Cabot's Marcellus Presence Impress, Falling Gas Prices a Woe

On Jun 8, we issued an updated research report on Cabot Oil and Gas COG. The company's exposure to the high quality Marcellus and Eagle Ford assets helps it to achieve industry leading rates of return. However, we remain worried about natural gas' volatile fundamentals and Cabot's high exposure to the commodity.

Cabot currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Notably, the company's portfolio is spread between low-risk/long reserve-life properties and large-volume/rapid-payout assets, with further variety from large prospect inventories that have a broad mix of production and payout profiles.

In fact, the company's Marcellus program continues to ramp up with exceptional results. Currently, it has around 200,000 net acres in the prime Marcellus acreage along with remaining estimated 3,000 undrilled locations. Cabot's high-quality assets in the region helped it to grow its first-quarter daily production volumes by 7% year over year.

As part of the Zacks categorized Oil & Gas-U.S Exploration & Production industry Cabot is also active in the Eagle Ford Shale play, where it controls 85,000 net acres. Going forward, it is planning to place 14 enhanced completion wells on production shortly.

It should be noted that results from the Eagle Ford's liquids-focused drilling improved significantly during the quarter. Based on the improved results from its core shale plays, Cabot raised its full-year production guidance from 5%-10% to 8%-12%.

However, with natural gas prices trading barely above $3 per MMBtu and Cabot being one of the most gas-weighted E&Ps, the company's earnings and revenues seem to be under pressure. Additionally, the company lost almost 11% over the last year, reflecting significant pricing weaknesses.

Moving ahead, Cabot is set to spend $845 million in 2017 more than twice of the 2016 spending level of around $375 million. This might lower the company's cash flows.

Stocks to Consider

Better-ranked players in the energy sector include Canadian Natural Resources Ltd. CNQ, McDermott International Inc. MDR and W&T Offshore Inc. WTI. Canadian Natural and McDermott sport a Zacks Rank #1 (Strong Buy), while W&T Offshore carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.      

We expect year-over-year earnings growth for Canadian Natural of 720% for 2017. 

McDermott beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 387.50%.   

W&T Offshore had an average positive earnings surprise of 69.21% in the last four quarters.

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