by Johnny Duncan
With natural gas is in such a state of abundance that oil and gas companies are looking for alternative means of profiting, savvy energy investors are watching these companies closely to see management's next steps. If these investors blinked, however, they would have missed Cabot Oil & Gas (COG) taking the position of one of the best-performing S&P stocks for 2011, gaining almost 100% during the period. While this Houston, Texas, company has a large stake in natural gas, I believe it is positioned as a well-performing company based on its low-cost drilling and extraction while still remaining near the high end of all competitors.
Cabot is a leading independent natural gas producer whose principal areas of operations include Rocky Mountain and Appalachian areas in North region, and the Anadarko Basin in Texas and Louisiana areas of South region. When compared with competitors such as Chesapeake Energy (CHK), Anadarko (APC), Devon Energy (DVN), and Ultra Petroleum (UPL), the company indeed has some of the lowest cost drilling assets in the business as well as a relatively low cost of extraction. With more than 3 trillion cubic feet proven, the company also has natural gas reserves near the high end of all competitors.
Low natural gas demand will continue to cause producers to see higher fees on pipelines to park the surplus volumes. A report by oil and gas analysts Bentek Energy indicates that the early start to injection season will have significant implications for U.S. natural gas working capacity. The report found that "if natural gas injections mimic last summer, the trajectory would imply inventories of 4,698 bcf by November, which is 220 bcf higher than total U.S. design capacity. The current high storage levels will intensify downward price pressure throughout the U.S. this fall and likely force additional production shut-ins if stronger demand does not materialize this summer."
But pushing on with lower cost production and perseverance is the character of Cabot. The company is currently producing about 200 Mmcf per day of volumes behind the Lathrop Compression station, recently damaged by a flash fire late last month. (The fire extinguished itself immediately.) At the time of this incident, Cabot was moving volumes that equate to approximately 365 Mmcf per day through this station. "We are pleased with this quick turn of events and with Williams' ability to restore a significant portion of our production," said Dan O. Dinges, chairman, president and CEO. "I want to commend the entire Williams organization for their handling of this matter. Their efforts have been exceptional."
This quick bounce back is typical of Cabot. When natural gas prices are low and demand is weak, a good leader will look for ways to turn lemons into lemonade. In late February, the company announced a new joint venture with Williams Partners (WPZ) to construct a large diameter pipeline, specifically designed to transport Cabot's Marcellus production to both the New England and New York markets. Named the Constitution Pipeline, this high pressure line will be able to move at roughly 500,000 Mcf per day from the heart of Cabot's Marcellus acreage in Susquehanna County, Pa., to interconnect with both Iroquois Gas Transmission and Tennessee Gas Pipeline in Schoharie County, N.Y. Cabot will retain a 25% equity position while Williams Partners will operate the pipeline and will be a 75% owner. The in-service date is set for March 2015 and will expand the capacity for Cabot to have access to the New England and New York marketplace, premium locations previously limited due to a lack of a pipeline infrastructure.
Cabot's quarterly production volume grew 46.1% from the previous-year period to 54.8 billion cubic feet equivalent (Bcfe). Natural gas volumes were up 42.1% year over year at 51.6 billion cubic feet (BCF) in the fourth quarter, while liquids volume escalated 164.1% to 523 thousand barrels (MBbl). Strength in natural gas production was driven by the Appalachia regions, where volumes swelled (by 91.8%). As of year-end 2011, the company had 3.03 trillion cubic feet equivalent (Tcfe) in proved reserves, up 12.2% from the 2010 level. For the first quarter of 2012, natural gas volumes are expected to be around 600.0-650.0 million cubic feet per day (Mmcf/d), while oil volumes are likely to vary between 5.0 and 6.0 thousand barrels per day (MBbl/d).
Of course, being an oil and gas company that must diversify, Cabot has success in liquid production as well. To cope with slumping natural gas prices, the company is leaning on its cash flow to fund an $850 million to $900 million drilling program to add more than 100 wells and boost production as much as 55% this year. Rival Chesapeake Energy, the second-largest U.S. producer of the fuel, and EQT (EQT) have announced plans to reduce drilling in response to natural gas price decline.
Cabot, aided by increased production, strong drilling performance at Marcellus Shale and lower exploration costs, reported impressive fourth-quarter and full-year 2011 results, with quarterly earnings per share (excluding special items) coming in at 20 cents -- an increase of 100% from 10 cents per share. For 2011, the company posted earnings of 67 cents per share, against earnings of 49 cents in the prior year.
During the last quarter 2011, Cabot generated revenue of $268 million, beating some analysts' expectations of $265.0 million. On a year-over-year basis, sales improved 20.4% from $222.5 million, buoyed by higher output. The excitement is in Cabot's generated revenues of $979.9 million in fiscal 2011, compared with $863.1 million in 2010. For even more appeal, the company in late January completed the two-for-one stock split of the company's common stock while, at the same time, management also announced it would hike its annual dividend payments to 8 cents from 6 cents.
Net wells drilled during the quarter increased to 29 (compared with 20 wells in the year-ago period), with a success rate of 100%. Capital expenditures were $222.3 million while operating cash flows were $126.5 million. As of Dec. 31, 2011, the company had $950 million in long-term debt, with a debt-to-capitalization ratio of 31.1%.
The company stated that it continues to achieve completion objectives in the Marcellus Shale with a number of wells been drilled. In the Marmaton and Eagle Ford shales, Cabot continues to improve oil and liquids production. Even with strong competition from larger rivals such as Anadarko Petroleum and Chevron (CVX), Cabot is quietly making inroads through its natural gas stockpile and its persistent liquid drilling plans. Cabot's wells are so fruitful that a gas price of $2.44 per million Btu still captures a 15% return, compared to the $3.50 minimum price competitors need to generate similar profits. With the company's diversified asset portfolio and low-cost drilling and extraction techniques, I see Cabot as an attractive stock to add to the keepers list.