On Jan 6, 2014, we retained our Neutral recommendation on
domestic energy explorer
Cabot Oil & Gas Corp.
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
Why the Reiteration?
Notwithstanding Cabot's exposure to the high-return Marcellus and
Eagle Ford Shale plays as well as its above-average production
growth, the company is faced with weak natural gas fundamentals
that are expected to further limit its ability to generate
positive earnings surprises.
Cabot's diversified asset portfolio is spread between
low-risk/long reserve-life Appalachian assets and
large-volume/rapid-payout Gulf Coast properties, with further
variety from large prospect inventories in the Rocky Mountains
and the Anadarko Basin that have a broad mix of production and
The company's Marcellus program continues to ramp up with
exceptional results. As of now, Cabot has nearly 200,000 acres
under lease in the play, and it continues to expand. In the Eagle
Ford Shale play, where Houston, Texas-based firm has partnered
EOG Resources Inc.
), the company controls 62,000 net acres and has a total of 43
producing wells. We believe Cabot's Marcellus and Eagle Ford
production will ensure 2013 volume growth beyond the
currently-guided target of 50-55%.
We believe that the company's recent restructuring operations and
the sale of Canadian assets will further help Cabot to focus on
core shale plays. A relatively low risk profile and longer
reserve lives are other positives in the Cabot story.
However, we remain worried about natural gas' volatile
fundamentals and Cabot's high exposure to the commodity. Unless
the outlook for natural gas prices improves, we do not see any
significant price upside for Cabot shares. The company's steep
valuation and miniscule payout also keep us on the sidelines.
Finally, Cabot's frequent brush with state regulators adds to the
Stocks That Warrant a Look
While we expect Cabot to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
Harvest Natural Resources Inc.
Athlon Energy Inc.
) as good buying opportunities. Both these U.S. upstream energy
operators - sporting a Zacks Rank #1 (Strong Buy) - have recorded
solid growth and have the potential to rise significantly from
the current levels.
ATHLON ENERGY (ATHL): Free Stock Analysis
CABOT OIL & GAS (COG): Free Stock Analysis
EOG RES INC (EOG): Free Stock Analysis Report
HARVEST NATURAL (HNR): Free Stock Analysis
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