Is This Natural Gas Player Running on Fumes?

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite strong production growth in 2012 which resulted in better cash flows, weakness in the natural gas market took its toll on Cabot Oil & Gas (NYSE: COG). In this article, I will examine Cabot's latest financials to see if the stock can present any opportunities for investors.

Financials

Cabot recently reported its financial results for the fourth quarter and full-year ended Dec. 31, 2012. Equivalent production of 267.7 Bcfe in 2012 consisted of 253.2 billion cubic feet (Bcf) of natural gas production and 2.4 million barrels of liquids production. These numbers were increases of 43%, 42%, and 67%, respectively, over the previous year. An annual equivalent production growth rate of approximately 49% was achieved by the company in 2012.

Cash flow generated by operations was $652.1 million in 2012, compared to $501.8 million in 2011. Discretionary cash flow was $680.1 million in 2012, compared to $549.2 million for the previous year. Higher equivalent production and higher realized crude oil prices were the principal reasons behind the improvement in cash flow. This benefit was partially offset by lower realized natural gas prices and increased operating expenses.

Cabot's net income was $131.7 million (an EPS of $0.63 per share), compared to net income of $122.4 million (an EPS of $0.59 per share) in 2011. Excluding selected items, net income was $138.9 million, or $0.66 per share, compared to $139.2 million, or $0.67 per share in the previous year. Natural gas price realizations, including the effect of hedges, were $3.67 per thousand cubic feet (Mcf) in 2012, down by 18% in comparison to the previous year. Oil price realizations, including the effect of hedges, were $101.65 per barrel (Bbl) in 2012, a growth of 12% over the previous year.

Production in the fourth quarter of 2012 was 78.8 bcfe, made up of 74.8 Bcf of natural gas and 647,000 barrels of liquids production. These figures represented a 44% increase in equivalent production in comparison to the same quarter of the previous year. Natural gas production for the fourth quarter grew by 19% over the preceding quarter, because of the completion of a record number of fracking stages and additional infrastructure capacity. 

Cash flow from operations for the quarter was $197 million, compared to $126.5 million last year.  Discretionary cash flow was $223.7 million, compared to $121 million for the same quarter of the previous year. The higher equivalent production, and higher realized crude oil prices, were partly offset by lower realized natural gas prices and increased operating expenses.  Net income in the fourth quarter of 2012 was $40.9 million (an EPS of $0.19 per share), compared to$26.4 million, or $0.13 per share, last year.

Excluding selected items, net income was $57.1 million, or $0.27 per share, in the quarter in comparison to $40.3 million, or $0.20 per share, last year. Natural gas price realizations, including the effect of hedges, were $3.91 per Mcf, down 3% from last year, while oil price realizations, including the effect of hedges, at $105.40 per Bbl were up 15% year-over-year.

On Dec. 31, 2012, Cabot's total debt was $1.087 billion, of which $325 million is outstanding under the company's credit facility. Total commitment by lenders under the credit facility is $900 million, of which $574 million of credit was amenable on Dec. 31, 2012. As of this date, the  net debt to adjusted capitalization ratio was 33.2%, compared to 30.4% as at Dec. 31, 2011.

What other analysts say

Shares of Cabot rose after reporting fourth-quarter earnings, which were ahead of expectations because of higher production. Analysts surveyed by FactSet had estimated that the company would earn an adjusted $0.21 a share on revenue of $349.5 million. However, the price realization for natural gas fell by about 3% from the previous year, but production grew by an impressive 44% to the equivalent of 78.8 billion cubic feet of gas. Stifel, Nicolaus & Co. analyst Amir Arif commented that results from the Marcellus "continue to set (Cabot) apart from its gas peers." 

He added that the company's proved reserves of gas grew an "impressive" 27%. Reserves are seen as an important indicator of future production for energy companies.Brean Capital analyst Raymond Deacon opined that the company had a strong quarter because of higher production, and that initial results for extended lateral wells in the Marmaton field of the Great Plains "also look encouraging." He added that the company continues to plan for a 2013 capital budget of about $1 billion and production growth of 35 to 50%.

Cabot's peers

Fitch Ratings has affirmed Southwestern Energy's (NYSE: SWN) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BBB-' with a stable rating outlook.  The ratings are based on Southwestern Energy's strong performance in replacement of reserves, growth in production, and its management of capital expenditure. The company added 919.5 billion cubic feet equivalent (Bcfe) to reserves in 2012, compared to production of 565 Bcfe.

Reserve replacement was 163% of production at a cost of $2.08/mcfe, while 2012 production represents a 13% growth over the previous year. E&P revenue, including the effect of hedges, declined by $377 million from 2011 because of weaker natural gas prices, but increased production at lower costs added $180 million in EBITDA. EBITDA from midstream gas operations grew by 19%. Because the natural gas market continues to be depressed, I would rate the stock as a Hold.

WPX Energy (NYSE: WPX), which operates in the same region as Southwestern Energy and Cabot, missed estimates in the fourth quarter in comparison to the same quarter of the previous year. Revenue showed a significant decline, non-GAAP earnings per share showed a loss, while GAAP loss per share declined.

WPX Energy generated revenue of $572 million, compared to the analyst estimate of $634.7 million polled by S&P Capital IQ. GAAP sales came in 5.7% lower than the $877 million year on year. EPS worked out to a loss of $0.20 a share against earnings estimates of $.09 per share compiled by S&P Capital IQ. Non-GAAP loss was $0.20 a share for the quarter, compared to $0.14 per share for the same quarter of the previous year. GAAP loss was $0.53 a share, compared to a loss of $1.71 per share last year. The average estimate for the next quarter revenue is $768.9 million, while the average EPS estimate is a loss of $0.15 per share. I anticipate the stock will continue to fall in 2013, and recommend avoiding it for the time being.

Conclusion

Despite strong production growth, the weak natural gas market in the U.S. will continue to hurt Cabot. Investors should only consider buying the stock on significant pullbacks.


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