EFTA01450733

Deutsche Bank Markets Research Rating Company Date Buy Cobalt International 19 December 2013 North America Energy Alert Forecast Change United States Price at 18 Dec 2013 (USD1 15.66 Industrials 0 E N OE UN NYS Price Target 25.00 Oil & Gas Exploration & 52-week range 30.20- 15.33 Production One Last Lump of Coal No, Virginia, there is no Santa Claus....or at feast it feels that way sometimes In a fitting finish to what has been a difficult past 6 months, CIE unexpectedly reported a dry hole at US GoM prospect, Aegean. At this point, valuation has taken a back seat, as lack of confidence in the story, fund flows, year-end derisking, tax-loss selling, lack of catalysts and general frustration have the stock trading well below our $22/sh estimate of discovered resource ($15/sh of US GoM discovered resource). While valuation remains extremely attractive, we expect the stock to struggle in the near-term as the market wrestles with the value of discovered resource and potential paths to monetization, but see value for those able to withstand near-term volatility. Maintain Buy. Enter the debate. What is discovered resource? And what rs it worth? In our view, for the time being the stock has flipped from a "resource-plus" model (ie. discovered resource plus some risked value for future exploration) to a "discount to resource" model. With significant disagreement on discovered resource, however, we see a couple of potential paths towards greater clarity: 1) Improved transparency on discovered barrels - CIE has given little clarity on discovered resource, and would benefit greatly from some disclosure on resource ranges and accompanying geologic scenarios. (see "Cameia", where many attribute 200-250 mmboe, the company's "minimum threshold", despite what is clearly a much larger deposit. 2) Monetization - CIE is clearly on the path towards monetization in the form of "farm-downs" as a funding vehicle, but these are likely contingent on additional appraisal activity at Shenandoah and North Platte, making monetization likely a 2015 event. We would expect to see some rising pressure on the company to act earlier to arbitrage the gap between GoM asset deals and current CIE valuation. We expect a more proactive approach from the company on the first point in 2014, but remain skeptical of the company's willingness to leave money on the table through an accelerated sale. However, with the stock trading at a 34% discount to DBe's $22ish of discovered resource, and a $0.50/sh discount to the US GoM alone, expect continued market pressure on both avenues. Whar happened? And What's nevt? PT from 832 to $25 CIE reported a dry hole at the Aegean prospect in the US GoM (CIE 60%. Total 40%), a three-way trap targeting the inboard Lower Tertiary. CIE will now release the Ensco 8503 rig. Upcoming targets include Bicuar (late 10/2O) and Orca (2O14) in Angola, as well as three non-operated US GoM wells in 2014: CVX's Anchor (11114, CIE 24%), BHP's Rum Ramsey (21114, CIE 24%) and ENI's Goodfellow (21114, CIE 30%). We have reduced our PT from $32 to $25 to account for -$2.50 of risked Aegean value and higher risk to future exploration. fiV.PI Research Analyst (+II 212 250-8342 [email protected] Research Analyst (+II 212 2508356 [email protected] 'St: StiVt.t..ilitiA Research Associate (+II 212 250-7697 ICasheilwIrsteinedb.com Key changes Hat Target 32.00 to 25.00 eager esesauseit I -21.9% !Stock & option liquidity clot i Market Cap (USD) 6.371.3 Shares outstanding (ml 406.9 Free float I%) 100 Volume (18 Dec 2013) 779,642 Option volume fund. shrs . 1M avg.1 sown Oatach• Set 257.879 rely data EYE 12/31 2012A 2013E 2014E 10 EPS -0.09 -0.16A -0.20 20 EPS -0.35 -0.12A -0.19 30 EPS -0.10 -0.19 -0.20 40 EPS .016 -0.20 -0.20 FY EPS (USD) -0.70 -0.66 -0.78 PIE (x) Sam Deaschr Sat • irciuclos the wrpact of rasurfa new.; tro oponewq al twit 0P.n. Deutsche Bank Securities Inc. The views expressed above accurately reflect the personal views of the authors about the subject companies and its(their) securities. The authors have not and will not receive any compensation for providing a specific recommendation or view. Deutsche Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. FOR OTHER IMP• T DISCLOSURES PLEASE VISIT MICA( P) 054/04/2013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0106559 CONFIDENTIAL SDNY_GM_00252743 EFTA01450733