Independent oil and gas exploration company, Cabot Oil and Gas (COG) reported robust third quarter 2013 earnings, primarily aided by increased production levels and to a lesser extent by higher oil price realization.
The domestic energy explorer reported earnings per share (excluding special items) of 18 cents, above the Zacks Consensus Estimate of 15 cents and the year-ago adjusted profit of 11 cents.
During the three-month period ended Sep 30, 2013, Texas-based Cabot generated operating revenues of $435.9 million, up 46.8% year over year. However, the top line failed to beat the Zacks Consensus Estimate of $439.0 million.
Volume Analysis
Cabot’s overall production during the quarter was 107.1 billion cubic feet equivalent (Bcfe) – 95% gas – up 61.1% from the prior-year quarter. Natural gas volumes jumped 62.2% year over year to 101.7 billion cubic feet (Bcf), while liquids volumes improved 42.8% to 898 thousand barrels (MBbl). Strength in natural gas production was driven by the Appalachia region, where volumes expanded 70.9%.
Realized Prices
Average realized natural gas price was down 8.7% from the year-ago quarter to $3.36 per thousand cubic feet (Mcf). However, better realizations are expected in the coming months on the back of capacity additions and the onset of winter. On the other hand, average oil price realization increased 2.4% to $103.76 per barrel.
Costs & Expenses
Transportation and gathering costs increased 76.6% year over year to $60.8 million, taxes (other than income) were up 10.5% year over year at $11.5 million, while depreciation, depletion and amortization expensed were up 53% at $169 million. As a result, total operating expenses increased 39.7% over the third quarter of 2012 to $308.7 million. However, Cabot was able to cut exploration costs by 58.2% from the year-ago quarter to $3.9 million.
Drilling Statistics, Capital Expenditure & Balance Sheet
Net wells drilled during the quarter increased to 41 (from 30 in the year-ago period) with a 100% success rate. Operating cash flows were $276.7 million, while capital expenditures were $319.5 million. As of Sep 30, 2013, Cabot had $1,162.0 million in long-term debt, with a debt-to-capitalization ratio of 33.3%.
Dividend
In a separate announcement, Cabot declared a dividend of 2 cents per common share. The dividend will be paid on Nov 19, to shareholders of record as of Nov 7.
Company Guidance
Cabot reiterated its 2014 production growth guidance of 30% to 50%. The company plans to utilize 85% of the 2014 capex budget – $1.375 to $1.475 billion – on drilling and completion activities. The major focus of the drilling budget, over 75%, will be on Marcellus Shale with expectations of drilling around 130 to 140 net wells. The Eagle Ford shale will see drilling in around 40 to 50 net wells, with total well count reaching 170 to 190 in 2014.
Zacks Rank & Stock Picks
Cabot currently carries a Zacks Rank #4 (Sell), implying that it is expected to underperform the broader U.S. equity market over the next one to three months.
Meanwhile, one can consider other stocks in the exploration and production sector such as Linn Co, LLC (LNCO), Linn Energy, LLC (LINE) and Matador Resources Co. (MTDR) as good investment opportunities. These stocks sport a Zacks Rank #1 (Strong Buy) and have solid secular growth stories with the potential to rise significantly from current levels.
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