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.
On December 9, 2013, Cabot Oil & Gas reported its first 10-well pad in the Marcellus Shale returned a combined peak production rate of 201 MMcf/d and a combined average 30-day production rate of 168 MMcf/d. The rates per 1,000 feet of lateral exceed COG’s 14 Bcf type curve. The pad was recently turned in-line with 170 fracture stimulation stages targeting eight Lower Marcellus wells and two Upper Marcellus wells.
Overview of the 10-well Pad
COG de-risked the Upper Marcellus by drilling two wells approximately 1,000’ apart, offset 500’ by a well in the Lower Marcellus. The initial production rate of the two Upper wells reached 32 MMcf/d with a 30-day rate of 24 MMcf/d. COG also ran a 500’ downspacing pilot program, consisting of three Lower wells producing initial rates of 62 MMcf/d and 30-day rates of 56 MMcf/d. The company’s regular well spacing is 1,000’, but the pilot results reinforce COG’s belief that tighter downspacing will increase resource recovery in its assets.
Drilling efficiency resulted in approximately $6 million in cost savings ($600,000 per well), and drilling cost per foot decreased 30% compared to 2012 and 12% compared to 1H’13. The benefits of pad drilling resulted in reduced move time between wells and increased efficiency, leading to company records on the completions side. COG completed 170 stages over a 27-day period, twice achieving a company-best nine completed stages in a 24-hour period. An average of 6.3 stages were completed per day, representing a 50% increase over 2012 and a 24% increase from 1H’13.
In line with the efficiency savings, COG anticipates well cost to decrease to $5.8 million from $6.4 million for a typical 14 Bcf well. The company plans to drill approximately 60% of its wells in 2014 from a pad with five or more wells, resulting in additional savings. Its pad was also hydraulically fractured by an entirely bi-fuel frac fleet. Baker Hughes, the frac service provider, utilized line gas from nearby producing Cabot wells to operate the stimulations. The measure displaced approximately 110,000 gallons of diesel fuel and reduced COG’s environmental footprint in the play.
Share Repurchase Program Fueled by Non-Core Asset Sales
COG has repurchased approximately 4.8 million shares in Q4’13, roughly 25% of the 19.2 million shares authorized under its current share repurchase plan. COG reported approximately 420 million weighted shares outstanding in its Q3’13 news release, meaning the repurchase plan will account for 4.5% of the company’s total shares.
Funding for the plan comes from recent divestures, including the $123 million sale of certain legacy properties in the Mid-Continent to an undisclosed buyer. Current production for the sale area is roughly 15 MMcfe/d (94% gas) and is expected to close by year-end 2013. The company sold other properties in the Mid-Continent and West Texas for approximately $188 million on October 17, 2013, with Chaparral Energy Inc. accounting for $160 million of the total.
Cabot management said it has sold $325 million worth of its non-core assets to date.
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Cabot Oil & Gas following the event. 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.
Wells Fargo Securities Note – (12.9.13)
COG: Strong Operations Update–Marcellus Keeps Getting Better
Summary: Positive. Cabot provided a solid operational update that included promising downspacing and Upper Marcellus results, along with an update on share repurchases and asset sales. Overall, a very strong update as well results suggest upside potential to current type curves in both the Upper and Lower Marcellus, along with further de-risking of more locations, and strong cost efficiency gains, none of which we incorporate into our $42.92 NAV. Stock should perform well on the news in our view.
Marcellus Keeps Getting Better. Solid results from downspacing and upper Marcellus drilling, as company completed first 10-well pad with two wells in the Upper Marcellus and remaining in Lower Marcellus. Upper Marcellus wells averaged a combined 32 MMcfe/d 24 hour rate and 24 MMcfe/d 30 day rate. Wells were spaced 1,000’ apart and 500’ from Lower Marcellus. While still early and more production history is needed, results a strong positive in our view as wells tracking ahead of prior 7-9 Bcf type curve previously expected in the Upper Marcellus, though still early. In the Lower Marcellus, the company’s primary target to date, COG tested three wells at 500’ spacing, down from 1,000’ previously, also with strong results. Three wells averaged a combined 62 MMcfe/d 24 hour rate and 56 MMcfe/d 30 day rate, which is ahead of the company’s 2012 type curve (14 Bcfe), though no lateral lengths given.
Efficiency Gains Continue With Pad Drilling. COG indicated cost savings of $600,000 per well on the 10-well pad, while at the same time increasing lateral length and frac stage density. Management expects that 60% of 2014 activity will be on pads of 5+ wells, which together with results that are tracking ahead of current EUR targets, translate to continued upside potential to economics and NAVs.
Share Repurchases Funded With Asset Sales. Over Q4 2013, COG has repurchased 4.8 MM shares, about 25% of its 19.2MM authorization, and company remains opportunistic given management’s perception of undervalued stock price. COG also announced the sale of its conventional midcon assets for $123MM covering 15MMcfe/d of production. Total of $325MM of noncore asset sales YTD, more than cover current buyback.
