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Invest in Luck. Try This Oil Exploration Company

By: Martin Tillier
Posted: 1/28/2014 10:35:00 AM
Referenced Stocks: CIE;BP

I am probably going against some unwritten financial writers' code here, but, for traders and investors, luck is important. I think we are all supposed to pretend that everything is predictable and explicable and that, if you would just read more of what we write, you could begin to predict market moves with accuracy. Well, I hate to be the one to tell you this, but sometimes you just have to get lucky.

Ask anybody who has ever been responsible for hiring people to staff a trading desk and they will probably all tell you the same thing... they'll take luck over ability every time. It's not that hard work and analysis don't have their place. As the wise man once said "The harder you work, the luckier you get." That is certainly true when it comes to trading and investing to some extent, but a healthy dose of good old fashioned chance can lay to waste the best laid plans of mice and men.

The same is true for individual companies as well and probably nowhere more than in the oil exploration field. Despite huge advances in technology and geology, drilling for oil is still a hit and miss game. You can do all of the computer modeling you like, but until you take the time and money to drill you can never be sure what you have. It would make sense then, if you are looking for an investment in this risky sector, to look for a company whose luck is changing and seems to be on the beginnings of a roll, like Cobalt International Energy (CIE).

Cobalt International

CIE's shareholders didn't have a very good 2013, as you can see. The company is a deepwater drilling specialist and, as if the bad press following the Deepwater Horizon disaster and competition from advances in shale oil weren't enough, the year also saw the announcement that an exploratory well in their Aegean property in the Gulf of Mexico had come up dry. I guess you could say they were due a change of luck.

According to this from BP (BP), oil exploration has, with advancing technology, moved from a 10% success rate to one approaching 50%. Even so it is a coin flip, so when the first four exploratory wells drilled in a particular field strike the old black gold, it could be regarded as lucky. That is the case in the deepwater sites off of Angola where CIE is currently drilling.

The latest discovery, at Cobalt's Bicuar #1A well revealed an estimated 150-300 million barrels of oil. At the upper end of that estimate, this field may be viable as a standalone venture, but even if not, that viability can be achieved given the proximity of other recent discoveries. In the short term, it certainly doesn't hurt CIE that drilling in the offshore Angolan properties is taking significantly less time (and therefore money) than originally estimated. According to Cobalt's press release, Bicuar #1A was drilled to total depth in 59 days, 63 days ahead of schedule.

From a big picture perspective, I am not particularly bullish on fossil fuels over the long term for reasons I have laid out many times, including downward price pressure as shale oil comes online, but it would seem to me that betting on a change of luck in a risky business is worth doing. It would, of course, be both of those things, betting and risky, but if you accept that luck is an important component of successful trading and investing, then that shouldn't scare you too much. Luck has a way of coming and going in waves and a small investment where the tide seems to be turning could be a good idea.