Cabot Oil & Gas (COG, Financial), an independent oil and gas company has seen good times in the last two years with the stock shooting up by 75%. This article discusses why the company will continue to do well and the stock more upside in the long-term.
Company Overview
Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development, exploitation and exploration of oil and gas properties exclusively in the continental United States. The company’s asset focus currently is Marcellus shale and Eagle Ford shale. As of December 2013, the company had proved reserves of 5.5tcfe and the company had recorded a production of 413.6bcfe for the year.
Key Investment Positives
Rich Assets – Cabot Oil & Gas has two assets, which have a long production profile. The company’s Marcellus shale asset has a net acreage of 200,000 with a current rig count of six. Proved reserves in Marcellus have increased from 459bcf in 2009 to 4752bcf in 2013. This gives an idea of the immense potential in the asset. The company’s Marcellus production has also increased from 11.5bcf in 2009 to 357bcf in 2013. Therefore, the asset has contributed significantly to the company’s growth in the last five year. Another excellent point about the company’s Marcellus asset is the fact that the finding and development cost has declined from $0.73 per mcf in 2009 to $0.4 per mcf in 2013. This is indicative of the company’s operational efficiency. The company’s Eagle Ford asset is 66,000 net acres and has a current rig count of two. The Eagle Ford asset is also expected to be a major growth driver for the company in the future.
Strong Growth And Fundamentals – Cabot Oil & Gas has witnessed strong revenue growth on the back of strong production from Marcellus. The company’s revenue has increased to $1746 million in 2013 as compared to $980 million in 2011. During the same period, the company’s operating cash flow has increased to $1 billion from $502 million. The company’s free cash flow was also positive for the first time in 2013. As strong growth continues, the company’s free cash flow will become more robust. Another attractive point is that the company’s dividend per share has increased from $0.03 in 2011 to $0.06 in 2013. With rich assets resulting in strong production, the company’s dividend payout will continue to increase. Cabot Oil & Gas has a debt of $1.1 billion as of 2013. However, the best thing related to the debt is the maturity profile. The company has no debt maturity in 2014 and 2015 and only a maturity of $20 million in 2016. Debt is therefore not something to be concerned about. Overall, with high operating cash flow, robust revenue growth and a comfortable debt maturity profile, Cabot Oil & Gas has strong fundamentals.
Proved Reserves & Reserve Addition – Cabot Oil & Gas has seen strong proved reserve addition and an equally strong reserve replacement in the last few years. The company’s proved reserves have increased from 3033bcfe in 2011 to 5454bcfe in 2013. I would like to highlight that the reserve replacement ratio for 2011, 2012 and 2013 has been excellent at 390%, 417% and 522% respectively. The company has a drilling activity of 150-170 net wells in 2014 and the proved reserve addition and strong reserve replacement trend will continue.
Robust Guidance for 2014 and 2015 – After clocking production of 413.6bcfe in 2013, Cabot Oil & Gas has provided a strong guidance for 2014 and 2015. The company expects production to increase by 28% to 41% in 2014. Further, 2015 production is also expected to increase by a healthy 20% to 30%. This implies that the company’s strong revenue and cash flow growth will continue over the next two years. Even beyond these two years, growth is likely to continue considering the high proved reserves.
Conclusion
Cabot Oil & Gas is an excellent buy for the next few years as the company’s strong growth continues. The company offers strong reserves growth, production growth and cash flow growth, which will support higher dividends over the next few years.
The company is currently trading at an EV/EBITDA of 12.2, which is at a premium as compared to Chesapeake Energy’s (CHK, Financial) EV/EBITDA of 5.5 and Devon Energy’s (DVN, Financial) EV/EBITDA of 5.6. However, I believe that this premium is justified as Cabot Oil & Gas is on a higher growth trajectory as compared to these companies. Analyst estimates point to 78% earnings growth for Cabot Oil & Gas for 2014 as compared to 36% earnings growth for Chesapeake Energy and 38% earnings growth for Devon Energy.
Cabot Oil & Gas is therefore a good stock for investors looking for high growth companies with an excellent asset base. In addition, the company has the potential to be a big dividend player over the long-term. All these factors combine to make Cabot Oil & Gas an investment option worth considering.
