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How This Marcellus Producer Is Coping With Low Regional Gas Prices

http://www.fool.com/investing/general/2013/09/19/how-this-marcellus-producer-is-coping-with-low-reg.aspx

Arjun Sreekumar
September 19, 2013

It's safe to say that the Marcellus has exceeded most expectations about production growth. In the first half of this year, output from the prolific shale gas play increased 50% year over year, according to Bentek Energy, an energy market analytics company.

Ironically, however, this supply growth has led to depressed regional prices that have proved a major challenge for the very same Marcellus producers that drove the surge in production in the first place. Let's take a closer look at what Cabot Oil & Gas (NYSE: COG), one of the largest gas producers in the Marcellus, is doing to combat low regional gas prices.

Low gas prices in the Marcellus
The collapse of regional gas prices in the Marcellus has been one of the biggest causes for concern among investors recently. In a nutshell, the combination of soaring production from the play and inadequate infrastructure has caused basis differentials to widen significantly. Last month, for instance, gas at a Pennsylvania trading hub known as TGP Zone 4-Marcellus traded for as little as $1 per Mcf, a more than $2 per Mcf discount to benchmark prices at Henry Hub.

Even Cabot, despite its industry-leading low costs of production, hasn't been immune to the impact of widening basis differentials. According to CEO Dan Dinges, the company's gas production during the month of July sold at an average $0.15 per Mcf discount to NYMEX futures prices on a pre-hedged basis. These types of heavy discounts for Marcellus gas have left regional producers scrambling to market their production profitably.

To alleviate this problem, Cabot is diversifying its transportation network through multiple pipelines while also pursuing a rigorous hedging program to mitigate its exposure to regional price volatility. In the company's second-quarter earnings conference call, Dinges explained the various measures Cabot is taking to accomplish these objectives:

"...We have pursued many different avenues, including: diversifying all multiple pipelines; firm transportation agreements; long-term sales agreements, that's our firm sales; investing in new projects like the Constitution Pipeline; and opportunistically hedging a portion of our production. All of this provides us diverse opportunities to maximize the value of this tremendous resource."

Cabot's gas marketing efforts
Cabot currently moves its production to market through three large interstate pipeline systems: Tennessee Gas Pipeline's 300 Line, which is owned by Kinder Morgan (NYSE: KMI), the Transco Gas Pipeline, owned by the Williams Companies (NYSE: WMB), and the Millennium Gas Pipeline, owned by affiliates of NiSource Inc (NYSE: NI), National Grid (NYSE: NGG) and DTE Energy.

Right off the bat, having access to three large interstate pipeline systems places Cabot in an enviable position. Not only do these pipelines provide the company with firm transportation contracts to move as much as 325 MMcf per day this year, all three of them recently wrapped up expansion projects and have announced plans to expand capacity in the future.

Furthermore, Cabot has an ambitious plan to more than triple its current capacity secured by firm transportation contracts by 2015, as it adds a number of additional pipelines to its existing transportation and marketing efforts. These include the Constitution pipeline, for which Cabot filed an application with FERC during the second quarter and expects the line to be in service by March