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COG AT A GLANCE

P/E ► 25.9 AVG EV/EBITDA ► 10.1 AVG ROA ► 6% AVG ROE ► 8.9% AVG Debt to Equity ► 0.968 AVG Current Ratio ► 1.36 AVG Interest Coverage Ratio ► 5.54 AVG

 

 

 

 

 

 

Cabot Oil & Gas is an independent oil and gas company that participates in the exploration, development, and exploitation of oil and gas fields in North America. The company's oil and gas operations are divided into four regions: the East Region, the Gulf Coast Region, the West Region, and the Canada Region. During 2008, the company drilled 432 wells in these regions with a 97% success rate.^[1] By the end of 2008, Cabot had proved reserves of 1,942 billion cubic feet of natural gas equivalents (Bcfe), which will last over 20 years at the compay's 2008 production rates.^[2]

Because 80% of Cabot's revenue came from the sale of natural gas, the financial health of the company depends on the price of and demand for natural gas as an energy source.^[3] In the second half of 2008, natural gas prices dropped substantially after reaching historic highs in July 2008. While the company's revenue and net income were higher in 2008 than in 2007, lower natural gas prices and weak demand for energy have forced the company to reduce its 2009 capital expenditures budget significantly and lower production and drilling rates. However, the consumption for natural gas has to potential to rise in 2009 and 2010 as a result of President Obama's stimulus package, which contains $38 billion in government spending on efficient energy sources.^[4]

Company Overview

In 2008, Cabot made $211 million in net income, an increase of approximately $44 million from 2007.^[5] Higher natural gas and crude oil prices along with the sale of some of its assets were the main reasons operating revenues and net income increased by 30% and 26% respectively.^[6]

Revenue from the sale of its natural gas products, which accounted for over 80% of Cabot's 2008 revenue, increased by 30% due to higher natural gas prices and a 12% increase in production.^[7] In 2008, higher natural gas prices also benefited the company’s brokered gas segment, which increased 22.5% to $114 million. ^[8] Revenue from crude oil production represented 7.3% of the company’s 2008 operating revenue. ^[9]

For the first quarter of 2009, operating revenues increased by $14.3 million, or 7%, from the first quarter of 2008.^[10] Despite lower natural gas prices that were lower during this quarter, revenues from the production of natural gas increased 11% in the first quarter of 2009 when compared to the same quarter in 2008.^[11] Natural gas revenues rose as a result of increased production in the Gulf Coast and East Coast.^[12]

Source: 2008 Annual Report, pg. 58 ^[13]

Source: 2008 10-K Financial Report^[14]

• Mmcf: Million cubic feet
• Mbbl: Thousand Barrels
• Mmcfe: Million cubic feet equivalent

Business Segments

Cabot’s revenues come from the exploration, production, and the sale of natural gas and oil. Unlike many of its competitors, Cabot’s operating segments are by geographic region instead of by operation. In response to the global recession beginning in 2007, Cabot announced restructuring plans. In May 2009, Cabot plans to close its Charleston, WV and Denver regional offices by the end of summer.^[15] Instead, Cabot is in the process of building a new office in Pittsburgh, PA to oversee the West Virginia assets along with the Rocky Mountain assets.^[16] Cabot has also combined the Gulf Coast operations with its Mid-Continent operations to form a new South Region.^[17]

East Region( 23% of 2008 Operating Revenue): Cabot’s East region operations are located primarily in West Virginia and Pennsylvania. With 3,382 wells located in this region, Cabot’s average daily production of natural gas was 69.1 Mmcfe in 2008.^[18] Although lower than Cabot’s Gulf region in terms daily production in 2008, the East region accounts for 45% of Cabot’s proven reserves.^[19] Of the 871.8 Bcfe in proved gas reserves, 613.4 Bcfe of natural gas can be extracted from Cabot’s current wells using existing equipment. In 2008, Cabot produced 62 barrels of crude oil/condensate/NGL per day from the East region, which accounted for 3% of the company’s revenue from crude oil production.^[20]

Natural Gas sales in from the East region represent 28.3% of Cabot’s 2008 revenue from natural gas production. ^[21] 70% of the 25, 171 Mmcfe of natural gas produced in the East region during 2008 was sold at index-based prices under contracts with a term of one year.^[22]

In 2008, capital spending in this region was $369.6 million, which represented 24% of its total capital and exploration expenditures in 2008.^[23] Expenditures in this region increased $191 million in 2008 primarily as a result from a $103.1 million increase in lease acquisition costs. Cabot has allocated $200 million of its 2009 capital expenditures budget for well development and equipment investments in the East region. ^[24]

