures next year.

We could revise the outlook to stable if the company were able to improve liquidity, which would most likely occur if it were able to sell its Angolan assets at a price that would fund capital expenditures over the next two to three years, or if it raised other external capital. Although cutting capital expenditures would preserve liquidity near-term, it could ultimately hinder the company's ability to grow production and reserves.