Cabot Oil & Gas Corp. (COG): Multi-area success highlights conservative production guidance - Goldman Sachs - March 14, 2008
News
Cabot announced three successful wells: a 12.6 MMcf/d initial production (IP) rate from a James Lime test in East Texas, a 6.5 MMcf/d IP from the Frontier formation in the Rockies, and a 10 MMcf/d estimated rate from a the Hinton field in Canada. Additionally, Cabot indicated that it has resolved nitrogen issues that previously delayed completions and sales from its Hurricane Devonian horizontal shale area in West Virginia.
Analysis
We believe each of these is positive and collectively further point to management raising production guidance for 2008 by the company's 2Q2008 earnings results. We assume 14% production growth in 2008 versus guidance of about 10%. The Hurricane nitrogen remediation should pave the way for increased completion activity that could lead to renewed attention on Lower Huron shale potential in addition to the emerging Marcellus Shale in Appalachia. The James Lime well success is less of a surprise, although further delineation of the southeast portion of Cabot’s acreage would represent upside. We do not believe that the Street has put much value on Rockies and Canada unbooked potential – we regard these successes as one-offs for now, although we see rising interest in the Hinton area within industry.
Implications
We continue to maintain our Conviction Buy rating on Cabot and see 40% upside potential to our 12-month, $71 DCF-based target price (commodity price volatility, drilling results, cost pressures and government pronouncements are key risks). Recent data points from the key James Lime, Marcellus, Hurricane and Trawick (East Texas) projects have each been positive, which we believe are supportive of further share price upside before considering potential from other plays. Cabot remains leveraged to our bullish view on US natural gas prices, where we assume $10+/MMBtu Henry Hub gas at least through next winter. |
