Is Cobalt International Energy Inc. A Good Speculation?

| About: Cobalt International (CIE)

Summary

The company has about $1 billion in cash.

The Angola deal may add more than $1.5 billion to $1.75 billion in cash to that total, solving the financing needs for several years.

The company lists several Gulf of Mexico discoveries on its website and has received the first revenues from one of those discoveries.

Stock plus long term debt is now under $3 billion, so the Angola deal is far more significant to shareholders than when the total value was over $20 billion.

Management is still exploring and planning development, so the remaining leases have value. That value probably currently exceeds the value of the stock plus long term debt by a lot.

Here is a company that has suffered mightily as the oil industry has bottomed. This former market darling, Cobalt International Energy Inc. (NYSE:CIE), has crashed a far greater percentage than many of the stocks in the energy sector. What was once a great speculation or even an investment in the $20 to $40 per share range is now a pariah in the $1 range. Even though the price of oil is less than one-third of its former highs this stock has had quite a correction. The main thing is to determine if the stock has dropped enough or does it have further to go.

The company's latest release shows about $1 billion in cash. Management has mentioned several times that the cash on hand is enough to last until the end of 2017. The company website lists several discoveries and on-going evaluations. Yet from the price of the stock, one would think the company will file bankruptcy tomorrow and has yet to discover a drop of oil (let alone several major discoveries).

The company announced a sale about a year ago that would bring another $1.75 billion or so into the company coffers once the transaction closed. To the market's dismay, this transaction has been delayed. So of course the rumors are flying about a cancellation. However, as of right now the deal is still on, although more delays are certainly possible.

Should the deal close within the next year, as currently seems more than likely, the influx of cash would solve any potential liquidity problems for several years. Even if the deal does not close, the company has discoveries on these leases that are worth something. So management should be able to arrange the necessary financing to continue as an operator on the leases or explore other options as required. In any event this situation is clearly not a disaster in the making.

The first revenues from the company properties have finally been received, but it will be some years before those revenues are expected to complete the company's transition from a "concept stock" or a stock of promise to an operating oil company. Even the company website mentions that this process has just started. It will be some years before the company shows profits. So clearly the company will need more cash to get there. But several of the discoveries are credit-worthy assets. So financing development will be easier even in the current hostile industry conditions. Many of the company's leases involved multi-year projects if successful. So there likely is some financing or more property sales ahead.

Plus the company has nearly $2 billion in convertible bonds, although the convertible part is not worth anything right now. When the market value of the stock was sky high, those bonds did not look like much of an obligation, but now that the stock has crashed, that debt is a whole lot more significant. But it is not a deal killer.

The Angola deal, if closed would bring in enough cash to nearly wipe out the long term debt if management would choose to do it. That would mean the rest of the company is worth about $800 million or so in common stock value and remaining debt. Back when the market value of the equity was around $20 billion or so, the Angola deal would not have the significance to shareholders that it does now when the market value of the equity is far less than $1 billion. When I look at all the older articles when oil and gas prices were higher that called this stock cheap at much higher values, one should be investigating the potential here even with the new industry environment.

Management is still exploring, drilling and developing its leases. So the leases have value even now. Activity in the Gulf may be down, but as this company demonstrates, there is still profitable development opportunities and this company will get its share on those in the future. More Gulf of Mexico wells will add to revenues in the future, and should the company have an average amount of success going forward, this could be a very viable company in the future. It really would not take too many Angola type sales or discoveries to change the market's perception of this stock. So for the investors who realize and are able to stomach the risks, this speculative situation is probably a far better value now than it ever was in the years leading up to the current price.

Investors will have to watch the cash balance and the cash needs well into the future. Oil prices may not cooperate and could go so low as to render the company's leases useless, but that seems unlikely. Any oil price increases from the current levels are definitely welcome in the industry. The management has demonstrated a reasonable amount of experience, and the last few years of drilling have enabled far more accurate placements of potential wells. The stock, which once held so much promise in the market's eyes, now holds next to none, so there clearly is a fair amount of upside to the stock on average success. As usual the market tends to abandon stocks like this just when the revenues begin to trickle in. The industry down-turn certainly did not help the price of this stock. But that current low stock price may prove the best time to speculate on some high capital gains.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.