(By Kevin Donovan) Bad news can be good news for opportunistic investors. A drilling mishap off West Africa recently sent shares of Cobalt International Energy (CIE) tumbling, presenting what we believe is a good entry point for the Houston-based exploration and production company.
Last month, Cobalt said that repairs on a drilling rig offshore near Angola will delay the results of an appraisal well, inserting a dose of uncertainty that troubled investors who had been expecting more test results by the end of this year. We think the selloff reached a level far below what could be the net asset value of potential reserves.
To be sure, Cobalt has yet to produce oil & gas revenue, but it has confirmed a significant hydrocarbon reservoir at its Cameia #2 well offshore Angola. And with the potential for a windfall once the appraisal well is drilled, we think the shares have significant upside if oil prices remain near current levels of about $90 per barrel. Shares, currently trading at about $21, have fluctuated between $8.77 and $36.51 in the last 52 weeks.
Company officials are enthused about the Cameia #2 well for several reasons. First, its tests so far show now salt water contact with the oil find, which makes the recoverable oil more valuable. Second, in a conference call with analysts last summer, the company noted that data so far showed that exploration confirmed that the field was "well north" of the level for commercial viability.
Simply put, buying Cobalt is a play on the outcome of the appraisal well. So far, Cobalt has found potential for a deeper and wider reservoir than previously expected. How deep and how wide without oil-water contact are the uncertainties that await appraisal results.
Meanwhile, Cobalt is exploring in the Gulf of Mexico, with results expected late this year from the North Platte #1 well and the Shenandoah #2 appraisal well, where more than 300 feet of net oil pay was discovered.
Cobalt participated in the June 20, 2012 Central Gulf of Mexico Lease Sale 216/222 and was high bidder on 10 blocks, which represented a total net bid amount of approximately $17 million. These blocks, if awarded, will expand Cobalt's Gulf of Mexico asset inventory by adding two new prospects to the inventory, and by adding adjacent blocks to two of Cobalt's existing prospects.
Clearly, Cobalt management is upbeat about the potential it has found so far. "We do see every indication that a high quality reservoir extends over a broad area," Joseph H. Bryant, Cobalt's chairman and CEO said last summer.
We don't think a broken drilling rig changes that and would be buyers of Cobalt shares.
Cobalt International Energy, Inc., a development stage company, operates as an independent oil-focused exploration and production company. It focuses on the deepwater of the United States Gulf of Mexico, and offshore Angola and Gabon in West Africa. The company has strategic relationships with TOTAL E&P USA, INC. and Sociedade Nacional de Combustíveis de Angola Empresa Pública.