As oil has trended higher in 2016, several exploration companies have surged upward from oversold levels. However, there are still several deep value opportunities in the energy sector; Cabot Oil & Gas (COG, Financial)Â has trended higher by 30%.
Cabot Oil & Gas is well positioned in financial flexibility. The company recently issued 44 million shares at a price of $20 per share, and this is the factor driving a comfortable liquidity position for 2016.
To put things into perspective, Cabot Oil & Gas has $580 million in cash and equivalents after the public offering, and the company expects to incur capital expenditure of $325 million for 2016. It is fully funded for 2016 and will close the year with a decent liquidity buffer. In addition, with net debt to LTM EBITDAX of 1.3, the company’s leverage is well under control. There are no concerns for Cabot Oil & Gas in the next 12 months from a liquidity and debt perspective.
In terms of production growth for 2016, Cabot Oil & Gas expects growth in the range of 2% to 7%. With capital expenditure declining by 58% in fiscal year 2016 as compared to fiscal year 2015, muted production growth was expected. That is not a concern as long as the company’s balance sheet remains robust.
The negative is that Eagle Ford Shale has no rigs currently running, and the company expects only five net wells to be drilled in the asset through 2016. With Eagle Ford Shale being liquids rich, that could be a worry in the near to medium term. Companies with assets in the Permian Basin are still ramping up production while Eagle Ford Shale production is on a decline.
If oil prices remain sideways, failure to increase liquids production from 1,300 net Eagle Ford locations can hurt Cabot Oil & Gas.
However, the company’s Marcellus asset remains attractive from a cost perspective, and the cash unit cost ($/Mcfe) declined to $1.27 in fiscal year 2015 from $1.76 in fiscal year 2011. The unit cost is expected to decline further, to $1.25, in fiscal year 2016. With industry-leading cost structure, Cabot Oil & Gas will continue to deliver decent EBITDAX margins in the gas segment.
My overall view is mixed for Cabot Oil & Gas with the key positive being the company’s balance sheet position and liquidity in hand. However, with a significantly higher mix of gas production and with minimal activity expected at current oil prices at Eagle Ford Shale, I see that as a concern from a valuation perspective.
The company has done exceedingly well at Marcellus Shale, but there are relatively attractive investment options in the oil and gas exploration industry at this time. Occidental Petroleum (OXY, Financial) and Marathon Oil (MRO, Financial)Â are better investment options in the exploration sector compared to Cabot Oil & Gas.
When oil prices witness sustained recovery and the company ramps up its production at Eagle Ford Shale, the stock might look more interesting. Investors who have benefited from the recent rally in the stock can consider booking profits. If there is renewed downturn in the stock, another trading opportunity is likely.
Disclosure: No positions in the stock.
