Cabot Oil & Gas Corporation (ticker: COG), headquartered in Houston, Texas, is a leading independent natural gas producer, with its entire resource base located in the continental United States. The company’s predominate growth asset is the Marcellus Shale in Pennsylvania which is producing more than one billion cubic feet of natural gas per day.
Recent Earnings Results
On October 24, 2013, Cabot Oil & Gas released its 2013 third quarter results that once again highlighted the tremendous growth potential locked away in the Marcellus shale. Incredibly, COG almost doubled net income during Q3’13 from Q3’12 to $69.9 million, or $0.17 per share. Q3’12 net income was $36.6 million, or $0.09 per share.
Bigger Means Better
The real headline of the company’s third quarter results was its comments about encouraging wells results. If the Marcellus shale wasn’t good enough – it may be getting better. Longer lateral lengths and tighter frac stage spacing has resulted in higher production rates and higher estimated ultimate recoveries (EUR). Some analysts believe current EURs of 14 Bcf could be increased to as high as 17 Bcf if COG’s recent well results continue. In a conference call on October 25, 2013, Dan O. Dinges, Chairman, President, and Chief Executive Officer of Cabot Oil & Gas, said: “We feel very comfortable that we’re going to have increases in those wells based on what we’ve seen through early stage time and flow backs. And the fit on the production curve is going to tell us fairly quickly that we can expect a better EUR. There’s nothing that we see right now that’s going to deter us from our position that EURs will be higher in 2013 than they were in 2012.”
Dinges added the lateral lengths in the 2013 lateral program are several hundred feet longer than the 2012 program, and well spacing has been reduced to approximately 200 feet. The process allows COG to complete three to four extra stages per well.
The Eagle Ford drove increased liquids by approximately 28% compared to Q2’13, due to the drilling of a four-well pad. Completion is expected to begin at the end of October. A six-well pad is currently being drilled with COG’s walking rig in its multi-well pad drilling operations. The measure saves the company an estimated $500,000 to $600,000 per well, and a decline in stimulation costs per stage increases the return on Eagle Ford operations.
2014 Guidance, Budget, and Debt
COG will keep its 2014 production growth guidance at a range of 30% to 50%, with a capital program of $1.375 billion to $1.475 billion. Approximately 85% will be used to for drilling and completion, with more than 75% of drilling expenditures intended for Marcellus Shale operations. COG currently operates seven rigs in the Marcellus and intends to drill 130 to 140 net wells in the region in 2014. Two rigs are currently operating in the Eagle Ford, and 40 to 50 net wells are expected to be drilled over the same period. The 2014 guidance expects to drill a total of 170 to 190 net wells.
The company’s net debt to adjusted ratio, according to its Q3’13 release, is 32.8%. The ratio was 33.2% in its Q4’12 report. Total debt is $1.162 million, with $475 million outstanding under its credit facility.
Dinges said: “Operationally, we have a significant level of wells and a significant number of stages in those wells that we’ll roll into 2014. With our current level of drilling and the addition of the seventh rig, I think we are going to be able to meet or exceed the guidance that we’ve given with our operations program.”
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Cabot Oil & Gas following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Robert W. Baird Equity Research Note on October 25, 2013
COG 3Q13 slight beat; operations update very positive. Another solid quarter for COG driven by improved well performance in both the Marcellus and Eagle Ford, with natural gas pricing coming in at the high-end of guidance. The Marcellus ops update provided several key data points from COG’s new completion design, which show significant improvements to IP rates. Eagle Ford volumes deliver liquids growth as well performance continues to improve. We reiterate our Outperform rating based on COG’s superior growth profile and improving Marcellus economics. We believe Appalachian differentials will improve in the colder months and see the recent weakness as a good entry point to build a position.
Wells Fargo Securities Note on October 25, 2013
Summary: Solid quarter on production beat, decreasing costs. 3Q EPS of $0.18 beat both our and the Street’s $0.17 on higher production which was 2% ahead of us and 5% ahead of the Street. 2014 expense and capex guidance introduced, with capex slightly higher than us, while expenses below us. Production guidance was previously announced at 30-50% growth in 2014. Ops detail light, but solid execution continues in the Marcellus with results from tight frac spacing trending above prior type curves. Stock has been under pressure on pricing concerns of late, and pricing came in at high end of company expectations. COG expects differentials will narrow in coming months due to capacity additions and seasonal demand. In our view, company has one of the most high-quality assets in the Marcellus, and with free cash flow ramping significantly in 2015, COG is a stock we want to be long. Our 2013/2014 EPS estimates move to $0.69/$1.26 from $0.73/$1.09.