Gulf Coast Region(39% of 2008 Operating Revenue): During 2008, Cabot produced daily an average of 104.1 Mmcfe of natural gas from the 844 wells it owns in this region.^[25] Although the Gulf Coast region was Cabot’s largest source of natural gas in 2008, the region’s proven reserves, of which 93% is natural gas, accounted for 29% of Cabot’s total proved reserves as of December 31, 2008.^[26]

Cabot sells natural gas from this region to intrastate pipelines, natural gas processors and marketing companies. As Cabot's biggest operating region in terms of production and sales, the production and sale of natural gas from this region accounted for 42% of the company’s natural gas revenues.^[27] From the Gulf region, the company produced a total of 578 million barrels of crude oil in 2008, which made up 72.4% of the company’s crude oil revenue.^[28]

In 2008, Cabot paid $604.0 million for 25,000 acres of oil-producing properties in East Texas.^[29] As a result, investments in the Gulf region accounted for 64% of Cabot’s total 2008 capital and exploration expenditures and 79% of the increase in capital expenditures in 2008.^[30]

West Region( 22% of 2008 Operating Revenue): Cabot’s Rocky Mountain and Mid-Continent areas compose the company’s West region segment. In this area, the total proved reserves are 475.3 Bcfe, of which 97% is natural gas.^[31] Although Cabot only operates 1,031 of the 1,560 wells it owns in the West region, Cabot produced daily an average of 75.2 Mmcfe in 2008.^[32] In addition to its natural gas operations, Cabot produced approximately 451 barrels of crude oil/condensate/NGL per day in the West region.^[33] Sales in the West region accounted for 25.4 % of Cabot’s natural gas revenue and 21.8% of its oil/condensate/NGL revenue.^[34] Capital investments in the Rocky Mountain and Mid-Continent areas were $88.7 million and $60.3 million, respectively.^[35] However, the company plans to reduce 2009 capital and exploration investments in this region by 73%.^[36]

Canada Region(16% of 2008 Operating Revenue): 2% of Cabot’s proved reserves lie within its Canada region.^[37] However, 93% of the region’s proved reserves are developed and can be extracted with Cabot’s current equipment.^[38] Daily production in this region averaged 11.7 Mmcfe for natural gas and 59 barrels of crude oil/condensate.^[39] Therefore, products from the Canada region accounted for 4.3% and 2.6% of the company’s natural gas and crude oil/condensate revenues.^[40] Although Cabot plans to spend $1 million in 2009 for capital and exploration expenditures in its Canada region, the company spent $25.4 million developing this region in 2008.^[41]

In April 2009, Cabot sold its Canadian operations to a private Canadian company in exchange for CAD$78 million in cash and CAD$24 million in new equity. At the end of 2008, Cabot's Canadian properties had approximately 40.4 Bcfe in natural gas reserves.^[42] Prior to the sale, Cabot had halted all 2009 capital expenditures for its Canadian operations in order to increase investment in its more profitable American operations.^[43]

Trends and Forces

Amid Government inventory buildup, Natural Gas prices fall below $3 mark

In August 2009, natural gas futures dropped more than 5% to the sub-$3 mark for the first time since 2002. Prices fell in response to reports on the U.S. government's natural gas inventory buildup.^[44] Average daily production peaked several months before the government reported on its inventory and has the potential of declining significantly as prices drop. Domestic production already flatlined among the majors like BP, Chevron, and ConocoPhillips.^[45] However, independent producers like Chesapeake Energy and XTO Energy have been slow to cut production because they do not have many alternative sources of revenue. Falling prices and rising inventory levels have the potential of reducing earnings for independent natural gas producers.^[46]

Natural Gas Prices and Demand Are the Primary Determinants of Cabot's Operating Revenue

After rising 81% during the first six months of 2008, natural gas prices ended February 2009 $4.79 per Mmbtu lower than their July high of $13.11 per Mmbtu.^[47] In the second half of 2008, the low demand for energy led to price decreases for crude oil and natural gas while simultaneously increasing natural gas inventory levels.^[48] Changing natural gas supplies, the global recession beginning in 2007, and market speculation have played an important role in natural gas price volatility in 2008 and early 2009.

