Cabot Oil & Gas Corporation (COG) - Independent Oil & Gas based in Houston - Texas.
Cabot oil & gas is a large-cap oil company with a market cap of $11.92 Billion. The company is part of my general study of twelve oil companies listed below.
The investment thesis is pretty simple here.
If you believe that oil is going to hold $50 per barrel, and may eventually continue to rise to the $60 per barrel mark in 2018, you should own stocks that have the greatest correlation to react in the underlying commodity. Generally speaking that means investing in stocks of exploration and production companies, such as Cabot Oil.
What differentiates Cabot oil & Gas in this commodity segment?
It is mainly a Natural gas player in the USA, which means that Cabot natural gas segment is a significant percentage of its total operations, roughly the same model as Antero Resources Corp. (AR) which owns 292 miles of gas pipeline, with 25% production growth rate expected in 2017.
Thusly, the price of natural gas is particularly important for Cabot.
Henry Hub Natural Gas Spot Price data by YCharts
According to the U.S. Energy Information Administration [EIA], Natural gas averaged $2.61 per MMBtu (million British thermal units) in 2016, and will rise to $3.03 per MMBtu in 2017 and $3.19 in 2018; with the commercial use of natural gas rising by 6% in 2017. Consequently, Investors in this sector should monitor natural gas prices particularly.
Expected growth in natural gas exports and domestic natural gas consumption in 2018 contribute to the forecast Henry Hub natural gas spot price rising from an annual average of $3.03/MMBtu in 2017 to $3.19/MMBtu in 2018.
- U.S. Dry natural gas production is forecast to average 73.6 billion cubic feet per day (Bcf/d) in 2017, a 0.8 Bcf/d increase from the 2016 level. Natural gas production in 2018 is forecast to be 4.9 Bcf/d higher than the 2017 level.
Bearing these above comments in mind a long term investment in this segment makes perfectly sense. The question now is to look at the company fair and intrinsic value and compare it to the street price.
Cabot Oil & Gas Corp., is an independent oil and gas company, develops, exploits, explores for, produces, and markets natural gas, oil, and natural gas liquids in the United States.
The company primarily focuses on:
- Marcellus Shale with approximately 180 K net acres in the dry gas window of the play located in Susquehanna County, Pennsylvania;
- Eagle Ford Shale with approximately 84 K net acres in the oil window of the play located in Atascosa, Frio, and La Salle Counties, Texas.
COG also transports, stores, gathers, and purchases natural gas for resale. The company sells its natural gas to industrial customers, local distribution companies, gas marketers, and power generation facilities through gathering systems and pipelines.
Independent oil & gas companies
Cabot Oil is the fifth of 12 different companies in this category that I will study.
- Apache Corporation (APA) - read article here
- Anadarko Petroleum (APC) - read article here
- ConocoPhillips (COP) - read article here
- Occidental Petroleum (OXY) - read article here
- Cabot Oil (COG)
- Noble Energy (NBL) -read article here
- Hess Energy (HES)
- Murphy Oil (MUR)
- Marathon Oil (MRO)
- Devon Energy (DVN)
- EOG Resources (EOG)
- Pioneer Natural Resources (PXD)
Case 5: Cabot Oil - Stock Analysis.
COG, ascending wedge pattern may have actually experienced a negative breakout last week, albeit the crossing of the line support occurred with insufficient volume to be 100% certain. Two immediate supports to consider.
- Support $25 likely to be tested.
- Support $23 in case of weakness.
On the positive side, the resistance line (violet) indicates $27.25 at which level, I recommend to take some profit off the table.
Financial Table - 10 last consecutive quarters.
|Total Revenues in $ Billion||0.46||0.31||0.31||0.28||0.28||0.25||0.31||0.32||0.52||0.46|
|Net Income in $ Million||40.26||−27.51||−15.51||−111.12||−51.19||−62.91||−10.26||−292.76||105.72||21.53|
|EBITDA $ Million||262,79||133,55||143,30||−7,79||106,30||72,14||142,69||−302.26||324,80||202.08|
|Profit margin % (0 if loss)||8.7%||0||0||0||0||0||0||0||20.4%||4.7%|
|EPS diluted in $/share||0.10||−0.07||−0.64||−0.27||−0.12||−0.14||−0.02||−0.64||0.23||0.05|
|Cash from operations in $ Million||267||171||146||156||67||85||100||140||269||261|
|Capital Expenditure in $ Million||395||266||175||136||92||67||86||130||208||185|
|Free Cash Flow (Ychart) in $ Million||−128||−95||−28||20||−25||18||15||10||61||76|
|Cash and cash equivalent $ Billion||0.014||0.015||0.009||0.001||0.579||0.517||0.501||0.499||0.537||0,517|
|Long term Debt in $ Billion||1.88||2.00||2.04||2.02||1.60||1.54||1.52||1.52||1.52||1.52|
|Dividend per share in $||0.02||0.02||0.02||0.02||0.02||0.02||0.02||0.02||0.02||0.05|
|Shares outstanding (diluted) in Million||415||414||414||414||432||465||465||465||467||467|
|Crude oil and condensate in K Bo||1,428||1,448||1,350||1,203||1,110||1,139||941||823||921||1,014|
|Natural gas ("MCF")||1,618||1,284||1,330||1,428||1,531||1,443||1,444||1,586||1,638||1,662|
|Crude and concentrate price ($/b)||43.82||56.10||43.71||45.72||27.65||40.51||40.13||37.65||46.68||40.03|
|Natural gas price ($/Mcf)||2.23||1.75||1.68||1.81||1.49||1.55||1.68||1.70||2.65||2.38|
Note: Most of the data indicated above come from YCharts.
