Cabot Oil and Gas (COG, Financial) soared after the company reported its fiscal first quarter results that topped the analysts' expectations. Although the numbers were down on a year over year basis on account of weak commodity prices, its strong fundamentals managed to earn investors confidence, pushing the stocks up. Along with this, the recent rally in oil prices has been a strong support for the industry. Consequently, after touch its 52-week low in January, the stock rose more than 30% in the past few months. Let’s look at its numbers and see if this rally will continue in the future.
Analysis of the quarter
During the quarter, its revenue fell 8.8% from a year ago period to $464.77 million, while earnings declined to 12 cents a share compared to an EPS of 26 cents last year. The numbers ,however, topped the analyst’s expectations of 3 cents EPS on revenue of $417.25 million. Its lowered results do not come as a surprise, as the entire industry reels under the pressure of weak oil and gas prices. Although, there are positive cues coming in with the improvement in prices, we cannot expect a quick turnaround.
Taking a serious note of this, the management has cut its capital expenditure for the fiscal to $900 million compared to its previous guidance of $1.53 billion to $1.6 billion projected last fall. It does not come without a loss in production, and the company anticipates production growth for the year to fall in the range of 10% to 18% from 20% to 30% projected earlier. Such initiatives for lowered production have been adopted by other companies as well, which is quite good for the long term prospects of the industry.
A look at the end market
According to a recent data from EIA, natural gas production has declined in the past few months. However, for the entire year it expects production to grow by 5% and 1.9% in 2016. This is further backed by weak demand in the market. But going forward, natural gas consumption is expected to get a boost from the power sector, which is forecasted to grow by 11.5% in 2015. Similarly, industrial production, which is expected to increase by 4.9% and 2.5% in 2015 and 2016, respectively, would also act as a tail wind to boost natural gas demand.
Cabot has reported solid production growth at its fields such as Marcellus, which would be the key to its growth in the future. In fact, considering the strong performance of Marcellus, 60% of its 2015 capital spending would be allocated for this region, while 40% for Eagle Ford. Additionally, the Leidy Southeast expansion project of 525 million cubic foot per day of new capacity will prove extremely beneficial for the company and is expected to be in service by December 2015.
Conclusion
Going forward, the company expects to produce between 1.55 and 1.6 Bcf per day of gross production in the Marcellus for the second quarter. This clearly indicates its ability to move volumes in excess of these base load levels, which would come in handy when the commodity prices return back to their normal level. Cabot currently has an impressive forward P/E of 47.47 compared to its trailing P/E of 394.72, indicating strong earnings in the days ahead. However, it P/S multiple of 7.72 compared to the industry average of 3.02 reflects that the stock is overvalued at the current price. Therefore, it seems prudent for investors to wait some time until its valuations return to normal level.
