Independent energy exploration and production (“E&P”) company Cabot Oil and Gas (COG) reported fourth quarter earnings per share (excluding special items) of 19 cents, missing the Zacks Consensus Estimate of 23 cents and way below the year-ago adjusted income of 51 cents. Revenue of $216.9 million was also slightly behind our expectation of $218.0 million and was down 7.1% year-over-year.
The weaker-than-expected results can be attributed to lower gas prices (which make up the lion’s share of the company’s production), more than offsetting the effects of higher production.
For full-year 2010, Cabot earned 98 cents per share on revenues of $844.0 million.
Volume Analysis
Overall production volume during the quarter was 37.5 billion cubic feet equivalent (Bcfe) – the highest ever reported – up 42.6% from the previous-year period. Natural gas volumes were up 45.2% year over year to 36.3 billion cubic feet (Bcf) though liquids volumes were down 10.0% to 198 thousand barrels (MBbl).
Strength in natural gas production was driven by the North region, where volumes rose significantly (by 91.8%), partially offset by a slight decline of 8.6% in South region volumes.
The year-over-year fall in oil volumes can be attributed to a 10.1% decrease in the output from the South region and a 5.9% dip in North region production.
For the year-ended December 31, 2010, production of natural gas and crude oil reached a record high of 130.6 Bcfe, up 26.8% from 2009.
Realized Prices
Average realized natural gas price (including the impact of hedges) was down 35.1% to $5.02 per thousand cubic feet (Mcf), while average oil price realization was up 5.6% to $99.53 per barrel.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter reduced to 20 from 22 in the year-ago period, with a 100% success rate. Operating cash flows were $117.4 million for the quarter, while capital expenditures were $199.1 million. As of December 31, 2010, the company had $975 million in debt, with a debt-to-capitalization ratio of 34.2%.
Operational Update
During the earnings release, Cabot also provided an update regarding its operations. The company informed that its drilling/completion operations in the Marcellus Shale play are yielding excellent results.
Additionally, Cabot is close to finalizing three separate agreements – consisting of both a carried interest in certain wells and cash consideration for the sale of certain acreage and production – with regard to its Haynesville acreage. The company also informed that construction is continuing on the second phase of the Lathrop Compressor Station.
Company Guidance
Cabot expects first quarter 2011 natural gas production to be in the 390.0 – 400.0 million cubic feet per day (Mmcf/d) range, while oil volumes are likely to vary between 2.5 and 3.3 thousand barrels per day (MBbl/d). For the second quarter of 2011, natural gas volumes are expected to be around 460.0 – 480.0 Mmcf/d. Cabot guided towards liquids output in the 3.3 – 4.3 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 #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the stock.
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, 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.
CABOT OIL & GAS (COG): Free Stock Analysis Report
WILLIAMS PTNRS (WPZ): Free Stock Analysis Report
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