Analyst Commentary
KLR Group (10.24.14)
Investment thesis
We are increasing our target price $4 to $47 per share driven by greater Eagle Ford execution. Our ’15 production growth expectation of ~26% is slightly above the midpoint of company guidance (20%-30%). Our ’15 liquids production expectation of ~19 Mbpd is at the midpoint of guidance (18-20 Mbpd).
Eagle Ford returns modestly exceed Marcellus with divergence in oil and gas price realizations
Marcellus wells average ~20 Mmcfpd the first 30 days and should recover 15-20 Bcfe for a cost of ~$7 million per well (~50% IRR). Eagle Ford wells should recover ~575 Mboe per well for a cost of ~$7 million (~60% IRR). Cabot is conducting a four-rig program and plans to drill 80-85 net Eagle Ford wells next year. Development is primarily in the ~60,000 net-acre Buckhorn area. The company has ~1,000 drilling locations on 40-acre spacing or ~12 years of drilling inventory. Approximately 50% of expected ’15 capital spending is allocated to the Eagle Ford.
Recent complementary Eagle Ford oil window acquisition
Cabot recently announced the acquisition of ~30,000 net acres in the Eagle Ford for ~$210 million in cash, which includes ~17,000 net acres near the company’s Buckhorn area. Current production associated with the properties is ~1,600 Boepd (~90% liquids). The company added a fourth rig to its Eagle Ford development program.
Superior capital productivity evident in ability to achieve competitive production/CFPS growth at cash generation
An illustration of COG’s differential capital productivity is its ability to achieve competitive production/CFPS growth (’14E-’16E), while spending in line with cash generation, as Marcellus peers spend ~40% beyond cash generation.
Outstanding capital yield (cash-on-cash recycle ratio)
Given the industry’s lowest capital intensity, Cabot should generate a ’15 capital yield of ~160% ($4 NYMEX gas) versus the industry median ~120%.
Gross Marcellus production should double by ’19
Cabot’s current gross Marcellus production of ~1,700 Mmcfpd should increase to ~2,000 Mmcfpd in late ’15 and subsequently increase almost 400 Mmcfpd per annum to ~3,400 Mmcfpd in ’19. Marcellus takeaway should increase to ~2,500 Mmcfpd in early ’16 with the commencement of Constitution pipeline (Iroquois Zone 2/Tennessee 200 interconnects). Further, COG has secured ~850 Mmcfpd of takeaway on Atlantic Sunrise commencing in 2H/17. By ’18, Cabot should have ~3,400 Mmcfpd of gross Marcellus take away capacity.
