Statoil And Cobalt Energy Could Profit Off Angolan Pre-Salt Play

Includes: CIE, PBR, STO
by: Power Hedge

One of the big stories in the energy space over the next few years is likely to be that of the Angolan pre-salt. When most investors think of pre-salt plays, they likely think of Brazil, whose massive pre-salt reserves off of the coast have made it one of the few countries in the world with rising oil output. Not as well-known are the large pre-salt deposits that sit across the Atlantic from Brazil, directly off of the coast of the West African country of Angola.

The Angola pre-salt reserves are believed to be enormous as evidenced by the fact that they are regularly compared to be similar in scope to Brazil's. In fact, these pre-salt reserves are part of the same geologic formation as the ones off of the Brazilian coast and so there is a lot of optimism for the potential of these resources. The Angolan government is understandably quite excited about the economic growth that their pre-salt oil resources can bring to the nation and so earlier this year it leased out various blocs in the Kwanza Basin to a number of Western oil companies with the intent that they will develop these resources. The nation also leased out another high-potential pre-salt play in the Benguela Basin to Brazil's Petrobras (NYSE:PBR). Petrobras, of course, already has considerable expertise and experience in developing pre-salt plays.

Angola is currently one of the two largest oil exporters in Africa and has been battling Nigeria for the title. Angola has not, however, been able to out export Nigeria on a consistent basis. These pre-salt reserves have the potential to change that. According to the EIU,

"In the long term, if the pre-salt reserves prove to be at a level comparable to those in Brazil, Angola's oil production will probably overtake Nigeria on a sustained basis, raising the country's position to that of Africa's biggest oil exporter."

One way that investors can profit off of the growth in the Angolan pre-salt is with the Norwegian energy giant Statoil ASA (NYSE:STO). I briefly discussed Statoil's opportunities in the Kwanza Basin in my analysis of their fourth quarter results. Statoil has operatorship of Blocks 38 and 39 in the Kwanza Basin with a 55% position in these projects. The company also holds a partner position with a 20% interest in Blocks 22, 25, and 40.

Another company that is well-positioned to profit off of Angolan pre-salt development is Cobalt International Energy (NYSE:CIE). Cobalt has a significant presence in the Angolan pre-salt. The company's website states that it is the operator of Blocks 9, 20, and 21 in Angola's Kwanza Basin. Cobalt has a 40% working interest in each of these three blocks.

The potential upside to Cobalt could be huge if there are significant resources found in these areas. There does appear to be a strong possibility of that. On February 9, Cobalt announced the successful drilling of a test well at Cameia in Block 21 offshore Angola. The company was able to confirm the presence of a 1,180 foot gross continuous oil column with over a 75% net to gross pay estimate through a wire line evaluation program. The company's drill stem test at the location also showed very promising results. The drill stem test flowed at an un-stimulated sustained rate of 5,010 barrels per day of oil and 14.3 million cubic feet per day of associated gas. This test, which exceeded the company's pre-drill expectations, confirmed the presence of a very thick, continuous, high-quality reservoir saturated with light oil. The company believes that the full production well that they intend to develop at the site will produce at least 20,000 barrels per day.

Cobalt shareholders struck (black) gold on the news, with the share price rocketing to its 52-week high in the weeks following the announcement. The shares have since receded somewhat but they still remain significantly above the level that they were at at the beginning of February.

Source: Fidelity Investments

Cobalt stated in their third quarter conference call that the company intends to begin drilling a test well in Block 9 off of the Angolan coast around the end of 2012. If this test well is as successful as the one at Cameia then there could be significant further upside to the shares.

One of the biggest risks of Cobalt is the company's finances. Cobalt has lost money every quarter since the company was started. This is largely due to the company's start-up costs. Cobalt was essentially started with a pile of money and leases to a few areas in the Gulf of Mexico and West Africa. From there, the company started drilling in these areas in search of oil. Of course, drilling for oil on the bottom of the ocean floor (and below the pre-salt layer in Angola) is not at all cheap. These exploration and drilling costs have resulted in a cash drain on the company.

I expect this to continue over the next few quarters as the company brings their successful discoveries online. As the company continues to develop the Block 21 area in Angola and the other pre-salt blocks in the region, the company should be able to reduce their losses and swing to a profit. There are no guarantees that there is oil on their other Angolan blocks but it is likely that oil is present. Cobalt does remain a riskier play than larger oil companies that are developing the Angolan pre-salt. The upside potential also appears to be greater. This may be a risk worth taking. I am currently considering buying Cobalt for my portfolio but I will likely wait for a pullback to do it in order to increase my margin of safety.

Disclosure: I am long STO. I may acquire a position in CIE within the next 72 hours.

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