Boost Your Energy Portfolio With This Quiet Winner
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The third quarter of 2012 earnings report brought very good news to Cabot Oil & Gas (NYSE: COG) investors. The company reported a substantial increase in production with Production of 66.5 billion cubic feet equivalent (Bcfe), an increase of 33 percent over last year's comparable quarter. The company saw a 31% increase in gas production and a 61% increase in liquids production compared to the same quarter last year. Net income was $36.6 million, an increase of over $8 million from the same quarter last year. Cash flow also increased to over $164 million from just under $155 million for the third quarter of 2011.
Higher production was the main driver of this success. But the company still made these gains with natural gas prices hovering near historic lows. This cannot be overestimated by an investor doing his due diligence. Many companies heavily involved in the natural gas sector have struggled recently; Cabot is not one of them. Chesapeake Energy has had to resort to asset sales in order to generate cash flow in the depressed environment. ExxonMobil (NYSE: XOM) has not seen the desired results from its purchase of XTO Energy three years ago. ExxonMobil recently reported net income of $9.57 billion in the third quarter, down from $10.33 billion year-over-year. ExxonMobil reported revenue of $115.71 billion, roughly 8 percent lower than in the third quarter of 2011. Royal Dutch Shell (NYSE: RDS-A) has also seen profit decline due to natural gas prices in the U.S. Shell announced net earnings of $6.6 billion, down from $7 billion in the third quarter of 2011. Shell had to write down $354 million in assets during the quarter. This was mostly gas fields in the U.S.
Unlike many exploration companies which are cutting back on natural gas production and sitting on reserves in the expectation of better natural gas prices, Cabot has been aggressive about increasing gas production. As the results show, this has been a smart decision by using volume increases in production to offset the weakness in prices. The third quarter sequential production growth has been 5% but with the acquisition of about 90% of its 2012 gathering permits on hand and 30 Marcellus wells to be in production in the fourth quarter, there will be substantial production growth in the fourth quarter as well as a strong outlook for production in 2013. This has been a remarkably successful strategy, and is fairly unique in the energy field. For a company to be successful with their natural gas operations while so many others are struggling is a testament to the good management team at Cabot. The company is not alone in the strategy, but it is by far the most successful.
Talisman Energy (TLM) has invested aggressively in the Marcellus Shale increasing production aggressively in a similar strategy. Chevron (CVX) is also performing well in the Marcellus Shale while the leading player in the area is Chesapeake Energy. In the Marmaton shale in Oklahoma, along with Cabot, is QEP Resources (QEP) which has completed its first well. None of these companies, however, has been able to adopt a natural gas strategy that has come close to producing the positive results seen at Cabot. Good management and good strategy has been able to weather one of the worst natural gas markets in recent memory, as the market turns around in the next year or two the results growth will be outstanding.
Cabot has also provided an operations update. The highlights of the update include success in its initial Pearsall effort, continued momentum in the Marcellus operations and a breakthrough in gathering permits which have been long awaited... the initial short lateral well in the Pearsall was successfully completed in 11 stages and had an initial production rate of more than 1,400 barrels of oil equivalent (BOE) per day. In 20 days, the well averaged more than 900 BOE per day of which roughly 50 percent was oil.
Currently, Cabot is completing wells in the fourth quarter between the Pearsall, Marmaton and Eagle Ford, of which approximately half will be completed in December. The company is finding new ways to exploit the already prolific Marcellus and two new producing wells have been brought in making a total of seven wells in the area. This is a pilot program to explore tighter frat spacing which should provide increased efficiency and higher initial production. The company has received 90 percent of the 2012 gathering line permits. There are currently numerous construction crews in the field, which should allow for approximately 30 wells to begin producing during the fourth quarter.
Investors can look forward to increased production throughout 2012 and into 2013. The company will continue its successful strategy of offsetting natural gas price weakness with production increases. The company will continue to remain the lone bright sport in the natural gas market. Should a cold winter happen resulting in higher gas prices then the company will soar to unseen heights. Cabot has done very well in a market with horrible conditions. It is trading around $48. In the current environment I expect the stock price to hit $60 before the start of the fourth quarter 2012. If gas inventory is reduced by a harsh winter there is no reason the stock cannot reach $75 in 2013. This company is a solid investment and will make investors good money going into 2013 and beyond.
jordobivona has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.