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.
Q1’14 Results
Cabot announced its production for Q1’14 totaled 119.9 Bcfe (97% liquids) – an increase of 34% trailing twelve months. Production is actually up 39% if the Mid-Continent asset sales are excluded. The sale, announced in December 2013, involved 15 MMcfe/d for proceeds of $123 million. Discretionary cash flow on the quarter rose 36% to reach $319.5 million and the company’s net income of $107.0 million is more than double the results from Q1’13. On a quarter-over-quarter basis, discretionary cash flow and net income increased 12% and 38%, respectively.
Management said operations were slowed by unscheduled downtime due to winter conditions, but production still slightly increased compared to Q4’13. Higher realized gas prices also contributed to the differential spread and averaged $3.74/Mcf, excluding the effects of hedging. In the meantime, per unit costs decreased by 19% compared to Q1’13 and are now at $2.66 per Mcfe.
Management had previously said in its Q4’13 call that the bulk of new production will come online in 2H’14, and 15 wells are expected to be turned in line in Q2’14.
Marcellus Operations
Net production from the Marcellus Shale alone surpassed 1.2 Bcf/d in Q1’14 – 44% higher than Q1’13 and 3% higher than Q4’13. Management notes the entire production volume has been achieved within six years and the company has used no more than six rigs to produce from 290 horizontal wells.
Production in April 2014 is averaging 1.48 Bcf/d, including a single-day record of 1.54 Bcf. Management expects the upward trend to continue into Q2’14 as prices rise due to low inventory levels. The company also noted its sales are being boosted due to the infrastructure buildout in the Northeast. Two pipelines with a combined capacity of 1.3Tcfe/d are scheduled to be online in 2017. The company plans on allocating 65% of its 2014 capital budget to the Marcellus, even though attention is increasing on its Texas assets.
Eagle Ford
Production in Texas also rose. Q1’14‘s stream averaged 7,271 BOEPD (94% liquids), which is roughly 42% greater than production TTM. Cabot’s first six-well pad in the region was placed online late in the quarter and returned a cumulative rate of 6,270 BOEPD (89% oil) in the first 10 days of production. Management said the region’s success has prompted the addition of a third rig by Q3’14, with production results expected by 2015. Cabot believes its use of pad drilling can reduce costs by up to $600,000 per well.
In a conference call following the release, management said the company is seeing returns of 60% at $90 per barrel, hence the addition of the extra rig. The wells are drilled at 6,700 feet in lateral length and are currently outperforming the typical rates of an average Eagle Ford well of 500 MBOE.
The company added 4,000 net acres in the region in the quarter and is actively seeking additional properties. In the conference call, management said there are 500-600 identified drilling locations and the possibility of bringing in a fourth rig is “certainly an option” if the third is deemed a success. The locations are scattered across much of its acreage so no core area has been identified, but COG plans on operating a pad drilling program based on efficiency rather than delineation.
Source: COG April 2014 Presentation
Pricing
As previously stated, COG’s ability to produce gas ($2.66/Mcf) and sell at an effective price ($3.74/Mcfe), is the main driver to the quarterly increase in discretionary cash flow and net income. A company presentation in March 2014 indicates COG’s production trades at a discount of $0.10 to the NYMEX index, which occupies 26% of Cabot’s total production. Differentials in the Marcellus are $0.60-$0.65, which are in line with company estimates. A comprehensive view of natural gas price realizations can be seen in the chart on the right.
A full list of its hedging summary can be found here.
OAG360 notes COG is one of the lowest cost producers in its E&P database consisting of 87 companies. Three-year finding and development (2011 through 2013) costs are $0.76/Mcfe, ranking third on the list and second among Marcellus producers. Similarly, operating expenses and general administrative costs are $1.25/Mcfe – good for fifth overall and second among its Marcellus competitors.
Cabot also holds high ranks in the debt-adjusted production growth per share category. The company’s three-year ratio is 252%, which ranks fourth overall and second in the Marcellus. In the meantime, Cabot has increased its debt adjusted reserve growth per share in the same period by 109%. Its debt to market capitalization ratio at the close of business on May 2, 2014 was 7.6%, and its interest coverage ratio was 10.6 times.
2014 Guidance
The decision to add another rig to the Eagle Ford has increased 2014’s capital budget to $1.375-$1.475 billion. Production guidance has been refined to 530-585 Bcfe, and 2015 production is forecasted to grow by 20%-30%. Using midpoints, COG’s full-year 2015 production will reach roughly 660-730 Bcfe. Gross production of 2 Tcfe will be reached early in 2015.
The borrowing base has increased to $3.1 billion from $2.3 billion as part of its revolving credit facility. At the end of Q1’14, the company has roughly $1.2 billion in debt with $535 million outstanding.
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