We are upgrading Cabot Oil & Gas Corp. (COG) shares to Outperform from Neutral, reflecting the company’s impressive exposure to the high-return Marcellus and Haynesville Shale plays, as well as its above-average production growth. Additionally, the current turnaround in natural gas prices bodes well for Cabot, which derives approximately 86% of its operating revenues from the commodity.
Buoyed by the growth momentum from the company’s drilling efforts, particularly in its North region, Cabot recently reported better-than-expected third-quarter results. Cabot’s large acreage holdings will support several years of oil and gas drilling in fast-growing fields, including Marcellus Shale in Appalachia and Haynesville Shale in east Texas. We believe that the company’s recent operations restructuring and the sale of Canadian assets will further help it to focus on core shale plays.
A relatively low risk profile and longer reserve lives are some other positives in the Cabot story. Based in Houston, Texas, Cabot is an independent oil and gas exploration firm with producing properties mainly in the U.S. The company was founded over 100 years ago in Pennsylvania and originally operated in the Appalachian Mountains of the eastern U.S. before moving the bulk of its activities to the Gulf Coast.
Today, 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 2008, the company had 1.9 trillion cubic feet equivalent (Tcfe) in proved reserves (97% natural gas). Cabot produced 95.2 billion cubic feet equivalent (Bcfe) of oil and gas in 2008, of which more than 95% was natural gas.
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