When the general mood in a market is gloomy and the bears have the upper hand, even good news can get overlooked, or rather overpowered. For those with money to speculate with, and a great deal of patience, that situation can often lead to opportunities. That is the case this week with one E&P company.
Cobalt International energy (CIE) announced this week that they had made a “very large” oil discovery at the Anchor #2 well in the Gulf of Mexico. Management did not offer any details as to how large, presumably because CIE is only a 20 percent holder in the well, which is operated by Chevron who have a 55 percent interest. They did, however, describe it as one of their best wells in the Gulf.
The stock did react positively to the news, but as I write it is trading at only about $0.30, or 3.6 percent higher than the close on January 5th, before the announcement.
Pessimism is understandable; should oil continue to fall then it doesn’t matter how much oil you discover. This week, though, there have been signs that a bottom is forming somewhere below $50. There could still be a little further to drop before a turn around, but, as I said a few weeks ago, oil at the $40 level last seen in the depths of the depression makes little sense. Yes, supply has increased significantly since then, but consumption has also continued on an upward path. There may be fears that the rate of increase is slowing, but none of that justifies oil at recession levels.
After such a collapse a rapid retracement is unlikely, but nor is it likely that we will remain at these levels for an extended period. Buying CIE is, then, by nature a long term play, but that doesn’t mean that investors should just buy, hold and hope; you must always have an exit plan. In this case, the all time low for CIE of $7.40 achieved, if that is the right word, in December gives a logical level to watch. Given the long term nature of the play and recent volatility I wouldn’t want to be too tight to that level, but a stop somewhere just below $7 makes sense.
I would, however, be extremely surprised if that level is reached. CIE has an Enterprise Value (EV) of $3.6 Billion and, at current levels, a market capitalization of $3.5 Billion. There is, of course, no reason that a company cannot trade below book value, just look at large U.S. banks which have been doing so for years, but any stabilization or increase in oil prices from here will make a company trading at under book look remarkably cheap.
Cobalt is not just about the Gulf. They also have significant holdings in North Platte and are a leader in opening Angola’s pre-salt play. In the current panic about anything oil related, the news released at the same time that the most recent well in that offshore play came up dry garnered more attention than the good news from the Gulf. Obviously that is a setback, but CIE still has a 70 percent success rate in the region, with 5 out of 7 wells revealing decent reserves, a pretty remarkable success rate.
In a more general sense, of course, buying an exploration company now is a risky play in and of itself. We should, however, always remind ourselves of the oft quoted but wise words of Warren Buffet, the Sage of Omaha. Successful investing is about being fearful when others are greedy and greedy when others are fearful. There is no shortage of fear in the energy sector at the moment and the fact that that has led the market to virtually ignore some very good news gives investors with an appetite for risk a good opportunity to show their greedy side.