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Diversification, Hedging and Joint-Ventures Are Cabot´s Long-Term Drivers
Posted by: Victor Selva (IP Logged)
Date: April 3, 2014 09:56PM
Cabot Oil & Gas Corp. (COG) is an oil and gas company engaged in the development, exploitation, exploration, production and marketing of natural gas, crude oil and, to a lesser extent, natural gas liquids. The company also transports, stores, gathers and purchases natural gas for resale.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
Diversified Asset Portfolio
The operations are primarily focused in the Marcellus Shale in Pennsylvania, the Eagle Ford in south Texas and in Oklahoma. The company's asset base is now among the most diverse of the small oil and gas firms. It has an ample acreage in Appalachia and the Gulf Coast.
Cabot has hedged around 30% of its projected 2014 natural gas production. We have to remember that natural gas accounts for 97% of Cabot Oil & Gas' production and more than 95% of reserves. As of Feb. 20, the firm had hedges for 1.2 Bcf of natural gas production for 2014. Only 0.29 Bcf/d of these were swaps at an average price of $4.05/Mcf. The rest were collars with an average floor of $4.11/Mcf and an average ceiling of $4.51/Mcf.
The Constitution Pipeline Company
The project, in partnership with Williams Partners will connect natural gas production in Pennsylvania to markets in the northeast and will serve approximately 3 million homes in the New York State area. Williams’s spokesperson Chris Stockton said, “The pipeline is not dependent upon, nor does it require the development of, new natural gas wells along the project’s proposed path, because it is already fully contracted with long-term commitments from established natural gas producers currently operating in Pennsylvania.”
The firm is currently Zacks Rank # 4 – Sell, and it also has a longer-term recommendation of “Neutral.” A Sell rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 4.8%, which is not attractive for investors. For investors looking for a Strong Buy Rank, Range Resources Corporation (RRC), Clayton Williams Energy Inc. (CWEI) and World Point Terminals LP (WPT) could be the options.
P/E, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 51.5x, trading at a premium compared to an average of 20.1x for the industry. To use another metric, its price-to-book ratio of 6.6x indicates a premium versus the industry average of 1.5x and the price-to-sales ratio of 8.29x is above the industry average of 3.28x. The metrics indicate that the stock is relatively overvalued relative to its peers and makes sense to sell the stock.
Earnings per share (EPS) increased by 90% in the most recent quarter compared to the same quarter a year ago, to $0.19 per share for the fourth quarter of 2013. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has doubled when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:
As we can see, the firm has a higher ROE than Range Resources Corporation and EV Energy Partners LP, but lower than the one registered by EOG Resources Inc. (EOG).
Companies positioned in Appalachian shale gas are performing well. Moreover, the diversification provided by the assets and hedging positions will drive potential revenues and earnings. Finally, we consider the joint-venture as a key step in the firm´s strategy.
Although Zacks Rank and relative valuation, in looking at the bigger picture, I would recommend investors to add Cabot to their long term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Daniel Loeb (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ron Baron (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio) have taken long positions in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Daniel Loeb: Current Portfolio, Stock Picks
Jean-Marie Eveillard: Current Portfolio, Stock Picks
Stocks Discussed: COG, RRC, EOG, EVEP,