With oil and natural gas prices still hovering at lows not seen in years, things haven’t been so great in the energy patch.
We’ve already seen some high profile bankruptcies and huge lay-offs from many energy stocks. The reality is, the shale players are playing a game of who can kick the can the furthest and survive until oil rebounds.
Cabot Oil & Gas (COG) should be one of those firms.
Featuring quality assets in some of the lowest-cost producing regions, COG is one of the best mid-tier energy stocks to take advantage of any sort of rebound in energy prices. Moreover, recent moves by COG to cut costs even further should bear fruit and help the firm get to a point where oil finally does rebound.
For investors, looking for bargains among the wreckage of the shale industry, COG could be it.
COG: It’s All About Those Assets
The key for most of the successful mid-sized independents has been the first mover advantage before the boom was a boom. We’ve seen that with Continental Resources (CLR) in the Bakken and EOG (EOG) in the Eagle Ford.
These firms were able to sniff out the best possible acreage in their respective areas and lay claim to the best drilling sites — long before anybody else got there.
Cabot was no different in that regard in the natural gas rich Marcellus shale.
COG controls roughly 200,000 acres in Susquehanna County, Pennsylvania. That’s right in the heart — and thickest part — of the dry gas window of the Marcellus shale. As a result, Cabot was able to monopolize and become one of the largest producers of dry gas in region. The fields are so rich that COG actually controls Pennsylvania’s top 16 wells by cumulative production.
The problem is that prices for dry natural gas have been low for some time. To combat that, COG started adding quality acreage in the Eagle Ford. Today, that sits at 89,000 acres. Those acres provide a growing stream oil production into Cabot’s mix — albeit, still tiny when compared to its total.
At the end of the day, Cabot Oil & Gas has seen continually rising production from these assets in North America’s two main shale fields. Cabot expects that total production growth for all 2015 to be approximately 13%.
COG Lowering Costs as Well
At first blush, it seems that Cabot is following the playbook of “raise production in order to sell more oil/natural gas at lower prices so we can keep the lights on.” The difference is that Cabot has been able to raise production while reducing costs.
COG originally budgeted for $850 million in capex spending for all of 2015. However, the collapse in oil services pricing has worked to Cabot’s benefit.
The E&P firm saw some big reductions in oil service costs. Operating efficiencies at its well sites have also helped the firm save some big dough. COG now expects to only have spent around $774 million when it finally reports fourth-quarter earnings next week.
Cabot has taken that reduction in costs a step further.
The company plans to spend just $325 million on capex this year. That’s roughly half of what the firm gave for capex spending in its prior guidance back in October.
Again, drop in spending comes down to being able to spend less on oil services. COG still estimates that it will be able to drive production growth 2% to 7% in the New Year. In addition, by reducing its capital outlays, COG won’t need to tap its credit line. The drop more aligns its spending needs with its operational cash flows. That will allow it kick that can that much further and COG could do more if need be, such as cut its token 0.39% dividend to save cash if push comes to shove.
Also helping COG kick the can will be its hedge book. Cabot has also expanded its hedge book for the April to October period of the year. With natural gas swaps averaging approximately $2.51 in price, COG should get marginal higher prices for some of its production. That’ll help the firm get through the middle chunk of the year.
Giving COG Stock a Go
While things in the energy patch are far from good, Cabot Oil & Gas seems to be doing everything it can to keep on keepin’ on in the low price environment.
COG continues to derive value from its prime acreage in the Marcellus and Eagle Ford, while reducing costs and playing it conservative with spending.
Ultimately, Cabot will be one of the survivors of the shale bust.
Investors seem to realize this, as COG stock is one of the few stocks in the green this year. Pulling the lens back further, the 26% decline in Cabot stock over the past year offers an interesting value for investors looking for energy stocks.
The Bottom Line: COG stock maybe down, but it’s not out. Cabot should be able to motor through the current low price environment and survive just fine until oil prices rebound.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
