Think Long Term for Cabot Oil & Gas

NEW YORK (TheStreet) -- It wasn't long ago that the U.S. was very dependent upon imported oil. Things change. Now the U.S. is expected to be energy independent by 2020 and potentially become the largest producer of oil and natural gas on the globe.

It's old news that hydraulic fracturing in horizontal wells ("fracking") has opened up oil and gas extraction from shale here in North America. The technology to pull gas from unheard-of places is the reason for the boom, the abundance and the low prices for natural gas.

If investors are interested in oil and gas exploration and production in the U.S., the best companies to look at are producers that have a low overhead and can make money even when gas prices are as low as they are now. Cabot Oil & Gas is one of those companies, but it takes long-term vision to see the potential.

The Marcellus Shale region of Pennsylvania is where the company will grow.

Cabot's bread and butter revenue comes from its 200,000 net acres in the Marcellus Shale. Not only does it account for 79% of the company's reserves, but also over 80% of its net production.

In 2008 Cabot extracted only 20 million cubic feet of natural gas per day. It has grown to 1.2 billion cubic feet per day in 2013 with a mere 226 horizontal wells. This proves the company's efficiency. Cabot brought in a sixth rig last year and plans to drill an additional 100 wells. This is where the company is going to grow and where it has poured over 60% of its development capital.

Cabot is a smallish company, with a market cap of about $17.2 billion. The company's financial ratios show that it is focusing on growth. Its current debt-to-equity ratio is below the industry average. It is financing growth through debt.

There hasn't been much growth in earnings in the last five years. Cabot is retaining most of those earnings for reinvestment. It would be nice to see a better earnings ratio, because the company's price-to-earnings ratio is 65.36, far above the industry average of 23.09. With the price-to-book value of 6.79, it is way overvalued. Investing in this company is a growth play.

Presently Cabot is in 95% natural gas, which also makes up 96% of its reserves. Since the company is pouring its resources into the Marcellus Shale region for bread-and-butter revenue, the price of natural gas is going to have a huge impact upon what the company will be able to do revenue-wise, outside of more production.

The recent cold snaps have helped increase natural gas prices, which have continued to climb since the summer of 2012. Supplies are tightening. Analysts believe that the prices will continue to rise through the winter. Even though production has been high, natural gas producers appear to be adjusting operations to supply. In other words, supply and demand appears to be balancing out. This can be seen in the Weekly Natural Gas Storage Report.

The storage chart shows that the amount of natural gas being stored is gravitating toward the lower end of the five-year average.

This is merely an observation. All it takes is a warm second half of the winter to cut down on the usage of natural gas, especially in the Northeast where many homes use gas heat.

The growth of the natural gas industry has two catalysts: the increasing industrial usage of liquified natural gas (from utilities to transportation), and export of LNG that will continue to increase.

An investment in COG would require a long-term vision. The company is doing an incredible job with its Marcellus wells, but looking long term will be the key. Even though it is highly overvalued presently, Cabot shows great potential in frugal drilling for natural gas.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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