Houston-based oil and gas company Cabot Oil & Gas (COG) has had a how year, punctuated by a busy couple of weeks. It reported Street-beating earnings in late February, but followed that up with a share sale to shore up its embattled finances.
COG stock has rallied sharply so far in 2016, up 25% vs. a broadly down market. But investors appear to be regrouping to see what’s in store for the rest of the year. Right now, they appear to be weighing the firm’s valuable and productive oil and gas acreage against its debt levels and low natural gas prices.
The fundamental matter for Cabot, as well as any oil and gas company in general, is that it generates profits when the price of a barrel of oil or gas level is above a certain level, but it loses money below that level.
With pricing still on tepid ground, the clock is ticking for Cabot Oil & Gas management to get its finances in order, especially if a price recovery is far down the road.
Cabot Oil & Gas Earnings for 2015
The 2015 report, when not compared to analyst expectations, was awfully ugly.
For all of 2015, Cabot reported a rather significant but understandable 38% drop in sales to $1.36 billion. While Cabot also drills for and sells crude oil, natural gas represented the bulk of the top line at just more than $1 billion, or 71% of total sales.
COG’s derivatives activities, such as hedging for natural gas and oil price volatility, reported a gain of $56 million that was booked as revenue, but represented a steep drop from $220 million reported in 2014. Cabot Oil & Gas also brokers natural gas sales, and this category fell by more than half.
Revenues weren’t pretty, nor were profits. Net income dropped from $104 million in 2014 to a loss of $114 million. Free cash flow also dipped negative to $215 million.
Looking at the balance sheet, Cabot ended the year with $2 billion in debt and a debt-to-equity ratio of about 1, or just as much equity (book value) as reported debt. It made up for the negative free cash flow generation by issuing $273 million in debt.
Unlike a lot of other energy stocks right now, the dividend on COG stock isn’t a worry — it offers a very modest payout of 2 cents per share quarterly that translates into a yield of just 0.4%. It’s not that difficult to fund (COG spent just $33 million on it last year), and cutting it wouldn’t spark the panic it did like larger payer ConocoPhillips (COP).
The Share Offering
Cabot announced on Feb. 22 that it was undergoing a secondary offering of 44 million shares of COG stock at $20 per share, one assumes to shore up its balance sheet.
Considering Cabot’s outstanding shares sat at 414 million prior to that, we’re looking at a pretty significant 10% dilution in shares. That speaks to the fear that COG likely had about violating its existing debt covenants.
Cabot According to Cabot
In its most recent presentation to shareholders, Cabot touted its “low risk, high quality drilling opportunities” as well as “disciplined capital spending” in which “it is focused on maintaining a strong financial position.”
It also detailed a low cost structure; indeed, COG does have a reputation for being able to drill for gas at a lower overall cost than rivals. Morningstar estimates total natural gas costs of $2.50 per mcf and points out that this is due in good part to appealing drilling locations in the Marcellus shale in Pennsylvania, as well as the Appalachian Basin.
Don’t Buy Cabot at This Point
Cabot is about as close as investors can come to a pure play on trends in natural gas in the United States. More than 90% of its activities are here in the U.S. It was one of the first movers in the appealing (and massive) Marcellus Shale and produces there along with rivals that include Chesapeake Energy Corporation (CHK), Anadarko Petroleum Corporation (APC), EOG Resources Inc (EOG) and Exco Resources Inc (XCO).
The $20 share issuance at least gives an indication of what the company, as well as its underwriters, think the stock is worth. But on an earnings basis, analysts still project a 28-cent-per-share loss for all of 2016, and only modest profits of 40 cents per share in 2017.
Natural gas prices are hovering below $2 per MMBtu, and without a catalyst to change that, Cabot’s profit woes are likely here to stay. It has bought itself time with the share issuance, but investors are best advised to sit on the sidelines and not jump into COG stock until the pricing environment becomes more favorable for domestic oil and gas producers.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
