3 Reasons To Buy Cabot Oil & Gas Now

| About: Cabot Oil (COG)

Most natural gas producers are sitting on reserves that once the price of gas goes up, stand to profit nicely. In the meantime, the smart players are making sure to be well positioned in good natural gas plays to capitalize on the rise. Cabot Oil & Gas (NYSE:COG) is one of those smart players. The company continues to focus a large portion of its resources toward the exploration and production of natural gas. With the spectacular production of 752 Mmcf during one 24-hour period last month at its Marcellus play and its Pearsall Shale play joint venture with Osaka Gas, as well as a few others, Cabot is marching headlong toward future success by increasing production now. I believe Cabot to be a strong buy now and one to hold onto for a very long time.

Cabot has some company in the Marcellus play. Talisman Energy (TLM) has invested aggressively in the Marcellus Shale, increasing production to approximately 485 million cubic feet per day in first quarter 2012 and has about 200,000 net acres under lease in Pennsylvania. This past summer, Talisman, Canada's fifth-largest independent oil explorer, backed out of a deal with Sasol Ltd of South Africa citing that its immediate focus is to accelerate investment in near-term liquids opportunities, with the goal of increasing liquids and oil-linked gas production to 300,000 barrels a day by 2015. Chevron (NYSE:CVX) is another company prospering in Marcellus Shale. Chevron made its way into Marcellus when it acquired Atlas Energy, Inc. and other properties in the area for around $4 billion. Chevron is so focused on getting up to speed with shale-gas production that it is in no hurry to produce oil from the 623,000 acres it acquired via Atlas in the Utica Shale, an oil-rich layer of rock located mainly in Ohio and Pennsylvania.

Cabot and other natural gas producers are expected to profit when demand increases and causing prices to rise. Thankfully demand is on the rise as more utility companies switch to natural gas from coal for electricity production, and natural gas fills more niches. Cabot has gas to spare. The company had 14 of the top 20 performing Marcellus Shale wells in the first six months of 2012 and the company's cumulative production is 354 billion cubic feet from 145 producing horizontal wells. The good news for Cabot and others in this region is that according to a newly published industry report from GlobalData, the Marcellus Shale output is expected to increase to 4.8 billions of cubic feet equivalent (bcfe) in 2015 before finally stabilizing in 2020 at 7,7 bcfe. According to the report, Chesapeake Energy (NYSE:CHK) is the leading producer in this play producing 193 bcfe in 2011. Chesapeake is also finding success in the Texas Panhandle Hogshooter play where it owns 30,000 net acres and where it announced this past June that an exploratory well had produced an average of approximately 7,350 boe per day during its first eight days of stabilized production. Cabot ranks second in the Marcellus play with Range Resources (NYSE:RRC) in third position. Range Resources will be directing 86% of its capital budget this year toward development drilling in the region. Total production volume for the company experienced a 41.6% improvement from the year-earlier period, mainly due to the sustained accomplishments from the company's drilling program in this play.

In the Marmaton shale in Oklahoma, where Cabot drilled its first well in 2011, a 10-staged non-operated well, the company reported an average daily production of 368bbl/d and 130 Mcf/d during the first month and 320bbl/d and 189 Mcf/d for the first two months from this well. It reported 175-225 Mboe of estimated potential reserves and 150-250 net drilling locations in the Marmaton shale in the third quarter of 2011.

The company has approximately 61,500 net acres in the Marmaton shale, with 14 wells producing and seven wells drilled. The company has plans for 10 more wells in this play in 2012. Production in this play has increased by 45% since the end of the first quarter 2012. Chairman, President and CEO Dan O. Dinges said regarding this region, "Driving this growth has been our continued success in the play. Our last five operated wells have delivered initial production rates from 650 to 2,000 barrels of oil per day (Bopd). One well has averaged 1,320 Bopd and 1.5 Mmcf per day for the last thirty days. With these completed wells costing between $2.9 to $3.4 million on average, we are generating a very good return on our investment."

Operating in this same play is QEP Resources (NYSE:QEP), which had completed one Marmaton oil well with a peak 24-hour rate of 423 Boe/day in which the QEP Resources has a 95% working interest and is currently completing one Marmaton well (80% working interest). The company has one Marmaton well drilling (99% working interest) and one waiting on completion (96% working interest). QEP Resources is an independent natural gas and oil exploration and production company with operations focused in the Rocky Mountain and Midcontinent regions of the United States. Cabot is continuing to actively lease in the area and has accumulated 69,578 net acres to date, which is up 8,000 net acres since the end of the first quarter 2012. Since its entry in the play in the beginning of last year, Cabot has completed 11 operated wells (85% working interest) and participated in 15 non-operated wells (18% working interest).

Cabot continues to impress. Year on year it grew revenues 13.53% from $863.10 million to $979.86 million while net income improved 18.40% from $103.39 million to $122.41 million. The company enjoys a profit margin of 13.5% and cash flow increase of 23%. For the second quarter 2012, the company reported earnings of 0.05 per share, and had second quarter 2012 revenues of $265.66 million, 2.38% below the prior year's second quarter results.

While revenue may have declined somewhat, Cabot is on the verge of great success. A cold winter and an increase in demand for natural gas used in new, green technologies will create a rise in natural gas prices, which will greatly benefit Cabot.

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.

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