August 24, 2015 - 11:59am EST by
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 (in $M): 11,000 TEV/EBIT 0 0

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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.


Strong execution.

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