Cabot Oil & Gas Corp. (COG): Current production levels on track, operational update positive - Goldman Sachs - May 01, 2008
News
Cabot reported adjusted EPS of $0.58 versus our $0.48 and First Call consensus of $0.51. Production was 241 MMcfe/d versus our 244 MMcfe/d estimate, and management indicated production had risen to 255 MMcfe/d by quarter end. Operating cash flow was $134 million versus our $120 million, mainly due to higher realized prices and lower unit costs. In new quarterly production guidance, the company expects 4Q 2008 production to be up 15% versus 1Q 2008 levels. Management announced initial production rates from three James Lime wells (East Texas) of 14-17 MMcfe/d and one Haynesville well at Trawick (East Texas) of 2.9 MMcfe/d.
Analysis
We believe the slightly lower production levels were generally expected following the pullback from highs relative to peers over the last week. We view favorably that end of March production was already at the mid-point of production guidance for 2Q 2008. We believe momentum remains strong in James Lime, Haynesville and the Marcellus Shale (Appalachia). In the Pennsylvania portion of the Marcellus, Cabot plans to drill 12 horizontal wells this year and 70-100 wells (likely mostly horizontal) in 2009. If management can credibly show infrastructure is not a constraint, this could lead to 2009-10 growth likely not in Street estimates or the stock. We expect active drilling results over the next six months as management tests James Lime, Haynesville and Marcellus over multiple acreage blocks. While Cabot shares have outperformed, positive results from only some of these opportunities likely will lead to further upside relative to peers, in our view.
Implications
We continue to rate Cabot Conviction Buy. We see 25% upside to a $71 12-month discounted cash flow based target price versus 16% for E&P stocks (key risks are commodity price volatility, drilling results, cost pressures, government pronouncements). Cabot trades at 7.7x 2009 EV/debt-adjusted cash flow versus 8.2x for long-lived peers. |
