Back in September, when Cobalt International Energy (NYSE:CIE) started prepping to go public, I thought we had all the makings of an exciting energy IPO. BP (NYSE:BP) had just uncorked a giant gusher in the Gulf of Mexico, which is where a good portion of Cobalt's offshore prospects lie. West Africa has also grabbed headlines this year with offshore discoveries by the likes of Chevron (NYSE:CVX) and Marathon Oil (NYSE:MRO), not to mention a wild race by ExxonMobil (NYSE:XOM), CNOOC (NYSE:CEO), and other parties to snap up Kosmos Energy's multibillion-dollar stake in Ghana's Jubilee field.
Alas, no fireworks came to pass. Cobalt priced at $13.50 per share this week, representing a discount to the planned range of $15 to $17. The market is apparently saving its barn burners for batteries.
Like I said last time, "with no proved reserves and no production expected before 2012, this is going to be a tough company to price with any precision." Let's see what sort of value Mr. Market has come up with.
|
Share Structure and Capitalization |
Numbers |
|---|---|
|
Shares outstanding |
336.2 million |
|
Market capitalization |
$4.47 billion |
|
Cash and equivalents |
$1.08 billion |
|
Debt |
$0 |
|
Enterprise value |
$3.39 billion |
|
Book value |
$1.75 billion |
Data from company filings.
That might sound like a steep price tag for a company that's heavy on promise and light on tangible asset value, but my own quick valuation (some might say wild guesswork) actually puts Cobalt's prospect inventory quite a bit higher. I'm happy to pull back the curtain and show you my thinking here.
|
|
Gulf of Mexico |
West Africa |
|---|---|---|
|
Prospects |
47 gross / 23 net |
85 gross / 26.7 net |
|
Average target size |
100 million BOE |
50 million BOE |
|
Success rate |
30% |
40% |
|
Price per discovered barrel |
$5 |
$5 |
|
Prospect inventory value |
$3.45 billion |
$2.67 billion |
Prospect inventories from company filings. The rest are author's estimates.
Any valuation attempt hinges on two key variables that are impossible to pinpoint today: the size of Cobalt's average drilling target, and the success rate in drilling commercial discoveries. In West Africa, where Cobalt's prospects are split between above salt and pre-salt targets, I gave the company better odds of hitting pay dirt, but fewer elephant-sized deposits. At $5 per discovered barrel, this gave me a total prospect inventory value pushing $6 billion.
Reverse-engineering Mr. Market's valuation implies (among other scenarios) a 25% success rate and 55 million barrels per target across the board. I think that is too low.
It's possible that I'm giving Cobalt too much credit in the Gulf of Mexico, where it has ridden Anadarko Petroleum's (NYSE:APC) coattails on two discoveries, but hit a drilling hitch with its own operated prospect. I think it's just as likely, however, that I'm lowballing Cobalt's West African prospectivity.
The bottom line is that it's far too soon to tell who's right here.