Cobalt International Energy (CIE, Financial) had a bad start to fiscal 2015, delivering poor results in the first quarter. The stock also had been unimpressive on the exchange over a period and has dropped further on the back of widened net loss in this quarter. It clearly indicates the impact of a depressed market due to falling commodity prices, which are eroding the company’s margins. If Cobalt doesn’t deal with these situations, they can be grave. It is now steadfast in maintaining an attractive balance sheet. In order to have this, Cobalt is taking some strategic initiatives. Let us have a look.
Positives to watch
The volatility in the commodity pricing environment has affected many companies and has made it difficult for them to maintain a good competitive edge in the market, and Cobalt is no exception. But Cobalt is now focusing on various initiatives to save its skin in such an environment. It is now cautious about its outlook for 2015. The management is seeing many bright spots that can help it to maintain its performance. For example, Cobalt has now received commitments from multiple banks for the previously announced $150 million Heidelberg reserve-based lending facility. With this, Cobalt is expecting to close and draw from the facility during the second quarter.
This can be a significant success, as, with this, Cobalt will seek additional RBL financing for other assets, its portfolio, which includes its most promising near-term asset, Cameia. In addition, under its efforts to make its balance sheet attractive, Cobalt is now actively pursuing asset-based partnerships involving its most promising Angolan portfolio where it is the clear leader in the deep-water Kwanza Basin with five discoveries and ongoing appraisal and development operations. It is so because the company has already seen broad industry and financial investor taking interest in partnering with it in Angola. This could be a turning point in Cobalt’s downfall.
Cobalt is laser focusing on appraising and developing several of its discoveries in the regions of the Gulf of Mexico and Angola. The prime motive of the company regarding this is to focus on progressing to potential sanction while simultaneously evaluating financing, partnership or other potential means of enhancing shareholder value.
Long-term opportunities
If we look closely, Cobalt is seeing many long-term opportunities in Angola Block 20. Being an exploration company, there are many positive signs under way which, if accessed properly, can help it to be still profitable in the weak commodity pricing environment. Orca is the largest oil discovery found to date in the Kwanza basin and further Orca #2 appraisal well and drill stem test results have confirmed the presence of a large oil accumulation in the Sag section of the Pre-salt. In addition, log and sampling evaluation results have confirmed the discovery of oil in the deeper Synrift reservoir of the Pre-salt. These are some of the bright signs that might be helpful for Cobalt in the long run.
Going forward to Cameia, Cobalt has planned a continual development drilling program at Cameia for the remainder of 2015 and early 2016, which will be a solid long-term opportunity for it. In conjunction with these ongoing development drilling activities, Cobalt continues to focus efforts on the optimization of Cameia facility and subsea infrastructure design and costs to take advantage of favorable market forces attributed to the current downturn in industry activity.
In order to strength its exploration portfolio, the company is engaged in identifying low-cash-burn high-value-add new venture opportunities and also mainly focusing at deep-water oil proven subsalt and pre-salt basins in the offshore regions of Eastern Canada and Mexico.
Conclusion
Now moving to the fundamentals, it is hard to predict anything sure about the stock’s performance as it is continually making losses. But, if the commodity prices recover in the future, which is less likely, I would like to suggest the investors wait until the industry shows concrete signs of recovery. Until then they should see investment in Cobalt International Energy from side lines.
