Cabot: Buy Now For Real Gains In 2013

| About: Cabot Oil (COG)

Sometimes, it becomes difficult to get excited about an oil and gas company that is a commodity producer that includes natural gas as a resource. We know that natural gas prices have not been something to cheer about in the recent past, but that has not stopped Cabot Oil & Gas Corporation (NYSE:COG) from continuing to grow and profit, while giving investors reason to smile.

Cabot's primary areas of operation include Appalachia, east and south Texas, and Oklahoma. The company has been racking up some pretty impressive production numbers lately. It saw a 40% year-on-year production growth for the second quarter of this year. While the company reported over 96% of proven reserves in natural gas at year-end 2011, it is also exploring in liquid-rich asset plays, such as Eagle Ford, and chalking up a 96% growth rate in liquids.

Staying the course is expected to bring greater profits for Cabot as natural gas prices continue to climb because of demand from electrical utilities and the increasing use as an alternative fuel. Because of the company's perseverance in gas and increased production of liquids, I believe Cabot to be a good, long-term solid buy.

Natural gas is Cabot's specialty and it is a master in the art of exploration, as well as exploitation of the gas. The company has been exceeding expectations in production with its five horizontal rigs, while setting records in some plays. Recently, the company announced that it hit a record 752 Mmcf during one 24-hour period in its Marcellus play. Gross Marcellus production has averaged over 700 million cubic feet (Mmcf) of natural gas per day for the last two weeks.

Cabot's Chairman, President, and CEO, Dan O. Dinges commented:

"This production increase was driven by a coordinated effort to manage field line pressures, rather than new well connections. Our infrastructure provider, Williams Partners L.P., recently completed a series of projects and upgrades that improved the pipeline system operating efficiency, allowing for increased production."

These types of successes put Cabot in a new league as an innovative leader. In fact, new data from the state of Pennsylvania signifies that Cabot is a leader in the state's Marcellus production arena. Heavyweight Chevron Corporation (NYSE:CVX) is one of the largest leaseholders in Pennsylvania, with more than 700,000 net acres of leases in the Marcellus Shale. These leases add a potentially recoverable resource of 14 trillion cubic feet to Chevron's already swelling portfolio with 850 billion cubic feet of proved natural gas reserves.

For consistent liquid output, Cabot relies on its Eagle Ford Shale play, where it operates over 60,000 net acres across four counties in South Texas. The company's five most recent wells in this play are producing an average peak rate of 781 Bopde and average thirty day rate of 616 Bopde. About one-third of its operations are operated by EOG Resources (NYSE:EOG).

EOG Resources has also had some impressive gains this year. Due to the Eagle Ford as well as the Bakken plays, EOG Resources' total crude oil and condensate production for the second quarter 2012 increased 52% compared to the second quarter 2011. Cabot is focusing on proving the feasibility of 400 ft spacing in the play, while operating one rig through 2012 in an effort to drive down costs through greater efficiency. The initial results look promising with wells performing better than average.

Chesapeake Energy (NYSE:CHK) also has a stake in Eagle Ford, being the second-largest leasehold owner in the play with 490,000 net acres. For Chesapeake, 66% of total Eagle Ford production during the second quarter of 2012 was oil, with 17% NGL, and 17% natural gas. Competitor like Denver, Colorado's SM Energy (NYSE:SM) is also heavily investing in the Eagle. Recently at the Barclay s CEO Energy Conference, SM Energy reiterated that it has budgeted for 2012 $520 million for production in the Eagle Ford Shale, and so far it is paying off, with the company averaging 230 million cubic feet of natural gas equivalents per day in July 2012.

The Pearsall Shale play, a gas bearing formation that garnered attention near the Texas-Mexico border in the Maverick Basin before the Eagle Ford development began any real production, is another area where Cabot is producing well. The company announced back in June that it had signed an agreement with a wholly-owned U.S. subsidiary of Osaka Gas for the sale of a 35% non-operated working interest in the Pearsall Shale.

The agreement was for approximately 50,000 net acres leased by the Cabot in Atascosa, Frio, La Salle and Zavala counties of Texas for a total price of $250 million. The agreement states that Osaka will pay $125 million to Cabot at closing and will pay an additional $125 million to carry 85% of Cabot's share of future drilling costs in the Pearsall Shale. The drilling carry is expected to be fully utilized by year-end 2013. For Cabot, the transaction is to provide an influx of needed capital that will help to accelerate drilling in this formation. Cabot will still maintain 100% interest in its Eagle Ford leasehold.

As its second quarter report points out, things are indeed looking rosy yet again for Cabot. As CEO Dinges puts it:

"Even with delays occurring in gathering our natural gas, the quarter results once again demonstrated the potential of our prolific acreage, with significant production growth reported over last year. Not only did liquids and natural gas production increase year-over-year, both also grew from quarter to quarter. Because of these results and our outlook, we are confidently reaffirming our production guidance."

Cabot reported net income of $35.9 million, or $0.17 per share, for the second quarter of 2012. Cash flow from operations for the second quarter of 2012 was $159.4 million, compared to the second quarter of 2011 when cash flow from operations was $129.5 million, and the company reported $0.05 earnings per share for the quarter. Its revenue was up 10.4% compared to the same quarter last year.

With gas production up and the prospect of higher gas prices on the horizon, and with Cabot's aggressive, yet often times cautious approach to successful liquid plays, it is apparent why this company is a long-term winner. Buying now is sure to please down the road.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.