2014 Production Guidance Reaffirmed, Expenses Trending Down. Calls for 2014 production growth of 30-50% based on capex of $1.375-1.475B. 85% capex on drilling and completions with 70% of this amount allocated to Marcellus operations. With 7 rigs in Marcellus and 2 in the Eagle Ford, company expects to drill 170-190 net wells in 2014. Guidance calls for per unit costs of $2.65 per Mcfe, over a 10% decrease from 2013 midpoint.
Operations Update: In the Marcellus, released results for 13 wells turned online in quarter with an average IP of 24 MMcf/d, very impressive results trending well ahead of type curve at 18 MMcf/d. Company has averaged an additional 4 frac stages thus far in 2013, 20% higher than 2012 levels, due to longer laterals and tighter frac spacing. As previously announced, company curtailed production in Marcellus at times during 3Q as a result of low gas realizations but volumes still set a record level at 1,295 MMcf/d. COG expects differentials will narrow in coming months due to capacity additions and seasonal demand. In Eagle Ford, drilled first 4 well pad with completions scheduled at the end of month and recently spud first 6 well pad. COG estimates $500,000- $600,000 of savings per well with pad drilling and along with longer laterals and larger fracs, expects improving economics in the play.
Additional Wells Fargo note on October 25, 2013
Summary: Positive. Key discussion points on the call included stock buybacks becoming a higher priority, positive well results, and upside potential to EURs in the Marcellus. We detail below.
Stock Buybacks Becoming Higher Priority. With recent stock underperformance, COG believes there is a disconnect between stock price and intrinsic value and said that stock repurchases have become a potential use of cash proceeds, along with accelerating drilling in the Marcellus and Eagle Ford, as well as dividends. Company currently has an authorization to purchase up to 10MM shares, so probably not a needle mover at this point. However, company said that authorization could be bumped up if warranted. Should act as a floor on the stock, and is a positive development in our view. Any buy back likely funded with borrowing base capacity and ramping free cash flow profile.
Upside Potential to EURs in 2014. COG reporting a significant uptick in IP rates in the Marcellus (based on the results given, over 20% higher than 2012 drilling program) due to increased lateral lengths and frac stages. Company believes that these rates will ultimately lead to a corresponding uptick in EURs. Will likely have an updated type curve for the play in early 2014 when proved reserves are reported, and we think it’s likely that COG will meaningfully increase its EUR assumptions for the Marcellus. For the 2013 drilling program, Cabot assumes 14 Bcf EURs and if increased IP rates realized thus far of 20% do indeed correspond directly to EUR increases, we could see this number go as high as 17 Bcf. Given that the longer laterals and reduced spacing between frac stages cost an additional ~$500,000 (current well costs near $6.5MM), very impressive economics are likely to only getting better. We have not factored in these economic improvements into our production or NAV model.
At current trading levels, COG is one of our top picks. The company is expected to begin to throw off meaningful free cash flow in 2014, ramping further in 2015 and economics in the Marcellus continue to improve with longer laterals and tighter frac spacing. We believe that the concern over differentials is more of a short term problem and that pricing will improve as additional takeaway becomes available over the coming quarters. Management indicated that at the low end of its differential guidance of flat to NYMEX less $0.40, company is still realizing returns in excess of 100% in the Marcellus. Temporary pricing dislocations present an opportunity in our view.
Johnson Rice & Company Note on October 25, 2013 – Morning Energy Call
3Q13 Financials In Line, Volumes Ahead of Expectations. Cabot reported 3Q13 adjusted EPS and CFPS of $0.16 and $0.67, in line with consensus of $0.17 and $0.67 and slightly behind JRCO at $0.17 and $0.69. Volumes of 1,164 Mmcfe/d were ahead of both consensus of 1,120 Mmcfe/d and JRCO at 1,136 Mmcfe/d. Product pricing was in line with expectations that had been recently lowered for natural gas in northeastern Pennsylvania.
