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Cobalt International Energy, Inc. (CIE) was formed in late 2005 by an affiliate of Goldman Sachs (GS), other private equity investors, and some industry veterans to assemble a portfolio of prospective oil leases. Having secured interests in 219 blocks—three in Angola, one in Gabon, and 225 in the Gulf of Mexico—by late 2009, the company went public in December of that year. Including holdings through its alliance (see below), Cobalt now has interest in more than 225 lease blocks in the Gulf of Mexico and the four in Africa. Each lease block contains several drilling prospects, and the company acts as operator in a majority of its leases.

In 2009, Cobalt signed an operating alliance with French energy giant Total (TOT). Under this arrangement, Cobalt and Total combined much of their Gulf of Mexico exploratory lease inventory through the exchange of a 40% interest in Cobalt’s Gulf of Mexico holdings for a 60% share of Total’s leases. The alliance currently covers 224 blocks, and Cobalt is acting as operator of the properties through the exploration and appraisal phases of development. With the alliance, Total committed to provide substantial support, including a fifth generation drilling rig for a five-well program; up to $300 million of drilling costs; $280 million for the costs of Cobalt’s leases; and up to $180 million based on the success of the initial five-well program. In addition, the alliance gives each party the right to participate in any oil and gas lease acquired by the other party within the designated area. To date, Total has paid the $280 million for the cost of Cobalt leases, and Cobalt may yet collect up to $370 million for drilling costs and success bonuses.

Since its formation, Cobalt has drilled four exploratory wells and participated as non-operator in three exploratory wells and two appraisal wells. The drilling found hydrocarbons in the Gulf of Mexico and offshore Angola, and the well-known oil engineering firm of DeGolyer & MacNaughton estimates that the Cameia well one in block 21 offshore Angola has a production capability of 20,000 barrels a day, 40% to Cobalt. The company plans to drill over a dozen wells through the end of 2013, and first oil production is forecast to be in early 2016.

Since revenues are years away, the value of Cobalt’s shares depends on a combination of drilling success and guesses about the value of its holdings based, in part, on the nearby drilling success or lack thereof of other companies. On that score, Cobalt advertises some big numbers. In the Gulf of Mexico, DeGolyer & MacNaughton estimates that the Inboard Lower Tertiary and Miocene Trends, where Cobalt has numerous leases, have “unrisked’’ gross resources of over three billion barrels of oil equivalent (boe). Here, “unrisked’’ means simply that few wells have been drilled to find and appraise the fields. Cobalt also is the fourth-largest leaseholder in the deepwater areas where it has leases. In Angola, the company is an operator in three blocks, each of which contains proved hydrocarbons. Moreover, there is some evidence that offshore Angola is an eastward extension of the prolific oil-bearing formations in offshore Brazil, where Petrobras (PBR) has made extensive discoveries. And Cobalt is in good company in Angola, where its neighbors include BP (BP), ConocoPhillips (COP), and ENI (ENI).

Cobalt’s stock price has fluctuated between about $6 and $36 a share over the past year in response to news and speculation about oil prices and its holdings. At this point, we think that oil prices will not fall much below their recent lows in the low $80s per barrel, thus ensuring the profitability of any more oil the company may find. And a major point in the company ‘s favor is its balance sheet: Cobalt has no debt, around $1.8 billion of cash and equivalents, and a drilling program that is forecast to cost $900 million-$1.2 billion over the next 18 months. Still, as we push the pencil, CIE’s recent price in the mid 20s implies production of something like 100,000 of oil a day net to Cobalt’s interest by late 2016, based on an oil price of $85 a barrel and profitability of major independent E&P companies, such as Anadarko (APC), Apache (APA), and Noble Energy (NBL). Despite the good prospects, about half its wells to date have been dry or discovered uneconomic resources. Thus, we suggest that adventurous investors keep Cobalt in mind for a time when oil prices have eased and the company has just drilled a dry well. That could provide a good entry point to this speculative company.

At the time of this article’s writing, the author did not own shares in any of the companies mentioned.