Insider Buying Sends Cobalt International Energy, Inc.'s Stock Soaring Today

Image source: Anadarko Petroleum.

What: Shares of Cobalt International Energy (NYSE: CIE) exploded higher on Thursday, and were up 32% at 10:45 a.m. EDT.

So what: Fueling today's rally were Securities and Exchange Commission filings by the company detailing that recently installed CEO Timothy Cutt and newly hired CFO David Powell both bought 100,000 shares of Cobalt's stock earlier this week. Both men paid just under a dollar per share, meaning their total investment was only $100,000 apiece, which is not that much, especially considering that the company's market value is north of $400 million.

The focus, however, is not on how much stock they bought but that the market views insider buying as a very bullish sign. On top of that, short covering is also a likely contributor to today's rally since that stock has a relatively high short interest of 22.5%. Those short-sellers tend to run for the exits and accelerate a rally on days like today.

Still, the reason the short interest was so high to begin with is that Cobalt International Energy has several issues. Most pressing is the fact that its $1.75 billion Angolan asset saleis expected to fall through. Because of that, it is already marketing those assets to new buyers, but it will unlikely be able to fetch a similar price because offshore asset values have plummeted due to the oil market downturn. In addition to that, the company had to write off $150 million in expenses during the second quarter after its Goodfellow prospect came up dry.

Despite those two major setbacks, Cutt and Powell see boatloads of potential in Cobalt, which is why both recently came on board. In particular, the company has several key developments in the Gulf of Mexico that have the potential to create substantial value over the long term. Among the most promising are its minority interests in several projects operated by offshore giantAnadarko Petroleum(NYSE: APC), including the recently started Heidelberg project and the Shenandoah discovery. The first three wells from Heidelberg just came on line earlier this year, and Anadarko plans to bring two more wells on line by the end of this year. Meanwhile, Anadarko announced that the Shenandoah No. 5 appraisal well encountered a significant amount of oil, which when combined with prior appraisal results suggests that this prospect could be a huge winner.

Now what: Cobalt International Energy is an interesting story. It has uncovered a substantial amount of oil and gas, which has its two new executives so excited about the company's future that both recently bought more shares. While that demonstrates confidence in their abilities to turn this company around, they need to show meaningful progress on a turnaround plan so that today's rally does not fade once the reality of its financial situation begins to set back in.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.