Despite prolific Marcellus shale wells detailed in the fourth-quarter earnings review, Cabot Oil & Gas (NYSE: COG ) made a recent decision to expand drilling assets in the Eagle Ford. The company continues to face infrastructure and price realization issues in the Marcellus that are impacting short-term investment decisions.
In six short years, the company has already reached total production in the Marcellus shale of 1 trillion cubic feet on only 290 wells. Even more interesting, the company has 51 wells in various stages of reaching production, including waiting on pipelines and completions. Based on that data and recent Eagle Ford drilling results, maybe investors shouldn't be surprised by the move to add a rig and capital spending to oil production in that area.
The shift to oil production in a new region and away from natural gas hasn't always been met with investor gains, as witnessed by Chesapeake Energy (NYSE: CHK ) investors. Focusing on a production area, whether in an ideal commodity or not, provides numerous efficiency and productivity advantages over constantly shifting spending around.
Strong growth despite pricing
Maybe due to its own success, Cabot continues to see weak pricing for its Marcellus gas. During the first quarter, the company produced 115.9 Bcf, mostly in the Marcellus, and sold that gas at price realizations of $0.60 to $0.65 below NYMEX settlement prices. Even worse, the company expects the realizations to expand in the short term before getting better.
These price realizations contrast sharply with those recently reported by CONSOL Energy (NYSE: CNX ) , which achieved prices in excess of NYMEX. The company saw realizations surge to $5.37 per Mcf from $4.21 per Mcf in the year-earlier quarter. Even more impressive, CONSOL Energy saw the unhedged prices reach $5.71 per Mcf versus NYMEX settlements of approximately $4.94 per Mcf.
In sharp contrast, Chesapeake Energy continues to see large differentials in the NYMEX price. Although, the company did see natural gas realizations jump to $3.27 per Mcf compared to only $1.90 in the fourth quarter of 2013. Despite this share increase in prices, Chesapeake still saw a companywide basis differential of $1.08 per Mcf.
The pricing environment didn't prevent Cabot from generating solid earnings and cash flow from production growth in the major production areas of around 40%. For the first quarter, Cabot generated $319.5 million of discretionary cash flow and net income of nearly $110 million.
Eagle Ford growth plans
Typically, gas producers in the Marcellus shale look toward the Utica shale to participate in the high prices for oil and natural gas liquids. The growth in the Eagle Ford shale provides Cabot Oil & Gas with diversification in regions that pay off in the long term. Production in the region remains small, with only 7,271 barrels of oil equivalent per day in the first quarter of 2014. Total crude oil and condensate revenue was only $59 million during the quarter compared to $432 million for natural gas production.
At the beginning of April, the company added its first six-well pad in the Eagle Ford on production. The wells achieved an impressive average peak 24-hour initial production rate of 1,045 Boe/d per well, or around 6,300 Boe/d added to production. Due to this success and likely the infrastructure constraints and pricing issues in the Marcellus, Cabot announced plans to add a third rig to the area. The company even speculated the potential for a fourth rig during early 2015. Additionally, the company added 4,000 net acres to inventory during the quarter.
The recent results in the Eagle Ford shale appear positive and worthy of Cabot focusing more spending on the region. Current infrastructure and pricing issues in the Marcellus shale don't provide the incentive for growing production in the region. Investors need to keep an eye on costs from a shifting production focus to a different region of the country. The process of shifting to oil from natural gas didn't help Chesapeake Energy's stock for years, and the company hasn't really made much of a shift. Even with oil production growing 20% year over year, it still makes up only 16% of production for the company.
If Cabot Oil & Gas is nimble enough to shift capital spending to the Eagle Ford shale while maintaining productivity in the Marcellus shale until pricing improves, it will be better off long term. The company continues to guide for very impressive 30% production growth. With the stock stuck for the last year at current levels, it might now provide an opportune investment.
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