Energy IPO a No Show

Dec.20.09 | About: Cobalt International (CIE)

Back in September, when Cobalt International Energy (NYSE:CIE) started prepping to go public, I thought we had all the makings of an exciting energy IPO. BP (NYSE:BP) had just uncorked a giant gusher in the Gulf of Mexico, which is where a good portion of Cobalt's offshore prospects lie. West Africa has also grabbed headlines this year with offshore discoveries by the likes of Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO), not to mention a wild race by ExxonMobil (NYSE:XOM), CNOOC (NYSE:CEO), and other parties to snap up Kosmos Energy's multibillion-dollar stake in Ghana's Jubilee field.

Alas, no fireworks came to pass. Cobalt priced at $13.50 per share this week, representing a discount to the planned range of $15 to $17. The market is apparently saving its barn burners for batteries.

Like I said last time, "with no proved reserves and no production expected before 2012, this is going to be a tough company to price with any precision." Let's see what sort of value Mr. Market has come up with.

Share Structure and Capitalization

Numbers

Shares outstanding

336.2 million

Market capitalization

$4.47 billion

Cash and equivalents

$1.08 billion

Debt

$0

Enterprise value

$3.39 billion

Book value

$1.75 billion

Click to enlarge

Data from company filings.

That might sound like a steep price tag for a company that's heavy on promise and light on tangible asset value, but my own quick valuation (some might say wild guesswork) actually puts Cobalt's prospect inventory quite a bit higher. I'm happy to pull back the curtain and show you my thinking here.

Gulf of Mexico

West Africa

Prospects

47 gross / 23 net

85 gross / 26.7 net

Average target size

100 million BOE

50 million BOE

Success rate

30%

40%

Price per discovered barrel

$5

$5

Prospect inventory value

$3.45 billion

$2.67 billion

Click to enlarge

Prospect inventories from company filings. The rest are author's estimates.

Any valuation attempt hinges on two key variables that are impossible to pinpoint today: the size of Cobalt's average drilling target, and the success rate in drilling commercial discoveries. In West Africa, where Cobalt's prospects are split between above salt and pre-salt targets, I gave the company better odds of hitting pay dirt, but fewer elephant-sized deposits. At $5 per discovered barrel, this gave me a total prospect inventory value pushing $6 billion.

Reverse-engineering Mr. Market's valuation implies (among other scenarios) a 25% success rate and 55 million barrels per target across the board. I think that is too low.

It's possible that I'm giving Cobalt too much credit in the Gulf of Mexico, where it has ridden Anadarko Petroleum's (NYSE:APC) coattails on two discoveries, but hit a drilling hitch with its own operated prospect. I think it's just as likely, however, that I'm lowballing Cobalt's West African prospectivity.

The bottom line is that it's far too soon to tell who's right here.

Author's Disclosure: No position in any company mentioned.