Independent energy exploration and production company Cabot Oil and Gas (COG) reported solid first quarter 2012 results, aided by improved production, higher realized oil prices and lower per-unit costs.
Quarterly earnings per share (excluding special items) came in at 14 cents, on par with the Zacks Consensus Estimate. Comparing year over year, earnings increased 40% from 10 cents per share.
During the quarter, Cabot generated revenue of $272.1 million, in line with our expectation. On a year-over-year basis, sales improved 30.2% from $209.0 million, buoyed by higher output.
Volume Analysis
Overall quarterly production volume grew 58.4% from the previous-year period to 59.7 billion cubic feet equivalent (Bcfe). Natural gas volumes were up 54.9% year over year at 56.4 billion cubic feet (Bcf) in the first quarter, while liquids volume escalated 138.1% to 538 thousand barrels (MBbl).
Strength in natural gas production was driven by the Appalachia regions, where volumes swelled (by 83.0%).
Realized Prices
The average realized natural gas price was down 22.0% at $3.65 per thousand cubic feet (Mcf) in the quarter, while average oil price realization hiked 10.9% to $96.67 per barrel.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter increased to 23 (compared with 17 wells in the year-ago period), with a success rate of 100%. Operating cash flows were $131.8 million, while capital expenditures were $188.5 million. As of March 31, 2012, the company had $1,012.0 million in total debt, with a debt-to-capitalization ratio of 31.6%.
Operational Update
During the earnings release, Cabot also provided an update regarding its operations, stating that it started producing in the Zick area of the Marcellus Shale. In the Marmaton and Eagle Ford shales, Cabot executed its operations efficiently with improved oil and liquids production.
Company Guidance
For full-year 2012, Cabot guided production growth in the range of 35% to 50%, including an expected liquid growth of 55% to 65%.
Our Recommendation
We believe that large acreage holdings will support several years of oil and gas drilling in the fast-growing fields, including the Marcellus Shale in Appalachia and the Eagle Ford Shale in Texas. The company’s recent restructuring operations and the sale of Canadian assets will likely help Cabot to focus on core shale plays. A relatively low risk profile and longer reserve lives are other positives in the Cabot story.
However, we remain concerned given the weak fundamentals of natural gas and Cabot’s high exposure to the commodity. The company also faces competition from larger rivals such as Anadarko Petroleum Corporation (APC) and Chevron Corporation (CVX). Hence, we maintain a long-term Neutral rating on the stock.
Cabot, currently retains a Zacks #3 Rank, which translates into short-term Hold rating for a period of one to three months.
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