COBALT INTL ENERGY INC CIE
August 17, 2013 - 1:26pm EST by
bruno677
2013 2014
Price: 29.37 EPS $0.00 $0.00
Shares Out. (in M): 411 P/E 0.0x 0.0x
Market Cap (in M): 12,078 P/FCF 0.0x 0.0x
Net Debt (in M): -393 EBIT 0 0
TEV: 11,685 TEV/EBIT 0.0x 0.0x

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  • Oil and Gas
  • Potential Acquisition Target
  • E&P
 

Description

I am recommending a long position in CIE ($29.37) with a 4-6 month time horizon.  I see an upside of $15 points ($45 upside price target) and a downside of $5 ($25 downside price target).  CIE is an oil and gas company.  CIE currently has none of the traditional metrics of a value investment and would not screen well on any value screen.  It has zero revenue and a $11-$12 market cap.  I highly recommend people read Mendoza’s December 2011 recommendation when the stock was at $9.  The investment in CIE is based on asset value and potential increase in asset value driven by an active exploration corporate strategy.   

 

 

Business Description

 

  • Cobalt International Energy (CIE) is an exploration play on oil and gas prospects in the deepwater Gulf of Mexico and especially offshore Angola and Gabon in West Africa, where its total leased acreage exceeds any other E&P company and where surveys suggest a continuation of the pre-salt formations like those in Brazil’s Tupi and Jupiter fields
  • CIE has no production to date. 
  • CIE has $1.5 billion of available cash to fund its drilling budget for the balance of 2013 and 2014.
  • The drilling program for the next two years is dedicated entirely to exploration and appraisal, not development. 
  • In fact, CIE lacks sufficient financial resources to develop the fields that it explores so its strategy will be to sell them.
  • CIE was founded as a private equity venture play on exploring, appraising, and then selling its interests in a promising and focused portfolio of deepwater oil and gas prospects.

 

http://www.cobaltintl.com/investor-center/#publications

 

Catalyst

 

Exploration

 

CIE has 4 big exploration wells with results in the next 3-6 months

 

 

Ardennes Project in Gulf of Mexico

 

  • Ardennes is similar in geographical extent to Shenandoah.  Shenandoah which is operated by Anadarko is one of the largest Gulf of Mexico oil discoveries.  CIE has a minority ownership interest in Shenandoah. 
  • The Ardennes Prospect will drill both Miocene and Inboard Lower Tertiary targets.
  • The total unrisked resource of these two targets has been appraised at up to 500mmboe
  • Ensco 8503 rig.
  • The well was spud in March and is estimated to take 155 days to drill. Well results in next 4-6 weeks. 
  • A successful Ardennes well can add $4-$6 to CIE.
  • Ardennes is CIE operated.

 

Diaman Well in Gabon

 

  • Total operated well
  • MRO a work interest partner like CIE has said the well has 250-800 mil. barrel potential and the whole structure has 3 bil. barrel potential.  
  • The Diaman well on Gabon is testing Lower Cretaceous Gamba and Dentale Sandstones.
  • This is the first well drilled in the Diaba block which is twice the size of a normal Angolan block.
  • Diaman is currently being evaluated by Total the operator.
  • Success at Diaman would add significant upside to CIE as well diversify its African portfolio. 
  • A successful Diaman well also opens up a large portion of offshore Gabon in which CIE owns acerage so there is additional optionality and resource potential for CIE if Diaman is successful. 
  • A successful Diaman well should be worth $7.50-$10 to CIE
  • Total is evaluation the well so results should be expected in next 4-6 weeks.

 

Lontra Well in Angola 

 

  • Lontra is probably the world’s most watched well and one with probably the greatest potential on a global basis for any company.
  • In my conversations with CIE management their research and seismic works has made them very interested in Lontra’s potential. 
  • Lontra is the largest 4-way pre-salt structure in the greater Kwanza Basin.
  • The Lontra hydrocarbon structure will not be derisked by this one well. 
  • CIE management has stated that Lontra well has an estimated resources potential of 1.5 bil. barrels.
  • I expect there to be may wells in this structure if Lontra well is successful. 
  • Lontra success would add between $10-$15 to CIE
  • Lontra was spud 5/21/2013 and is estimated to take 120 days to drill. Results in next 6-8 weeks. 
  • Lontra in CIE operated.

