Cabot Oil & Gas (COG, Financial) has been growing at a stellar pace in terms of revenue, EBITDA and capital expansion for increase in production. However, weak oil and gas prices have been a burden for Cabot Oil & Gas as they have been for many other upstream companies. While the stock has declined by nearly 16% in 2014, it has outperformed several stocks in the oil and gas sector due to its robust growth trajectory even after the decline in oil and gas prices. This article discusses why this might be a good time to buy Cabot Oil & Gas with a 2-3 year perspective.
One of the big positives for Cabot Oil & Gas in the recent times has been the company’s acquisition of Eagle Ford Shale. The company acquired and currently has 86,000 net acres in Eagle Ford, and the company’s acreage is liquids rich. Prior to this acquisition, the company had 200,000 net acres in Marcellus Shale, which was primarily gas rich. Therefore, the acquisition of Eagle Ford is a strategic diversification to the portfolio.
For 2015, Cabot Oil & Gas expects to incur a capital expenditure in the range of $1.25 billion to $1.32 billion and 46% of the capital expenditure will be directed towards Eagle Ford and 52% being directed towards Marcellus Shale.
Again, the strategic acquisition of Eagle Ford helps as the company expects to increase 2015 liquids production to 7% of total production as compared to 5% in 2014. I believe that liquids production will continue to increase over the next few years considering the rich asset (Eagle Ford).
I must mention here that the company already has identified 11 years of drilling inventory in Eagle Ford at the current drilling pace. While I believe that the company’s drilling pace will increase as oil prices move higher, even 5-6 years of drilling inventory will provide enough room for production growth in the liquids rich asset.
This will help the company improve its EBITDA margin when oil prices move back to earlier levels. At $80 per barrel of oil the Eagle Ford is likely to provide a before tax IRR of 48%, which will increase to 66% and 86% respectively at $90 and $100 per barrel of oil. I am of the opinion that oil prices are likely to move higher to around $90 per barrel levels in 2015 and 2016. Therefore, an IRR of 66% is likely for Cabot Oil & Gas at Eagle Ford and this is certainly positive.
Cabot Oil & Gas has another potential game changer in the coming years. With Marcellus Shale gas rich and the prospects and plans for LNG exports taking off in the United States, Cabot Oil & Gas can expect strong sales through the export route.
Further, if the demand remains strong from countries like China and India (very likely), the gas prices will remain stable or higher over the next few years; this is positive for Cabot Oil & Gas as it big investments will pay off well.
The company’s Marcellus Shale economics is even more attractive and at $2.5/mmbtu, the IRR (before tax) is 65% with the IRR increasing to 102% at $3.0/mmbtu. Therefore, Cabot Oil & Gas is well positioned in terms of each of the assets economics to do well when oil & gas prices trend higher. The company investment of nearly $1.3 billion in 2015 will translate into strong cash flow on and after 2015.
Cabot Oil & Gas is currently trading at an EV/EBITDA of 10.9 and I believe that these are attractive valuations also considering the fact that the stock is currently trading at a PEG ratio (5-year expected) of just 0.88. I believe that Cabot Oil & Gas has significant upside from current levels and the correction in the recent past is an excellent opportunity for long-term exposure to the stock.
While the stock offers a low dividend yield of 0.2% currently, the company’s dividend payout will also increase significantly once the phase of major investments is over. With a conservative leverage position of 1.2 (debt to LTM EBITAX), Cabot Oil & Gas is well placed in terms of fundamentals to provide investors with returns through increased dividends once oil & gas prices move higher.
In conclusion, all these factors make Cabot Oil & Gas an attractive investment option to consider. Investors should consider exposure to the stock with a time horizon of at least 2-3 years. The company is likely to be one of the star performers in the oil and gas sector.
