Shares of Cobalt International Energy Surge 15% After Contract Amendment

By Tyler Crowe Markets

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What happened

Shares of Cobalt International Energy (NYSE: CIE) are up 14.9% as of 10:45 a.m. EDT after the company announced yesterday after the market close that it has agreed to the early termination of a rig it contracted with Rowan Companies (NYSE: RDC).

So what?

If investing in pure-play oil and gas companies didn't have enough speculation in it already for investors, there was Cobalt International Energy. When the company IPOed in 2009, it wasn't producing oil and gas. Instead, it was a speculative bet on a bunch of deepwater properties that would be developed. Since that time, the company has logged several discoveries in the Gulf of Mexico and Angola, but it has just barely started producing from its Hiedelberg field.

This means the company has been completely reliant on raising capital from debt and equity to fund development. The problem with this approach, though, is that it's getting harder and harder for Cobalt to raise capital. As a result, it's scaling back its operations. This early termination will help the company reduce its capital spending. Cobalt and Rowan agreed to end the contract on theRowan Reliancedrillship in March of 2017, 1 year earlier than originally contracted.

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The only reason Rowan was willing to agree to this early termination -- which will impact its bottom line -- is because Cobalt agreed to use Rowan as an exclusive rig contractor for five years. So when Cobalt is ready to start spending money again, Rowan will get the business.

Now what?

Cobalt may be getting out from under a rig contract early, but that doesn't change the fact that its spending program has no support from operational cash flows. Management has stated that it wants to monetize -- aka, sell off interest stakes -- some of its Angola assets, but it hardly seems like the time to be selling assets with oil prices where they are today. For investors, this company has "stay away'" written all over it.

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Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool.

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