CABOT OIL & GAS CORP COG
August 24, 2015 - 11:59am EST by
Coyote05
2015 2016
Price: 22.75 EPS 0 0
Shares Out. (in M): 414 P/E 0 0
Market Cap (in M): 9,000 P/FCF 0 0
Net Debt (in M): 2,000 EBIT 0 0
TEV: 11,000 TEV/EBIT 0 0

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Description

COG

 

At 22.75 or so, COG is a long.  Best way to play, IMHO, is to short puts.  In the interest of time, this is a short write up.  Same positive macro fundamentals on natural gas just mentioned in RRC write apply.  Also, it is very telling, at least to me, than while oil prices (and those of very much everything else) are collapsing, natural gas prices are fairly stable.

 

Here is why I like COG:

  • Low cost producer

  • Strong balance sheet

  • Lowest g+a/unit (the leanest of all)

  • Undemanding valuation

 

 

(Why not MRD, because you’ll have to pay through the nose to own that one.  While COG and RRC are relatively inexpensive)

 

On the other hand, as I mentioned in the RRC thread:

  • Their differentials are not great, and will take some time to improve

  • Their reserves, while not bad at all, not as way-above-average as RRC

 

Net, net, even in this environment of depressed pricing, COG still makes money.  That is economic FCF, not some silly adjusted metric.  Once you add all economic expenses including fully -loaded g+a and interest expense, COG generates cash on every unit they produce.  In contrast, at $40 WTI and $3 HH, very much the rest of the industry (NA e&P) is under water.

 

It is worth noting that COG’s debt load is very undemanding; about 3x Ebitdax.  And no significant maturities until 2018+.

 

 

In what seems to be turning into a game of last-man-standing, COG is a prime candidate.  And probably The prime candidate once one adjusts for valuation.

 

Speaking of valuation, here’s a chart showing the correlation between valuation on reserves and valuation on production (among other things):

 

 

Needless to say, there are plenty of risks; especially in e&p.  First and foremost, commodity price risk.  Should natural gas prices dive, the stock will dive too (and vice versa).  As mention in RRC write up, there are some mitigants and can be hedged to a large extent. Another key risk here is a bad acquisition.  This one is hard to handicap for me.  However, so far there seems to be a semblance of discipline.

 

Bottom line, COG seems like a good investment if one can get it close to $20 through the options market.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Strong execution.

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    Description

    COG

     

    At 22.75 or so, COG is a long.  Best way to play, IMHO, is to short puts.  In the interest of time, this is a short write up.  Same positive macro fundamentals on natural gas just mentioned in RRC write apply.  Also, it is very telling, at least to me, than while oil prices (and those of very much everything else) are collapsing, natural gas prices are fairly stable.

     

    Here is why I like COG:

     

     

    (Why not MRD, because you’ll have to pay through the nose to own that one.  While COG and RRC are relatively inexpensive)

     

    On the other hand, as I mentioned in the RRC thread:

     

    Net, net, even in this environment of depressed pricing, COG still makes money.  That is economic FCF, not some silly adjusted metric.  Once you add all economic expenses including fully -loaded g+a and interest expense, COG generates cash on every unit they produce.  In contrast, at $40 WTI and $3 HH, very much the rest of the industry (NA e&P) is under water.

     

    It is worth noting that COG’s debt load is very undemanding; about 3x Ebitdax.  And no significant maturities until 2018+.

     

     

    In what seems to be turning into a game of last-man-standing, COG is a prime candidate.  And probably The prime candidate once one adjusts for valuation.

     

    Speaking of valuation, here’s a chart showing the correlation between valuation on reserves and valuation on production (among other things):

     

     

    Needless to say, there are plenty of risks; especially in e&p.  First and foremost, commodity price risk.  Should natural gas prices dive, the stock will dive too (and vice versa).  As mention in RRC write up, there are some mitigants and can be hedged to a large extent. Another key risk here is a bad acquisition.  This one is hard to handicap for me.  However, so far there seems to be a semblance of discipline.

     

    Bottom line, COG seems like a good investment if one can get it close to $20 through the options market.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Strong execution.

    Messages


    Subjectdifferentials
    Entry08/24/2015 03:58 PM
    Membermpk391

    Coyote-  any thoughts on where differentials are going as takeaway gets built out in the NE Marcellus? 

    some folks seem to be in the camp of "we always overbuild everything" in the natgas industry, and by 2017/2018 differentials should collapse.  certainly, differentials in the rockies collapsed once the REX pipeline went online.  but unlike rockies gas, gas from the marcellus is - as you've noted - at the low end of the cost curve and likely to displace some higher cost production as pipelines go into service.  

    clearly, Cabot and others have well behind pipe that they're just waiting to turn on once the Constitution pipeline comes online (hopefully) in mid-2016, so I'm not hoping for a huge drop in differentials by then.  but as others come online (esp. Atlantic Sunrise, PennEast, and Northeast Energy Direct) I'd like think takeaway will be at least a tad overbuilt by then.  my fear is that production just ramps until we're back to the same old traffic jam 

    FWIW, the sellside research I've seen doesn't seem to forecast a significant drop in differentials.  at the same time, none of those reports seem to address the issue specifically.  I have yet to see an analysis that really explores this issue


    Subjectand if you like Cabot...
    Entry08/24/2015 04:13 PM
    Membermpk391

    ... and don't need tons of liquidity, you should check out Epsilon Energy (EPS in Toronto)

    don't let the Canadian listing fool you - this really a U.S. company with acreage adjacent to Cabot (to the west in Susquehanna County, PA).  Great management, great balance sheet, and they have a 35% stake in the Auburn Gas Gathering System which alone is worth the current C$2.55 share price even in a pessimistic scenario (8x EBITDA).  FYI, Auburn is the township in the SW corner of Susquhanna County.

    Game plan is to prove out their Upper Marcellus reserves (already done that for Lower Marcellus) and sell the company once takeaway gets built out ... so, 2017-2018

    they're buying back shares like every day.  near the end of their authorization, but will re-up in October.


    SubjectRe: Re: differentials
    Entry08/24/2015 06:28 PM
    Membermpk391

    Thanks.  i agree it's interesting how these "gassy" E&Ps have sold off in last few weeks while natgas prices have been flattish.  makes me think that some of this is technical - maybe some E&P focused funds are getting margin calls/redemptions.

    on the other hand, the latest blowout in differentials does seem to correlate, but who in their right mind would value these stocks based on current wellhead prices?  

    http://www.naturalgasintel.com/data/data_products/daily?region_id=northeast&location_id=NEATENN4MAR


    SubjectRe: Re: Re: Re: differentials
    Entry08/25/2015 10:02 PM
    MemberPaincap

    @Coyote05,

    COG, RRC and AR have some of the lowest FD&A costs in the industry. Note a few things when you look at Peyto's slide on cost, the CAD plays into effect and in 2014, Peyto invested C$120 mil in infrastructure which increased FD&A by almost C$0.40. Then if you were to consider the exchange rate, the cost in USD would be around $2.37. COG's overall cost is below that.

     

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