Cabot Oil & Gas Corp. (COG): Positive on E. TX acquisition due to drilling upside, hedged prices - Goldman Sachs - June 05, 2008
What's changed
Cabot announced June 4 it plans to acquire 176 Bcfe of proved reserves and 32 MMcfe/d of production in East Texas next to its Minden acreage for $603 million with deeper upside to Cotton Valley and Haynesville zones. Management sees 300-400 unbooked drilling locations and indicated ultimate financing could be through both debt and equity.
Implications
We view this deal positively, as we believe the proved producing assets lower the risk profile by providing a cash flow stream vs. solely an acreage acquisition. With rising opportunities in Cotton Valley and optionality on deeper Haynesville potential, we see further upside if Cabot can grow production at attractive finding and development costs over the next 1-2 years. Specifically, the Street is giving Cabot limited credit for the extension of Haynesville into its acreage, and we see meaningful upside if drilling results are attractive. For now, we are assuming that Cabot only grows production to 40 MMcfe/d by 2012 for an additional $25-$50 million in annual capital spending, both of which could be conservative.
Valuation
Cabot remains on our Conviction Buy List (our coverage view is Attractive). We see 36% upside to an $80 12-month DCF-based target price vs. 25% upside for other E&P stocks. We are raising our EPS estimates for 2008-12.
Key risks
Commodity price volatility, drilling results, costs, gov’t pronouncements.
Impact on related securities
Notably, Cabot is hedging forward production at prices of $11-$13+ per MMBtu through 2010. Given that this is far above what we believe is priced into equity valuations for Cabot and other E&Ps, we believe the Street will generally react favorably which could give other companies confidence in making their own acquisitions. |