Capital One Southcoast Note on October 25, 2013 – Cabot Quick Take
Positive. Our $45 target likely moves higher. 3Q production 4% above Street relieves fear that vols would be adversely impacted by weak spot Marcellus pricing, and mgmt comments about pricing were relatively sanguine. COG’s y/y prod growth actually accelerated to 61% from 52% in 2Q despite some vols in Marcellus being held back over pricing. Fact that COG adding 7th rig in Marcellus in ’14 shows mgmt putting $ where mouth is and not being overly concerned over pricing issue, which has been a massive lightening rod issue for the stock. 3Q EPS was 18c vs 17c/19c Street/COS. 3Q CFPS was 67c vs 67c/74c Street/COS. The slight miss vs our model was primarily driven by lower realized gas prices and a gassier mix of production. Production at 194 Mboe/d (+13% q/q, +61% y/y) was 4% above the Street’s 186 Mboe/d estimate and 3% above our 188 Mboe/d est. This likely puts COG on track towards the higher end of 44% – 54% production growth guidance for 2013. COG reaffirmed 2014 production growth guidance of 30% – 50% and issued inaugural CAPEX guidance of $1.375B – $1.475B, which is above the Street est of $1.35B, likely b/c COG will add a 7th rig in Marcellus (up from 6 currently). COG will keep 2 operated rigs in Eagle Ford. COG plans 130 – 140 net wells in the Marcellus and 40 – 50 net wells in the Eagle Ford. COG reported impressive results from its Marcellus dry gas window in Susquehanna County: a 4-well pad IP’d at 110 MMcf/d and three 3-well pads IP’d at an average of 71 MMcf/d. COG drilled its first 4-well pad in the Eagle Ford during 3Q w/ completion scheduled to begin at the end of this month and is currently drilling a 6-well pad. Cost savings of $500K to $600K per well expected as a result of a walking rig used for its multi-well pad drilling operations. On the call, we will be looking for more details on Marcellus gas differentials and firm transport arrangements, as well as anticipated use of its 2014 FCF.
Raymond James Equity Research Note on October 25, 2013
Recommendation: Following the company’s 3Q13 release we are trimming our earnings estimates and lowering our price target to $42. Infrastructure constraints have plagued the Northeast Marcellus in recent months, meaningfully dragging on the company’s realized natural gas pricing. We believe that constraints remain, but see added pipeline solutions and the winter months alleviating near-term pricing issues. High growth and liquidity should support Cabot thereafter, with the Constitution pipeline granting relief in 2015. Though we have less visibility on a solution to the NE Marcellus discounts, we view Cabot’s strong growth profile and balance sheet as fueling free cash flow generation next year. We reiterate our Outperform rating, as recent stock weakness has provided a buying opportunity.
Earnings in-line with consensus: Cabot reported adjusted EPS/CFPS/EBITDA of $0.18/$0.67/$312 million vs. our $0.19/$0.71/$334 million and consensus $0.17/$0.67/$311 million. Natural gas pricing (-6% vs. Raymond James estimate) was the main culprit, outweighing a 4% beat to production (+5% over the Street) to drive revenues 6% below our forecast. Operating costs came in below our forecast (-16%).
Production stays strong, guidance reiterated: Cabot averaged 1,164 MMcfe/d vs. Raymond James estimates and consensus at 1,120 MMcfe/d and 1,114 MMcfe/d. Despite shutting in a some volumes toward the end of the quarter, production was up 12% sequentially, on track for 52% y/y growth (44-54% guidance). For 2014, we model the midpoint of production guidance of 30-50%, as well as the company’s $1.375-1.475 billion capital budget plans (75% Marcellus, 25% Eagle Ford).
But still generating cash: Central to remaining bullish on the name, we estimate Cabot generating $75 million of free cash flow after $1.4 billion of spending in 2014. This should bring the company’s net debt/EBITDA gradually below 1x vs. large cap peers at 1.6x. Cabot’s hedging strategy should provide some protection to cash flows next year, as approximately one third of gas is hedged at a $4.10 floor.
Estimates: We are trimming our estimates to account for lower realized gas pricing.
Valuation: Our new $42 price target is a result of our total company NAV using $4.25 natural gas and $80 WTI long-term.
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