As part of its cost-containment initiatives, Cabot Oil & Gas Corporation COG recently inked a deal to divest Eagle Ford Shale holdings to a unit of Venado Oil & Gas LLC for $765 million. Subject to satisfactory closing conditions, the deal is set for completion during the first quarter of 2018.
The divested assets will include around 74,500 acres which produced 15,656 barrels of oil equivalent per day in the third quarter of 2017. The assets accounted for just 5% of the total year-to-date equivalent production and 4% proved reserves. The company will record a one-time charge of around $270-$280 million on the Eagle Ford sale in the fourth quarter. In a separate transaction, the company also offloaded remaining East Texas properties to an undisclosed buyer.
This year, various energy firms including Carrizo Oil and Gas Inc CRZO, Devon Energy Corporation DVN and Sanchez Energy Corporation among others have offloaded their non-core assets in Eagle Ford to shore up their financials and focus on promising regions.
Amid the industry downturn, Cabot like all other upstream players reduced its spending and adopted various other cost-cut initiatives to improve its financials. Driven by its operational efficiencies, Cabot was able to reduce its year-to-date unit operating costs by around 19% — an impressive achievement amid the low price scenario. The company has managed to generate positive free cash flow for the sixth consecutive quarter and is likely to achieve more of the same in the near-to-medium term.
Cash proceeds from this transaction will further strengthen the balance sheet of the company boosting its free cash flow generation. Cabot’s execution success, disciplined capital allocation and improving well economics will further enhance its outlook, driving the shareholder value by share buyback programs and dividend growth.
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. Though The Eagle Ford and Marcellus Shale assets complement each other, of late decline rate of return from the Eagle Ford holdings prompted the company to divest it. Increased focus on the Marcellus shale will enable the company to deliver double-digit growth per debt-adjusted share from the region. In this regard, the company also updated its capex guidance for 2018. It intends to spend around $900-$1,000 million in the next year, with $750-$850 million attributed toward the Marcellus shale.
Zacks Rank and Key Pick
Headquartered in Houston, TX, Cabot is an independent oil and gas exploration company with producing properties mainly in the continental United States. The company presently carries a Zacks Rank #3 (Hold). Shares of Cabot have rallied 15.5% year to date as against 20% decline of its industry.
A better-ranked player in the same industry is Northern Oil and Gas, Inc. NOG which sports a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Northern Oil and Gas delivered an average beat of 175% in the last four quarters.
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