Cabot Oil & Gas (COG) is a very attractive asset for investors looking to add an E&P to a portfolio. Cabot operates exclusively in North America and takes a very focused and measured approach toward its current operations and future projections. It shows conviction in its vision of future growth and shows versatility and industry knowledge in its diversification of its own portfolio. Both its financials and operations show high potential for growth through 2012 and more so in the long-term. I would view this is a predominately long-term investment with a high potential for future growth. Focusing on dominating the natural gas industry while growing in liquids, specifically oil is essential to its future success.
Right now is the best time to invest in Cabot because I don't believe its stock price will decrease by much, if at all through the remainder of 2012. Unlike the majority of competition in the industry, Cabot is not currently facing any bad publicity or litigation issues apparent in mainstream media. The market cap is slightly over $1 billion less than the enterprise value showing some potential for growth while being properly valued in the market. The price to earnings ratio is improving steadily while the beta is close to one. The current stock price around $35 is closer to the lower end of the 52 week range from $27 to $45 while being in line with the 50 day and 200 day moving average of $33 and $35, respectively. These are all signs of stability and steadily increasing value despite the 10-year low in natural gas prices. Both the current ratio and quick ratio are above one, while both the institutional ownership and gross margin are currently above 70%. These figures underscore the expressed value in Cabot. Both the operating margin and return on equity increased over the past three quarters. Net margin decreased but it was still slightly the industry average along with 2011 and 2012 growth rates.
According to Cabot's CEO, the commitment to maintaining its position as a leading producer of natural gas in North America is essential to growth and prominence in the long-term future. The commitment to increasing its market share and production rates despite the current low prices in the industry is reassuring in the least. The resistance to be dissuaded by the low prices should give investors' confidence in Cabot's commitment to its identity and business model or operations looking toward the future. Cabot increased production by 58% in comparison to Q1 of 2011. Cabot increased growth in natural gas by 55% and increased its growth in liquids by 138% as well. Rather than be inundated and held hostage by the prices in the natural gas market, Cabot understands the potential and need to grow in the oil and LNG markets as well. Those numbers only included a few days of new production in April from its Marcellus play.
Cabot is focused on increasing full year production by 35 to 50% by 2013. Most of its capital is for drilling in its Marcellus play while the remainder will go toward oil in Eagle Ford and Marmaton. Cabot currently has seven rigs in its plays in Texas, Pennsylvania and Oklahoma. Cabot has over 30 wells for oil in Texas already. Natural gas is the primary focus right now but all extraneous capital is being put toward development in the oil industry. Cabot plans to add or participate in another 20 to 25 wells for Eagle Ford by 2013 aside from its joint venture with EOG (EOG) in Texas. Maximizing the drilling opportunities from its current acreage and increasing production and transportation efficiency are key initiatives for Cabot in 2012. The 2013 budget will have an increased allocation for liquid drilling. Due diligence and scientific research guide Cabot in finding the most promising fractures in the continent.
Cabot's new stake in the Constitution Pipeline Company LLC will also help improve its stock price and operations throughout 2012 and beyond. The pipeline will connect natural gas production from northeastern Pennsylvania to northeastern markets and should be completed by the year 2015. Cabot has a 25% stake in this new joint venture with Williams Partners (WPZ). William Partners L.P will be responsible for building and maintaining the 121 mile long pipeline and Cabot will be sending 500,000 dekatherms per day through the pipeline. Cabot will benefit by collecting profits and focusing on transportation opposed to being the sole party liable for operational costs. Southwestern Energy (SWN) will also be sending through 150,000 dekatherms per day.
The ability to increase revenues and production rates despite low natural gas prices depicts how well Cabot is being managed and positioned for the future. The commitment to stay the course by improving production in its current assets while diversifying its portfolio shows Cabot has a plan for the long-term. The prices in natural gas are extremely cyclical. The 10 year low in prices for 2012 was mostly due to the innovations in shale technology but the change in production mandated by the EPA for the summer months will normalize the pricing again to better match supply and demand. Natural gas and LNG are the rapidly growing markets for the future, as the prices normalize once again Cabot will benefit immensely.
Cabot is positioned as a leader in the E&P industry in North America. Revenues have increased each of the last four quarters supported by record growth in production. There is nothing on the horizon to inhibit this current trend. The bad publicity or litigation attached to the names of competitors like BP (BP) and Chesapeake (CHK) will also help improve Cabot's stock price as more investors look into this industry throughout the year as pricing increases for both oil and gas.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.