KLR Group Morning Brief – (12.9.13)
COG ($35.20, B, $48) – Operations Update, Share Repurchases and Sale of Conventional Mid-Con Properties – Cabot announced today an update on its Marcellus operations, share repurchases and the sale of conventional Mid-Con properties. The company turned in-line its first 10-well pad consisting of eight Lower Marcellus and two Upper Marcellus wells (~170 frac stages) with a combined 30-day rate of ~168 Mmcfpd. The Lower Marcellus wells should recover ~18 Bcf and the Upper Marcellus wells should recover ~12 Bcf. Well costs have lowered from ~$6.4 million to ~$5.8 million largely due to efficiencies associated with pad drilling. The two Upper Marcellus wells on the 10-well pad were tested with 500’ spacing and have displayed comparable performance to the previous wells with 1,000’ spacing. In 4Q/13, Cabot has repurchased ~4.8 million shares or ~1% of shares outstanding. The company has entered into an agreement to sell its conventional assets in the Mid-Con area for ~$123 million, which should close at year-end. Current production is ~15 Mmcfepd (~94% gas), which equates to an attractive ~8.2x production rate multiple. This announcement should have a negligible value implication.
Baird Energy Daily Dirt – (12.9.13)
COG announces share buyback, Marcellus pad results, significant well costs reductions and non-core asset sale (Katzenberg). This morning COG announced another set of impressive results from the lower Marcellus and continued de-risking of the upper Marcellus. The wells, which were showcased on COG’s first 10-well pad, successfully tested downspacing to 500` from 1,000′ between laterals and once again proved up the upper Marcellus zone. The two upper Marcellus wells produced at an average 30-day rate of 12 MMcf/d from an average of 18.5 frac stages and are in-line with COG’s current 14.1 Bcf type curve. The three downspaced lower Marcellus wells came online at an average 30-day rate of ~18.6 Mmcfe/d, which tracks above COG’s current type curve and represents upside to our RNAV and reinforces our view that EURs will be set higher at year-end. Marcellus costs also continue to trend lower via the use of pad drilling and underpin our view that COG’s resource in the Marcellus can deliver strong economics and associated NAV even if gas prices fall lower. Well costs averaged $6 million per well, leading management to lower its future anticipated well costs to $5.8 million from $6.4 million on a 10-well pad. Even more positive was the aggressive share buyback program of ~4.8 million shares, representing ~25% of the 19.2 million shares authorized. The buyback is funded by recent non-core asset sales and given our estimates for significant FCF generation in 2014 we could expect more to come. Also in this morning’s update, COG announced the sale of non-core assets in the Mid-Continent with current production of 15 Mmcfe (94% gas) for $123 million, which brings this year’s total asset sale proceeds to $325 million. We expect shares to outperform on today’s positive update and reiterate COG as our favorite gas stock with best-in-class economics and superior debt-adjusted growth profile.
Johnson Rice & Company Morning Energy Call – (12.9.13)
Cabot Oil & Gas Corp. (COG – $35.20,EW rated): Cabot provides results from first 10-well Marcellus pad
Cabot announced results from its first 10-well Marcellus pad which produced at a peak average rate of 20.1 mmcf/d and a 30-day average rate of 16.8 mmcf/d from eight Lower Marcellus wells and two Upper Marcellus wells. The wells were completed with an average 17 stage frac and produced above the Company’s 14 Bcf type curve on a per 1,000 of lateral basis. The two Upper Marcellus wells were completed with an average 18.5 stage frac and produced at peak and 30-day average rates of 16 mmcf/d and 12 mmcf/d, respectively. The 10-well pad also included a pilot density drill test that tested 500’ downspacing on three wells which produced at peak and average 30-day rates of 20.7 mmcf/d and 18.7 mmcf/d, suggesting tighter spacing will be required. Improved efficiencies from pad drilling have allowed Cabot to decrease its expected wells costs for its 14 Bcf wells to $5.8 million (from $6.4 million). Cabot has also signed a PSA to sell some conventional properties in the Midcontinent for $123 million, as it continues to high-grade its asset base and the Company has used a portion of its sales proceeds to repurchase 4.8 million shares quarter-to-date.
Raymond James Energy Daily Update – (12.9.13)
Cabot (COG/$35.20/Outperform) announces operations update and Mid-con sale. The company recently turned on line its first 10-well Marcellus pad (eight Lower Marcellus, two Upper Marcellus) with a combined peak rate of201 MMcf/d and combined average 30-day rate of 168 Mmcf/d, exceeding the company’s 14 Bcf type curve. The 500-foot downspacing resulted in cost savings that drove average well costs from $6.4 million to $5.8 million. Additionally, Cabot announced that it has repurchased 4.8 million shares (1.1% of float), which is 25% of authorized buybacks. Finally, the company announced the sale of legacy conventional oil and gas properties in the Mid-Continent for $123 million, equating to a premium $8,200 per Mcfe/D. Bottom line: The operations update from the 10-well pad, share buybacks, and asset sale should provide a lift for shares of COG today.
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