Cabot Oil & Gas: Oil Is Of Secondary Importance Despite Growth

| About: Cabot Oil (COG)

Summary

Cabot increased its 2017 capital expenditure budget to $720 million, with 33% of its $650 million E&P budget going to the Eagle Ford.

This results in guidance for 15% oil production growth in 2017, including 50% Q4 2016 to Q4 2017 oil production growth.

However, oil still only contributes around 4% of Cabot's total production and around 11% of its revenue.

Oil production growth is not expected to approach 50% in future years as Cabot will likely focus more on Marcellus development in 2018 once infrastructure is completed.

I had looked at Cabot Oil & Gas (COG) in January when it had announced a $625 million capital expenditure budget for 2017, and noted then that it could potentially increase its capital expenditures substantially, while still delivering a significant amount of positive cash flow due to the improvement in gas and oil prices.

Cabot did increase its capital expenditure budget to $720 million (including $650 million for its E&P budget), resulting in no change to its overall production guidance, but an increase from zero percent growth to 15% growth for its oil production (although oil only accounted 3% of Cabot's total production in Q4 2016).

Budget Allocation

It appears that Cabot has increased its drilling, completion and facility capital budget from $535 million to $610 million. In terms of allocation, the Marcellus goes down slightly from $425 million to $410 million, while Cabot significantly increases its Eagle Ford budget from $110 million to $200 million.

$ Million

Initial 2017

Revised 2017

Marcellus

$425

$410

Eagle Ford

$110

$200

Total

$535

$610

Overall, Cabot is drilling 5 more net Marcellus wells (bringing the total to 60), along with 15 net Eagle Ford wells (bringing that total to 30). It is also completing an additional Marcellus well (for a total of 51 net wells) and 14 net Eagle Ford wells, bringing that total to 39 net wells). It appears that Cabot has lowered its Marcellus costs a bit, allowing it to drill and complete a few more wells for slightly less total cost.

2017 Outlook Based On New Guidance

It appears that Cabot would end up with approximately $1.907 billion in revenue at current strip prices. Cabot's 2017 production is estimated at 678.2 Bcfe, which is an 8% increase over its 2016 production.

Cabot is growing its oil production by around 15% in 2017 and expects its 2017 oil exit rate to be 50% higher than 2016's exit rate as it invests more in the Eagle Ford.

Oil (mostly from Cabot's Eagle Ford assets) is still only expected to represent 4% of Cabot's total production in 2017 and around 11% of its revenue despite the strong growth though.

Type

Units

$ Per Mcf/Barrel

$ Million

Natural Gas (Bcf)

647.5

$2.60

$1,684

Crude oil and condensate (Mbbl)

4,615

$46.50

$215

NGLs (Mbbl)

507

$15.00

$8

Total Revenue

$1,907

Cabot is expected to generate nearly $380 million in positive cash flow at current strip prices, despite its increased capital expenditure budget. This is higher than its estimates for $250 million in positive cash flow in late February due to the improvement in natural gas prices since then.

Although oil prices have decreased a bit since February, Cabot's financial results remain much more sensitive to changes in natural gas prices. A $5 change in oil prices has roughly the same impact on Cabot as a $0.04 change in natural gas prices.

Type

$ Million

Direct Operations

$105

Transportation And Gathering

$478

Taxes Other Than Income

$37

Cash G&A

$58

Exploration

$19

Cash Interest

$74

Capital Expenditures

$720

Dividends

$38

Total Expenses

$1,529

Notes On Oil

Although Cabot expects 50% oil production growth between Q4 2016 and Q4 2017, I don't believe that rate of growth will continue going forward. Cabot still expects much greater returns from its Marcellus wells (before tax IRR of over 150%) than its Eagle Ford wells (before tax IRR of 46%), so most of its future development capital will go towards the Marcellus.

Cabot expects significantly higher Marcellus production in 2018 as various infrastructure projects come online and increase the takeaway capacity from Appalachia. Thus I'd expect Cabot's oil production to remain at around 4% of its total production in future years, making it of distant secondary importance compared to natural gas.

Source: Cabot Presentation - Scotia Howard Weil 45th Annual Energy Conference

Conclusion

Natural gas remains Cabot's main product and should continue to contribute around 85% to 90% of its revenues in the future. Cabot expects its natural gas differentials to improve in 2018 with the infrastructure additions allowing it to move more of its gas out of Appalachia. However, natural gas strip prices are lower for 2018, so Cabot's realized price for its natural gas may only be marginally higher in 2018 compared to 2017.

Cabot's increased oil production does bump up my valuation estimate slightly from before (from $25.50 before to $26.00 now). However, Cabot's ability to attain a significantly higher value than that is largely dependent on longer-term natural gas prices moving up.

Author's Note: If you thought this article was interesting, please scroll to the top of the article and click on "Follow" next to Elephant Analytics. Thanks for reading!

Disclosure: I/we 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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , , , Independent Oil & Gas
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here