Cobalt International Energy (NYSE:CIE) did not enjoy a lot of investor love this year. The stock was heavily punished after the company failed to find commercial oil or gas at its Ardennes-1 well in the Gulf of Mexico.
Such disappointments are a part of life for an oil company. Lately, Cobalt announced that its Lontra-1 well in Angola resulted in a discovery. BP (NYSE:BP), which also owns a share in Lontra, confirmed that it was satisfied with the results.
Angola is a prospective place for majors like BP and Chevron (NYSE:CVX). The country's oil production is expected to grow to 2 million barrels per day in 2015, a 14% increase. The oil majors are actively taking part in this growth despite the recent tax lift.
Cobalt's valuation vastly depends on its success in Angola. Besides Lontra, Cobalt has also made a discovery at its Mavinga-1 well. The company will provide additional information about these discoveries at the end of this year. At present, one can only speculate how big they are.
It's worth noting that the Northern Kwanza basin, where these wells are situated, is a success for Cobalt. All five wells that have been drilled there were successful in finding hydrocarbons. This is a very promising sign.
Cobalt holds 1,360,000 acres covering three Angola blocks. This is a vast space for future exploration, but there is one thing that might worry investors.
No earnings so far
Cobalt is an exploration stage company. It means that it has no revenue so far. There is a risk that Cobalt runs out of money before it starts producing oil. The company's expenditures in the first nine months of this year were $670 million. Cobalt has stated that it expects full-year expenditures to be between $850 million and $950 million.
Cobalt had $2 billion of liquidity at the end of the third quarter. If the company continues to spend at current rates, it will have enough money to run well into 2015. However, first oil from the Heidelberg project, where Cobalt owns a 9.375% working interest, is expected in 2016. First oil from recent discoveries Cameia and Shenandoah is expected in 2017. Cobalt is at risk of running out of money before it starts generating any revenue.
What's does the future hold?
It is possible that Cobalt will have to raise additional money. The company can do it via debt or equity offerings. Cobalt already had a secondary offering this year. It was a sale from original investors, and the company did not receive any proceeds from this offering.
Public investors held 71% of Cobalt's shares at the end of the third quarter, while original investors held 29% of shares. It means that there is still plenty of stock that could be put to sale by original investors. Such moves typically put pressure on the share price.
Cobalt might as well become a takeover target for big companies that already operate in the region, like BP or Chevron. However, BP's stance on returning money to shareholders does not make it a suitable candidate. Chevron is engaged in a $10 billion LNG project in Angola, and the company could search for additional projects in the area.
I don't think you should bet on Cobalt becoming a takeover target soon. Possible share dilution presents a risk, but Cobalt is still an interesting way to play offshore Angola.