Cabot Oil and Gas (COG) – an independent energy exploration and production (“E&P”) company – reported third quarter earnings per share (excluding special items) of 31 cents, surpassing the Zacks Consensus Estimate of 28 cents. Revenue of $219.1 million was also slightly ahead of our expectations. The better-than-expected results were mainly driven by increased gas production in its North region.
Year Over Year Results Down
Compared with the year-ago period, Cabot’s adjusted earnings per share declined 24.4% – from 41 cents to 31 cents – amid lower gas prices, which make up the lion’s share of the company’s production. However, revenue rose 5.9% year over year (from $207.0 million to $219.1 million).
Volume Growth Continues
Overall production volume during the quarter was 36.0 billion cubic feet equivalent (Bcfe) – the highest ever reported – up 41.2% from the previous-year period. Natural gas volumes were up 43.8% year over year to 34.8 billion cubic feet (Bcf) though liquids volumes were down 15.6% to 195 thousand barrels (MBbl).
Strength in natural gas production was driven by the North region, where volumes rose significantly (by 94.3%), partially offset by a slight decline of 7.5% in South region volumes.
The year-over-year fall in oil volumes can be attributed to a 14.1% decrease in the output from the South region and a 24.2% dip in North region production.
Realized Natural Gas Prices Down
Average realized natural gas price (including the impact of hedges) was down 27.4% to $5.37 per thousand cubic feet (Mcf), while average oil price realization was up 12.3% to $98.26 per barrel.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter reduced to 26 from 32 in the year-ago period, with a 97% success rate. Operating cash flows were $124.2 million for the quarter, while capital expenditures were $203.9 million. As of September 30, 2010, the company had $1.1 billion in debt, with a debt-to-capitalization ratio of 37.3%.
Operational Update
During the earnings release, Cabot also provided an update regarding its operations. The company informed that it has drilled and completed its first pad with three horizontal wells in the Marcellus Shale play and successfully completed its third Eagle Ford oil shale.
Company Guidance
Cabot expects fourth quarter 2010 natural gas production to be in the 375.0 – 384.0 million cubic feet per day (Mmcf/d) range, while oil volumes are likely to vary between 2.1 and 2.6 thousand barrels per day (MBbl/d). For the first quarter of 2011, natural gas volumes are expected to be around 380.0 – 390.0 Mmcf/d. Cabot guided towards liquids output in the 2.5 – 3.3 MBbl/d range.
Our Recommendation
Cabot’s better-than-expected third-quarter earnings reflect a more than 40% year-over-year production increase, particularly in its North region, highlighting the growth momentum from the company’s drilling efforts. On the whole, we believe that Cabot’s natural gas-weighted asset base should help generate steady volume growth going forward.
Despite this, we have a Zacks #4 Rank (short-term Sell recommendation) on the stock, mainly due to weak natural gas fundamentals. However, our long-term recommendation for the company remains Neutral.
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