No sector says "go big or go home" more than the oil sector. The amount of capital required to research prospective oil finds and subsequently drill narrows the field of prospective companies dramatically.
So when an exploratory-stage company does make a find or sees promising reserves, it pays to take notice. That was the case over the past few months with Cobalt International Energy (NYSE: CIE).
Less than two weeks ago, Cobalt released better-than-expected drilling results from the Cameia-1 well, which is located on block 21 of its Angolan offshore holdings. The possibility that Cameia-1 could yield 20,000 barrels per day crushed its own early projections and jolted the likelihood that adjacent pre-salt fields in the area could yield big results for BP (NYSE: BP) and Statoil (NYSE: STO), which are also big players in the Angolan offshore oil fields. But has the market priced Cobalt for perfection? I'm inclined to think so.
Cobalt reported its fourth-quarter results yesterday and shareholders were given a stark reminder of what it's like to own an exploratory-stage oil company. Cobalt's $51 million loss was nothing out of the ordinary, nor was its $134 million full-year loss, since it has no revenue-generating operations. What was a surprise was the 47-million-share secondary offering that Cobalt dumped on shareholders despite the fact that it ended the year with $1.54 billion in cash.
Aside from the obviously dilutive effect that 47 million more shares -- of which 15.7 million are new and the rest are being sold by existing shareholders -- will have on the stock, it puts into perspective how rapidly Cobalt is burning through cash. And you can expect that cash burn only to increase. Cobalt projected that its 2012 capital expenditures will be in the range of $550 million to $650 million, which is up from its previous guidance and roughly three times the amount it spent in 2011 ($194 million).
Just having the oil doesn't necessarily mean it will translate into success for Cobalt's bottom line. I do appreciate the vast difference in business models between ATP Oil & Gas (Nasdaq: ATPG), for example, and Cobalt, but ATP is purportedly sitting on a sea of oil reserves that it hasn't been able to capitalize on. There's no guarantee that Cobalt's finds will translate into bottom-line results -- at least not in terms of valuing the company at $12 billion.
With years of projected losses on the horizon and the prospect of more dilutive share offerings still present, I can't help but feel that Cobalt investors are taking a very large gamble buying into the stock here. Although Cobalt is currently the worst-performing stock in my CAPS portfolio, I am nonetheless sticking by my CAPScall of underperform on the company.
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