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Today Cobalt International Energy (CIE) announced a planned secondary public offering of 50,000,000 shares of common stock. Cobalt will not receive any of the proceeds from the sale as the common stock being sold is held by affiliates of First Reserve, Goldman Sachs (GS), The Carlyle Group (CG), and KERN Partners Ltd.

Investors should be concerned. 50,000,000 shares is a lot for the market to absorb - especially for a company with no earnings like CIE. Also, if the stock isn't good enough for Goldman Sachs, why is it good enough for you? Indeed, the stock is currently down 6.7% as I write this article.

CIE Chart
(Click to enlarge)

CIE data by YCharts

  • CIE = $26.85
  • Mkt Cap = $10.87 billion
  • Shares Outstanding = 406,651,869 (according to Q1 earnings report)
  • EPS (ttm) = -$0.92
  • P/E = N/A
  • Div (Yield) = Nil (0%)

While this warning maybe too late, could further drops in the stock come as a result of 50,000,000 shares being dumped onto the market? This secondary offering is 12.3% of the total outstanding share count at the end of Q1. And this comes on the heels of a recent similar offering of 40,000,000 shares back in January of this year. In that previous announcement CIE stated:

Cobalt today also announced that, as a result of the secondary offering and the selling stockholders now owning in the aggregate less than 50% of Cobalt's total outstanding shares of common stock ...

However, it is clear large stockholders still own significant chunks of CIE stock. Investors should prepare themselves for additional future secondary offerings like the one announced today.

While I have written previously about CIE's asset base ("Is Cobalt International A Speculative Buy"), these large secondary offerings concern me. If Goldman Sachs believes the firm could be bought out by a big oil company, why are they selling now? And why should investors buy shares now when they can wait until a future large secondary offering takes place when even more shares are held by weaker shareholders?

Small individual investors should be careful with CIE. I might even consider shorting the stock a couple months from now if it climbs significantly from today's level. Another secondary offering is probably coming. The last one was 4 months before today's announcement. Could the next one be 4 months from now?

Source: Be Careful With Cobalt International Energy