Cabot Oil & Gas Corporation (COG) proves that although you can’t cut your way to growth, you can cut your way to a higher share price. Indeed, COG stock is among the market’s best performers this year.
That an independent oil and gas exploration and production company should be delivering strong returns in this environment is counterintuitive to say the least.
Oil prices have rebounded somewhat over the last couple of weeks, but benchmark Brent crude is still off 8% for the year-to-date. U.S. West Texas Intermediate is down 11%.
The wider oil and gas industry is doing even worse. The United States Oil Fund LP (USO), which is the largest exchange-traded fund in the sector, has tumbled 22% so far this year.
And yet against this backdrop, COG stock is up nearly 20% in 2016. That makes it one of the top 20 gainers in the S&P 500 this year. So what gives?
COG is getting hammered by the oil glut just like the rest of the industry. Revenue fell by more than half in the most recent quarter, hurt by steep declines in prices for oil and natural gas. The top line result of $280.8 million missed Wall Street’s forecast of $335.1 million.
On the bottom line, COG recorded a net loss of $111.1 million in the fourth quarter, or 27 cents a share. True, on an adjusted basis the loss was a narrower 2 cents a share, which beat Street estimates by a penny. Still, a loss is a loss.
COG Stock Cruises on Cost Cuts
What makes COG stand out in this beleaguered sector is the ferocity of its cost cutting. (It also gets a gold star for the diversity of its assets portfolio.) Sure, all oil and gas names are slashing capital spending, but COG ain’t fooling around.
COG’s capital spending budget is just $325 million for the current year, down from $774 million in 2015, or about a 60% reduction. That’s on top of a 50% drop in capital spending from 2014 to 2015.
By slashing spending, COG is spring-loading itself for profitability when the oil market finally turns. To that end, Cabot Oil & Gas is focusing its resources on low-cost natural gas production in the Marcellus Shale and the Eagle Ford Shale.
As you can see from the trajectory of COG stock, the market likes the plan.
Whether that means shares have more upside remains to be seen. It’s always dangerous to chase performance. COG stock could easily become a source of profits for traders.
But if you’re looking for a stock to buy in exploration and production, COG has as good a story as any name.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
