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Domestic energy explorer Cabot Oil and Gas Corporation (COG - Analyst Report) recently declared that its production of natural gas from Marcellus Shale – in western Pennsylvania and West Virginia – hit a record. Per day production averaged over 700 million cubic feet (Mmcf) for the last two weeks and touched 752 Mmcf during one 24-hour period.

Management attributed the record production to a singular focus on managing field line pressures rather than new well connections. Cabot operated 14 out of the top 20 producing wells in the Marcellus region in the first half of 2012. The company’s cumulative production reached 354 billion cubic feet (Bcf) with 145 producing horizontal wells.

Cabot Oil & Gas was the best performing S&P 500 stock for 2011, gaining almost 100% during the period. The natural gas producer defied weak commodity prices to set a scorching growth pace in a year that saw the overall index decline 0.6%. Most of the gain was driven by its exposure to the high-return Marcellus and Eagle Ford Shale plays, as well as its above-average production growth. A relatively low risk profile and longer reserve lives are other positives in the Cabot story.

We expect Cabot’s new pipeline initiative – the ‘Constitution Pipeline Company’ in partnership with Williams Partners L.P. (WPZ - Snapshot Report) – that will connect natural gas production in Pennsylvania to markets in the northeast, to further improve its operations moving forward.

However, Cabot’s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with higher oil production.  

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

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