 

Mavinga in Angola

 

  • CIE is drilling Mavinga, as an offset to the large Cameia discovery
  • 5/3/31 spud with results in next 6-8 weeks.

 

CIE Optionality

 

Deepwater offshore drilling is a high risk venture.  There will be dry holes – not every well is successful.  Why do I like the risk return profile of CIE?  It is because its older discoveries have created a substantial asset base.  CIE discoveries in Gulf of Mexico and Angola give it a discovered asset value base of $22-$27 dollar.    CIE did not go from $9 to $29 without being successful with the drill bit.

 

What I like here is that for $5 of downside I am able to buy significant exploration upside.  The upside on hitting Lontra or Diaman would be a game changer in terms of CIE’s stock price.   I am much more comfortable taking expolartion convexity and risk with an asset floor built around North Platte, Shenandoah and Cameia.

 

 

Corporate Sale

 

I don’t expect CIE to be a public company in 12-24 months.  The size and potential of its asset base and its asset development are resources that can only be developed by a Major. 

 

 CIE normally has a slide and makes comments about high yield, farm outs, jv or other corporate strategies to develop their assets.  I personally think it is a joke.  These guys (CIE management) are exploration guys they don’t have the skill set, experience or ability to develop their asset base. 

 

http://www.bloomberg.com/news/2012-12-06/chevron-seen-eyeing-cobalt-to-kosmos-in-oil-hunt-real-m-a.html

 

http://www.bloomberg.com/news/2013-04-24/cobalt-s-oil-finds-seen-luring-shell-to-exxon-real-m-a.html

 

Management also has $500 mil. worth of equity interest in CIE and I think they probably want an exit and liquidity event over trying to build a mini XOM.

 

CIE private equity investors I thought would be pushing for a sale but they have reduced exposure in 2 separate billion dollar secondary sales.  For their remaining positions a corporate sale would be a great liquidity event. 

 

Any exploration success will bring additional talk of a sale to a major.    

 

Risks

 

  • Exploration - There will be dry holes.  In the kind of exploration CIE is doing it only needs to hit 300 to get into the hall of game – a baseball analogy someone in the oil business told me about CIE.  I am not a baseball guy. 

 

  • Angola - TIA - This is Africa.  There is country risk in Angola and Gabon. 

 

  • Oil Commodity risk

 

  • PE Selling - The Private equity holders already have the best PE investment every in the oil and gas space.  They are sitting on 6-8X and if there is exploration success with be holding 10X exisitng positions.  Do they seek liquidity via public markets instead of a sale of the company.

 

  • Development Strategy - CIE management decides to build an empire around their asset base and undertakes massive development projects - $20 bil. plus. 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

 
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    Description

    I am recommending a long position in CIE ($29.37) with a 4-6 month time horizon.  I see an upside of $15 points ($45 upside price target) and a downside of $5 ($25 downside price target).  CIE is an oil and gas company.  CIE currently has none of the traditional metrics of a value investment and would not screen well on any value screen.  It has zero revenue and a $11-$12 market cap.  I highly recommend people read Mendoza’s December 2011 recommendation when the stock was at $9.  The investment in CIE is based on asset value and potential increase in asset value driven by an active exploration corporate strategy.   

     

     

    Business Description

     

    • Cobalt International Energy (CIE) is an exploration play on oil and gas prospects in the deepwater Gulf of Mexico and especially offshore Angola and Gabon in West Africa, where its total leased acreage exceeds any other E&P company and where surveys suggest a continuation of the pre-salt formations like those in Brazil’s Tupi and Jupiter fields
    • CIE has no production to date. 
    • CIE has $1.5 billion of available cash to fund its drilling budget for the balance of 2013 and 2014.
    • The drilling program for the next two years is dedicated entirely to exploration and appraisal, not development. 
    • In fact, CIE lacks sufficient financial resources to develop the fields that it explores so its strategy will be to sell them.
    • CIE was founded as a private equity venture play on exploring, appraising, and then selling its interests in a promising and focused portfolio of deepwater oil and gas prospects.

