Dividend investors don't typically look to a stock that pays 8
cents per year for income. Especially when that dividend means
the stock yields just 0.23% annually.
But when that stock is Cabot Oil and Gas (
), the largest natural gas producer in the Marcellus shale,
income investors should dig a little deeper. That's because
Cabot's growing natural gas production is leading higher-yielding
pipeline operators to expand their infrastructure - and that
means more cash flow to support their dividend payments.
As Cabot nearly doubles the amount of
it sends to market over the next five years, the company's
growing production will power dividends for the pipeline
operators that transport the gas. These companies offer the
higher yields, between 3% and 6%, that income investors often
Additionally, for those investors looking for a
growth-oriented investment with significant
potential, Cabot is a definite "buy".
Cabot has more than 3,000 drilling locations in the sweetest
spot of the Marcellus Shale; good enough for 25 more years of
drilling. These super-rich locations enable Cabot to be a
low-cost producer, largely because the company recognized the
potential early and got in before many competitors.
Due to rapid production growth, Cabot is going to be
contributing a sizeable quantity of natural gas to pipeline
operators in the northeast for the foreseeable future. Those
Kinder Morgan (
, Williams Companies (
) and WGL Holdings (
). We'll talk more about those companies in a minute.
But first, this is why you might want to consider COG as
Cabot's fourth quarter profit rose by a whopping 90% to $78
million as natural gas production climbed by 56%. Full-year net
income of $280 million, or $0.67 per share, was up 115% over the
previous year. Beside the impressive top and bottom-line
growth, two operating metrics separate Cabot from many other
natural gas producers.
First, the company is consistently able to improve natural gas
recoveries from its Marcellus wells. In 2013, the company's
average recovery per well increased by 20% to 16.9 billion cubic
feet equivalent (Bcfe) - more than three-times that achieved in
2008. Improvement in recoveries is largely the result of Cabot's
move to longer lateral wells - a trend it will continue in
Second, Cabot has once again decreased cash costs, by 26% in
the fourth quarter (as compared to the year ago quarter).
The net effect of these two operating efficiencies is that
Cabot's pre-tax returns exceed 100%, based on a $3 natural gas
price. By comparison, Range Resources (
) and Chesapeake Energy (CHK) require
of $4 to generate 100% returns. In other words, it's far easier
for Cabot to turn a profit than the competition.
The problem for COG, and the opportunity for income investors,
is that infrastructure limitations still harm its ability to get
a good price for gas. Even though gas prices were higher in 2013
than 2012, Cabot only received $3.44 per unit of gas in the
fourth quarter. That's a 12% decline from the price received in
the fourth quarter of 2012.
The solution to this problem is to improve takeaway capacity.
And this is where things get interesting for investors over the
next three years. Numerous marketing projects should dramatically
improve Cabot's ability to get natural gas to market at a fair
Four infrastructure projects with partners that already
transport the vast majority of Cabot's natural gas, including
Williams Companies and Kinder Morgan, should add daily delivery
of 550,000 MMBtu via interstate pipelines.
Cabot has also executed an agreement with WGL Holdings'
subsidiary, Transcontinental Gas Pipeline (Transco), to move gas
from the Marcellus. This deal will help COG move gas to
Washington D.C. and the Cove Point LNG export terminal in
Maryland via Transco's "Atlantic Sunrise" expansion project.
All in, that new agreement will add an additional 850,000
MMBtu per day of pipeline capacity. And it allows COG to
participate in the project as a 20% equity owner too.
WGL Holdings expects the Atlantic Sunrise project to fire up
service in 2017. The project represents WGL's second large
natural gas infrastructure investment within the last nine
months. The company has a market cap of $2.07 billion and pays a
The combined impact of all of these projects should allow
Cabot to increase daily distribution by 90%. And also allow the
company to increase its dividend - not to mention add incremental
capacity to COG's partners, including Kinder Morgan (current
yield of 5.1%), Williams Companies (current yield of 3.9%) and
WGL Holdings (current yield of 4.4%).
Click here to discover the one stock set to
capitalize on America's natural gas revolution