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On Jan 6, 2014, we retained our Neutral recommendation on domestic energy explorer Cabot Oil & Gas Corp. (COG - Analyst Report). Our investment thesis is supported by a Zacks Rank #3 (Hold).

Why the Reiteration?

Notwithstanding Cabot’s exposure to the high-return Marcellus and Eagle Ford Shale plays as well as its above-average production growth, the company is faced with weak natural gas fundamentals that are expected to further limit its ability to generate positive earnings surprises.  

Detailed Analysis

Cabot's diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties, with further variety from large prospect inventories in the Rocky Mountains and the Anadarko Basin that have a broad mix of production and payout profiles.

The company’s Marcellus program continues to ramp up with exceptional results. As of now, Cabot has nearly 200,000 acres under lease in the play, and it continues to expand. In the Eagle Ford Shale play, where Houston, Texas-based firm has partnered with EOG Resources Inc. (EOG - Analyst Report), the company controls 62,000 net acres and has a total of 43 producing wells. We believe Cabot’s Marcellus and Eagle Ford production will ensure 2013 volume growth beyond the currently-guided target of 50-55%.

We believe that the company’s recent restructuring operations and the sale of Canadian assets will further help Cabot to focus on core shale plays. A relatively low risk profile and longer reserve lives are other positives in the Cabot story.

However, we remain worried about natural gas’ volatile 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 for Cabot shares. The company’s steep valuation and miniscule payout also keep us on the sidelines. Finally, Cabot’s frequent brush with state regulators adds to the bearish sentiment.

Stocks That Warrant a Look

While we expect Cabot to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Harvest Natural Resources Inc. (HNR - Snapshot Report) and Athlon Energy Inc. (ATHL - Snapshot Report) as good buying opportunities. Both these U.S. upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have recorded solid growth and have the potential to rise significantly from the current levels.

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