Buy Cabot Now For Significant Gains In 2013

| About: Cabot Oil (COG)
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Cabot Oil & Gas (NYSE:COG) is an attractive stock for investors that are bullish on natural gas for the long term. Current shareholders should continue to hold this stock while interested investors should consider this quarter as an opportune entry point to initiate a position. Cabot released a strong earnings report for the third quarter and expects production to ramp up even more in 2013. When natural gas prices do rebound, it's highly probable that this stock will realize a significant rally in 2013. Even at these low natural gas prices, Cabot is able to turn a profit off of the current rates without being inundated with debt or a risk laden portfolio like Chesapeake Energy (NYSE:CHK).

Anadarko Petroleum (NYSE:APC), EOG Resources (NYSE:EOG), Chesapeake Energy, and Range Resources (NYSE:RRC) are the E&P firms with natural gas assets most comparable to Cabot Oil & Gas. Cabot's price is around 84.7 times earnings, 9.04 times sales and 4.75 times its book value. These are the highest price ratios among the aforementioned firms. Its 0.50 current ratio is the lowest among these firms. Anadarko's 1.4 current ratio is the highest among the firms. Cabot's debt-to-equity ratio is around 0.47. Chesapeake's debt-to-equity ratio is around 0.82. Range Resources' 1.25 debt-to-equity ratio is the highest among the firms. Cabot's annualized dividend is around $0.08 per share. Its sales have increased 5.1% over the past five years. This is the lowest growth among the firms.

Cabot's $0.56 EPS has increased 18.1% in 2012, and it is projected to increase 98% in 2013. Range Resources' -$0.27 EPS has declined 53.5% in 2012, and it is projected to increase 65.6% in 2013. Cabot's 27.1% operating margin is the highest among the aforementioned. Its ROE is around 5.6% and its profit margin is around 10.6%. Cabot's float short is around 3.04% and its short ratio is around 2.55. Cabot's beta is around 1.1 and its average volume is around 2.4 million. Its 2.94 relative volume is the highest among the firms. The stock's 25.2% increase YTD and 5.4% increase over the past month are the highest among the aforementioned firms. Cabot Oil & Gas stock has increased around 5.2% since its last earnings release.

Cabot's third quarter operating revenues totaled $296.87 million, increasing from $262.11 million YOY. Third quarter natural gas revenues totaled $231.89 million, increasing from $218.52 YOY. Crude oil revenues totaled $57.87 million, increasing from $33.15 million YOY. Third quarter operating expenses totaled $220.97 million, increasing from $200.73 million YOY. Cabot's third quarter net income totaled $36.6 million, increasing from $28.48 million YOY. Total debt at the end of third quarter was $1.06 billion, increasing from $950 million at the end of 2011.Cabot's third quarter production totaled 66.5 Bcfe, increasing 33% YOY. Nine months overall production totaled 188.9 Bcfe, increasing 42% YOY.

Third quarter natural gas production totaled 62.7 Bcf, increasing 31% YOY. Liquids production totaled 629 mbbls, increasing 61% YOY. Despite permit delays, the Marcellus asset was primarily responsible for the increase in production. Cabot plans to begin producing from 45 additional wells in this play before 2013. The increased production and higher realized prices for crude oil were catalysts behind the overall improvement for the third quarter. These were partially offset by lower natural gas prices and higher operating expenses due to the increased production. First nine months 2012 natural gas production totaled 178.4 Bcf, increasing 40% YOY. Liquids production totaled around 1.8 mmbbls, increasing 91% YOY.

The Marcellus Shale is one of the largest natural gas finds in the history of the US. Unlike many E&Ps, Cabot has committed to increasing its natural gas production from this play under the expectation that eventually these commodity prices will rebound in the US. Cabot's breakeven point is around $2.05 per Mcf. Its transportation cost can be as low as $0.50 per Tcf. These costs indicate that Cabot can still turn a significant profit despite the low natural gas prices in the US. Third quarter realized natural gas prices averaged around $3.80 per Mcf, realized prices averaged $3.70 per Mcf in the first nine months 2012.

Fortunately for Cabot, there are opportunities for natural gas demand to increase in the near term. In 2011, over 5,570 electricity generators used natural gas for fuel, increasing from almost 5,450 in 2009; the number is expected to increase for 2012. Electricity generation consumed 9.1 Tcf of natural gas YTD in 2012, increasing from 7.8 Tcf YOY. Natural gas demand is growing as a more affordable alternative to coal or oil. Natural gas pipeline exports to Mexico increased 50% in 2011, at an average rate of $4.18 per Mcf. Mexico continues to increase its natural gas consumption for fuel in electricity generation. Due to lower natural gas prices, plastics producer Dow Chemical (DOW) is currently considering 91 addition manufacturing projects.

Cabot Oil & Gas believes it currently has 14 out of 20 of the most productive wells in the Marcellus Shale. With Williams Partners LP (NYSE:WPZ) increased pipeline efficiency, Cabot not only plans to drill more wells but to extract more gas per well also. Cabot's CEO expects strong production numbers in the last quarter 2012 and industry-leading growth for 2013. In 2013, Cabot projects a positive cash flow program, using a gas price at $3.50 per Mcf. The CEO projects that with only using 10 operated rigs throughout the year, at some point in 2013, Cabot will reach a net production of a Bcf per day.

Cabot's projected 2013 production ranges from a 35% to 50% increase; 2013 would be three consecutive year of 40% production growth. Liquid production is expected to increase 60% to 70% in the remainder of 2012 and 45% to 55% in 2013. Cabot's capital spending for 2013 is projected to range from $950 million to $1.02 billion - 70% of this capital will be allocated to high rate of return projects on the Marcellus Shale. Cabot's most recent net production reached around 780 Mcf per day, with new wells already under construction. It's on track for improving its becoming the industry leader in near-term. Investors bullish on natural gas should initiate in 2012 and hold Cabot through 2013.

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.