Cabot Oil & Gas: Meade Pipeline Sale Could Fund More Share Repurchases

Summary

• Cabot is selling its 20% stake in Meade Pipeline Co. for $256 million.
• This is a good return for the $167 million it appears to have invested in the pipeline and is also a healthy 13x EBITDAX.
• The proceeds could help Cabot reduce its share count to 388 million by the end of 2020.
• Cabot appears to be a decent value now despite relatively weak natural gas prices.
• There is also room for dividend increases as Cabot has strong dividend coverage even with weak strip prices.
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Cabot Oil & Gas (COG) announced that it was selling its stake in Meade Pipeline Co. for $256 million. This is a healthy return on Cabot's investment in the pipeline and also gives it additional funds for its share repurchase program (should it choose to do so). The outlook for natural gas prices in 2020 remains fairly weak, so Cabot may not generate as much positive cash flow then. However, Cabot is starting to look more attractive at $17.58 per share again.

Meade Sale

Cabot is selling its 20% ownership stake in Meade Pipeline Co. for $256 million. Meade owns 39% of the Central Penn Line, which is a 185-mile interstate pipeline that is part of the Atlantic Sunrise project. This appears to be a pretty good return given that Cabot had made around $167 million in contributions to Meade since 2014.

Cabot mentioned that the deal valuation was over 13x 2019 EBITDAX, which suggests that the 20% stake in Meade was generating around $19 million EBITDAX for Cabot in 2019.

NextEra Energy Partners is purchasing Meade, which is expected to generate slightly higher EBITDAX (around $22 million per year for Cabot's 20% stake) after a future capacity expansion.

While the sale of its stake in Meade is a relatively small transaction for a $7 billion company, it does allow Cabot to repurchase more shares without incurring additional debt.

2020 Outlook

At the 2020 NYMEX natural gas strip price of around $2.42, Cabot may end up with $1.887 billion in revenues based on its expectation for 5% production growth in 2020.

Type	Units	$ Per Mcf	$ Million
Natural Gas [BCF]	903	$2.09	$1,887
Total Revenue			$1,887

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This would result in around $214 million in positive cash flow (after dividends) that it could put towards share repurchases and debt

Analyst’s 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.