     

    http://www.cobaltintl.com/investor-center/#publications

     

    Catalyst

     

    Exploration

     

    CIE has 4 big exploration wells with results in the next 3-6 months

     

     

    Ardennes Project in Gulf of Mexico

     

    • Ardennes is similar in geographical extent to Shenandoah.  Shenandoah which is operated by Anadarko is one of the largest Gulf of Mexico oil discoveries.  CIE has a minority ownership interest in Shenandoah. 
    • The Ardennes Prospect will drill both Miocene and Inboard Lower Tertiary targets.
    • The total unrisked resource of these two targets has been appraised at up to 500mmboe
    • Ensco 8503 rig.
    • The well was spud in March and is estimated to take 155 days to drill. Well results in next 4-6 weeks. 
    • A successful Ardennes well can add $4-$6 to CIE.
    • Ardennes is CIE operated.

     

    Diaman Well in Gabon

     

    • Total operated well
    • MRO a work interest partner like CIE has said the well has 250-800 mil. barrel potential and the whole structure has 3 bil. barrel potential.  
    • The Diaman well on Gabon is testing Lower Cretaceous Gamba and Dentale Sandstones.
    • This is the first well drilled in the Diaba block which is twice the size of a normal Angolan block.
    • Diaman is currently being evaluated by Total the operator.
    • Success at Diaman would add significant upside to CIE as well diversify its African portfolio. 
    • A successful Diaman well also opens up a large portion of offshore Gabon in which CIE owns acerage so there is additional optionality and resource potential for CIE if Diaman is successful. 
    • A successful Diaman well should be worth $7.50-$10 to CIE
    • Total is evaluation the well so results should be expected in next 4-6 weeks.

     

    Lontra Well in Angola 

     

    • Lontra is probably the world’s most watched well and one with probably the greatest potential on a global basis for any company.
    • In my conversations with CIE management their research and seismic works has made them very interested in Lontra’s potential. 
    • Lontra is the largest 4-way pre-salt structure in the greater Kwanza Basin.
    • The Lontra hydrocarbon structure will not be derisked by this one well. 
    • CIE management has stated that Lontra well has an estimated resources potential of 1.5 bil. barrels.
    • I expect there to be may wells in this structure if Lontra well is successful. 
    • Lontra success would add between $10-$15 to CIE
    • Lontra was spud 5/21/2013 and is estimated to take 120 days to drill. Results in next 6-8 weeks. 
    • Lontra in CIE operated.

     

    Mavinga in Angola

     

    • CIE is drilling Mavinga, as an offset to the large Cameia discovery
    • 5/3/31 spud with results in next 6-8 weeks.

     

    CIE Optionality

     

    Deepwater offshore drilling is a high risk venture.  There will be dry holes – not every well is successful.  Why do I like the risk return profile of CIE?  It is because its older discoveries have created a substantial asset base.  CIE discoveries in Gulf of Mexico and Angola give it a discovered asset value base of $22-$27 dollar.    CIE did not go from $9 to $29 without being successful with the drill bit.

     

    What I like here is that for $5 of downside I am able to buy significant exploration upside.  The upside on hitting Lontra or Diaman would be a game changer in terms of CIE’s stock price.   I am much more comfortable taking expolartion convexity and risk with an asset floor built around North Platte, Shenandoah and Cameia.

     

     

    Corporate Sale

     

    I don’t expect CIE to be a public company in 12-24 months.  The size and potential of its asset base and its asset development are resources that can only be developed by a Major. 

     

     CIE normally has a slide and makes comments about high yield, farm outs, jv or other corporate strategies to develop their assets.  I personally think it is a joke.  These guys (CIE management) are exploration guys they don’t have the skill set, experience or ability to develop their asset base. 

     

    http://www.bloomberg.com/news/2012-12-06/chevron-seen-eyeing-cobalt-to-kosmos-in-oil-hunt-real-m-a.html

     

    http://www.bloomberg.com/news/2013-04-24/cobalt-s-oil-finds-seen-luring-shell-to-exxon-real-m-a.html

     

    Management also has $500 mil. worth of equity interest in CIE and I think they probably want an exit and liquidity event over trying to build a mini XOM.

