Back to top

Analyst Blog

On Jun 15, Zacks Investment Research downgraded independent oil and gas exploration and production (E&P) company, Cabot Oil & Gas Corporation (COG - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Cabot witnessed sharp downward estimate revisions after reporting weak first-quarter 2013 results. In fact, the company has delivered negative earnings surprises in 2 of the last 4 quarters with an average miss of 15.95%.

On Apr 24, 2013, Cabot reported earnings per share, excluding special items, of 20 cents, missing the Zacks Consensus Estimate of 25 cents. The underperformance resulted from lower realized natural gas prices.

Cabot’s 2013 capital expenditure guidance – at $950–$1,025 million – add to the negative sentiment, as we do not expect this rate of spending to be matched by increased cash flows at the current gas price level. Accordingly, we apprehend a free cash flow deficit in 2013.   

Moreover, we remain worried about volatile natural gas fundamentals and Cabot’s high exposure to the commodity. Unless the outlook for natural gas prices improves, we do not see any significant price upside in Cabot shares.

A combination of all these factors weighed on the earnings estimates for Cabot in the last 60 days. The Zacks Consensus Estimate for the second quarter of 2013 has gone down by 19.35% to 25 cents per share while it dropped 10.87% to $1.23 per share for 2013.

Other Stocks to Consider

Not all E&P companies are performing as poorly as Cabot. The stocks of Anadarko Petroleum Corporation (APC - Analyst Report), Encana Corporation (ECA - Analyst Report) and Harvest Natural Resources Inc. (HNR - Snapshot Report) are worth considering. All these stocks carry a Zacks Rank #2 (Buy).

Please login to Zacks.com or register to post a comment.