Cabot's New Oil Wells Will Strengthen Your Portfolio

| About: Cabot Oil (COG)

Though Cabot Oil & Gas (NYSE:COG), headquartered in Houston, Texas, is a leading independent natural gas producer with its entire resource base located in the continental United States, it won't just sit still and sulk over the non-movement of the gas industry. The company has not been waiting for something to happen, but rather creating its own path to success.

Founded over 100 years ago in Pennsylvania, the company currently focuses on four areas domestically: the Anadarko Basin (in Oklahoma, Kansas, and the Texas Panhandle), the Appalachia, the Gulf Coast, and the Rocky Mountains. Even while natural gas prices were depressed last year, Cabot still succeeded in gains of 100%, making investors happy. Most would think that the company can only fall from grace after soaring so high, but I believe the company to still be very attractive based on the way management plans for the future and controls costs, and the potential of future rising natural gas.

When wondering if Cabot can provide a repeat performance of 2011, all factors that were in place last year are not still available. In other words, the stars that were lined up then are just a little off kilter this year. Last year, the company made steady progress on the development of oil and liquid plays in the Eagle Ford Shale, drilling 30 wells and kicking up production to 6,500 barrels of oil equivalent (NYSE:BOE) per day. Another reason is because that is when Cabot then began work on 62,000 net acres in the Marmaton play in Oklahoma and Texas.

At the same time, the company got rid of its Rocky Mountain assets for $285 million in July, entered joint ventures on its properties in East Texas, and benefited from the Marcellus Shale wells performing better than investors expected. Cabot might not repeat 2011 being one of the best-performing S&P stocks, but it is still in a growth position and taking careful steps going forward.

The free fall in natural gas prices is not expected to suddenly jump back to the days of yesteryear. In fact, it recently dipped below the $2 for the first time in ten years. However, some experts believe the price will get back to some normalcy in 2013 because of the slowing of production and a return to winters of old. Cabot continues production despite the dip in pricing.

Natural gas volumes were up 42.1% year over year at 51.6 billion cubic feet in the fourth quarter, while liquids volume escalated 164.1% to 523 thousand barrels (MBbl). As of year-end 2011, the company had 3.03 trillion cubic feet equivalent (Tcfe) in proved reserves, up 12.2% from the previous year. Going forward, 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) for this year.

When faced with adversity, the company finds a way to keep on keeping on. With the Lathrop Compression station fire behind it, (the unit was damaged by a flash fire, with no injuries and minimal damage, but too much press coverage), the company is focusing on ramping up production and is back up to its 365 Mmcf per day through this station.

Additionally, even with previous lawsuits and some work stoppage in the previous two years, Cabot is a leading energy driller in Pennsylvania's Marcellus Shale region, continuing to provide great results with production of 517 million cubic feet per day, with 200,000 acres under lease in the play. The company controls 60,000 net acres and has a total of 21 producing wells in the Eagle Ford Shale play where it is in partnership with EOG Resources (NYSE:EOG).

Cabot continues to stay diversified drilling for oil and keeping an eye out for even more opportunities. The company is generating cash from the Marcellus gas produced and exploring oil from the company's Texas and Oklahoma lease properties. While Cabot may not be the largest producer of oil, it does drill at the lowest cost when compared with competitors such as Ultra Petroleum (UPL), Chesapeake Energy (NYSE:CHK), Devon Energy (NYSE:DVN), and Anadarko Petroleum (NYSE:APC), and is extremely competitive when it comes to proven natural gas reserves, currently in the neighborhood of 3 trillion cubic feet.

Cabot continues to seek natural gas, but is upping its search and production of oil, knowing that payday for the gas is coming soon. In a statement made during a fourth quarter earnings call in late February, Cabot's Chairman, President, and CEO Dan O. Dinges stated:

We have doubled the level of proved reserves associated with liquids. 2010 Marcellus wells we revised up to 11 Bcf from 10 Bcf. Undrilled PUD percentage is 36%, flat with 2010. Net income exceeded $100 million for the seventh consecutive year even with the lowest natural gas price realized in that same timeframe and our debt levels were reduced year-over-year.

The company continues to generate strong profits from its exposure to crude oil. When 2013 rolls around and natural gas prices start to move up, Cabot will be reeling in the profits. Additionally, the company's various energy fields are predicted to keep their usefulness for a very long time, so revenues could remain strong for years to come.

Speaking of strong revenues, revenues for Cabot has gone up for three straight quarters. In the fourth quarter of the last fiscal year, revenue rose 23.6% to $268 million, rising 19.6% in the third quarter of the last fiscal year from the year earlier, and 23.1% in the second quarter of the last fiscal year. Going forward, revenue for the first quarter, 2012 is projected to be 31.2% above the year-earlier total of $209 million at $274.1 million for the quarter. For the year, revenue is projected come in at $1.28 billion.

For the last quarter, 2011, gross margin was 75.5%, 650 basis points worse than the prior-year quarter. Operating margin was 26.7%, 1,260 basis points better than the prior-year quarter. Net margin was 9.8%, 1,280 basis points worse than the prior-year quarter.

With Cabot's projected strong growth due to new wells set to come on line this year, the company should see steadily rising output when combined with current proven reserves, totaling about 1.4 million cubic feet of natural gas and 8,000 barrels of crude oil. When viewed for long-term growth, this is a company set to please once again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.