Impressive Revenue Growth And 40% Shale Production Increases For Cabot Oil & Gas

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 |  About: Cabot Oil & Gas Corporation (COG)
by: Michael J. Bernard

Summary

Cabot Oil & Gas misses earnings estimate by $0.01, misses by 29.32M on revenues.

COG Reports Q1 (Mar) earnings of $0.26 per share, $0.01 worse than consensus estimate of $0.27.

Revenues rose 36.6% year/year to $509.8M vs. the $539.12M consensus.

As I highlighted in my recent article "5 Value Growth Stocks I Am Buying Now," Cabot Oil & Gas (NYSE:COG) is one of my favorite five stocks to accumulate now for long-horizon investment value growth. My bullish opinion on COG is driven by several positives which I believe outweigh all identifiable challenges, and should result in considerable value growth in the long term. These positive include booming revenue growth, continuing record of earnings per share growth, advancing growth in net income, increasing cash flow from operations and peer-leading profit margins. COG reported Q1 results today so let's take a look at how the thesis has been confirmed or challenged.

Based on today's Quarter 1 2014 earnings release:

  • Q1 2014 production of 119.9 billion cubic feet equivalent (Bcfe), an increase of 34% over Q1 2013.
  • Cash flow from operations in Q1 of 2014 was $255.4 million, compared to $212.7 million in Q1 2013, an increase of 16.7%.
  • Discretionary cash flow in Q1 2014 was $319.5 million, compared to $234.4 million in Q1 2013, an increase of 26.6%.
  • Net income in Q1 2014 was $107.0 million, or $0.26 per share, compared to $42.8 million, or $0.10 per share, in Q1 2013, an increase of 161.5%.
  • Excluding the effect of selected items, net income was $109.7 million, or $0.26 per share, in Q1 2014, compared to $54.2 million, or $0.13 per share, in Q1 2013, an increase of 50.6%.
  • Total per unit costs (including financing) decreased to $2.66 per Mcfe in Q1 2014 from $3.29 per Mcfe in Q1 2013, a decrease of 19.1%.
  • During Q1 2014, COG averaged 1,209 million cubic feet (Mmcf) per day of net Marcellus Shale production, an increase of 44% over Q1 2013.
  • COG's net production in the Eagle Ford Shale during Q1 2014 was 7,271 barrels of oil equivalent (BOE) per day, an increase of 42% over Q1 2013. This included 6,839 barrels of liquids per day, an increase of 49% over Q1 2013.

Perhaps most tellingly, COG has tightened its low-side production guidance range for 2014 from 519 Bcfe to 530 Bcfe, a 2% increase, and initiated 2015 production growth guidance of between 20% and 30%.

"I can assure you with confidence we would be able to deliver within our guidance points, otherwise we would not put those guidance points out," said Chairman, President and CEO Dan O. Dinges as he concluded today's conference call, "When you look at what we have to be able to deliver in the future, we're going to comfortably deliver top-tier production growth, not only in the next few years but moving out. We will also have reserve growth that will be very robust, we'll do it in a free cash flow environment, and that gives us certainly confidence that we will be able to enhance shareholder value on out into the future and it certainly should give the shareholders confidence that the asset package we have will be able to deliver that value."

Review of 2013 Results:

2013 revenue growth of COG of 44.97% from 1.20B to 1.75B, greatly exceeded the industry average of 7.6%. Net income improved 112.38% from 131.73M to 279.77M. The gross profit margin for COG is very high, coming in at 74.61%. While this has decreased compared to last year, net profit margin of 16.02% is notably higher than industry peers.

Looking at year on year growth rates, both dividends per share and earnings per share (excluding extraordinary items) growth increased 50.00% and 112.19%, respectively. This positive trend in dividend payments is an additional strength and may illustrate another long-term opportunity for value growth with COG. The annualized five year dividend per share growth is 14.87%, an impressive number when compared to industry peers.

Cash reserves at COG fell by 7.34M in 2013, however, the company earned 1.02B from its operations for a Cash Flow Margin of 58.67%. In addition the company used 918.21M on investing activities and also paid 113.66M in financing cash flows. Finally, at the end of 2013, COG had a Debt to Total Capital ratio of 34.22%, a lower figure than the previous year's 47.48%.

Conclusion:

Taking in 2013 financial performance, along with today's Q1 2014 earnings release and the forward guidance, COG should be an outstanding long-horizon investment. Increasing natural gas prices and/or oil prices would be a significant boon for COG, while a depression of these prices could pose risks to continued high-flying profitability. COG continues to increase production acreage and build important production platforms that should result in increasing production for years to come. Sometime in the near future I aim to produce a report on COG versus a few of their industry peers, and I expect COG to be a winner in this comparison in most important metrics.

While COG has jumped today on the earnings release, closing at 37.97, an increase of 5.06%, accumulation as a long-term holding is still a very good strategy. To track COG as well as my other Value Growth Accumulation stocks you may view the public portfolio I have created at reuters.com.

Disclosure: I am long COG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.