Shares of oil producer Cobalt International Energy Inc. surged 36 percent Friday after the company released a study showing that one of its wells might be far more productive than many analysts thought.
THE SPARK: On Thursday, Cobalt International released the results of test drilling at the company's "Cameia-1" well off the coast of Angola. Cobalt International said the well yielded "exceptional results" and will be able to produce 20,000 barrels of oil per day.
THE BIG PICTURE: The Cameia-1 well is just the beginning of Cobalt International's efforts to drill oil off the western coast of Africa. The company said it has plans to drill even deeper wells now that Cameia-1 has proven to be so productive.
When a well proves to be surprisingly productive, it's like winning the lottery for an oil company. Firms like Cobalt International invest in drilling leases and exploratory wells without knowing how much fuel they will produce. When companies strike the mother lode, it means they can reap much bigger profits from that fixed investment in drilling equipment and leases. Negative drilling results mean future revenue is likely to be weak.
Those same dynamics make stocks like Cobalt International's risky.
THE ANALYSIS: Citigroup Global Markets analyst Joseph Stewart said the success of the Cameia-1 well shows that Cobalt International has strong growth potential because the initial well was relatively shallow. As Cobalt International drills deeper wells, it could add a lot more production into the company's operations off Angola.
Stewart rated Cobalt International a "Buy" rating and gave the company's stock a target price of $26 per share.
SHARE ACTION: The shares surged past $36. By midday, they were up $8.52, or 35.7 percent, trading at $32.42. That's an all-time high since the shares started trading in late 2009 for less than $14. They have climbed steadily since December, when they were trading for $9.