Cabot Oil & Gas (COG, Financial) is among the fast growing oil and gas companies and I have been bullish on the stock in the past. With the company declaring its 1Q15 results, I maintain my bullish view on the stock and the company is good for gradual long-term accumulation. This article discusses the company’s results and the positive factors despite the challenging operating environment due to lower oil and gas prices.
Production in 1Q15 increased by a robust 43% to 171.4Bcfe as compared to 119.9Bcfe in 1Q14 and this is the first positive highlight of the results. Even in a depressed environment for oil and gas companies, Cabot Oil & Gas delivered an impressive production growth that comes from the company’s excellent assets in Marcellus.
However, the growth in production was still not able to offset the decline in gas prices and 1Q15 revenue declined to $465 million as compared to $510 million in 1Q14. Average gas sales price was $2.46/Mcfe as compared to $3.74/Mcfe in 1Q14. In my view, lower gas prices will sustain in FY15, but the company’s production is likely to remain robust. It is important to mention here that the company drilled 42 net wells in 1Q15 as compared to 27 net wells in 1Q14, and this is the reason to believe that production will remain strong in the coming quarters as well with strong exploration activity.
Another important part of the results is the company’s operating cash flow and Cabot Oil & Gas had an operating cash flow of $268 million for 1Q15 as compared to $255 million in 1Q14. The cash is important from the perspective that Cabot Oil & Gas has $1.8 billion in debt and debt servicing is likely to be smooth even at these prices and production levels. Therefore, the risk on the credit side is minimal.
Further, I must also add here that Cabot Oil & Gas announced a quarterly dividend of $0.02 per share. While the annual dividend might not be significant at this point, the company has been able to maintain its dividends and considering the strong production growth trajectory, I expect robust increase in dividends in the coming years with attractive IRR projects.
In terms of the company’s guidance for FY15, production growth of 10% to 18% is expected for the full year and I believe that this will be robust considering the point that gas prices are likely to remain depressed through 2015. While production growth can’t offset lower oil prices, it will ensure that operating cash flows remain robust to service debt. Further, a $900 million capital expenditure program for FY15 implies that the company’s investments for the year can be covered through the operating cash flow. I therefore expect no increase in debt in FY15.
In conclusion, Cabot Oil & Gas has some excellent assets in Marcellus Shale and Eagle Ford Shale. Depressed oil and gas prices are a good opportunity to consider some exposure to this stock with a long-term investment horizon. The company’s 1Q15 results underscores the point that the company’s operating level performance is excellent even in difficult times. I believe that Cabot Oil & Gas will navigate the crisis with ease.
