Cabot Oil & Gas Corp (ticker: COG) is engaged in the development, exploitation and exploration of primarily natural gas and natural gas liquids in the Marcellus Shale. Outside the Marcellus, Cabot continues to expand its oil development efforts in the Eagle Ford and Pearsall Shales of South Texas, and the Marmaton, in the Oklahoma and Texas Panhandle.
Recent Earnings Results:
On October 26, 2012, COG announced Q3’12 operating and financial results for the period ending September 30, 2012. During Q3’12, COG reported net income of $36.6 million or $0.17 per share, compared to net income of $28.5 million or $0.14 per share during Q3’11. Cash flow from operations for Q3’12 was $164.0 million, a 6% increase year over year. Discretionary cash flow for Q3 ’12 totaled $175.7 million, a 6.2% increase from Q3’11 levels.
Q3’12 production of 66.5 Bcfe grew 33% from Q3’11 levels with the natural gas component growing 31% and liquids growing 61%. The 61% growth in liquids production is primarily attributed to COG’s continued operational success in the oily Eagle Ford, Marmaton and Pearsall. Despite the liquids growth, OAG360 notes that COG’s production is still 94% natural gas.
Continuing Sustainable Growth Path
Over the past eleven quarters, COG generated a 10% compound quarterly growth rate, among the highest rate of any gas weighted stock, while maintaining a top quartile “all-in” 3-year finding and development (F&D) cost of $1.30 per Mcfe. The 108 North American companies in EnerCom’s E&P Database have a 5% average compound quarterly growth rate and an average 3-year F&D cost of $2.76 per Mcfe.
Marcellus Operations Update:
Cabot continues to refine its completion process in the Marcellus and believes its new process of using a total of 25 narrower spaced frac stages, slightly less than 200 feet apart per stage, is yielding greater returns. Infrastructure remains an issue of all operators in the Marcellus but Cabot received news that Williams (ticker: WMB) has obtained 90% of the 2012 gathering line permits. As a result, the added capacity currently being constructed should allow for approximately 30 wells to begin producing in the fourth quarter and about half of those wells being turned on in December.
Emerging Liquids Plays: Pearsall, Marmaton and Eagle Ford:
Cabot recently drilled and completed its first Pearsall well under its joint venture with Osaka Gas in Frio County, Texas. The IP rate from the short lateral, 11 stage well was 1,400 BOEPD and was able to sustain a 20-day rate above 900 BOEPD (approximately 50% oil). A second Pearsall well is in the process of being completed and there are plans for three additional Pearsall wells for the joint venture.
In the Marmaton, the company has drilled its first extended lateral well, approximately 9,500 feet, and completed the well with 30 frac stages. At the time of the call, the extended lateral well just started flowing back. Cabot’s second Marmaton extended lateral well has already been drilled and is scheduled for completion by the end of October. OAG360 notes that one of the only other public operators drilling extended laterals in the Marmaton is Unit Corporation (ticker: UNT). In UNT’s October 2012 presentation, the company reports well costs of $4.2 million for a well design with a 9.500 foot lateral and 32 frac stages.
Currently, COG has two rigs running in the in the Pearsall and Marmaton, respectively and one rig running in the Eagle Ford. COG plans to complete 16 net wells in the fourth quarter between the Pearsall, Marmaton and Eagle Ford and roughly half of these will be completed in December.
What does 2013 look like?
In 2013, COG plans to spend $950 million to $1.025 billion with approximately 40% of the drilling budget focused on liquids growth. Full year 2013 production is expected to grow 35% to 50% with the liquids cut growing approximately 45% to 55%. Guidance for COG’s 2013 Marcellus program was revised to better reflect tighter frac spacing which also was a driving factor for the increase in the low end of the production guidance and increase in program spending. The company expects to be cash flow positive based on their 2013 budget price deck of $3.50 per MMBtu gas and $90.00 per barrel oil.
Final Thoughts on COG
As Cabot continues to responsibly grow production volumes, be mindful of costs and add a liquids component to it production mix, we believe COG will continue to command a premium multiple compared to its peers. As of October 19, 2012, COG was trading at 14.2x estimated 2012 cash flow compared to a median of 5.1x for the 86 U.S. E&P companies in EnerCom’s database.
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