Cobalt International Energy - Risky, But Not Hopeless

| About: Cobalt International (CIE)

Summary

The company raised $500 million so the unrestricted cash balance now is in the range of $900 million. That should last two years.

Meaningful production will not start until at least 2020. So more financial planning is needed.

The Angola leases are being marketed but the stock market does not appear to put much hope into their sale.

The company is making solid progress in the Gulf. Sufficient delineation could make some of these discoveries loan-able.

Those prepared for a bumpy ride could win big with a stock like this that is part of a basket of speculative stocks.

The last time this company was reviewed, Cobalt International Energy (NYSE:CIE) had been pretty much left for dead by the market. This one time market darling, that once traded over $30 a share on high discovery and low cost hopes, now trades for a fraction of its value. But then again, new issues frequently trade at very low percentages of their offering price sometime after the offering. For this company, the process took awhile, but this stock suffered more than most, beginning its decline before the wave of commodity price decreases, and then getting absolutely pounded once those decreases started.

As with last time, there was a ray of hope. The last article detailed the hope that the sale of the Angola leases would provide some badly needed liquidity. But that article was barely published when the deal came apart. Management, however, proved to have a few other options. So along came a fund raising anouncement that added about $500 million to the cash account. At the same time, management also pushed the due date for about half of the long term debt further out into the future.

The balance sheet did become more leveraged in the process, but the only way to get some of these discoveries to produce is to further explore and establish commercial parameters. Cobalt is a big company that has taken on some large offshore projects. So reducing the capital budget may be out of the question. Shareholders just dodged a bullet because the latest financial moves resulted in the issuance of about 30 million shares. The dilution could have been far worse.

But until something solid with the Angola leases happens, more financing moves will be necessary. That $500 million raise is about one year's worth of expenditures.

Source: Cobalt International Energy, September, 2016 Investor Presentation

Cobalt was always going to have lots of production (Adobe download) in the future ever since the public offering. As shown above that future really gets started after 2020. The Gulf spill relayed delayed the future of this company in so many ways. It also added considerably to projected costs. Still, management has managed to keep liquidity adequate.

Discovering the oil may have been cheap per BOE, but the delays are exponentially adding to the financing headaches. The company still has to make it to the days of adequate production as an operating company. Those days are still in the future. So the financing must get the company there and that has always been the challenge.

So if the Angola leases are not sold or things do not improve materially in Angola, than the money to achieve the Gulf production shown above must come from somewhere else. The future bonanza has been delayed several times during the public company years for various reasons. But for shareholders those delays mean more dilution, more debt, and a greater bankruptcy possibility.

The current stock price seems to have most of the really terrible outcomes priced into it and for good reason. As shown above, there is not much income for the next few years. Even after the latest cash raise, the company has about two years of liquidity. 2020 is just a little bit further away than that. So this company will be very dependent upon non-operational cash to fund its future. Mr. Market is never to happy about that. Plus management made the fateful decision to incur debt long before there was any promised production. More stock was clearly indicated until the future parameters were far better defined. But the capital structure still appears to have some flexibility left because management did raise $500 million or so. How much more can be raised is an open question.

Source: Cobalt International Energy, September, 2016 Investor Presentation

The future appears to be more and more (Adobe download) dependent upon the outcome of the slide above. The discoveries are clearly evident, but now the profitability, and the costs needed for that profitability are the main concern. The company had more than $400 million of unrestricted cash on the balance sheet, so the latest financing moves raised that figure to more than $900 million. Possibly some of these projects can be moved to production earlier to add to future cash flow. There is some production income, but not nearly enough to matter. For all intents and purposes, this is still basically an exploration company.

"The preliminary results are encouraging and indicate that the well encountered approximately 650 feet of net oil pay, which is greater than the approximately 550 feet of net pay found in the North Platte #3 appraisal well. The North Platte #4 initial appraisal results also indicate high quality Inboard Lower Tertiary Wilcox reservoirs on the eastern flank of the North Platte field."

The market appears to be currently ignoring this kind of solid progress. Company finances appear to be the main concern. But if one of these prospects is large enough, and the resource has been property defined, then the projects may be loan-able at some point and still be very profitable. The company once had a market value of more than $10 billion when oil prices were higher. Now the total enterprise value is in the $2 billion range. Yet discoveries have been catalogued and future income is becoming visible on the horizon. Ironically profits are becoming more certain, yet the stock is now worth far less than when profits were far more speculative.

Now the road to get to that income could be very bumpy, and shareholders definitely run the risk of losing their total investment. But buying on disappointments, dollar cost averaging, or even purchasing upon the achievement of significant benchmarks may be a winning strategy for investors in this company. A strong stomach is required though. This stock is not for the faint hearted. This investment should definitely be a small part of a basket of speculative stocks. The chance to win big, though is clearly there.

Management has guided the company this far, it seems that they will be likely to guide the company to significant productions and that first year of profitability. Such an event could make the current shareholders a lot of money. The sale of the Angola leases would shore up the company finances tremendously. But there is really not much hope of that currently. Still the potential is there. In the meantime, management has demonstrated the ability to finance the company so far, though the latest financing required liens. A future large scale equity for debt swap, or even a merger with a production company may be the best way to go.

The company is definitely speculative, but it is far from hopeless. Those Gulf Of Mexico discoveries will be worth something. The main hope is for management to be able to guide the company to the point where those discoveries profit shareholders. There is a lot less risk now that the stock is approximately at $1 or so than there was when the stock was more than $30.

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.

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Tagged: , Oil & Gas Drilling & Exploration
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