     

    CIE private equity investors I thought would be pushing for a sale but they have reduced exposure in 2 separate billion dollar secondary sales.  For their remaining positions a corporate sale would be a great liquidity event. 

     

    Any exploration success will bring additional talk of a sale to a major.    

     

    Risks

     

    • Exploration - There will be dry holes.  In the kind of exploration CIE is doing it only needs to hit 300 to get into the hall of game – a baseball analogy someone in the oil business told me about CIE.  I am not a baseball guy. 

     

    • Angola - TIA - This is Africa.  There is country risk in Angola and Gabon. 

     

    • Oil Commodity risk

     

    • PE Selling - The Private equity holders already have the best PE investment every in the oil and gas space.  They are sitting on 6-8X and if there is exploration success with be holding 10X exisitng positions.  Do they seek liquidity via public markets instead of a sale of the company.

     

    • Development Strategy - CIE management decides to build an empire around their asset base and undertakes massive development projects - $20 bil. plus. 
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

     

    Messages


    SubjectRE: Dry Holes
    Entry08/19/2013 01:26 PM
    Memberbruno677
    The dry holes put a lot of risk on Lontra well.  
     
    The downside NAV is not much changed but I am worried market will now be totally focused on Lontra.  
     
    The upside NAV is reduced but I think Total will be very active in Gabon - they have a lot of acreage and see resource potential.  
     
    My biggest worry is if Lontra does not produces as expected - does the market start to worry about liquidity. 
     
    I think PE will sell as they have taken all their cost out already.  

    SubjectRE: RE: Lontra
    Entry12/02/2013 08:15 PM
    Memberbruno677
    The more I look at CIE and the way the sell side looks at it I am starting to realize that no one on the sell side has actually tried to model CIE as a going concern.  Its all NAV and its all NAV going forward.  
     
    I have spoken with the company and come to realization that even they cannot fully explain how they are going to fund the development of their resource base.  These resources dont belong in a non-major.  Its like throwing XOM/CVX/BP GoM and West Africa exploration into a entity - one does not see entities like this cause certain assets belong in a portfolio to be developed, de-risked ect.  
     
    The buyside wanted another Cameia - Lontra might have a greater eventual resource potential that Cameia in the long term.  Lontra is a much bigger structure - but the buyside wanted 1000 ft of net pay and all oil.  
     
    I think a eventual sale of CIE is the only outcome.  Todays price reaction has moved the event froma 2016-2017 event into a 2014-2015 event.  
     
    The upside price of 45 plus is sadly gone.  A good amount of that value will be transfered to the major that buys CIE.  I think CIE can be sold for between 30-35 dollars to a major.  
     
    After todays price reaction I don't think its old business model of high impact wells alone works - market hated Lontra results when the well a sizable find.  
     
    The main risk is liquidty - what happens if they operate as usual dont undetake a sales process and then realize they need few bil. to drill their asset base and 10-15 bil to develop their found resources.  
     
    The PE guys should be able to see the writing on the wall even if management wants to build an empire.  
     
    For the majors its the price at which they want to buy into exisiting and new exposures and price for the reosurce optionality especially in Gabon anf Angola.  
     
    I think at $30 this company could be bought and it is at that price I originally recommended this stock (terrible recommendation).  At todays stock price I think it is a good risk reward into 2014 and there is actually meat on the bone for a major even if they pay 30-35 dollars.  

    SubjectRE: RE: RE: RE: RE: RE: RE: Lontra
    Entry12/04/2013 12:27 AM
    Memberbruno677
    Sugar:
     
     
    Great points.  
     
    Cobalt is a little different.  
     
    A little background 
     
     
    I did the rights offering on Sonde back when it was Canadian Superior in Candian Bankruptcy.
     
    In March 2009 when the world was ending and S&P was at 666 - there were 13 interested parties including some majors looking at the Trinidad assets.  Lesson I learned was if assets are desired you will see more majors/strategics in a data room willing to buy assets that buying distressed securities (or companies) to control those assets.
     
    Back to Cobalt 
     
    My fear is they burn cash drilling and do a fire sale in a liquidity crisis.  This is pretty obvious to anyone other than sell side analyst focused on NAV.  The PE guys know what is awaiting in 12-18 months.  
     
