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Can Cabot (COG) Stock Rebound From Its Three-Year Lows?

Zacks Equity Research

Markets often overreact to good and bad tidings, resulting in arbitrary stock price movements that do not always match a company's fundamentals.

Just as there are a number of companies breezing past their fair value, there are potentially underpriced ones trading way below their intrinsic worth.

Stocks wobbling at 52-week lows will discernibly spook wary, old-school investors.

Shares of Cabot Oil and Gas COG have been in the red for a while now. This is evident from the stock’s price trend in the year-to-date period. The stock has declined 28%, underperforming its industry’s 22.5% plunge.

This independent oil and gas exploration company has also decreased 6.2% in the past month. The stock closed at $16.10 on Dec 13, up merely 3% from the three-year low of $15.61, which was attained earlier this month.

What's Hurting the Stock?

Cabot with producing properties, mainly in the continental United States, focuses on high-impact natural gas-focused drilling in the Marcellus Shale. It is widely known that Cabot’s Marcellus acreage in the northeast Pennsylvania is the core asset of its portfolio and the key driver of production and reserve growth.

However, with natural gas prices recently falling to multi-year lows and Cabot being one of the most gas-weighted upstream players, its performance remains under pressure.

While Cabot consistently reported strong quarterly numbers, its positive surprise was overshadowed by an elevated expenditure guidance. The company lifted its 2019 capital spending outlook at the mid-point to $810 million from a prior view of $800 million. It is spending more money yet producing less growth this year. That didn't go well with investors, even though the downtrend mainly due to an acquisition.

From a production perspective, expectations from this year aren’t particularly rosy either. Cabot recently cut its annual production growth projection to 17% from 20% previously. This is likely to affect the company's revenues and earnings.

Grappling with lawsuits and denied a water permit, Cabot’s pipeline initiative, the Constitution Pipeline Company, is likely to get delayed to a great degree or be abandoned. This is set to dilute the company's earnings forecast. Recently, U.S. Supreme Court also upheld New York State's decision to stall the project due to environmental concerns.

The bearish natural gas fundamentals and their seasonal nature are responsible for the understandable reluctance on investors’ part to put their money on this stock.

Is a Turnaround Possible?

We note that despite the headwinds, Houston-based Cabot does have its share of tailwinds. The company recently reached an agreement with NextEra Energy Partner, LP NEP wherein the former will sell its 20% stake in Meade Pipeline Co LLC to the latter.

The deal proceeds worth $256 million clubbed with Cabot’s existing operating free cash flow will help the company boost its shareholder value. This can be achieved by combining the growing dividend base with a favorable share repurchase program.

Cabot is committed toward returning more than half of free cash flow to its stockholders through share buybacks and dividends. Recently, the company hiked its quarterly dividend per share by 29%, marking the fourth payout raise in the last two years. Per the results based on year-to-date buybacks and anticipated dividend payments, the company envisions to return at least $490 million to its shareholders in 2019, significantly higher than its minimum return of 50% capital target of the annual free cash flow.

As part of a broader deal, Meade Pipeline, which holds 39.2% interest in the Central Penn natural gas pipeline system connecting the Marcellus Basin to mid-Atlantic and Southeast regions, will be acquired by NextEra Energy for $1.37 billion from Cabot and other partners. The 185-mile long Central Penn Line pipeline can carry up to 1.7 billion cubic feet of natural gas per day.

In light of the above, we believe that even though the stock is struggling, it should be retained by investors.

Zacks Rank & Key Picks

Cabot currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the energy space are Phillips 66 PSX and Valero Energy Corporation VLO, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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