80% of Cabot’s 2008 revenue came from its natural gas operations.^[49] In 2008, the average price of natural gas impacted Cabot’s revenue growth significantly; the average price of natural gas in 2008 was 16% higher than in 2007 and was responsible for nearly 56% of the $177 million increase in Cabot’s operating revenues.^[50] Natural gas prices also influence Cabot’s production levels and the size of it capital and exploration budget.^[51] In order to profit more from rising natural gas prices in 2007 and 2008, Cabot increased capital expenditures by 86.3% and overall natural gas production by 12% in 2008.^[52] The increase in production capacity accounted for the remaining 44% of the revenue increase in 2008.^[53]

In February 2009, when natural gas prices were $8.61 per Mmbtu lower than July 2008 highs, Cabot released a 2009 capital expenditures budget that was less than one third of its 2008 budget.^[54] If low demand for natural gas continues is 2009, the company expects that overall production will be less in 2009 than in 2008.

Lower natural gas prices had a significant impact on Cabot's profits in the second quarter of 2009.^[55] Natural-gas prices fell 22% and oil prices declined 15% to from a year earlier during the second quarter of 2009. Due to lower product prices, Cabot's year-on-year profits fell 53% to $25.5 million.^[56] Despite lower profits, Cabot increased its natural gas production by 10% and investments by 5% during the quarter in anticipation of higher natural gas prices.^[57]

Obama Energy policy and Environmental concerns will benefit U.S. natural gas companies

When compared to oil, natural gas is more abundant, burns cleaner, and is more plentiful in the U.S..^[58] Approximately 22% of United State’s energy consumption in 2007 came from natural gas, but that percentage has the potential to increase considerably with a new Obama energy plan.^[59] Clean energy policies are likely to benefit natural gas companies because their product has fewer emissions of sulfur, carbon, and nitrogen than coal or oil. Of the $787 billion stimulus package President Obama signed in February 2009, $38 billion will be spent on renewable energy sources and there will be $20 billion in tax incentives over the next 10 years.^[60] The stimulus package includes a 50% tax credit worth up to $50,000 for gas stations or business that install fuel pumps that dispense E85 fuel, electricity, or natural gas.^[61]

Additionally, burning natural gas for energy produces half the carbon emissions that come from burning coal.^[62] The amount of energy generated by natural gas fired plants grew by 10.8% in 2007 because rising coal prices and growing environmental concerns over coal’s emissions made natural gas a more practical alternative.^[63] Despite being a “cleaner” form of energy, natural gas remained a more expensive energy source at the end of 2008; the cost of producing energy by using natural gas was 50% higher than the price of producing energy from coal.^[64]

In order to profit from the rising demand for cleaner forms of energy, many oil & gas majors will increase their natural gas exploration and capital investments budget in 2009. In particular, much of Exxon’s 2009 production growth will come from natural gas. The oil major has nine projects scheduled to begin in 2009, several of which are focused on the development of large gas fields in Qatar.^[65] Overall, Exxon's 2009 energy exploration and production budget is $29 billion, which is significantly larger than Cabot's 2009 budget of $200 million.^[66] Companies like Exxon Mobil (XOM) and BP (BP) are capable of using their large capital expenditures budgets to outspend independent producers like Cabot when bidding for natural gas fields and investing in production equipment.^[67]

Although the White House's environmental policy has the potential of benefiting natural gas producers, compliance with environmental regulations and inspection is capable of slowing Cabot's expansions and projects.^[68] In the third quarter of 2009, Cabot halted its fracing operations in Susquehanna County, Pennsylvania for nearly a month due to inspection by the Pennsylvania Department of Environmental Protection (PADEP).^[69] Although drilling and pipeline work were not affected, Cabot's U.S. operations have the potential of facing similar delays as energy producers face increased pressure to comply with environmental policies.^[70]

Cabot reduces spending in 2009, but concentrates financial resources on developing its Marcellus Shale fields

In March 2009, Cabot completed its second and third horizontal wells in the Marcellus Shale, a region located in eastern Pennsylvania.^[71] In the Marcellus Shale region, Cabot has 150,000 acres under lease and has completed successfully three horizontal wells as of March 05, 2009.^[72] Cabot’s management believes that the Marcellus Shale territory is one of the company’s largest regions in terms of potential reserves and has allocated $100 million towards developing this region.^[73] Drilling additional wells in this region not only requires a substantial investment in rigs and pipelines but also forced Cabot to shut down several of its vertical wells.^[74] However, Cabot’s horizontal wells are more efficient than its vertical ones in this region and are able to extract more natural gas as a result.^[75] Prior to the development of its second and third horizontal wells, Cabot produced 21 Mmcf per day of natural gas with one horizontal well and several vertical wells.^[76] By completing these additional horizontal wells, Cabot will add an additional 17.1 Mmcf of daily production capacity.^[77] While Cabot is cutting total capital expenditures by approximately two-third of its 2008 budget, the company will continue to invest in rigs and pipelines for its Marcellus Shale operations.^[78] Cabot’s investments in this area have the potential to increase daily production capacity by 30 Mmcf by March 2009 and 65 Mmcf by the end of May 2009.^[79]

