Having a laser-sharp focus in business is an important element
of success. And for Cabot Oil & Gas, its focus on the
Marcellus Shale has paid off handsomely.
Not only is the Houston-based oil and gas explorer and
producer reaping results this year from the Pennsylvania shale,
it's also expected to have excess cash flow in 2014.
The company will then need to decide what to do with the free
cash flow: issuing a dividend increase, repurchasing shares,
exploring new ventures or accelerating development of existing
acreage positions. That's a good problem to have.
About 95% ofCabot 's (
) production comes from the Marcellus Shale, where the company
has a 200,000-net-acre position from which it generates natural
gas. The remaining 5% comes from Texas-based Eagle Ford, where
the company has been drilling for oil.
Cabot's management believes the Marcellus Shale could yield
more than 3,000 potential drilling locations over time. This
translates into a 25-year inventory and production rates of 44%
to 54% in 2013 and 30% to 50% in 2014.
"I'm pretty bullish on the Marcellus, which is the heart of
this company," said Canaccord Genuity analyst Robert Christensen.
"Natural gas is going to be developed by this company over the
next 20 years."
He cites several factors that will put the company in an
advantageous position. "It's going to be the lowest-cost, largest
natural gas play ever to be had in the U.S."
The nation's energy outlook has been improving. In October the
Energy Information Administration estimated that the U.S. will be
of petroleum and natural gas hydrocarbons combined this year,
passing Russia and Saudi Arabia.
Tuesday, the International Energy Agency's calculations pegged
the U.S. as leader in oil output in 2015, two years earlier than
The Right Rocks
One of the contributing factors to low-cost production is the
quality of the rock, which absorbs more natural gas than in other
areas of the U.S. Cabot "chose the rocks that really make a
difference," Christensen noted.
Another factor is the increased efficiencies that Cabot is
able to realize in the area. Technological improvements as well
as better gathering, processing and transporting of natgas allow
Cabot to have a lower cost structure than its competitors
Thanks to the company's extensive experience in the region and
improved technology, it's been able to reduce drill times from
22-25 days to 12-15 days, noted Global Hunter Securities analyst
"If you look at the behavior of the stock, it's been amongst
the best performers for the past year and a half, and that's
despite a very challenging natural gas price environment," said
Trimble, speaking of stocks in his energy coverage area.
"Cabot has done an excellent job of lining up transport
capacity and contracts for gas, and this has allowed them to
retain a more resilient price basis than many of the competitors
in the Marcellus," Trimble said.
Cabot stock is up 36% this year through Wednesday, but in
recent weeks has been trading off a high above 40 that it notched
in early September.
During the last five reported quarters, the company's earnings
per share have grown between 22% and 667% and revenue has
improved between 13% and 69%. Cabot's third-quarter report,
delivered Oct. 24, showed a 64% EPS gain to 18 cents on sales up
47%, to $435.9 million.
Industry Group Performs
Cabot is the ninth largest by market capitalization in the
102-company Oil & Gas-U.S. Exploration & Production
industry group. This group, whose largest constituents areEOG
),Anadarko Petroleum (
),Noble Energy (
) andPioneer Natural Resources (
), is ranked No. 6 in performance of 197 that IBD tracks. It's up
38% year to date through Wednesday, but like Cabot is trading off
Cabot recently divested some minor assets in Oklahoma and
Texas so it could further streamline operations and focus on only
the best areas.
The company expects to have 100 net wells in the Marcellus
region this year and 130 to 140 net wells next year. It will have
seven rigs in Marcellus and two in Eagle Ford in 2014. Eagle Ford
drilling should result in 30-35 net wells in 2013 and 40-50 net
wells next year.
Cash Is Coming In
Analysts forecast that Cabot will generate $1.1 billion in
operating cash flow in 2013, which should fund all or nearly all
of the firm's capital investment requirements. In 2014, Cabot is
estimated to produce $1.6 billion in operating cash flow, of
which some $300 million will be in excess.
The company will then be evaluating potential uses for the
extra cash. It has a $10 million share repurchase authorization
and it could also increase or offer a special dividend. It did
this in July, when it doubled its dividend and announced a
2-for-1 stock split.
Drilling, Moving, Selling
Cabot's midstream operations also have been improving. The
company's gas marketing has transportation contracts and
long-term sales agreements with durations of eight to 15 years on
many pipelines that provide access to various markets, wrote
Barclays Capital analyst Jeffrey Robertson in a research report.
Cabot currently transports gas on three interstate pipelines and
there could be others in future years.
It also established a partnership withWilliams Cos. (WMB) to
build gathering, dehydration and compression infrastructure to
bring gas to the interstate pipelines.
"Low-cost production is marketable and when it's abundant,
it's more marketable," Christensen said. Having access to power
plants, committing your gas long-term to an interstate pipeline
or to industrial facilities ". . . to the extent you have that
long-term supply and to the extent it's low cost, you have an
edge in moving your gas out of the region."
Some of the risks for Cabot's business include natgas prices
and the quality of the free cash flow reinvestment choices next
year. However, Christensen believes that the price pressure risk
is overdone. He noted that the company's marketing force is very
strong and that a lot of action is taking place behind the
scenes, to do with the infrastructure and improving access via
Management has improved significantly over the past several
years, analysts say.
"When CEO Dan Dinges came in, Cabot was not perceived amongst
the highest-quality operators," Trimble said. "I think what you
see is a company willing to take their lessons learned and apply
those." The evolution of the quality profile of the company "very
much has mimicked the massive increase in shareholder value,"
Trimble said. "I don't think they'd get to where they are in
terms of share price without a very high-quality level of