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Cabot Oil & Gas: Capture The Rise Of Natural Gas

Jun. 02, 2020 7:14 AM ETCoterra Energy Inc. (CTRA)5 Comments
QuandaryFX profile picture


  • Natural gas markets started the first half of this year on a weak note as poor demand impacted the commodity.
  • Gas is setting up for a strong rally as production has corrected to the point where prices will need to rise to satisfy the market.
  • COG is unhedged through 2021 which sets them up as a strong way to trade the rally in gas.

As you can see in the following chart, it’s been a strong (but volatile) year for Cabot Oil & Gas (COG).

While this year has already seen a good degree of upside momentum in COG, I believe that this momentum will carry through into the next few quarters. Based on both natural gas fundamentals as well as the specific market approach to COG, I believe now is a good time to buy the stock.

Natural Gas Fundamentals

Let’s start this piece off with a deep-dive into natural gas fundamentals. The reason for this is quite simple: COG is a large producer of natural gas and its share price has a fairly strong correlation with changes in the price of natural gas.

What the above chart shows is a very clear relationship between what happens to the price of Cabot in relation to changes in natural gas. Put simply, a fairly strong degree of the variability of returns (around 40%) is exclusively explained by what happens to natural gas prices, which means that if you have an idea of where gas prices are headed, you have a good idea of where COG is likely headed as well.

Let’s start this piece off with an updated look at the short and long-term fundamentals for natural gas. We are fortunate in that the EIA has recently released its latest authoritative monthly figures of gas fundamentals, so we have greater clarity behind where we currently stand.

Put simply, short-term fundamentals are still coming in as bearish in that natural gas inventories are climbing versus seasonal benchmarks like the 5-year average and the figures from 2019. As you can see in the following chart, the pace of builds is actually still very strong in that each weekly rate of change is still either above the 5-year average or

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

I am not sure we count count on the storage/gas price cycles presented to repeat itself with all the associated gas from shale oil wells now being produced. Where before, conventional gas wells would be shut-in (or workovers delayed) when gas prices were bottoming, now those wells are kept online for the oil and it's much more difficult to flare gas than a few years back.

The tipping point to high gas prices will need to come from the NGL demand side as more NGL loads are exported. As most of the NGL sold from USA does not have long term commitments, a good percentage of these loadings have been canceled with the pandemic. It's going to take a while for this all to this to sort itself out. My guess is next winter.
Natural Gas has fallen by ~25% YTD, yet COG is up more than 10%.
The same can be said for most Natgas stocks.
So my question is whether they have got too far ahead of the yet-to-be-realized surge in natgas!
The increase shown in the strip will already be priced into the stock. After all it is an easy pair trade for any hedge fund. Arbitrage opportunity.

Only if you expect better than strip recovery, will you get outsized returns in the stock. And certainly over the years, this has been a very bad trade by the permabulls as natty (sustained over weather variation) has moved down from 10 to 6 to 5 to 4 to 3 to 2.5. Of course at some time it has to stop. But I don't see any reason why massive amounts of dry gas in the Haynesville and Marcellus come on line if natty tries to establish a sustained 3+ price.

P.s. And yes, nobody can predict the future. Maybe this winter is very cold. Maybe very warm. But the strip will have been priced based on average winter.
02 Jun. 2020
What about $AR and $RRC? Aren’t they more levered to price of gas? Their stocks are up huge while COG is up only 25-35 percent.
What makes those 2 so levered, is because they both have very weak balance sheets and high debt coming due. In actuality, both are heavily hedged(especially AR). COG is the exact opposite: very strong balance sheet and little debt, and almost no hedges at all. Clearly, COG is the strongest financially of the 3, and can afford to play the gas price unhedged. Hence, it is the purist play on NG prices. By the way, COG is THE quality name in NG, being also the lowest cost producer, and the only one with FCF.
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