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Cobalt International - Best pure play on sensible Deepwater production ?

July 28, 2010 | About:

Cobalt International is a relatively new company that is a pure-play on a deepwater portfolio of oil reservoirs. In 2005 as a private company Cobalt went about acquiring a portfolio of high impact deepwater properties. And they successfully did that. According to a report by reserve engineering firm Degolyer and MacNaughton Cobalt’s portfolio contains unrisked prospective resources of 8.9 billion BOE.

After the Macondo well starting leaking water into the Gulf of Mexico and politicians started yammering about increasing liability caps and the drilling moratorium went into place, the stock price of Cobalt dropped rapidly from $14 to near $8.50 today.

With BP now seemingly finally in control of the leak and emotions starting to ease now might be the time to start looking at companies like Cobalt that have had their stock prices slashed dramatically. Will the future of Deepwater production be so changed that Cobalt should be selling at such a reduced price ? Cobalt has an enterprise value of currently of about $2 billion ($3 billion market cap less $1 billion of net cash). If you figure that $20 per BOE might be a reasonable valuation for proven oil reserves, then this suggests that Cobalt is being priced as though it has 100 million BOE ($2bil ent value / $20 per BOE). Granted, this is very high level valuation. But when you consider the unrisked potential of 8.9 billion BOE that Cobalt has, this does put in perspective how little an investor has to pay for this upside potential.

The potential for government legislation is still an overhang on Cobalt. But when you consider how important independent oil producers are to the United States, a reasonable outcome that continues to allow them to operate seems likely. Consider the following fact from IHS Global Insights:

1) In 2009, independents participating in the exploration and development of the Gulf of Mexico accounted for more than 200,000 jobs, $38 billion in economic benefits and more than $10 billion in federal and state revenue and royalty payments.

2) Through the next decade, the relative contribution of the independents to overall industry employment is projected to increase from 53 percent in 2009 to 59 percent in 2020.

3) The Gulf of Mexico is a strategically important source of domestic energy, security and economic activity. It accounts for almost 30 percent of all U.S. oil production and 10 percent of U.S. natural gas. Last year, for the first time since 1991, the U.S. recorded an increase in domestic oil production. This is attributable to developments in the deep-water Gulf of Mexico.

4) Independents like Cobalt hold majority interests in 52 percent of all deep-water Gulf of Mexico leases. In fact, the independents collaborate extensively with the majors in exploration and production. The benefits of this integration would be lost if independents were excluded, resulting in decreased activity and a reduction in future production of domestic energy.

5) If independents are excluded just from the deep-water Gulf of Mexico, job losses would total 265,000 by 2020, with a loss of $106 billion in tax revenue from the four-state Gulf region over that same period.

Deepwater production is important for American jobs, American government revenue, and for American domestic oil supply. Cobalt might be a one of the best ways to take advantage of a sensible resolution to future production.

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