Cobalt International Energy Inc Needs This Offshore Play to Pay Off

While other E&P players have turned toward onshore shale plays, Cobalt International Energy  (NYSE: CIE  )  has done just the opposite. Instead of the Bakken or the Eagle Ford, it's betting everything on Angola and the Gulf of Mexico.

Cobalt is all about offshore
Cobalt International Energy (NYSE: CIE  )  recently made a huge discovery off the coast of Angola. The Orca oil discovery is the largest pre-salt oil discovery in the Kwanza Basin to date. Being the operator with a 40% stake in the Block 20 project (Block 20 is a leasehold off the coast of Angola that houses part of the Kwanza Basin), Cobalt has a lot to gain -- and also a lot to lose from this play.

Cobalt successfully drilled an exploratory well in the Orca oil field, which produced 3,700 barrels of oil and 16.3 million cubic feet of natural gas a day. Combined with other data acquired from the well, this means that the Orca field could conservatively hold 400 MMBoe-700 MMBoe of crude oil.  

Cobalt has yet to generate any substantial income from its operations, as its projects are still under development. Last year Cobalt International Energy spent $880 million on exploration, appraisal, and development of its assets. This year, that will come in slightly less at $750 million-$850 million, but when no money is coming in that will still take a toll on the company's finances. 

This is why Angola is such a crucial part of Cobalt. At the end of 2013, Cobalt had $1.8 billion in cash. On top of the $175 million in interest payments and other fees Cobalt is going to have to pay this year, it also plans to spend $800 million on its drilling and exploration program. By the end of 2014, Cobalt International Energy will only have $825 million (midpoint of guidance) in cash left.

This means that if its Angola operations don't pan out as planned, Cobalt could be done for. Other than Angola, all Cobalt International Energy has is stakes in offshore Gulf of Mexico operations, but those too haven't entered commercial stages of production. If Cobalt runs out of cash, it will be forced to divest part or all off its assets in one form or another to raise additional funds. Luckily for Cobalt International Energy, finding the largest pre-salt oil discovery in the Kwanza Basin gives it more than a fighting chance to become profitable.

Proof that more is to come
There are still 11 more prospects Cobalt International Energy and its partners will have to go and test out, but so far it looks like its leasehold in Angola holds the motherlode. Another discovery off the coast of Angola, Lontra, further testifies to the enormous potential of Cobalt International Energy's operations. An exploratory well targeting the Lontra was able to produce a consistent 2,500 barrels of crude/condensate and 39 million cubic feet of natural gas a day, which is a great sign that there is still plenty more to be uncovered. 

Cobalt International Energy isn't alone out in the middle of the sea. It has partnered up with BP Exploration Angola, a subsidiary of BP plc that owns a 30% interest in Block 20, and Angola's state-run oil company which also has a 30% stake in the project. BP plc has already invested $25 billion in Angola, and due to the success of these two new discoveries and the discoveries to come, plans to invest another $20 billion over the next decade. By teaming up with several other companies, Cobalt International Energy is able to migitate costs, giving it access to a wide spectrum of potential offshore bonanzas (like the Gulf of Mexico) instead of having to choose just one due to budget concerns. 

Foolish conclusion
As more information becomes available due to more wells coming online, Cobalt International Energy and BP plc will be able to gauge just how valuable the Kwanza Basin truly is. This will most likely result in reserve estimates being revised upwards due to the success of the first two exploratory wells in the area.

Offshore drilling is extremely expensive. For a company like Cobalt International Energy that is yet to turn a profit, it needs to be able to showcase a clear plan on when it expects its projects in the Gulf of Mexico and Angola to begin producing substantial amounts of hydrocarbons. Cobalt International Energy doesn't have the deep pockets of BP, which makes hiccups along the watery road all the more dangerous. If Cobalt International Energy fails to deliver, then it will be forced to raise additional funds to keep operating, which could come at the expense of shareholders through equity dilution, and is a risk worth considering for investors. 

A lower risk play on offshore drilling
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