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Cobalt Seeks a Few Good Wells

[CIE completed its IPO @$13.50 six weeks ago. It has a JV with TOT in the GoM (#msg-40322346).]

http://online.wsj.com/article/SB20001424052748704022804575041202729694506.html

›FEBRUARY 3, 2010
By BRIAN BASKIN

Every oil well counts for Cobalt International Energy Inc.

After an underwhelming initial public offering in December, the Houston-based exploration and production company is staking its future on about 15 wells scheduled to be drilled in the Gulf of Mexico and off West Africa over the next couple years. Striking oil would send the company's shares into the stratosphere, but too many dry holes could quickly blow through over $1 billion the company has raised from its share offering and backers.

Cobalt was formed in 2005 by Goldman Sachs Group Inc. and several private-equity firms, and over the next three years became one of the largest holders of exploration leases in the Gulf of Mexico. The company, headed by industry veterans from offshore exploration pioneers like Unocal Corp. and BP PLC, has also snapped up exploration rights off Angola and Gabon.

But Cobalt's exclusive focus on high-risk, high-reward deepwater prospects turned off some investors when the company issued shares in December.

Cobalt's debut came as midsize U.S.-based energy companies like Devon Energy Corp. were selling offshore oil assets in favor of pursuing onshore natural gas reserves.

Offshore exploration has increasingly become the domain of the biggest oil companies, which can more easily afford to pay as much as $150 million per well to explore geological formations that might have only a 30% chance of containing oil.

Cobalt's strategy more closely aligns with small U.K.-based exploration ventures like privately held Kosmos Energy, which last year received an offer from Exxon Mobil Corp. to sell its stake in a giant oil field off Ghana for $4 billion.

Analysts say Cobalt might find similar success and begin producing oil as early as 2012—or in a worst-case scenario find nothing and blow through the cash it has raised by that same year.

The company declined to comment for this article.

"The appetite of U.S. investors at this point in time is a little bit different than what we've seen in some of the international markets," said Scott Hanold, an analyst with RBC Capital Markets. "Cobalt is unique in its own way in the U.S., but clearly they are exposing themselves to a tremendous amount of upside."

Shares made their debut on the New York Stock Exchange at $13.50 in December, below expectations for pricing between $15 and $17. The stock closed at $12.60 on Tuesday.

Several analysts recently set price targets above $20 based on the enormous potential of the company's unexplored leases.

The company's original backers still control about 75% of outstanding shares. Whether Cobalt shares ever come near those targets will depend heavily on how much oil turns up in the leases the company bought before going public.

Cobalt's first well, at the Criollo prospect near Chevron Corp.'s successful Tahiti field in the Gulf of Mexico, disappointed investors as the company said last week that it had encountered drilling issues that will prevent its full testing. The company said that the size of the prospect was likely reduced by complexities in the reservoir's structure.

Cobalt or its partners will explore another 16 fields in the Gulf of Mexico and off West Africa over the next two years, according to RBC. With the company's fortunes depending on so few wells, each one could have an impact on the share price.

"Early success and you'll be buying noticeably higher than (the current share price)," wrote David Heikkinen, an analyst with Tudor, Pickering, Holt & Co. Securities Inc. "Early dry holes and you'll have a chance to add in the $10-$13 range."

The odds of success are tough to calculate, with analysts setting Cobalt's chances anywhere from 30% to 70% for any single well due to be drilled this year.‹