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Cabot (COG) Banks on Marcellus Play Amid Constitution Setback

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We issued an updated research report on Cabot Oil & Gas Corporation (COG - Free Report) on Feb 27.

The upstream energy player’s portfolio is spread between low-risk/long reserve-life properties and large-volume/rapid-payout assets, with further variety from large prospect inventories that have a broad mix of production and payout profiles.

The company's recent deal to offload its non-core Eagle Ford assets bode well. Cash proceeds from this transaction will strengthen the balance sheet of the company, boosting its free cash flow. Further, the streamlining of the portfolio is in sync with the company‘s aim to increase its focus on Marcellus shale, which generates solid returns. Increased focus on the Marcellus shale will help the company deliver double-digit growth per debt-adjusted share from the region.

Cabot’s Marcellus program continues to garner exceptional results. As of now, the company has around 200,000 net acres in the prime Marcellus acreage with an estimated 3,000 remaining undrilled locations. Cabot's high-quality assets in the region helped it drive its overall third-quarter production volumes by 5% year over year.

However, with natural gas prices trading below $3 per MMBtu and Cabot being one of the most gas-weighted exploration and production player, the company's earnings and revenues are under pressure. Other companies exposed to volatility in natural gas price are Chesapeake Energy Corporation (CHK - Free Report) , Southwestern Energy Company (SWN - Free Report) and QEP Resources, Inc. (QEP - Free Report) .

Also, Cabot is set to spend $950 million in 2018, higher than the 2017 spending level of around $765 million. This might lower the company's cash flow.

Moreover, grappling with lawsuits and denied a water permit, we expect Cabot’s new pipeline initiative — the Constitution Pipeline Company — to be delayed substantially or get cancelled. This is set to impact the company's earnings outlook.

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