Current COG Stock Info

Atlantic Sunrise pipeline expected to boost future Cabot Marcellus results

Cabot Oil & Gas (ticker: COG) announced third quarter results today, showing net earnings of $17.6 million, or $0.04 per diluted share. After adjusting for special charges, Cabot earned $32 million this quarter. This result compares favorably to Q3 2016, when the company lost an adjusted $16.7 million.

Much of the improvement in earnings was due to higher commodity prices, which were up across the board. Cabot Oil & Gas realized $2.03 per Mcf, which is 16% higher than in Q3 2016, $45.53 per barrel of oil and $17.04 per barrel of NGLs. These two prices represent improvements of 13% and 35%, respectively.

Atlantic Sunrise to the Rescue in the Marcellus

Some of the most important news for Cabot Oil & Gas regards its takeaway capacity. The Atlantic Sunrise pipeline project has received final approval, and began construction in September. Cabot will be the main shipper in the line, with 850 MMcf/d of capacity.

The 197-mile, $3 billion project will connect Marcellus production to the major Transco pipeline, which transports gas across the eastern seaboard. The line has a 1.7 Bcf/d capacity will help relieve the long-standing infrastructure bottleneck in the Marcellus. Current schedules predict the pipeline will finish construction by July 2018.

2018 spend:  ~ $1.1 Billion, 75% earmarked for Marcellus

Cabot  announced a rough plan for 2018, describing the company’s expected spending and production. The company expects to spend $1.025 billion to $1.15 billion in the year, with about 75% going to Marcellus operations. As the company announced earlier in the year, Cabot Oil & Gas expects to spend some money on exploratory activities, searching for new prospects. About $75 million will be spent on this in 2018. Cabot Oil & Gas is currently acquiring leases in two new exploratory areas, and plans to use the $75 million to test these areas. If the tests are successful, Cabot will fund the additional second half spending with asset sales.

Cabot’s overall spending plan consists of:

  • Marcellus Shale:            $750 to $850 million
  • Eagle Ford Shale:          $125 to $150 million
  • Exploration Areas:         $75 million
  • Pipeline Investments:    $60 million
  • Corporate:                     $15 million
Cabot Oil & Gas Predicts $2.5 Billion in Free Cash Flow 2018 - 2020

Source: Cabot

What will Cabot do with $2.5 billion in cash flow? EnerCom Analytics examined this exact question in a recent Monthly Trends Report

EnerCom Analytics recently did a deep dive into this exact question, examining share buybacks vs. other possible uses of capital available to an E&P company.

Cabot Oil & Gas expects production growth of 15% to 20% in 2018, which means the company’s Marcellus assets would generate pre-tax cash flow of $2.5 billion from 2018 to 2020. This gives Cabot the interesting problem of how to spend this projected cash.

Paying down debt is always an option, but is not always needed. Share buybacks can be a good way to send a message to investors that the company is undervalued, but they can also send the message that the company has nothing to do with its capital. The possibility of reinvesting this capital into the business is also a consideration, as expanding the drilling program or buying new assets can add reserves and production.

The most recent edition of EnerCom’s Energy Industry Data & Trends Report examines all these possibilities for many E&P companies, including Cabot, and identifies which programs may be most optimal for each.

Q&A from today’s Q3 earnings call

Q: $2.5 billion is a lot of free cash flow. You’ve got options, you can buy back up to 20% of your stock, you can pay a meaningful or S&P type dividend on the shares. How do you think about those two options in reallocating or returning that capital to shareholder? And obviously, the share buybacks depend on the stock price, but at close to current levels, how do you think about the options between share buybacks and dividend increase?”

Cabot Oil & Gas CEO Dan Dinges: We recently, as you’re aware, increased our dividend 150%. We also bought back a nice tranche of shares in the second quarter. We do have an authorization still on the shelf to buy back shares. When you compare those two, we will, I think, look at both of them as an avenue to give back money to shareholders.

On the dividend, we are moving towards a much more certainty attached to our free cash flow generation, now that we have the approval of infrastructure going in the ground. With that infrastructure in the ground and gas moving through additional outlets and also seeing the basis compress on the three pipes that we currently sell into, we’re going to have a significant level of confidence of an ongoing continuous improvement in the realizations. And that gives us a little bit more confidence on just the dividend side of our give-back.

In the meantime, however, though, we have had, as you are aware, $0.5 billion or so of cash on our balance sheet, and we have continued to rationalize our portfolio and we looked at the buybacks with some of that cash. So, to say it a little bit more succinctly, once we get the infrastructure in place, we know we’re going to be generating a significant level of free cash. And with that, we’ll then make decisions between the share buybacks and the dividends and look at that as prudently as we can.

Q: Not to beat a dead horse here, but just have one question really on the stock buyback. I mean, on our model, which appears to be in the right ZIP Code, based on the outlook you provided, you’re trading at a 7 or actually probably 6% free cash flow yield after today’s recent move. I mean, there’d seem few similar opportunities when we think about the broader non-E&P, of course, market. Just in that context, how do you think about buybacks?

Dan Dinges: We look at that as a unique position for an E&P company. Free cash flow yield of not only that, but we think we can increase that free cash flow yield. If you compare that free cash flow yield to other industries out there and you look at our multiples, I would like to see what the Street thinks the value is of an E&P company that does deliver that type of yield. And if we get the reaction from the Street and they value that free cash flow yield in a way that we think merits the valuation per share of Cabot stock, then buying back shares is not going to be as big of interest to us because we’re going to see it in stock price appreciation. But to date, even though we think that is very visible on that yield and improving as we go forward, I haven’t seen the comparison of the Street giving us the credit in our current share price.

Q: I was hoping you could talk a little bit more about the exploration plays, and if you have success there, how you think about that in terms of funding. You said, in your prepared remarks, that they would be absent any cash flow at the asset level, but how do you think about that at the corporate level? Would you still be generating free cash flow? Or any more color you could provide on how you guys would progress with that program would be helpful.

Dan Dinges: Yeah. On the free cash flow, we do expect to generate free cash flow at the corporate level. When you look at our effort out there right now, we do have a drilling rig active on one of the areas, and we’ll be moving to having a drilling rig on the other area. Characteristic of what we’ve done in the past on expiration plays, we’re not going to comment on results at this point in time. Information that we have seen, we’re encouraged to continue to move forward with collecting data and evaluating the area. And we have our fingers crossed and we’re cautiously optimistic that we’ll be able to demonstrate that the areas that we are focused in will compete for incremental capital. And we do fully intend to fund it and still, at the corporate level, be able to generate free cash flow.

Q: And can you just remind us how much of the acreage in your exploration areas is held and how much activity you think you would need to run if you wanted to hold on an acreage?

Dan O. Dinges: Yeah, we have $75 million allocated for the exploration area in 2018. We have just a portion of our 2017 budget remaining that we had allocated and announced previously at the beginning of this year. That portion that we had identified at the beginning of this year was $125 million. We’ve spent the majority of that $125 million. We do expect to stay within that budget between now and year-end. And as I said, in 2018, we have $75 million that we’ve allocated to the two areas. We have a significant amount of acreage that we think would be impactful on Cabot if we have success.

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