New Sunrise Dawns for Cabot
The last couple of years have been tough for Marcellus natural gas producer Cabot Oil & Gas (NYSE: COG). Fundamentally, the company is extremely sound, with perhaps the lowest cost of production of any natural gas driller in the region. Between 2012 and 2015 the company drove down production costs for natural gas by over 50% while more than doubling its natural gas reserves.
How did the market respond? Not very kindly in 2015, when Cabot shares declined by more than 40%. Nevertheless, in the Jan. 21, 2016 issue of The Energy Strategist we ranked Cabot our top Best Buy, noting:
Cabot tops the rankings because the decline in U.S. oil production is likely to intensify, which will limit the supply of associated gas in basins like the Eagle Ford and the Bakken. Production in the Marcellus is rolling over too, which should continue improving producers’ access to existing transmission pipelines even as new ones come on line. The discount on Marcellus gas relative to its Gulf price has narrowed dramatically in recent months and should continue to do so.
Natural gas demand, meanwhile, is expected to increase as a result of LNG exports, shipments to Mexico and the construction of new gas-fired power and chemical plants. Unlike crude, domestically produced natural gas has no low-cost overseas rivals on the U.S. market. It also has more visible drivers of near-term demand dependent on growth in the U.S. and Mexico, not China.
Our faith in Cabot was rewarded in the first half of 2016, as the stock notched a 46% gain. But in the seven months since then, the price has pulled back 8%. Actually, it had fallen a bit more than that before the company got some good news last week. More on that below.
Given Cabot’s terrific growth story and low-cost position in the Marcellus, one might expect that its share price would have appreciated more in recent years. But the single biggest issue is that although natural gas prices have recovered from less than $2 per million British thermal units a year ago, they remain low by historical standards.
Source: U.S. Energy Information Administration (EIA)
Moreover, Cabot has been forced to sell its gas at a discount to the Henry Hub benchmark price because it does not have good pipeline access to major markets in the Northeast. A pair of pipeline projects were intended to relieve that access bottleneck.
The Constitution pipeline project is being developed in a partnership with Williams (NYSE: WMB) to connect Cabot’s gas fields in northeast Pennsylvania to markets in New York. The project has been approved by the Federal Energy Regulatory Commission (FERC), but blocked by the New York Department of Environmental Conservation. Cabot and Williams are challenging the latter decision in court.
The other pipeline is the Atlantic Sunrise, a Williams Partners (NYSE: WPZ) project that will connect Cabot’s gas to markets in the Mid-Atlantic and southeastern states. This week FERC approved the pipeline. Fortunately for project developers, Atlantic Sunrise does not have to be approved by New York. Cabot shares rallied 10% on news of the approval.
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