However, Cabot’s investments in developing the Marcellus Shale region could run into legal trouble.^[80] In March 2009, homeowners in Susquehanna County accused Cabot of leaking gas into homes as well as the local water supply.^[81] Although still under investigation, the accusations have the potential to turn into lawsuits if Cabot knowingly allowed gas to leak into homes.^[82]

Competition

Anadarko Petroleum (APC): Anadarko Petroleum is an independent oil and gas company that operates in the exploration and production of crude oil, natural gas, and natural gas liquids.^[83] The company has operations primarily located in the United States, the deepwater of the Gulf of Mexico, and Algeria, but also operates in China, Ghana, and Brazil.^[84] In 2008, Anadarko produced on average 206 million barrels of oil equivalents daily and ended the year with 2.28 billion barrels of oil equivalent in proved reserves.^[85]

Petroleum Development (PETD): The Petroleum Development Corporation is an independent energy company that operates in the exploration and production of natural gas and crude oil.^[86] By the end of 2008, the company had 4,712 gross wells located primarily in the Rocky Mountain region and the Appalachian and Michigan Basins.^[87] Petroleum Development Corporation had an average daily production of 106.1 Mmcfe in 2008. The company has 753 Bcfe in proved reserves.^[88]

Comstock Resources (CRK): Comstock Resources operates in the development and production of oil and natural gas. The company operates in Texas, Louisiana and offshore the Gulf of Mexico.^[89] As of December 31, 2008, Comstock had proved reserves of 581.7 Bcfe as of December 2008 of which 90% is natural gas.^[90]

