Cabot Oil And Gas Corp. (COG) at $7.30B is a mid cap oil and gas E & P company. It has shown strong growth in production volume and in proved reserves in the last few years. Yet it has evident problems. The reasons are below:
- COG has a high PE (57.00) and FPE (41.39) for its industry. Such high multiples are especially vulnerable in tough economic times.
- The analysts' full year EPS estimates for both FY2012 and FY2013 have decreased dramatically in the last three months. The FY2012 estimate has moved from $0.83 to $0.47. The FY2013 estimates has moved from $1.44 to $0.84. Given that oil prices have only fallen much in the last two to three weeks, this probably reflects weakness in the natural gas prices. US natural gas prices have fallen from last summer's high of approximately $5/MMbtu to approximately $1.90/MMbtu. Then they have rallied in the last few weeks to $2.76/MMbtu. They seem to be on their way down again as they are currently at $2.56/MMbtu. This mini US natural gas price rally may have been a dead cat bounce. Given recent economic and consequent commodities weaknesses and the worsening glut in natural gas, the most likely direction over the next several months is down.
- US natural gas storage is far above its historical norm after an exceptionally warm winter and over supply of natural gas due to huge amounts of new production from the unconventional shale fields. The EIA put the amount in storage as of Mar. 18, 2012 at 2,774 Bcf. The norm for this time of year is 1,991 Bcf. The rise this past week was far above the usual rise for this off season week. It was 77 Bcf versus the 5 year average of 37.8 Bcf for this week. The maximum volume of US storage is approximately 4,000 Bcf. At the current rate this will fill sometime this summer. At that point all production may go directly into the already glutted market. Many pundits think this will cause a further fall in prices. Some are projecting a price of $1.34/MMbtu or lower. This fall in prices may start at any time before storage is full.
- Some producers have cut back on natural gas production. However, this week's storage gain makes it clear that this is not stopping the increases in supply. The BHI US Gas rig count was 600 for the week ending May 18, 2012. This was up 2 from the previous week. The US gas rig count will not decrease to nothing due to the oversupply situation as some seem to think. Some drilling has to occur because leases are HBP (held by production). Other drilling is directed at more lucrative WetGas (NGLS). However, WetGas wells produce natural gas as well. Even oil shale wells often produce natural gas. The US Oil active drilling rig number has increased 45% year over year to 1382 rigs. The wells completed by these rigs produce a non-negligible amount of natural gas. Throwing it away is generally not cheaper. Hence it becomes additional production (adds to the glut).
- COG's total reserves are more than 90% natural gas at over 3 Tcf. With much lower natural gas prices this year, these may have to be written down. When this occurs, COG's already high Price/Book ratio of 3.46 will move even higher. Yes, there is supposed to be production growth of 35% to 50% this year; but at such low natural gas prices, that will not help the company be more profitable. It will instead add to the glut. Even though COG is emphasizing oil development in its capital allocation this year, it still expects 60% natural gas development.
- COG has some good natural gas hedges with 262,289 Mcf/day hedged at $5.22/Mcf (MMbtu) for 2012. However, this is less than 50% of COG's Q1 2012 production exit rate for natural gas of 623 MMcf/day, and that number will likely grow by the end of the year. As of the last week of March 2012, there were only 48,572 Mcf/day hedged at a floor of $5.15 for FY2013. This is less than 8% of the Q1 2012 exit rate for natural gas production. It will likely be less than 7% of the 2013 production rate.
- The Q1 2012 exit rate for oil production was 5,870 bopd. This should be substantially higher by the end of the year in 2012. COG has only 4000 bopd hedged at $99.30 for FY2012; and it has only 2000 bopd hedged at $100.33 for FY2013. Oil is already below this at $91.80/barrel. With the rapidly worsening EU economic situation, oil prices seem likely to be headed lower over the next several months as demand lessens. COG's profitability could get hurt due to its lack of oil hedges.
- Some of COG's development lands are in the Pennsylvania Marcellus shale. Pennsylvania recently passed the Unconventional Gas Well Impact Fee Act (Feb. 2012). This will cost COG significant extra development expenses for its Pennsylvania wells.
- The US Congress is considering a new "Anti-Fracking Bill". If this passes, it is sure to cause extra expenses.
- NGLs prices have fallen in the last year. The current cash propane price (PNY00) is $0.8369 per gallon (42 gallons/barrel * $0.8369/gallon = $35.15/barrel. This is down -43.71% year over year. A recent ethane price was only $0.0724/gallon. Ethane is not profitable at this price. COG has a relatively small amount of NGL resources. However, the profitability of the resources it does have is heading south. The glut in natural gas prices has caused a flow of resources into development of NGLs. This in turn has caused a glut in NGLs.
- The current EU and world economic environment has a negative trend to it. The EU crisis is threatening to become a very severe crisis at any time. Greece may leave the Euro. Spanish and/or Italian banking may collapse. The situation could cascade downward from there. Stock markets do poorly in times of extreme economic uncertainty. Mid cap energy stocks get beaten down more than large caps. COG falls into this weaker category with a market cap of $7.30B.
- COG has 5.01% short interest. This means that a lot of smart investors think this stock will go lower. However, the short trade is not overly crowded at this point. The potential for a dramatical short squeeze reversal is limited. That's good if you intend to short COG.
- COG has a Total Debt/Total Capital (MRQ) ratio of 32.26%. This is only slightly higher than the industry average. However, it is worrisome if COG's profitability is in question.
- From COG's Income Statement, the GAAP net income applicable to common shares has decreased each quarter for the last four quarters ($54.7 million to $28.5 million, to $26.4 million to $18.3 million in Q1 2012). This is a strong and disturbing trend. It seems likely to get worse in Q2 2012. This means the PE should trend upward instead of downward. This is likely to lead to a decrease in the price of the stock.
In sum you may wish to unload COG if you own it. The profitability trend is negative. The hedging is worrisome for 2012, and it is almost nonexistent for 2013. Natural gas prices are still extremely weak, and they may get much weaker. This is extremely negative for a company that is primarily a natural gas producer. If you are an aggressive trader, you want to short this stock.
The two year chart of COG provides some technical direction for this trade.
The slow stochastic sub chart of COG indicates that it is neither over bought nor over sold. The main chart indicates that it is in a down trend. The 50-day SMA is firmly below the 200-day SMA. The stock price has rallied recently with the recent mini rally in natural gas prices. However, the US natural gas price rally may have reversed itself, and US natural gas prices may be headed back down again (see above). The easy money in a short trade is a retracement down to $30 per share. However, that is by no means the end of a short trade. COG could go down to $25 per share or below in the tough economic environment that we are likely to see in the near future. As a caveat, the overall market is near over sold levels. We might well see a short term bounce. If you like this trade, it might be smart to average into your short position.
Note: Much of the fundamental data used in this article was from TDameritrade and Yahoo Finance.
Good Luck Trading.