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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


Shares outstanding

336.2 million

Market capitalization

$4.47 billion

Cash and equivalents

$1.08 billion



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


47 gross / 23 net

85 gross / 26.7 net

Average target size

100 million BOE

50 million BOE

Success rate



Price per discovered barrel



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.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. CNOOC is a Motley Fool Global Gains pick. The Motley Fool has a disclosure policy.

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