Following the recent capital infusion of over $200 million and strong operating results, we upgrade independent energy exploration and production (“E&P”) company Cabot Oil and Gas ( “>COG) to Neutral from Underperform.
Based in Houston, Texas, Cabot has four domestic focus areas: the Appalachia, the Gulf Coast, the Rocky Mountains, and the Anadarko Basin (in Oklahoma, Kansas, and the Texas Panhandle). As of year-end 2009, the company had 2.06 trillion cubic feet equivalent (“Tcfe”) in proved reserves (98% natural gas). Cabot produced 103.0 billion cubic feet equivalent (“Bcfe”) of oil and gas in 2009, of which more than 95% was natural gas.
On the whole, we believe that Cabot’s natural gas-weighted properties should help generate steady volume increases going forward, highlighting the growth momentum from the company’s drilling efforts. This was evident from its better-than-expected third quarter results that reflected a 41% year-over-year production increase, particularly in its North region. We also like Cabot’s relatively low risk profile and longer reserve life asset base.
Last week, Cabot entered an agreement with Tourmaline Oil Corp. to sell its remaining investment in Canada for about $61.3 million in cash and stock. The Tourmaline transaction, which follows Cabot’s agreement with Williams Partners L.P. (WPZ) to sell its midstream assets in Pennsylvania for $150 million, is expected to further shore up its strong balance sheet and bolster its natural gas operations on core shale plays.
However, we think these factors are adequately reflected in the present valuation, leaving little room for meaningful upside from current levels. The uncertain commodity-price outlook along with the soft global economy and the erosion of oil and gas demand continue to weigh on the company. In particular, unless the outlook for natural gas price improves, we expect Cabot to perform in line with the market.
Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
CABOT OIL & GAS (COG): Free Stock Analysis Report
WILLIAMS PTNRS (WPZ): Free Stock Analysis Report
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