In the U.S. shale revolution, oftentimes the Bakken and Eagle Ford shale plays get all the attention. After all, those two shales are the most prolific and profitable oil-producing shales in the country. But what about natural gas? When it comes to shale gas, one shale play stands out from all the rest. This play not only has a very low cost base, with production costs dropping as low as the $1 range in the core, but also has tremendous inventory that will last for decades, maybe much longer.
That play is the Marcellus Shale in Pennsylvania and upstate New York. And since New York has a ban on fracking, the Marcellus is effectively limited to Pennsylvania and some parts of West Virginia. Like the other big shale plays, if one wants to invest in the Marcellus, there are quite a few choices.
But if you're looking for quality and concentration in this amazing dry gas play, look no further than Cabot Oil & Gas (NYSE: COG ) . Cabot has a respectable 200,000+ acre position with tremendous inventory. It is the best operator with the lowest cost base, and it has a reasonably clean balance sheet.
Best operator, bar none
In the Marcellus Shale, Cabot may not be the biggest, but it probably is the best. For example, in 2013 Cabot operated 17 of the top 20 wells by estimated ultimate recovery per 1,000 feet of lateral well. By cost base, Cabot is also hard to beat. Cabot's production cost per thousand cubic feet, or mcfe, is an astonishing $0.75. It shouldn't be surprising, then, to see an internal rate of return of just over 100%, even with dry gas prices at $3 per mcfe. At $4 per mcfe, the internal rate of return rises to over 200%.
As a very early mover in the Marcellus Shale, Cabot is now an established player with a tidy balance sheet. While many other shale players have debt at multiple times cash flow, Cabot has used its profitable production base to keep debt at a very reasonable level. For example, the company's total debt is now $1.15 billion, but operational cash flow is $1.06 billion. This means that, if absolutely necessary, Cabot could pay off its debt in about a year if it stopped all capital expenditure. Compare Cabot with one of its closest peers, Range Resources (NYSE: RRC ) , which has $2.88 billion in debt and $744 million in operating cash flow.
Last but not least is Cabot's very long-lived inventory. Cabot's proved reserves currently sit at 4 trillion cfe. At this rate, Cabot has 25 years' worth of drilling inventory. No one knows exactly how much oil and gas is in the Marcellus shale, but most experts agree there is at least 100 years' worth of dry gas. In any case, Cabot is going to be drilling profitably in the Marcellus for a long time.
There are many reasons to put Cabot Oil & Gas on your watch list: The company has at least 25 years of drilling inventory in the Marcellus, and probably more. With a rock-bottom cost basis, Cabot can make money in pretty much any price environment. Finally, Cabot's pristine balance sheet makes it an ideal choice for beginning investors or just those who are generally risk-averse.
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