Current COG Stock Info

Cabot Oil & Gas increases CAPEX $20 million for 2016 to add completion crew

Houston-based Cabot Oil & Gas (ticker: COG) announced its second quarter earnings today, with the company reporting “modest production growth” and positive free cash flow. Equivalent production grew 10% year-over-year to 151.8 Bcfe, while discretionary cash flow was $97.6 million, according to the company’s press release.

Cabot continues to focus on its most productive acreage. During the company’s conference call, Cabot CEO Dan Dinges said the company’s Marcellus wells show internal rates of return over 100%, and because of that, and improved efficiencies, the company has decided to add a second completions crew through the end of 2016.

“Using the current five-year forward curve for Leidy Line, which is a good proxy for the most punitive pricing a portion of our Marcellus production receives, our well level internal rate of returns are over 100% and our PV-10s are approximately $14 million,” said Dinges. “I cannot think of another asset that generates those economics in the current price environment, and therefore, we feel extremely comfortable about slightly increasing our levels of operating activity beginning with this additional frac crew.

“In the Marcellus, we continue to operate one drilling rig and as mentioned, have recently added a second frac crew to accelerate the completion of our DUC inventory, which will allow for an acceleration of production in the first quarter of 2017.”

The additional crew will allow Cabot to complete an additional 15 to 20 Marcellus wells during the second half of 2016, and incur an additional $20 million of capital. While Dinges said an official 2017 budget and guidance would not be released until October, he did say “measured growth in the 5% to 10% range in 2017 is a prudent and reasonable assumption.”

While Cabot’s natural gas production increases through the end of the year, the company plans for its oil output to taper off. The company will allocate a “minimal amount of capital” to its oily Eagle Ford assets to arrest base declines and meet early sold obligations, but does not plan to pump additional capital into the play until prices rise.

“I would highlight that even in today’s prices, our returns in Eagle Ford far exceed our cost of capital,” said Dinges, “but given the much higher returns we see in the Marcellus, we believe the best place for additional capital today is in Susquehanna County.”

Being rational in today’s market

When asked during the conference call Q&A why Cabot does not increase production from the Marcellus further, given the company’s IRRs of 100%+, Dinges said it’s important to keep the larger markets in mind.

“It’s a great question, and we have that internal debate often,” Dinges answered. “When you look at the macro market and you look at the volatility still out there in the macro market, even though there are volumes, additional volumes we could move today, we do think it’s prudent to be rational into the market. We’ve seen NYMEX increase in the third quarter, beginning of the third quarter, but we’ve seen the differentials expand a little bit. Even though our realizations have improved over second quarter, we still think as we gain traction, continue to get regulatory approvals on the infrastructure buildout, we think it’s prudent to be rational at this point in time until we see the infrastructure projects put in place and at that particular time be prepared for the ramp-up. And by doing so in concert with that buildout, we don’t think it’s going to create liabilities to the existing basin and the limited infrastructure we have.”

During the conference call, Cabot’s CEO said it filed its initial appellate brief with the U.S. Court of Appeals regarding its Constitution Pipeline on July 12, and that the FERC issued its initial environmental impact statement for its Atlantic Sunrise project May 5, which should keep the project on schedule for a late 2017 in-service date.

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