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Is Cabot Oil & Gas Corporation (NYSE:COG) A Financially Sound Company?

Simply Wall St

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Mid-caps stocks, like Cabot Oil & Gas Corporation (NYSE:COG) with a market capitalization of US$10.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine COG’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into COG here.

Check out our latest analysis for Cabot Oil & Gas

COG’s Debt (And Cash Flows)

COG's debt levels have fallen from US$1.5b to US$1.3b over the last 12 months , which includes long-term debt. With this debt repayment, COG currently has US$315m remaining in cash and short-term investments to keep the business going. On top of this, COG has generated US$1.4b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 112%, meaning that COG’s current level of operating cash is high enough to cover debt.

Can COG pay its short-term liabilities?

Looking at COG’s US$240m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$680m, leading to a 2.83x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:COG Historical Debt, June 21st 2019

Can COG service its debt comfortably?

COG is a relatively highly levered company with a debt-to-equity of 53%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if COG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For COG, the ratio of 14.06x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving COG ample headroom to grow its debt facilities.

Next Steps:

COG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for COG's financial health. Other important fundamentals need to be considered alongside. You should continue to research Cabot Oil & Gas to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for COG’s future growth? Take a look at our free research report of analyst consensus for COG’s outlook.
  2. Valuation: What is COG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether COG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.