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Hidden "Massive" Value In Cobalt Energy Bankruptcy

|About: COBALT INTL ENERGY INC (CIEIQ)
Summary

Cobalt asset sale could potentially create significant value at current equity level.

Book value of assets on the balance sheet is not a suitable indicator.

Any asset sale over $1.8B will create recovery for equity holders.

High Level Financial position of Cobalt Energy

After the Angola asset settlement, Cobalt has about $1B of Cash- $500M before bankruptcy and $500M cash to be received from the Angola asset settlement. The total liabilities, including total debt, is around $2.8B. This means if Cobalt energy is able to sell its assets over $1.8B that should lead to recovery for Cobalt's equity owners and massive upside for those who buy the equity at the current levels.

Book value of assets on the balance sheet is not a good indicator

The book value of assets on the balance sheet is around $0.9B. Most of it is categorized as unproven reserves, which is a function of Cobalt Energy not being at the development stage for most of its assets. The company has capitalized the investments made in exploration and drilling of those assets and that's what constitutes the $0.9B book value. Cobalt Energy claims that its Gulf of Mexico assets have north of 500M barrels of oil. In the June investor presentation, Cobalt energy indicated that the implied valuation of its assets could range from ~$2.6B to ~$5.1B (see the chart on the right side).

A minor point, but an important one, to note. In June, at the time of the above presentation, the WTI was trading around $50. WTI is currently hovering around $70. That should further improve the value of Cobalt's assets.

Chapter 11 should help maximize the value of Cobalt's assets

The key focus of Cobalt energy during Chapter 11 is to sell all its assets through a bidding/auction process. A court monitored chapter 11 facilitates the sale process as creditors cannot wield influence and also the buyer gets the assurance that the target asset is free of any issues/conflicts. Finally, an auction could lead to multiple bids, maximizing the value of the assets. Per the court filings, Cobalt energy is aiming to conclude the assets sale by mid March.

Final Word

The total liabilities of Cobalt energy is around $2.8B and the cash position is around $1B. The implied valuation of 500M barrels of oil, per the investor presentation in June, is around $2.6B to $5.1B. Even if we assume that the company is able to sell the assets near the lower end of the range, the value left for equity holders could be ~$800M (Asset Sale of $2.6B plus $1B of cash minus $2.8B of liabilities). The market cap of Cobalt energy (OTCPK:CIEIQ) is hovering around $20M, which mean return of 40x after asset sale. Yes, I have ignored various legal fees of Chapter 11, management compensation etc., but all of those charges will look insignificant if Cobalt can really sell the assets at the suggested implied valuation numbers.

Disclosure: I am/we are long CIEIQ.