This Company is Turning on the Gas to Grow in 2014

While natural gas prices still aren't where producers would like them to be, some companies are still able to use natural gas to fuel growth. Cabot Oil & Gas (NYSE: COG  ) is one of those companies. Because of its super low break even cost of just $1.20 per Mcf, the company is able to profitably grow its natural gas production at an amazing clip.

The company recently reconfirmed its updated 2013 production growth guidance range of 44%-54%. At the same time it said that it believes it can grow its production by another 30% to as much as 50% next year even off this higher base. That's gas fueled growth that few competitors can match.

What's truly remarkable is that for Cabot this isn't growth at all costs. This is a company that is starting to generate significant free cash flow, despite growing at such a high rate. In fact, at current estimates the company is expected to produce more than $275 million in free cash flow after investing an estimated $1.3 billion on its 2014 growth plan.

Cabot is able to do this because its wells are in the very best spot of the Marcellus. Its average well is expected to produce a staggering 14.1 billion cubic feet of natural gas over its lifetime. To put that number into perspective, 1 billion cubic feet of natural gas is enough to meet the needs of about 10,000 American homes for one year. So basically, each of its wells can produce enough gas to fuel a small city.

Cabot believes that it has the potential to drill another 3,000 of these high impact wells over the next 25 years at its current drilling rate. Best of all, because each well will produce so much gas over its lifetime, it's able to earn triple digit internal rates of returns that are as good if not better than the best shale oil wells in the Bakken or Eagle Ford shale. No wonder why the company is planning on growing as fast as it is.

Cabot's prime spot in the Marcellus makes it one of the few companies that can grow its natural gas production at such a high rate. The combination of low costs and high estimated ultimate returns really push the economics in its favor. For some perspective, Wyoming focused natural gas producer Ultra Petroleum (NYSE: UPL  ) has been forced to cut back its growth to invest within its cash flow. Its plan is to only invest in projects with internal rates of return in excess of 20%. While that's a more than adequate return, it's nowhere near the returns that Cabot earns. That's why Ultra's production is only expected to grow by 42% by 2016, whereas Cabot's could grow by that much next year alone and both companies are starting off of a similar base.

While Ultra is also developing the Marcellus, its rates of returns are not at Cabot's levels yet as its estimated ultimate recoveries aren't as high. One company that does come close to Cabot is Range Resources (NYSE: RRC  ) as it's able to deliver triple digit internal rates of return from its high-impact Marcellus wells. The reason for this is that its dry gas wells are estimated to ultimately produce about 12.2 billion cubic feet of natural gas, while its liquids rich wells will produce as much if not more on a natural gas equivalent basis. High returning wells like those are why the company is expects that it should easily be able to grow its production by 20%-25% for the foreseeable future.  

The bottom line here is that Cabot has one of the best spots to drill for natural gas in the country. Each of its wells will produce enough gas to fuel a small city. Because of that and its low cost development, the company can grow rapidly as this isn't growth at all costs, but very profitable growth.

Natural Gas is Our No Choice Fuel of the Future

Cabot is one of the many companies providing the natural gas that will fuel our future. However, this little-known stock might actually hold the key to the explosive profit power of the coming "no choice fuel revolution." Luckily, there's still time for you to get on board if you act quickly. All the details are inside an exclusive report from The Motley Fool. Click here for the full story!

 


Read/Post Comments (0) | Recommend This Article (1)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2659766, ~/Articles/ArticleHandler.aspx, 9/21/2014 6:27:32 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement