3 Reasons to Buy Cabot Oil & Gas

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Houston-based Cabot Oil & Gas (NYSE: COG  ) , an independent oil and gas producer with a large acreage position in the Marcellus shale, recently had an exceptional quarter from both an operational and financial perspective – the best in the company's history, in fact.

Well, the market has quickly caught on, sending shares of Cabot soaring to an all-time high near $40 a share on September 3. But despite the run-up in the company's stock price, Cabot may still present an attractive opportunity for growth-minded investors. Here are three reasons why.

Solid growth in production and reserves
Over the past few years, Cabot has been aggressively growing both reserves and production. From 2010 to 2013, its compounded annual production growth rate averaged a whopping 45%, while its reserve growth from 2009 to 2012 was a similarly impressive 23%. As of year-end 2012, the company boasted proved reserves totaling 3.8 trillion cubic feet.

Looking ahead, the company is guiding for 2013 production growth in the range of 44%-54%, up from a previous guidance range of 35%-50%. Based on the midpoint of this guidance, Cabot is now looking at a three-year production CAGR of about 45%. Given that processing and takeaway capacity in the Marcellus is expected to improve dramatically over the next few years, that target doesn't look all that outlandish to me.

Industry-leading low cost structure
That leads me to the second reason why I like Cabot – it has an industry-leading low cost structure. Cabot's CEO, Dan Dinges, was quick to point out just how profitable the company's Marcellus operations are, despite the poor basis differentials for Marcellus gas. "Even assuming a 10% to 15% differential at current prices, our typical Marcellus well, defined as a 14 Bcf average, provides a 120% return," he remarked during the company's second-quarter earnings conference call. 

Part of the reason why Cabot's Marcellus operations are still profitable at sub-$4 per Mcf gas is its extremely low drilling finding and development (F&D) costs. In 2012, Cabot's drilling F&D costs came in at $6.28 per BOE to a study by Howard Weil, an energy investment boutique. In fact, of all the companies Howard Weil analyzed, only four – Ultra Petroleum (NASDAQOTH: UPLMQ  ) , Range Resources (NYSE: RRC  ) , EQT (NYSE: EQT  ) , and Consol Energy (NYSE: CNX  ) – had lower drilling F&D costs than Cabot, at $5.88, $5.48, $3.53, and $3.13 per BOE, respectively.

Strong financial position
In addition to a big runway for growth and an industry-leading cost structure, Cabot also has a solid financial position and plenty of financial flexibility. As of the end of the second quarter, it boasted $566 million of liquidity and had a net debt to adjusted capitalization ratio of 32%.  

Cabot also has a strong hedging program, which helped the company realize an average natural gas price of $4.06 per Mcf during the second quarter, up 20% from the year-earlier period. In fact, thanks to the company's hedges, the net impact of widening basis differentials in its Marcellus operations was negligible.

The bottom line
All told, I think the case for investing in Cabot Oil & Gas is quite compelling. Not only does the company have plenty of upside from higher natural gas prices, it also has limited downside thanks to its industry-leading cost structure.

And while it's true that the company's valuation has run up significantly in recent months – Cabot currently trades at roughly 19.3x trailing cash  flow – I think its exceptional prospects for growth could more than justify that valuation. Should a pullback in Cabot's stock price materialize over the next few months, I would most likely be a buyer.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2013, at 12:52 PM, susan400 wrote:

    COG is up 400% or is it 800 in 6 yrs.

    Do yu think the sellers at far less know nothing?

    This is "the" Marcellus play. No question,

    but finding yourself compelled now, is

    well, buying into what is largely known.

    Victim of its own success.

    3rd QTR not looking good.


  • Report this Comment On January 13, 2014, at 12:52 PM, BOOLEY wrote:

    Is COG a candidate for purchase by some of these foreign companies seeking access to USA energy?

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