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 (NASDAQ: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
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Range Resources and Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: long January 2014 $30 calls on Ultra Petroleum, long January 2014 $40 calls on Ultra Petroleum, and long January 2014 $50 calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.