In December 2009, newly formed Cobalt International Energy Inc. and its financial partners successfully launched the first E&P initial public stock offering in more than three years, despite its lack of revenue, production and reserves. The upstart company swung the deal based on its managers’ reputations and its targeted search for oil.

This classic case of “betting on the come” wins Oil and Gas Investor’s Excellence Award for Best Financing of the Year, which will be presented to Cobalt International during Energy Capital Week on June 15. (For more details on the conference, visit energycapitalweek.com.)

Early on, when Cobalt International LP was formed in 2005, its asset portfolio was light, to say the least. Yet, Joseph H. Bryant, chairman and chief executive officer, envisioned building a company with a deepwater prospect inventory that would rival the supermajors’ holdings.

“In the beginning, the only asset the company had was Joe’s cell phone,” admits Rodney Gray, vice president and chief financial officer. “In fact, the company itself had no operating history, no oil or gas reserves, no production and no cash flow.”

Nonetheless, Bryant’s vision attracted a management and technical team that had collectively played a significant role in the exploration and development of some 8 billion barrels of oil equivalent of proved-plus-probable reserves in the Gulf of Mexico, out of an industry total of some 17 billion barrels developed during the past 28 years.

During the next few years, Bryant gathered together a team of veteran explorationists, some newly available seismic technologies and a stable of reliable industry contacts.

To fund its initial expenditures, such as seismic acquisition and analysis, the limited partnership turned to the private-equity sector.

“Private-equity was the best source of capital for the risks involved at the time, so we went to providers who would understand our strategies,” says Gray. In 2006, Cobalt tapped Goldman Sachs & Co., Riverstone/Carlyle Global Energy and Power Funds, and Kern Partners. First Reserve Corp. invested in the partnership a short time later, bringing total private equity invested to about $600 million in 2008.

“We chose those capital providers because this was a big strategic move that would require large players that were very familiar with the industry,” Gray explains.

After considering numerous global oil-producing regions in which to focus its exploration efforts, the team selected the deepwater Gulf and offshore Angola and Gabon due to the largely unrealized hydrocarbon potential offered by their below-salt horizons.

Through a highly targeted leasing strategy resulting from an in-depth, multiyear study, Cobalt established a portfolio of 132 identified, well-defined prospects, comprised of 47 in the deepwater Gulf of Mexico, 85 in blocks offshore Angola, and the Diaba block offshore Gabon.

The first step in the program was to spend $250 million on Gulf-oriented seismic data in 2006.

“We went through a disciplined regional mapping exercise using the latest seismic data and reprocessing techniques,” explains Gray. “All this was in preparation for the lease sales in 2007 and 2008 that were coming up.”

In 2007, Cobalt went back to the private-equity sponsors for backing to aggressively bid during the lease sales. With the additional capital, the private-equity providers were on the hook for about $1.2 billion.

“We were successful in winning some of the most highly desired blocks against the major players in the industry,” says Gray.

The next step was to obtain interests in the Anadarko Petroleum Corp.-operated Heidelburg #1 (9.375% interest) in the Ligurian/Heidelberg prospect, and the Shenandoah #1 (20% interest).

Total Alliance

With success in the lease sales, it was time for a strategic alliance with a large player.

On April 6, 2009, Cobalt announced a long-term alliance with Total SA. Through a series of transactions, the E&Ps combined their respective exploratory-lease Gulf inventories, excluding their Heidelberg portion and Shenandoah prospects and all developed or producing properties held by Total.

Cobalt became operator through the exchange of a 40% interest in its leases for a 60% interest in Total’s leases, resulting in a combined-alliance portfolio covering 216 blocks. Total committed to providing a fifth-generation deepwater rig to drill the mandatory five-well program on Cobalt-operated blocks; and to pay up to $300 million to carry a substantial share of Cobalt’s costs with respect to the five-well program and other considerations.

“The Total alliance was a very strategic and important deal,” says Gray. “Total undertook a six-month due diligence on our assets and capabilities, then turned over their Gulf operations to us. It was a real vote of confidence in our people and processes by such a supermajor.”

Next, Cobalt formed a partnership with Sonangol EP in 2009.

“Joe had existing relationships in Angola with Sonangol,” says Gray. “After looking at some available seismic data, Cobalt’s team sat down with Sonangol and discussed the offshore, deepwater, pre-salt opportunities. Sonangol awarded Cobalt interests in blocks in offshore Angola. A second, separate transaction gave Sonangol interests in some of Cobalt’s prospects in the Gulf of Mexico.”

The partnership gave Sonangol a 25% nonoperated interest in Cobalt’s pre-Total-alliance interests in 11 Gulf leases. Cobalt formed an area of mutual interest with Sonangol to include a subset of the Gulf properties. This was Sonangol’s first entry into the North American E&P sector.

“After the Gulf of Mexico lease acquisitions, the arrangement with Total and the partnership with Sonangol, we felt the time was right to go to the public-equity market for additional capital to execute our exploration program.”

The team knew the IPO float would be challenging, because it was taking a company with no revenue and no reserves to market, which was unique, says Gray.

“It was also the largest proposed U.S. IPO at the time,” he adds. “We weren’t considering that very much, though. We just felt that it was the right time and we had the right assets and management to carry out our business plan, a pure play pre-subsalt oil play with large operated positions. We felt that the market would recognize that as valuable.”

Cobalt International LP became Cobalt International Energy Inc. and, on December 21, 2009, the company issued 63 million common shares, at $13.50 each, to float an IPO on the New York Stock Exchange. Its shares began trading under the ticker symbol CIE.

It sold an additional 3,125,000 shares through a private placement. Gross proceeds were $850.5 million, slightly less than the hoped-for $1.15-billion raise.

“The reason the deal was downsized was partially due to the timing of going to market,” says an industry analyst. “It wasn’t the optimal time. The market had cooled off for commodity prices and it was viewed as a reserve-potential E&P.”

Nonetheless, Cobalt has a “great inventory portfolio,” asserts the analyst. “What people are looking for now is execution. They potentially have some big wells coming up in West Africa.”

The market agrees. In January 2010, Cobalt raised an additional $107.7 million through the sale of an additional 7.9 million shares at $13.50, as an overallotment to its IPO to fund its drilling and exploration program through 2011. Including the overallotment, Cobalt raised a total $957.7 million through its IPO. The original private-equity investors still own 70% of the company.

Today, Cobalt is working to carry out its drilling plan and de-risk its portfolio. “We are working to put a drillbit on these prospects to determine the reserves that are there. We are active in our exploration program,” says Gray.

Cobalt plans to begin producing oil from its Gulf assets by 2015 and from its West Africa assets by 2016. Given the time frame, the company does not expect to generate any revenue from production until then.

“We will also be optimizing our portfolio,” notes Gray. “For example, if someone sees a piece of our assets as more valuable than we think it is, we would sell it. If someone offers a prospect that we believe is undervalued, we will buy it. But the real objective is to build a very large company with the potential to accumulate reserves the size of the majors.”

In total, Cobalt’s assets have an unrisked, net, mean potential of 9.2 billion barrels of oil equivalent.

According to Gray, if Cobalt has reasonable success with its exploration program, the company expects to raise additional capital during the next three to four years.