Cabot Oil And Gas: Room To Increase Its 2017 Capital Expenditure Budget

| About: Cabot Oil (COG)

Summary

Cabot has a $625 million capital expenditure budget for 2017.

This could potentially be increased to $850 million at current strip prices while still delivering significant positive cash flow. Production could increase close to 40% by 2018.

Cabot's breakeven natural gas price is estimated at roughly $2.10 per Mcf.

Narrowing differentials could improve this further and allow Cabot to reach $1.4 billion EBITDA with $3 Henry Hub gas in 2018.

Value is estimated at $25.50 per share in one year based on historical forward EV/EBITDA multiples.

Cabot Oil And Gas (NYSE:COG) previously released guidance for 2017 and called for 5% to 10% production growth in 2017, followed by 15% to 25% growth in 2018. This was based on a $625 million budget developed when 2017 oil and gas prices were lower than currently though, so there is the potential to see a boost in capital expenditures and stronger growth.

2017 Outlook

At current strip prices, I'd estimate that Cabot could generate approximately $1.902 billion in revenue, including slightly negative hedge value. This assumes that 2017 production is approximately 670 Bcfe, a 7.5% increase over estimated 2016 production (using Cabot's actual production for the first three quarters and its Q4 2016 guidance midpoint) of 623 Bcfe.

The Henry Hub natural gas price used is $3.45 and the negative $0.75 differential is roughly in-line with YTD 2016 differentials.

Type

Units

$ Per Mcf/Barrel

$ Million

Natural Gas (Bcf)

650

$2.70

$1,755

Crude oil and condensate (Mbbl)

3,000

$51.50

$155

NGLs (Mbbl)

360

$15.00

$5

Hedge Value

-$13

Total Revenue

$1,902

With a $625 million capital expenditure budget, Cabot is expected to generate approximately $400 million in positive cash flow at current strip prices. This includes $60 million allocated for current income taxes, roughly one-third of estimated total income taxes.

Type

$ Million

Direct Operations

$104

Transportation And Gathering

$472

Taxes Other Than Income

$50

Cash G&A

$58

Exploration

$19

Cash Interest

$74

Capital Expenditures

$625

Current Income Taxes

$60

Dividends

$37

Total Expenses

$1,499

Cabot's Breakeven Point

Cabot mentioned that $225 million in capital expenditures would be enough to keep production flat from its 2016 exit rate production level (around 1.75 Bcfe per day). Assuming that oil and NGL prices don't change, Cabot's natural gas breakeven point is estimated at a realized price of $1.30 per Mcf, or a Henry Hub price of $2.05 per Mcf with the same negative $0.75 differential used in the calculations above.

Cabot's liquids production percentage is decreasing, so its actual breakeven point to maintain both production levels and current production splits would probably be a bit higher (such as Henry Hub in the $2.10 to $2.15 per Mcf range).

This breakeven point is calculated before the effect of dividends which at $0.08 per share would add around $0.06 per Mcf to Cabot's breakeven point.

Potential For Increased Spending

Cabot's initial outlook for 2017 was released in late October when strip prices were a bit lower for both oil and gas. At the prices from late October, Cabot would have generated around $160 million to $210 million in positive cash flow instead of the $400 million mentioned above.

With the higher strip prices now, there is a chance that Cabot will increase its capital expenditure budget to drive higher growth in 2017 and 2018. Increasing the capital budget to $850 million in 2017 would likely allow Cabot to achieve low double-digit growth in 2017 while still delivering around $210 million in positive cash flow. As well, Cabot would then likely be positioned to achieve potentially around 25% to 30% production growth in 2018.

Valuing Cabot

Assuming that Cabot does end up growing production by low-double digits in 2017 and by around 25% in 2018, it could end up with approximately 860 Bcfe in production in 2018, which is a 38% increase from 2016's expected average production. At that production level Cabot may be able to generate around $1.4 billion EBITDA with $3 Henry Hub natural gas and a net differential improvement of $0.25 per Mcf (with the $0.50+ expected differential improvement partially offset by increased transportation and gathering costs). This leads to an estimate that Cabot will be worth approximately $25.50 in one year based on a 9x EV to forward 2018 EBITDA multiple. As Cabot's value is tied to natural gas prices, shifts in future natural gas prices will affect Cabot's value significantly. A $0.25 per Mcf shift in natural gas prices would affect Cabot's value by around $4.

Conclusion

With a natural gas breakeven point currently a bit above $2 per Mcf, Cabot looks capable of significantly growing production at strip prices. It released its initial 2017 outlook in late October and with the improvements in gas and oil prices since then, it seems plausible that Cabot may boost its 2017 spending to drive further growth. There is the potential for Cabot's 2018 production to be 40% higher than its 2016 exit rate, and that growth combined with $3 long-term natural gas prices would make Cabot worth around $25.50 by the end of 2017.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in COG over 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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