Independent energy exploration and production (“E&P”) company Cabot Oil and Gas (COG) reported first quarter earnings per share (excluding special items) of 20 cents, ahead of the Zacks Consensus Estimate of 12 cents, while revenue of $209.0 million was ahead of our expectation of $192.0 million. The positive results can be attributed to higher production.
However, Texas-based Cabot’s adjusted income declined from the year-ago level of 30 cents, while revenue was down 3.4% year over year, dragged down by lower gas prices (which make up the lion’s share of the company’s production).
Volume Analysis
Overall production volume during the quarter was 37.7 billion cubic feet equivalent (Bcfe) – the highest ever reported – up 41.2% from the previous-year period. Natural gas volumes were up 43.3% year over year to 36.4 billion cubic feet (Bcf), while liquids volumes improved 4.2% to 226 thousand barrels (MBbl).
Strength in natural gas production was driven by the North region, where volumes rose significantly (by 88.2%), partially offset by a slight decline of 15.5% in South region volumes. The year-over-year rise in oil volumes can be attributed to a 5.7% increase in the output from the South region.
Realized Prices
Average realized natural gas price was down 30.3% to $4.68 per thousand cubic feet (Mcf), while average oil price realization was down 10.5% to $87.15 per barrel.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter reduced to 17 from 20 in the year-ago period, with a 100% success rate. Operating cash flows were $91.2 million for the quarter, while capital expenditures were $203.2 million. As of March 31, 2011, the company had $1,055 million in long-term debt, with a debt-to-capitalization ratio of 35.9%.
Operational Update
During the earnings release, Cabot also provided an update regarding its operations. The company informed that it continues to achieve drilling/completion milestones in the Marcellus Shale play, drilling success in the Eagle Ford and agreements in principle for its Haynesville joint venture effort.
Company Guidance
Cabot expects second quarter 2011 natural gas production to be in the 460.0 – 480.0 million cubic feet per day (Mmcf/d) range, while oil volumes are likely to vary between 3.3 and 4.3 thousand barrels per day (MBbl/d). For the third quarter of 2011, natural gas volumes are expected to be around 480.0 – 510.0 Mmcf/d. Cabot guided towards liquids output in the 3.5 – 4.5 MBbl/d range.
Our Recommendation
Cabot Oil and Gas – which has been actively ramping up operations in the Marcellus Shale in Pennsylvania and the Haynesville and Eagle Ford shales in Texas – currently retains a Zacks #2 Rank (short-term Buy rating).
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. We also like Cabot’s relatively low risk profile and longer reserve life asset base.
In November last year, 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.
CABOT OIL & GAS (COG): Free Stock Analysis Report
WILLIAMS PTNRS (WPZ): Free Stock Analysis Report
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