Exceptional magazine: Americas edition, July 2013

Cobalt International Energy

Oil exploration has high stakes, but few executives understand how high tech can mitigate its risks better than Joseph Bryant, CEO of Cobalt International Energy.

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In an industry where success is measured in barrels, Cobalt International Energy has yet to turn a profit. Nonetheless, the oil exploration company Joseph Bryant founded in 2005 has doubled in value since going public four years ago. Its current market capitalization is US$11b.

Cobalt has been described as a “risky bet.” Unlike oil giants such as Shell and BP, it is nowhere near being a household name. Yet the sub-salt and pre-salt exploration work it is doing in the deep offshore waters of the Gulf of Mexico, and off the coast of West Africa, is attracting a great deal of attention.

Until relatively recently, this type of exploration was not considered worth the investment, because of a lack of seismic data and perceived low returns. It can cost US$200m to drill a well, without any guarantee of success.

Cobalt has taken the technology other companies use and applied it to deep water, a process that requires a great deal of skill, some guesswork and judgment — and a lot of nerve. But, as Bryant quips: “The more you surround yourself with brilliant people, the luckier you’ll get.”

“It wasn’t baby steps and working our way up the food chain. We started at the top of the food chain and took them on, on day one.”

When he founded Cobalt, Bryant had to persuade investors he could make the company a success, an idea he concedes was a little “nutty.” To do that, Bryant explained his unique idea that an agile company, armed with the best available information and a disciplined business model, can compete with the world’s largest energy companies.

“A lot of people thought we were crazy,” he laughs. “We were literally going from my garage to competing with the biggest companies in the world. It wasn’t baby steps and working our way up the food chain. We started at the top of the food chain and took them on, on day one.”

Bryant managed to recruit veteran oil executives and win over a group of private equity investors, but it was Cobalt’s subsequent success that made the big fish pay attention.

Cobalt not only acquired the leases and drilled the wells, but found oil. It has been estimated the wells that it has drilled in the Gulf of Mexico could yield more than a billion barrels of oil equivalent.

Cobalt was created from the “mental Post-it notes” Bryant had been writing since he started work in the oil fields of Wyoming 36 years ago. On graduating from the University of Nebraska in 1977 with a degree in mechanical engineering, he was talked out of a career as a “ski bum” by his father, choosing instead a career that allowed him to spend his days outdoors.

He took a job with the oil company Amoco Corporation. “I knew nothing of the oil industry or geology,” he remembers, “but I loved being outside in the mountains. It was the luckiest break I ever had. Living in the mountains, you can see firsthand what geology really looks like.”

For the next 20 years, he traveled the world with his wife and two daughters, from the Netherlands to Angola. All the while, he made his mental notes.

“I would say to myself, ‘If I ever had the chance to do this over again, or if it was ever my company, this is what I would do.’ Then, eight years ago, the opportunity presented itself.”

“I could buy the technology, I could hire the people, and I could buy the data. And that meant that I could compete with anybody in the world.”

Seismic changes
In 2005, the timing was right to form Cobalt. According to Bryant, four key shifts had taken place.

The first was capital formation.

As he explains: “The capital markets now don’t resemble the capital markets of the 1970s — the complexity and global nature of capital markets and the way in which entrepreneurs can access capital. Back then, unless you were General Motors or Chevron, you didn’t have access to capital.”

The second factor was the fungibility of technology.

“Before the dot-com era,” he says, “technology wasn’t really transportable. The big companies were the only ones that could develop new products, because they owned the technology.

“In the 1980s, when the industry collapsed,” he continues, “virtually all of the industry players got out of the technology business and farmed it out to third parties such as Schlumberger and Halliburton. That meant that if you had the money, you could buy the same technology as Exxon or Shell.”

The third was data.

While oil exploration still relies on intuition, companies also need well logs, land databases and seismic data. Up until recently, this kind of information wasn’t easy to find. Today, it is available almost instantly.

The final factor was people.

“Never have we had the quality of people that we’ve got today in this industry,” Bryant says excitedly. “They are truly some of the most brilliant scientists and technologists the world has ever known. Because they’ve been doing it for 30 or 40 years during a time in which the technology itself exploded, it’s allowed them to do more. At Cobalt, we’re armed with some exceptional human talent.

“It was pretty clear that I could form the capital with private equity,” he continues. “I could buy the technology, I could hire the people, and I could buy the data. And that meant that I could compete with anybody in the world.”

Believing the company should start with a rich culture, he went after the talent pool he had observed and lured the world’s most experienced geologists, geophysicists and engineers to his company by offering them the opportunity to do exactly what they love, without the “noise.”

As he explains, “We purposefully built a culture where we give people the very best technology and the best data, and we promise them we won’t waste their time doing stuff they don’t want to do.” As a result, work that is not core to the business (such as payroll and data storage) is subcontracted.

“And we do the neatest stuff in the world,” he smiles. “We’re going thousands of feet below the surface of the water, trying to hit a target that’s about the size of a dinner plate!

It’s as exciting as the lunar landing missions, and everybody wants to do this.”

Staff are recruited for technical expertise, specifically in deep-water oil and gas exploration, and for personalities that won’t disrupt the team. “If we start arguing with each other,” he adds, “that’s the end of Cobalt.”

His core staff has an average of 27 years in the industry, which brings a wealth of knowledge to the table. What happens when they retire, however, is uncertain. Bryant admits that the skills shortage afflicting the industry is a problem he hasn’t solved. For now, he plans to retain industry veterans for longer by keeping them “engaged.”

Managing risks

It’s a risk, but Bryant knows all about managing risk — technological, operational, political and financial. He has to make sure he is investing the right amount of money on the right technology at the right time.

For example, he says that spending US$6m on data may seem expensive but when it materially affects the prospects of a US$200m well, it is money well spent.

Making sure that wells are drilled without accidents such as the Macondo Gulf of Mexico oil spill in 2010 means avoiding taking shortcuts at all costs. The spill shut down operations in the Gulf for close to two years, and the political reaction nearly put Cobalt out of business.

“There were a lot of times where we could have thrown in the towel, but quitting never ever occurred to me.”

Then there was the recession. “We went from nothing to a US$11b market cap in supposedly the worst financial environment in the history of mankind,” Bryant recalls. “That was challenging.”

He now recommends anticipating where you might be in several years and making sure you have the resources to get through anything.

Bryant believes two specific traits drive entrepreneurs such as him. “First is confidence. There were a lot of times where we could have thrown in the towel, but quitting never ever occurred to me,” he says. “Second is courage. You’ve got to have the courage to see it through.

“I’m glad that, somehow, I found either the wisdom or the courage to stick with what I was doing. I wouldn’t be here today had I not had the privilege of enjoying all those very, very difficult moments in my career.”

Today, Cobalt’s big challenge is transitioning into production. “We’re at that cusp right now,” explains Bryant, “where we will have production in a few years with the discoveries we’ve made. The challenge is how to achieve that without sacrificing all that we’ve earned to this point in terms of work culture.”

Bryant is often asked about the possibility of a takeover, but he shrugs off the question, saying he doesn’t spend time worrying about things he can’t control. “What I can control is what I do every day when I come to the office,” he reflects. “And that is to make sure everybody here is creating shareholder value, spending our resources wisely and making sure we will be worth more tomorrow than we are today.”