There's a new king of northeast shale.
Cabot Oil (COG) is now the biggest producer of gas in the Marcellus Shale. While the former king, Chesapeake (CHK), continues to sell assets Cabot is settling in for the long haul, seeking settlements on fracking lawsuits.
The question is whether the new King can do any better than the old, who is now licking his wounds after over-supply and high costs forced him to go quiet and seek plays that are higher in liquids than those in the northeast. Since May 7, COG shares are up 23.5% while those of CHK are down 17.7%.
The question for investors is whether Cabot will work out any better for them. The company's results for the June quarter certainly showed increased profit margins, with net income approaching 15% of gross revenues, and heading higher. The balance sheet shows a steady-as-she-goes debt-to-assets ratio under 25%, with operating cash flow for the last quarter of about $300 million.
Those results were achieved with natural gas prices that were on an upswing toward $3/mcf, however. Since August, prices have struggled against that level - wellhead prices are still just $4/mcf.
While the economics of older plays were fairly simple - get a strike and you strike it rich - that's not true in newer plays, especially those like the Marcellus that are nearly all-gas. Fracked wells deplete quickly, there are always ongoing costs, and there are legal risks of developing in areas that are highly populated. Of course, producing in high-population areas also means lower storage and shipping costs - your customers are near your supply.
Then there's price. Liquid plays tend to have gas associated with them, so a falling price for gas does not guarantee falling production. The glut, like the dude, abides.
Several analysts see Cabot as currently fully-priced. Canaccord is the exception, with a price target of $69/share. My own guess is economic recovery should give Cabot a good multi-year run. This assumes they can avoid law courts and keep their heads down, which they're currently doing.
CEO Dan O. Dinges' name may be the most exciting thing about him, and after the excitement of the McClendon era that may be music to gas investors' ears.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.