Notes

1. ↑ Reuters: COG Company Description, March 2009
2. ↑ Reuters: COG Company Description, March 2009
3. ↑ COG 2008 10-K, pg. 43
4. ↑ CNET.com: Obama signs stimulus plan, touts clean energy, February 2009
5. ↑ COG 2008 10-K, pg. 43
6. ↑ COG 2008 10-K, pg. 43
7. ↑ COG 2008 10-K, pg. 43
8. ↑ COG 2008 10-K, pg. 58
9. ↑ COG 2008 10-K, pg. 58
10. ↑ gurufocus.com: COG 2009 1Q financial results, May 2009
11. ↑ gurufocus.com: COG 2009 1Q financial results, May 2009
12. ↑ gurufocus.com: COG 2009 1Q financial results, May 2009
13. ↑ http://www.sec.gov/Archives/edgar/data/858470/000119312509040956/d10k.htm.
14. ↑ http://www.sec.gov/Archives/edgar/data/858470/000119312509040956/d10k.htm
15. ↑ Reuters: Cabot Oil & Gas Corporation Announces Organizational Changes, May 2009
16. ↑ Reuters: Cabot Oil & Gas Corporation Announces Organizational Changes, May 2009
17. ↑ Reuters: Cabot Oil & Gas Corporation Announces Organizational Changes, May 2009
18. ↑ COG 2008 10-K, pg. 4-5
19. ↑ COG 2008 10-K, pg. 4-5
20. ↑ COG 2008 10-K, pg. 4-5
21. ↑ COG 2008 10-K, pg. 4-5
22. ↑ COG 2008 10-K, pg. 4-5
23. ↑ COG 2008 10-K, pg. 4-5
24. ↑ COG 2008 10-K, pg. 4-5
25. ↑ COG 2008 10-K, pg. 5-6
26. ↑ COG 2008 10-K, pg. 5-6
27. ↑ COG 2008 10-K, pg. 5-6
28. ↑ COG 2008 10-K, pg. 5-6
29. ↑ COG 2008 10-K, pg. 5-6
30. ↑ COG 2008 10-K, pg. 5-6
31. ↑ COG 2008 10-K, pg. 7
32. ↑ COG 2008 10-K, pg. 7
33. ↑ COG 2008 10-K, pg. 7
34. ↑ COG 2008 10-K, pg. 7
35. ↑ COG 2008 10-K, pg. 7
36. ↑ COG 2008 10-K, pg. 7
37. ↑ COG 2008 10-K, pg. 7
38. ↑ COG 2008 10-K, pg. 7
39. ↑ COG 2008 10-K, pg. 7
40. ↑ COG 2008 10-K, pg. 7
41. ↑ COG 2008 10-K, pg. 7
42. ↑ prnewswire.com: Cabot Oil & Gas Announces Canadian Sale, April 2009
43. ↑ prnewswire.com: Cabot Oil & Gas Announces Canadian Sale, April 2009
44. ↑ Fool.com: Natural Gas Is Headed Lower, August 2009
45. ↑ Fool.com: Natural Gas Is Headed Lower, August 2009
46. ↑ Fool.com: Natural Gas Is Headed Lower, August 2009
47. ↑ COG 2008 10-K, pg. 30
48. ↑ COG 2008 10-K, pg. 71
49. ↑ COG 2008 10-K, pg. 58
50. ↑ COG 2008 10-K, pg. 49
51. ↑ COG 2008 10-K, pg. 48
52. ↑ COG 2008 10-K, pg. 4
53. ↑ COG 2008 10-K, pg. 48
54. ↑ COG 2008 10-K, pg. 532
55. ↑ Cabot Oil 2Q Profit Down 53% On Lower Prices, Asset Loss, July 2009
56. ↑ Cabot Oil 2Q Profit Down 53% On Lower Prices, Asset Loss, July 2009
57. ↑ Cabot Oil 2Q Profit Down 53% On Lower Prices, Asset Loss, July 2009
58. ↑ Seekingalpha.com: The case for Natural Gas, January 2009
59. ↑ EIA: Natural Gas Energy Facts
60. ↑ CNET.com: Obama signs stimulus plan, touts clean energy, February 2009
61. ↑ Green Tech Media: Obama Signs Stimulus Package, February 2009
62. ↑ WSJ.com: A Better Climate for Natural-Gas Sector, January 2009
63. ↑ WSJ.com: A Better Climate for Natural-Gas Sector, January 2009
64. ↑ WSJ.com: A Better Climate for Natural-Gas Sector, January 2009
65. ↑ WSJ: Exxon Aims to Boost Production, March 2009
66. ↑ WSJ: Exxon Aims to Boost Production, March 2009
67. ↑ Cabot 2008 10-K, page 23
68. ↑ WSJ: Cabot Oil & Gas Commences Pennsylvania Completions, October 2009
69. ↑ WSJ: Cabot Oil & Gas Commences Pennsylvania Completions, October 2009
70. ↑ WSJ: Cabot Oil & Gas Commences Pennsylvania Completions, October 2009
71. ↑ Investopedia Community: Cabot a Strong Energy Play, March 2009
72. ↑ Investopedia Community: Cabot a Strong Energy Play, March 2009
73. ↑ Pressconnects.com: Cabot says gas levels in water drop, March 2009
74. ↑ Investopedia Community: Cabot a Strong Energy Play, March 2009
75. ↑ Horizontaldrill.com
76. ↑ Oil and Gas Journal: Cabot completes two wells in Marcellus play, March 2009
77. ↑ Oil and Gas Journal: Cabot completes two wells in Marcellus play, March 2009
78. ↑ Oil and Gas Journal: Cabot completes two wells in Marcellus play, March 2009
79. ↑ Oil and Gas Journal: Cabot completes two wells in Marcellus play, March 2009
80. ↑ Tradingmarkets.com: Consequences of gas drilling still unknown: Firm accused of causing gas infiltration, but it's unclear if rules knowingly violated, March 2009
81. ↑ Tradingmarkets.com: Consequences of gas drilling still unknown: Firm accused of causing gas infiltration, but it's unclear if rules knowingly violated, March 2009
82. ↑ Tradingmarkets.com: Consequences of gas drilling still unknown: Firm accused of causing gas infiltration, but it's unclear if rules knowingly violated, March 2009
83. ↑ Reuters.com: Cabot Oil and Gas, March 2009
84. ↑ Reuters.com: Cabot Oil and Gas, March 2009
85. ↑ Oil Voice: Cabot Oil and Gas, March 2009
86. ↑ Reuters.com: PETD, March 2009
87. ↑ Reuters.com: PETD, March 2009
88. ↑ Reuters.com: PETD, March 2009
89. ↑ Yahoo! finance: CRK
90. ↑ Yahoo! finance: CRK

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