Cabot: Buy This Long-Term Winner Now

| About: Cabot Oil (COG)

By Johnny Duncan

When natural gas prices began to slump and many oil and gas companies made the switch to focus more on liquids, and particularly crude, than continuing with natural gas exploration and production, Cabot Oil & Gas Corporation (NYSE:COG) kept up its natural gas production pace.

Well, now it seems that the strategy just might begin paying off for the company as soon as 2013. Natural gas prices are rising and the good news about gas coming in from various ends positions Cabot to soar even higher and close in on competitors Petroleum Development (PETD), and Comstock Resources (NYSE:CRK).

While Cabot has a market cap of $8.25 billion, revenue growth of 30.19%, and a profit margin of 6.73%, Comstock Resources' market cap is $772.33 million, revenue growth of 32.97%, and a profit margin of 5.86%. Petroleum Development has a market cap of $568.54 million, revenue growth of 93.07%, and a profit margin of 15.78%. Petroleum Development enjoys a P/E ratio of 11.62 with Cabot at 64.70 and non-applicable to Comstock.

While companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP (NYSE:BP) might have the resources to go after both oil and gas, Cabot remains focused with estimated proved reserves of about 2.7 trillion cu. ft. of natural gas equivalent. Some of the major areas of operation for Cabot include the Rocky Mountains (Wyoming), Appalachia, the Anadarko Basin (Kansas, Oklahoma, and Texas), and the Texas and Louisiana Gulf Coast, producing 59.7 Bcfe in the first quarter of 2012, with 56.4 Bcf of natural gas production and 538 thousand barrels of liquids production.

Compared to the first quarter of 2011, the avive-mentioned figures represent increases of 58%, 55%, and 138%, respectively. I believe Cabot to be a company to buy into now while natural gas prices are still low and the company is growing in both gas and oil exploration and production activities.

Cabot is always searching for new plays to bring energy resources to market. The company recently sold 35% non-operated working interest in 50,000 net acres in Atascosa, Frio, LaSalle and Zavala counties, Texas to a wholly owned U.S. subsidiary of Osaka Gas (OTC:OSGSY), Japan's second biggest supplier of city gas, for $250 million, in which Osaka will pay $125 in cash and an additional $125 million to cover 85% of Cabot's share of future drilling costs in the area. Payment is expected to be fully made by the end of 2013, and will help pay for two rigs beginning operation next month.

Cabot will add another rig in 2013 and a fourth one in 2014. In response to the transaction, Cabot's CEO Dan O. Dinges stated, "We are excited to partner with Osaka, one of Japan's leading energy companies, in developing our leasehold in the Pearsall Shale. We believe the Pearsall Shale could prove to be an additional liquids-rich catalyst in our portfolio and are pleased with the results we have seen to date-both internally and from neighboring peers. This transaction will provide the capital necessary to accelerate drilling of this formation, while still maintaining Cabot's 100% interest in our Eagle Ford leasehold." Cabot will retain its lease rights above the Pearsall, including the Eagle Ford Shale formation.

The company has a history of excelling at production. Cabot's production at the Marcellus shale in 2011 increased 141% year-over-year from 2010. The company averaged a production rate of 600 million cubic feet (Mmcf) per day because of successful increased horizontal drilling. It is this Marcellus play where the company is producing incredibly. The Marcellus Shale play, in Susquehanna County, Pennsylvania, is where the company drilled 64.7 net wells in 2011 while completing 904 frack stages.

In 2010, the company had gas production of 236 MMcfgd, and by year-end 2011, had ramped up production to 600 MMcfgd. Cabot reports that production from its Marcellus Shale properties had reached a new record of 606 million cubic feet per day in a 24-hour period and that production averaged 600 million cubic feet per day during the final two days of 2011. In addition, Cabot's production exit rate for 2011 was 154% above the 2010 production exit rate of 236 million cubic feet per day, while total compression capacity has now reached 650 million cubic feet per day. Because approximately 96% of Cabot's reserves and 95% of its production is natural gas, the company has obvious concerns about which direction the price of natural gas will take.

Thankfully, there is good news on the horizon. The price of natural gas is expected to rise over the next couple of years. The use of coal in utilities and other industries is on a gradual downslide. Using goal to generate electricity has slipped to 40% from 50% just four years ago. It is estimated that the use of coal will slide even further, down to 30% by year 2020. The reasons according to the Government Accountability Office, is because coal burning power plants produce more than 90 times as much sulfur dioxide, five times as much nitrogen oxide and twice as much carbon dioxide as those that run on natural gas.

It is the sulfur dioxide that is cited for causing acid rain. Nitrogen oxides are said to cause smog, and carbon dioxide is claimed to be a greenhouse gas that traps heat in the atmosphere. All of this, plus the cheaper cost of natural gas is causing utilities to switch to the cheaper, cleaner form of energy. With this increased demand, comes rising prices which will cause Cabot to profit nicely in the long run.

The company's production is so great that once natural gas prices do rise, the company's financials will look even sweeter, though they are looking pretty good right now. For the first quarter of 2012, Cabot posted net income of $18.3 million, or $0.09 per share, cash flow from operations of $131.8 million and discretionary cash flow of $138.5 million.

In the first quarter of 2011, the Company reported net income of $12.9 million, or $0.06 per share, cash flow from operations of $91.2 million and discretionary cash flow of $112.3 million. The company generated revenue of $272.1 million in the first quarter of 2012, and sales improved 30.2% from $209.0 million, generated by higher output. Cabot also had operating cash flows of $131.8 million, while capital expenditures were $188.5 million. As of March 31, 2012, the company had $1,012.0 million in total debt, with a debt-to-capitalization ratio of 31.6%.

Cabot is exploring new plays in both gas and oil, but is mainly sitting on a gold mine of gas. Buying into the company now is buying into a long-term winner.

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

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