Cabot Oil & Gas (NYSE:COG) is one natural gas stock that really flies under the radar. Shares performed very well in 2013, but the company never seems to draw the same attention from investors as other top natural gas stocks like Chesapeake Energy (NYSE:CHK) or Range Resources (NYSE:RRC). That's actually an opportunity for savvy investors to buy Cabot stock now, before everyone else realizes just how good this company is at profiting from natural gas.
Cabot is among the lowest-cost natural gas producers in America. Yet 2014 should see the company get even better as it transitions more of its growth to multiwell pad drilling. The company plans for 60% of wells drilled in the year ahead to be on pads with five or more wells, up from 23% of wells drilled in 2013.
One of the company's accomplishments in 2013 was completing its first 10-well pad in the Marcellus. Cabot was able to save a total of $6 million on the 10-well pad as it has reduced costs from $6.4 million per well on a typical two-well pad to an average of just $5.8 million per well on the 10-well pad. Put another way, the company is getting one well free for every nine it drills. Below is a picture of the pad from a recent investor presentation.
One of the other ways Cabot is cutting costs is by using bifuel frac pumps that are fueled with natural gas and diesel. Using natural gas enables the company to save money and reduce emissions.
Looking ahead to 2014, Cabot expects to grow its natural gas production by 30%-50%. That's on top of the 44%-55% growth it's expecting to deliver in 2013. Cabot is one of the few companies in America focused on growing natural gas production. Range Resources, for example, is growing its gas production, but at a slightly lower 20%-25% annual clip. Meanwhile, the nation's No. 2 natural gas producer, Chesapeake Energy, actually saw both natural gas production and total production decline over the past year. As of the third quarter, Chesapeake's natural gas production is down 10% year over year while total production is down 2%.
One reason Cabot is able to continue growing so fast is due to the fact its growth will be even more profitable in the year ahead thanks to efficiency gains. By reducing average well costs from $6.5 million to $6 million, the company can improve its returns. For example, with a natural gas price of $3.50 per mmbtu, the company's internal rate of return jumps from 100% to 115%. Range Resources can earn a triple-digit return as long as gas is above $4. At that price Cabot's returns jump to as high as 150% on wells it drills for $6 million.
One final consideration is that the combination of best-in-class production growth and a super low cost structure is yielding an increasing amount of free cash flow. The company has more than enough cash flow to grow, so it's beginning to return cash to investors. Already this year it used some of this cash flow to buy back shares and increase its dividend. The company sees share repurchases creating long-term value because it sees a big disconnect between its stock price and the company's intrinsic value.
Bottom line here is that 2014 could be a really big year for Cabot Oil & Gas even if gas prices don't move higher. This is all thanks to the fact that the company has one of the best core positions in the Marcellus. This allows it to make more money per well than more well-known natural gas stocks like Chesapeake Energy and Range Resources.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Range Resources. 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.