    You correctly mentioned a negative feedback loop - if market perception of Lontra was good - regardless of anything else,  CIE would have room to do another convert that would take sale from 2014-2015 to a 2016-2017 event and they would try to drill a few more holes.  
     
    The negative feedback loop has in a way destroyed CIE public equity business model - it is no longer a cheap option of exploration but a stranded asset.  Issuing new equity only sinks it further.  
     
    The new exploration wells don't matter as the market does not give it any credit for Lontra which management has said is a world class asset.  BP said some nice things about Lontra on their call as has Angola's oil minster.  All these have had no positive impact on CIE stock.  CIE stock and its public equity perception are broken - Mr Market just does not buy its exploration story anymore.  
     
    The purchase price question for CIE by a major hinges on where the GoM, Angola and Goban asset fit in the strategic plan of TOT, BP or CVX.  
     
    Also the Chinese would be interested in Angola - XOM sold its assets in Angola to the Chinese. 
     
    The majors don't buy small scale assets as I have also learned from other stranded E&P investments (SD for one).  
     
    The key question is are CIE assets of a quality that would attract a major - yes - why cause they are all partnered with majors.
     
    How would a major think - TOT is the best candidate for CIE.  It is tied in Gulf and Gabon and would get exposure to Angola.  Question is how fast does TOT or any other major move.
     
    The events of the last 4 months have put an urgency into CIE - it is not reflected in street research and I am very suprised why no sell side analysts have focused on liquidity but I am sure the private equity owners have thought about it.  I hope CIE management has thought about it.  
     
    CIE has to announce in next 3-6 months a strategic review or else the liquidity crisis starts to rear its head and put pressure on the stock further reducing any bargaining leverage.    
     
    Alternatively the majors who are tied in with CIE need to start reviewing what happens in 12-24 months on funding future drilling activity.  I am pretty sure TOT ain't walking away from Gabon after finding hydrocarbons.  I am also pretty sure BP wants to drill additional appraisal wells at Lontra.    
     
    I think starting with next conference calls and investor conference presentations buyside investor focus is gong to start shifting to what is CIE business model, how does it fund itself, why not sell company, walk us tru a production capital spending plan ect.  I have asked the company these questions and the answers are not there.  Simply put, the assets are too big for anyone other than a major to develop.  Maybe a Chinese or Indian NOC can step in for the African assets.  
     
    The only outcome I see is orderly sale of company or a firesale .   

    SubjectRE: Another Dry Hole
    Entry12/19/2013 12:30 PM
    Memberbruno677
    Forces the private equity holders - 40 percent of stock outstanding to put company up for sale.
     
    Tye risked nav on street research was 2 - stock moved down by that.  Stock trading at a big discount to street nav.  So the equity story is broken - a good well no upside a dry hole full risk nav downside.  
     
    The only way out is a sale of the company 
    .
     
    This is like nxy but even more in need of a sale - company and an asset portfolio that cannot ever get to development but an asset perfect for a major.  
     
    I still expect it to be sold in next 12-18 months 

    Subjectkiller discovery
    Entry02/27/2014 02:10 PM
    Membermendoza
    "...success rates tend to be mean reverting.  Buy them (ie exploration companies) after people start making jokes about their inability to find oil." That's utah's line from a few years ago. 

    With the pre-salt Orca discovery, it looks like Cobalt has rightened it's ship a bit.  A confident estimate of 400 to 700mmbo, and we're back to finding oil.  The syn rift flow is what I was always looking for in Cameia, and it looks like we got it in Orca. This should have positive consequences for some of the prospects down the road.  Mgmt is also moving up the learning curve with this last well taking nearly 40% less time than expected.  At $1mm a day to drill in the Kwanza Basin, this might translate to a couple hundred million of savings over the next 18 months. A flow test comes shortly.
     
    Not banging the table too hard given the run since December's capitulation, but I see value here. There's a decent number of prospects left, the funds left to explore them, and the company's first analyst day in a few months.  As we move past the disappointment of Lontra (which interestingly turns out to have been the largest discovery in the world in 2013), and get close to first production on some of the earliest discoveries, this story might get a second look by a lot folks who were hurt by a poor entry point the first time around.
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