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MKM On Cabot Oil & Gas: Buy The Dip

Jayson Derrick

Shares of Cabot Oil & Gas Corporation (NYSE: COG) are down around 30% since the middle of April and now reflects a potential 20% intrinsic equity value upside potential, according to MKM.

The Analyst

MKM Partners's John Gerdes upgraded Cabot Oil's stock from Neutral to Buy with a price target lowered from $26 to $25.

The Thesis

Cabot earns the title of operating the lowest capital intensity business among the North American E&P space with a full-cycle return of 210% versus the gas industry median full-cycle return of 100%-105%, Gerdes wrote in the note. The company should be able to show an 8% production compounded annual growth rate through 2021 with capital spending 40%-45% less than cash generation.

By comparison, peers operating in the Marcellus region are expected to show a 4% CAGR production rate while with growth spending at 5-10% beyond cash generation.

Assuming a reasonable 12.5% equity discount rate, the research firm's net present value model implies a 30% upside potential to $25 per share. This is based in part on 2019 production growth of 18%, which is consistent with management's own 16%-18% range and a 2020 growth outlook of 5%. These growth rates are within the company's capital intensity measurement error and reflects expectations of using a three-rig drilling program in 2020.

Price Action

Shares of Cabot Oil & Gas were trading flat at $19.16 Monday afternoon.

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Latest Ratings for COG

Date Firm Action From To
Jul 2019 Upgrades Neutral Buy
Jul 2019 Upgrades Market Perform Outperform
Apr 2019 Initiates Coverage On Outperform

View More Analyst Ratings for COG
View the Latest Analyst Ratings

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