Cabot bumps Marcellus EURs 16%
Cabot Oil & Gas (ticker: COG) reported its fourth quarter and year-end numbers Friday, posting higher than expected production for the three months ended December 31, 2016. The company produced 1.79 Bcfe/d, about 2% above guidance. Full-year production reached 627.1 Bcfe, consisting of 600.4 Bcf of natural gas, 4,013.1 MBO of crude oil and condensate, and 441.2 MBO of natural gas liquids (NGLs), according to the company’s press release.
The company reported increased Estimated Ultimate Recoveries (EURs) in its Marcellus acreage, helping to drive production higher. Based on Cabot’s year-end reserve bookings for 21 producing Lower Marcellus wells that were completed with the company’s fourth generation completion design, Cabot has increased its guidance for Lower Marcellus EUR per 1,000 feet of lateral from 3.8 Bcf to 4.4 Bcf, or 16%.
“The EURs for our fourth generation wells further highlight the peer-leading productivity from our Marcellus assets in the core of the dry gas window in Northeast Pennsylvania,” said Cabot Oil & Gas President and CEO Dan Dinges. “Based on our current well design and current commodity prices, we believe our project-level economics in the Marcellus are unrivaled across North American resource plays; however, we continue to test new initiatives to further enhance our economics.
“Based on our current outlook for 2017, we anticipate another year of production and reserves growth while generating positive free cash flow,” he added.
Cash flow from operations in the fourth quarter of 2016 was $139.7 million, compared to $155.8 million in the fourth quarter of 2015, according to Cabot. This equated to a net loss for the quarter of $292.8 million, or $0.63 per share, compared to a net loss of $111.1 million, or $0.27 per share, in the fourth quarter of 2015.
Cabot locks in the majority of its well costs for 2017
Cabot also announced as part of its quarterly earnings that the company has locked in 73%-78% of its drilling and completion costs in the Marcellus for 2017. Many E&P companies are concerned about rising oil service costs, but Cabot has worked out contracts in the Marcellus to limit well cost inflation, the company said.
Cabot increases 2017 capex budget
Cabot Oil & Gas reiterated its 2017 production growth guidance range of 5%-10% and initiated crude oil production growth guidance of 15%, which represents a substantial increase from the 0% oil growth contained in the preliminary 2017 budget issued in October 2016.
Based on the expectation for higher operating cash flow due to an improvement in the commodity price outlook, the company is increasing its exploration and production capital budget from $575 million to $650 million, or 13%. This incremental capital will fund additional drilling and completion activity, primarily in the Eagle Ford, the company said in its release.
“Cabot has seen a significant improvement in project-level returns in our Eagle Ford asset due to increased productivity from enhanced completions, continued cost reductions, and higher crude oil prices,” said Dinges. “Accordingly, we plan to allocate additional capital to this asset to grow exit-to-exit crude oil volumes by 50% in 2017.” Dinges added, “Even with this modest increase in capital for 2017, we are forecasting approximately $250 million of positive free cash flow for the year based on recent strip prices.”
Analyst Commentary
Wells Fargo
Eagle Ford Receiving More Attention: Several questions in Q&A on decision to dedicate more capital to the Eagle Ford given still superior economics in Marcellus. Management justified its decision as adds growth optionality in the event of any curtailments from Marcellus production, but none currently expected, together with macro environment and current infrastructure buildout schedule dictate amount of capital able to be redeployed into the Marcellus. Given amount of cash on balance sheet, the rise in commodity prices since 2017 guidance was first announced in October, and significant free cash flow generation make allocating capital to Eagle Ford with solid return potential appealing. While company modeling in some service cost increases in 2H17 in the Eagle Ford, returns still north of 45% and still justify additional investment. Coupled with greater certainty of free cash flow generation as a result of receiving the certificate of public convenience and necessity for Atlantic Sunrise on Feb 3, makes sense to get a jump start on Eagle Ford development heading into 2018, in our view.
Capital One Southcoast
• CAPEX guidance: COG raised the FY17 total capital budget to $720MM, up 15% from the $625MM set in late October. The new higher budget is 14% above both Street/COS ests. The budget was raised based on expectations for higher operating cash flow due to the company’s improved commodity price outlook. The new budget calls for an additional $85MM of spending in the Eagle Ford to help grow ‘17/’16 exit rate oil volumes by 50%. Even on the higher budget, COG still projects $250MM of FCF in ’17 at current strip prices.
