Cabot Volumes Up, Beats Zacks View

Yesterday, independent energy exploration and production (E&P) company Cabot Oil and Gas (COG - Analyst Report) reported better-than-expected third-quarter results, mainly driven by increased gas production in its North region. Earnings per share, excluding non-recurring items, came in at 41 cents, outperforming the Zacks Consensus Estimate of 37 cents. 

However, on a year-over-year basis, Cabot’s adjusted earnings per share declined 29.3% (from 58 cents to 41 cents), while revenue was down 15.4% to $207.0 million. The decline from the year-ago quarter can be attributed to lower commodity price realizations. 

Volume Growth Continues 
Overall production volumes during the quarter were 25.5 billion cubic feet equivalent (Bcfe), up more than 5% from the previous-year period. Natural gas volumes were up 5.2% year-over-year to 24.2 billion cubic feet (Bcf) and liquids volumes were up 11.6% to 231 thousand barrels (MBbl). 

Strength in natural gas production was driven mainly by the North region, where volumes rose by 24.5%, partially offset by the sale of the company’s Canadian assets. A more than 17% increase in the South region production was responsible for the year-over-year rise in oil volumes. 

Realized Prices Down 
Average realized natural gas price (including the impact of hedges) was down 14.6% to $7.40 per thousand cubic feet (Mcf), while average oil price realization was down nearly 12% to $87.49 per barrel.
 
Drilling Statistics, Capital Expenditure & Balance Sheet 
Net wells drilled during the quarter reduced to 32 (from 115 in the year-ago period), with a 97% success rate. Operating cash flows were $116.7 million for the quarter, while capital expenditures were $101.9 million. As of September 30, the company had $810 million long-term debt, with a debt-to-capitalization ratio of 30.8%.
 
Shale Play Update 
During the earnings release, Cabot also provided an update regarding its Marcellus shale development in Pennsylvania and the Haynesville shale development in Texas. In the Marcellus shale play, the company has 9 horizontal wells producing, of which 3 have produced over 1 Bcf. Year-to-date, 17 horizontal wells have been drilled, with 16 more expected by the end of 2009. Cabot further confirmed that the company and its partners are flow testing its first horizontal Haynesville shale well in County Line field in east Texas. 

Investment Budget Raised 
Cabot has raised its 2009 investment program to $580 million (from $500 million before). The increased amount has been earmarked for more activity in the company’s Marcellus shale properties.
 
Fourth Quarter Guidance 
Cabot expects fourth quarter natural gas production to be in the 268 – 280 million cubic feet per day (Mmcf/d) range, while oil volumes are likely to vary between 2.0 – 2.5 thousand barrels per day (MBbl/d). 


Outlook 
Cabot’s production gains during the quarter highlights the growth momentum due to 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 Neutral recommendation on Cabot shares.