Cabot: This Oil And Gas Stock Ready To Soar In Q4

| About: Cabot Oil (COG)

On Friday, October 25th, Cabot Oil & Gas (NYSE:COG) shares soared 10% and were among the top 10 gainers in the S&P 500. On late Thursday, the company reported impressive results for the third quarter which led to the increase in share prices. For the quarter ended September 30th 2012, the company reported a substantial increase in production of 66.5 Bcfe, with 62.7 Bcf of natural gas production and 629,000 barrels of liquids production. These numbers represent a 31 percent increase in gas production and a 61 percent increase in liquids production compared to the same quarter of the previous year. As a result, net income was $36.6 million, or an EPS of $0.17 per share, for the quarter compared to $28.5 million, or an EPS of $0.14 per share on a year-on-year basis. Excluding the effect of certain items, net income was $43.1 million, or an EPS of $0.21 per share for the quarter compared to $35.3 million or an EPS of $0.17 per share for the same quarter in the previous year. Consensus estimates for EPS were around $.14 per share.

Higher production and higher crude oil price realizations drove the overall improvement though it was partially offset by lower than realized natural gas price realizations and the increased operating expenses associated with the higher the level of production. Cash flow from operations for the quarter was $164 million, compared to $154.7 million for the third quarter of the previous year. Discretionary cash flow for the third quarter of 2012 was $175.7 million, compared to $165.4 million for the third quarter of 2011. After taking into account the effect of hedges, natural gas price realizations were $3.68 per thousand cubic feet ((NYSEMKT:MCF)) for the third quarter of 2012, a decline of 20% compared to the third quarter of 2011. Oil price realizations were $101.34 per barrel, an increase of 17% compared to the third quarter of 2011.

Production for the nine-month period ended September 30, 2012, was 188.9 Bcfe, with 178.4 Bcf of natural gas production and 1.8 million barrels of liquids production. These numbers represent increases of 42%, 40%, and 91%, respectively, compared to the same period in the previous year. This production also already exceeds the full-year production achieved in 2011. Net income for the period was $90.9 million, or an EPS of $0.43 per share, compared to net income of $96.0 million, or $0.46 per share, for the same period of the previous year. Excluding certain items, net income was $81.8 million, or $0.39 per share, compared to $99.0 million or $0.47 per share for the previous year. Cash flow from operations was $455.1 million and discretionary cash flow was $456.3 million compared to $375.4 million and $428.2 million respectively for the same period of the previous year.

Simultaneously, the company also provided an operations update. The highlights of the update include success in its initial Pearsall effort, continued momentum in the Marcellus operations and a breakthrough in gathering permits which have been long awaited... the initial short lateral well in the Pearsall was successfully completed in 11 stages and had an initial production rate of more than 1,400 barrels of oil equivalent ((NYSE:BOE)) per day. In 20 days, the well averaged more than 900 BOE per day of which roughly 50 percent was oil. Currently, Cabot is completing a second well and drilling three additional wells. The Company plans to complete 16 net wells in the fourth quarter between the Pearsall, Marmaton and Eagle Ford, of which approximately half will be completed in December.

The company is finding new ways to exploit the already prolific Marcellus and two new producing wells have been brought in making a total of seven wells in the area. This is a pilot program to explore tighter frat spacing which should provide increased efficiency and higher initial production. The company has been notified by Williams that it has received 90 percent of the 2012 gathering line permits. There are currently numerous construction crews in the field, which should allow for approximately 30 wells to begin producing during the fourth quarter.

Unlike many exploration companies which are cutting back on natural gas production and sitting on reserves in the expectation of better natural gas prices, Cabot has been aggressive about increasing gas production. As the results show, this has been a smart ploy by using volume increases in production to offset the weakness in prices. The third quarter sequential production growth has been 5% but with the acquisition of about 90% of its 2012 gathering permits on hand and 30 Marcellus wells to be in production in the fourth quarter, I should expect substantial production growth in the fourth quarter as well as a strong outlook for production in 2013. Talisman Energy (NYSE:TLM) has invested aggressively in the Marcellus Shale increasing production aggressively in a similar strategy. Chevron (NYSE:CVX) is another company that is doing well in the Marcellus Shale while the leading player in the area is Chesapeake Energy (NYSE:CHK). Cabot is second while in third place is Range Resources (NYSE:RRC) in third position. In the Marmaton shale in Oklahoma, along with Cabot, is QEP Resources (NYSE:QEP) which has completed its first well.

We can look forward to continued solid production growth in the fourth quarter of 2012 and in the year 2013 and this will validate Cabot's strategy to offset the gas price weakness with production increases so that overall profitability continues to grow and the gas operations remain cash positive. Cabot is in a great position to take advantage if there should be a cold winter resulting in increased gas demand and prices. I believe that this is one of the few independent energy companies that is currently worth picking up and you can look forward to capital appreciation on the back of the production growth. If you are interested in making an investment in the oil and gas industry, I would certainly recommend that you buy this stock.

Disclosure: I 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.

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