Cabot, Osaka in Pearsall Shale JV

Cabot Oil & Gas ( COG - Analyst Report ) has entered into a sales agreement, worth $250 million, with the U.S. arm of Japanese energy firm Osaka Gas Co., Ltd.

Per the deal, Cabot will sell a 35% non-operated working stake in Pearsall Shale acreage to Osaka. The interest covers approximately 50,000 net acres leased by Cabot in Atascosa, Frio, La Salle and Zavala counties of Texas.

Osaka will make a cash payment of $125 million to Cabot at closing, which is expected to take place on June 26. Osaka will pay the remaining $125 million, covering 85% of Cabot's future drilling costs in the Pearsall Shale.

The companies target to fully utilize the drilling expenses by the end of 2013. The initial plans include operations by two rigs, starting in July 2012. Cabot will add a third rig in 2013, followed by another in 2014.

Cabot management remains highly upbeat about this alliance that is expected to reap long-term benefits. Cabot believes that the developed Pearsall Shale will acts as a strong catalyst for growth in the coming years.

Houston, Texas based Cabot is an independent oil and gas exploration company with producing properties mainly in the U.S. As of year-end 2011, the company had 3.03 trillion cubic feet equivalent in proved reserves (96% natural gas). Cabot produced 187.5 billion cubic feet equivalent of oil and gas in 2011, of which more than 95% was natural gas.

We believe that Cabot has a diversified asset portfolio spanning 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.

However, we remain concerned given the weak fundamentals of natural gas and Cabot’s high exposure to the commodity. The company also faces competition from larger rivals such as Anadarko Petroleum Corporation ( APC - Analyst Report ) and Chevron Corporation ( CVX - Analyst Report ) . Hence, we maintain a long-term Neutral recommendation on the stock.

Cabot currently retains a Zacks #3 Rank, which translates into short-term Hold rating for a period of one to three months.