Cabot Meets Revs, Beats EPS

Zacks

Domestic energy explorer Cabot Oil and Gas Corporation (COG) reported stellar third quarter 2012 results, owing to enhanced output, better oil prices and lower exploration costs.   

The predominantly natural gas-focused exploration and production firm reported earnings per share (excluding special items) of 21 cents, breezing past the Zacks Consensus Estimate of 15 cents. Cabot’s performance also improved considerably from the year-ago adjusted profit of 17 cents per share.

During the three-month period ended September 30, 2012, Texas-based Cabot generated operating revenues of $296.9 million – up 13.3% year over year – with the help of healthier production. The result was in line with the Zacks Consensus Estimate.  

Volume Analysis

Overall production during the quarter was 66.5 billion cubic feet equivalent (Bcfe) – 94% gas – up 33% from the previous-year period. Natural gas volumes jumped 31.4% year over year to 62.7 billion cubic feet (Bcf), while liquid volumes shot up 60.9% to 629 thousand barrels (MBbl). The driving force behind the increase in natural gas production was Appalachia region, where volumes swelled by 42.4%.

Realized Prices

The average realized natural gas price went down 19.7% from the corresponding period of 2011 to $3.68 per thousand cubic feet (Mcf), while average oil price realization moved up 16.6% to $101.34 per barrel.

Costs & Expenses

Transportation and gathering costs and taxes (other than income) came in at $34.4 million (up 73.7% year over year) and $10.4 million (up 48.6%) respectively. As a result of, total operating expenses increased 10.1% over the third quarter of 2011 to $221.0 million.

Drilling Statistics, Capital Expenditure & Balance Sheet

Net wells drilled during the quarter increased to 30 (from 27 in the year-ago period) with a 95% success rate. Operating cash flows were $164.0 million for the quarter, while capital expenditures were $257.9 million. As of September 30, 2012, the company had $1,062.0 million in total debt, with a debt-to-capitalization ratio of 33.6%.

Company Guidance

Cabot guides its 2012 volume growth in the range of 38% to 44%, including an expected liquid growth of 60% to 70%.

For full-year 2013, the company expects to see production growth in the range of 35% to 50%, including an expected liquid growth of 45% to 55%.

Recommendation & Rating

We believe that large acreage holdings of Cabot will support several years of oil and gas drilling in the fast-growing fields, including the Marcellus Shale in Appalachia and the Eagle Ford Shale in Texas. The company’s recent restructuring operations and the sale of Canadian assets will likely help the company to focus on core shale plays.

But given natural gas’ weak fundamentals and Cabot’s high exposure to the commodity, we do not believe that the stock will be able to sustain the momentum in the near future. Cabot’s steep valuation and miniscule payout also keep us worried.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation. Cabot, which co-partners EOG Resources (EOG) in Eagle Ford Shale play, currently holds a Zacks #3 Rank (short-term Hold rating).
 

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