Trends, Charts and commentary: Revenues, Free Cash Flow and Upstream Production.
1 - Total Revenues.
Cabot Oil & Gas had total revenues of $460.50 million during the second-quarter, compared to the consensus estimate of $454.76 million. Cabot had a negative net margin of 10.95% and a positive return on equity of 4.68%. The company's revenues were up 86.6% on a year-over-year basis.
In August this year, Cabot has entered into a purchase and sale agreement with an undisclosed buyer to sell its conventional oil and gas properties located in West Virginia, Virginia and Ohio. The sale will close in 3Q'17.
Carbon Natural Gas Company, through its affiliate Carbon Appalachian Company is believed to be the buyer for $21.5 million.
2 - Free Cash flow.
The company is generating free cash flow totaling $162 million on a year basis according to Ychart. The last two quarters were strong.
During the second quarter of 2017, Cabot repurchased 3 million shares at a weighted-average share price of $22.41. The Company has approximately 7.1 million shares remaining under its share repurchase program.
Dividends have been increased to $0.20 annually, which means a payout of $93.4 million.
The company expects to return $150.0 million to shareholders through dividends and buybacks in 2017, which is covered by the actual free cash flow. The company "passed" the FCF test.
3 - Quarterly production.
Cabot oil & gas operate in two main locations in the USA:
1 - Marcellus Shale
During the second quarter of 2017, Cabot averaged 1,771 Mmcf/d of net Marcellus production (2,079 gross operated Mmcf/).
2 - Eagle Ford Shale
Cabot's net production in the Eagle Ford Shale during the second quarter of 2017 was 13,146 Boep/d (84% oil), an increase of 9% compared to the first quarter of 2017.
Natural gas price realizations improved by 46% relative to the prior-year comparable quarter.
Total Production per segment 2Q'17:
Debt situation, liquidity and commentary.
COG's net debt-to-adjusted capitalization ratio at the end of 2Q'17 was 27.6% compared to 28.5% on December 31, 2016.
We can say that the company has a healthy debt situation. One comment in the conference call, about liquidity.
We continue to maintain over $500 million of cash on hand and have approximately $1.7 billion of available commitments under our credit facility.
Cabot Oil & Gas Corp., announced its quarterly earnings data on Thursday, July 27th. Dan O. Dinges, CEO, said in the last conference call:
For the second quarter, Cabot delivered another successful report card, highlighted by 14% year-over-year production growth, while generating positive free cash flow for the fifth consecutive quarter. Production growth for the quarter was driven by a 15 % increase in net Marcellus volumes year-over-year. This production growth coupled with an increase in Marcellus cash margins of almost 100%, were the primary drivers for our strong cash flow growth year-over-year.
3Q'17 and 2017 production expectations.
In this morning's release, we also reaffirm our production growth, unit cost and capital guidance for the year, despite a small sequential decline implied by our third quarter guidance due primarily to mechanical issues at a third-party compressor that will likely continue until late August. We are very confident of being able to achieve our full year production targets.
The bulk of the production increase is expected in the Marcellus segment. However, COG may experience some weakness in production in 3Q'17.
COG's debt levels of $1.5 billion are excellent with a market capitalization of $11.92 billion. Investors might consider COG as a solid addition to their energy portfolio.
On August, Morgan Stanley upgraded Cabot Oil & Gas from Equalweight to Overweight with a price target of $31.00 (from $24.00). Also, on October 11, 2017, stock analysts at Barclays PLC increase COG target from $28.00 to $30.00.
Again, no surprise here after reviewing the balance sheet and price forecast. One weakness is the dividend, which is under 1%, even after the increase of 150% recently announced.
Finally, the caveat lector is that the stock has rallied strongly and seems overbought as we speak. I recommend to buy COG around $24 or lower and take some profit off the table at $27.25.
Important note: Do not forget to follow me on the oil sector. Thank you for your support, it is appreciated.
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.