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Cobalt’s Oil Finds Seen Luring Shell to Exxon: Real M&A

Cobalt’s Oil Finds Seen Luring Shell to ConocoPhillips
Among deals for oil exploration and production companies valued at more than $5 billion, the average premium paid has been 31 percent since the start of 2000, according to data compiled by Bloomberg. Photographer: Dado Galdieri/Bloomberg

Cobalt International Energy Inc., the oil explorer that doubled in value since going public in 2009, is turning into a takeover target for energy companies attracted to its oil finds from Africa to the Gulf of Mexico.

Cobalt has been buoyed by offshore crude discoveries that Global Hunter Securities LLC says could yield a total drilling potential of as much as 6 billion barrels of oil equivalent. That would be equivalent to almost all of the proved reserves of OPEC member Ecuador, according to data compiled by BP Plc. Larger energy companies such as Royal Dutch Shell Plc may be drawn by the chance to bolster crude resources, said Capital One Southcoast Inc. Suitors also may include Chevron Corp., Exxon Mobil Corp. or ConocoPhillips, said Guggenheim Partners LLC.

While Houston-based Cobalt has handed investors more than triple the gains of the Russell 1000 Energy Index since its initial public offering, the $11 billion explorer still trades at a 33 percent discount to the value of its underlying assets, according to data and analysts’ estimates compiled by Bloomberg. With analysts projecting Cobalt’s stock will rise another 43 percent in the next 12 months, Stifel Financial Corp. said now may be the time for a buyer to make a move on Cobalt.

“A savvy acquirer has probably already seen enough,” Michael Scialla, a Denver-based analyst at Stifel, said in a telephone interview. “They have an exploration portfolio that I think would be attractive to just about any major oil company that has exposure to deep-water plays around the world.”

Lynne Hackedorn, a spokeswoman for Cobalt, didn’t respond to a phone message or e-mail seeking comment.

Oil Interests

Cobalt, formed in 2005, has interests in oil fields off the coast of Angola and Gabon in West Africa as well as in the U.S. Gulf of Mexico, where it made what it called a “significant discovery” last year. The stakes give Cobalt total drilling prospects of as much as 6 billion barrels of oil equivalent, without accounting for exploration risk, according to John Malone, a New York-based analyst at Global Hunter.

That would be comparable to almost all of the proved reserves of Ecuador at the end of 2011, according to BP’s most recent statistical review of world energy published in June. Ecuador is one of 12 members of the Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s crude.

Attractive Target

Cobalt has a “good combination of high-quality assets and an extremely large resource-base potential” that could attract takeover interest, Matthew Portillo, a director of equity research for exploration and production companies at Tudor Pickering Holt & Co., said in a phone interview from Houston. Larger oil companies “tend to be cash rich and opportunity poor and so this definitely fills the hopper.”

Potential suitors among large international oil companies may include Total SA, Chevron and Exxon, said Rob Cordray, a Dallas-based analyst at Guggenheim. The market values of those three potential buyers range from $114 billion to $400 billion. ConocoPhillips and Houston-based Marathon Oil Corp., which have struggled to find successful wells, could also be lured to Cobalt’s assets and the chance to bolster their weaker exploration portfolios, he said.

“Bigger companies need to find an incredibly large amount of new resources each year just to stay flat,” Cordray said in a phone interview. Cobalt’s assets are “a needle mover.”

Shell Interest

Shell also could be tempted to bid on the company because it tends to favor “big elephant” projects with significant potential resources, such as those in Cobalt’s portfolio, according to Eliot Javanmardi, a New Orleans-based analyst at Capital One Southcoast.

The Hague-based Shell could seek to “expand its portfolio with something like Cobalt’s assets,” Javanmardi said in a phone interview.

Representatives for Irving, Texas-based Exxon; Marathon; Paris-based Total; San Ramon, California-based Chevron; Shell and Houston-based ConocoPhillips declined to comment on speculation about Cobalt.

Cobalt shares have doubled since its IPO in December 2009 to $27.07 yesterday, compared with a 32 percent gain for energy stocks in the Russell 1000 Index, according to data compiled by Bloomberg.

Today, Cobalt, which counts Goldman Sachs Group Inc. and Carlyle Group LP among its biggest shareholders, rose 3.3 percent to $27.96, the biggest gain in more than a month.

The explorer would likely fetch at least a 30 percent premium in a takeover based on similar deals in the industry, Javanmardi said. Among deals for oil exploration and production companies valued at more than $5 billion, the average premium paid has been 31 percent since the start of 2000, according to data compiled by Bloomberg.

Worth More?

At a 30 percent premium to Cobalt’s stock price yesterday, an acquisition would cost about $35.19 a share, or more than $14 billion. That means a buyer would still obtain the company at a discount to its net asset value of $40.54 a share, according to the average of three analysts’ estimates compiled by Bloomberg.

“This could be worth a whole lot more,” said Stifel’s Scialla, who estimates the company has a net asset value of $41 a share after accounting for exploration risk. “If there’s a disconnect between what the industry sees and what the market is willing to give them credit for in the stock price then I think there is the potential for them to be a takeover candidate.”

Analysts project Cobalt’s shares will rise 43 percent in the next 12 months to $38.77, still below the underlying value of its assets, according to data compiled by Bloomberg.

Exploration Expertise

Larger oil companies may prefer to partner with Cobalt on its discoveries, rather than seek a full takeover, said Malone of Global Hunter. That would allow them to reduce their exposure to the potential risks of the projects, while still reaping the benefits of any oil production, he said.

Big oil producers “view companies like this as sort of an outsourcing of exploration,” Malone said in a phone interview.

While partnerships are a possibility, Cobalt’s assets have so much potential that buyers might seek to purchase the company outright, said Cordray of Guggenheim.

Cobalt is “very, very good at exploration,” he said. “They would be an attractive takeover target.”

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