Cobalt International (CIE) is not a company that I would be typically interested in investing in. I did own it for one seven month stretch when I bought it at a depressed price shortly after the BP Macondo spill and sold in the spring of 2011.
The reason I’m not really all that interested in Cobalt is because I think it is virtually impossible for me to value. The company is an oil and gas explorer that is just getting started with its exploration program. Most of the value in Cobalt’s market capitalization is Mr. Market’s opinion on how much oil and gas Cobalt will find. Not how much oil and gas Cobalt has already found.
Cobalt is a pure exploration company. Cobalt has cash and exploration targets, no producing properties.
Valuing Cobalt is more speculation than calculation.
Now don’t get me wrong. I think Cobalt will likely turn out to be a very good investment. Cobalt sits on a bunch of highly prospective (and giant) exploration targets. And you can bet that the team that assembled those targets knows what they are doing. After all 19% of the shares are owned by Goldman Sachs who generally doesn’t bet big on amateurs. And given the size of the targets all Cobalt really needs to do is drill one successful well to make investors happy.
We Are At The Beginning of Cobalt’s Transformational Period
When I owned Cobalt in 2010 I did so simply because I wanted a basket of companies with a lot of exposure to the Gulf of Mexico. Cobalt was one of several. I thought the Macondo disaster would pass and that the stock prices of these companies would rebound significantly from depressed levels. That worked out well for me, but even when I owned Cobalt I knew that I couldn’t really value it.
Because I owned it I did study it a bit and became fascinated with what the company is doing. This is the game plan as described in the latest company presentation:
- Cobalt has commenced drilling programs on two continents that will expose our shareholders to several billion barrels of exploration resource over the next 3 years
- Cobalt is focused in two of the world‟s most prospective “oil prone basins “
o Deepwater Gulf of Mexico
o West African Offshore Margin
- Cobalt is levered for success
o Multiple potential catalytic events over the next 18 months
o Operating control - thus able to prioritize prospects to drill and influence timing
o Very large prospects - material impact to shareholders
These guys are truly elephant hunters. And they are about to set out for their first real hunting expedition in 2012 as the fallout from the Macondo spill is now finally over and Cobalt can start drilling Wildcat exploration wells.
Cobalt operates in two regions, the Gulf of Mexico and Offshore Africa. From now through the end of 2012 Cobalt plans to drill the following targets:
–Cameia - Drilling
–Bicuar - follows Cameia
–Block 21 appraisal and/or Block 9 exploration - 2H 2012
–Diaba exploration* - 2H 2012
Gulf of Mexico
–Ligurian - 4Q 2011 - waiting on rig
–North Platte - follows Ligurian – contingent permit in hand
–Heidelberg appraisal* - Drilling
–Shenandoah appraisal* - mid 2012
–Rum Ramsey exploration* - mid 2012
Every target Cobalt drills has multi hundred million barrel potential. So this is a pretty long list of potential catalysts for the next 12 months.
DeGolyer and MacNaughton estimate that Cobalt has 11 billion barrels of unrisked reserve potential. The list of prospects above account for 3 billion barrels of it. At the current stock price around $16 per share Cobalt has a market capitalization of about $6 billion. If you assume a barrel of oil in the deepwater is worth $20 then you could speculate that the market is assuming that Cobalt finds about $6 billion / $20 = 300 million barrels (Cobalt has already found 100 million barrels).
Is that optimistic? Too conservative? I have no idea. What I do know is that less than a month ago Cobalt’s stock price was just over half of where it is today. The increase relates to the following news item:
Dec. 20, 2011-- Cobalt International Energy, Inc. (“Cobalt”) (NYSE:CIE) announced that at an official signing ceremony today in Luanda, Sonangol and Cobalt executives signed the Production Sharing Contract for Block 20 offshore Angola. Cobalt has been named the operator of Block 20 and has a 40% working interest in the block under this agreement. Other partners in Block 20 include Sonangol Pesquisa e Produção, S.A. (30%), BP Exploration Angola(Kwanza Benguela) Limited (20%) and China Sonangol International Holding Limited (10%).
Chairman and Chief Executive Officer Joseph H. Bryant said, “Cobalt is extremely pleased to be awarded operatorship of Block 20, which was the most sought after block by industry in the Pre-salt Bid Round. Together with our current positions in Blocks 9 and 21 and the Diaba Block in Gabon, Cobalt has the pre-eminent Pre-salt portfolio in West Africa.” Bryant added, “The Block 20 partnership has already initiated the acquisition of a 4,100 square km (1,575 square mile) 3D seismic program following Sonangol’s conditional award of Block 20 earlier this year. We are planning our first well in Block 20 in 2013.”
Block 20 is located immediately north of and adjacent to Block 21 and 12 km (7.5 miles) from the Cobalt-operated Cameia-1 well location. Block 20 is Cobalt’s third operated block in the Angolan Pre-salt Kwanza Basin, along with Blocks 21 and 9.
Cobalt is currently evaluating the results of Cameia-1 in Block 21. The results thus far confirm the existence of hydrocarbons and are very encouraging.
The last line being the big market mover. The Cameia-1 being a prospect with potential for a billion barrels of oil. Shares have gone from under $9 to almost $16 on this news.
An exciting start to what is sure to be an exciting year. I wonder how many of these targets Cobalt would have to hit on before a major like BP (BP) comes knocking wanting to buy the entire company?