Lower Prices Hurt Cabot

Yesterday, independent energy exploration and production (E&P) company Cabot Oil and Gas (COG - Analyst Report) reported second-quarter results. Earnings per diluted share, excluding non-recurring items, came in at $0.38, outperforming our expectations of $0.35 and market expectations of $0.33. The Houston-based company’s better-than-expected profits were driven by increased production in its East and Gulf Coast regions. 

However, on a year-over-year basis, Cabot’s adjusted earnings per share declined 46.5%, while revenue was down 17.7% to $204.8 million. The decline from the year-ago quarter can be attributed to lower commodity price realizations. 

Overall production volumes during the quarter were 25.6 billion cubic feet equivalent (Bcfe), up more than 10% from the previous-year period. Natural gas volumes were up nearly 10% year-over-year to 24.3 billion cubic feet (Bcf) and oil volumes were up more than 4% to 198 thousand barrels (MBbl). 

Strength in natural gas production was driven mainly by the East and the Gulf Coast regions, where volumes rose by 42.4% and 20.8%, respectively. A more than 8% increase in Gulf Coast production was responsible for the year-over-year rise in oil volumes. 

Average realized natural gas price (including the impact of hedges) was down more than 22% to $7.25 per thousand cubic feet (Mcf), while average oil price realization was down more than 15% to $83.76 per barrel. 

Net wells drilled during the quarter reduced to 28, with a 100% success rate. Operating cash flows were $147.9 million for the quarter, while capital expenditures were $121.9 million. As of June 30, the company had $815 million long-term debt, with a debt-to-capitalization ratio of 30.7%. 

During the earnings release, Cabot also announced the completion of four horizontal gas wells in three different reservoirs and said it raised its 2009 investment program by 5.3% to $500 million. The increased amount has been earmarked for more activity in the company’s East Texas and Marcellus shale properties. 

Cabot’s production gains during the quarter highlights the growth momentum from the company’s drilling efforts. The independent natural gas producer is also poised to benefit from the recent gains on the commodity front and the improving outlook for the economy. 

We, however, think that these positives are adequately reflected in current valuation, leaving little room for meaningful upside from current levels. As such, we are maintaining our Hold recommendation on Cabot shares.