Domestic energy explorer Cabot Oil and Gas Corporation (COG) reported weak second quarter 2012 results, hamstring by lower gas prices (which make up the lion’s share of the company's production) and higher operating expenses.
The predominantly natural gas-focused exploration and production firm reported earnings per share (excluding special items) of 5 cents, below the Zacks Consensus Estimate of 7 cents. Cabot’s performance also deteriorated considerably from the year-ago adjusted profit of 20 cents per share.
During the three-month period ended June 30, 2012, Texas-based Cabot generated operating revenues of $265.7 million – up 10.4% year over year – aided by higher production, but missed the Zacks Consensus Estimate of $267.0 million
Overall production during the quarter was 62.8 billion cubic feet equivalent (Bcfe) – 94% gas – up 39.6% from the previous-year period. Natural gas volumes improved 37.4% year over year to 59.2 billion cubic feet (Bcf), while liquids volumes jumped 95.7% to 593 thousand barrels (MBbl). Strength in natural gas production was driven by the Appalachia region, where volumes swelled by 51.5%.
The Average realized natural gas price was down 27.4% from the corresponding period of 2011 to $3.39 per thousand cubic feet (Mcf), while average oil price realization was up 7.8% to $102.61 per barrel.
Costs & Expenses
Transportation and gathering costs, taxes (other than income), and exploration costs came in at $33.1 million (up 106.2% year over year), $10.9 million (up 84.7%) and $16.2 million (up 253.8%) respectively, as a result of which total operating expenses increased 51.8% over the second quarter of 2012 to $255.3 million.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter increased to 28 (from 22 in the year-ago period) with a 97% success rate. Operating cash flows were $159.4 million for the quarter, while capital expenditures were $222.8 million. As of June 30, 2012, the company had $972.0 million in long-term debt, with a debt-to-capitalization ratio of 31.3%.
Armed with significant production increase year-to-date, Cabot has maintained its 2012 volume growth guidance in the range of 35% to 50%, including an expected liquid growth of 55% to 65%.
Recommendation & Rating
Cabot Oil & Gas was the best performing S&P stock for 2011, gaining almost 100% during the period. The natural gas producer defied weak commodity prices to set a scorching pace in a year that saw the overall index decline 0.6%. Most of the gain was driven by its exposure to the high-return Marcellus and Eagle Ford Shale plays, as well as its above-average production growth. A relatively low risk profile and longer reserve lives are other positives in the Cabot story.
We expect Cabot’s new pipeline initiative – the ‘Constitution Pipeline Company’ in partnership with Williams Partners L.P. (WPZ) – that will connect natural gas production in Pennsylvania to markets in the northeast, to further improve its operations moving forward.
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, supported by a Zacks #3 Rank (short-term Hold rating).
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