In this article, let's take a look at Cabot Oil & Gas Corporation (COG), a $14.21 billion market cap company, which is an independent oil and gas company engaged in development, exploration and production in North America
Huge Assets
The company´s operations are primarily focused in the Marcellus Shale in Pennsylvania, the Eagle Ford in south Texas and in Oklahoma. The company's asset base is now among the most diverse of the small oil and gas firms.
At the end of last year, the company had reserves of 5.5 trillion cubic feet of equivalent, with net production of 1,130 million cubic feet of equivalent per day. Natural gas represented 96% of production and 97% of reserves.
The firm controls a highly productive, low-cost drilling inventory targeting the dry gas Marcellus shale in Pennsylvania.
The Marcellus Shale
It is the star of the firm, because it is the largest operating area and represents its largest growth and capital investment area, with approximately 200,000 net acres in the dry gas window of the play.
Last year, the production had an increase of 70.3%, from 209.3 Bcfe to 356.5 Bcfe. This number represents about 86% of total production. Further, the gas company invested $815.8 million here and drilled 94.5 net horizontal wells.
Eagle Ford Shale
The company holds more than 60,000 net acres in this oil window at relatively low cost. Last year, production of net liquids and natural gas has increased and represents approximately 3% of full-year production. Further, the firm invested $261.5 million s.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $42.33, so if you buy shares at current market price ($34.05), your return from price appreciation would be 24.3%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 2 cents per share each quarter, totalizing $0.08 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 0.23%. So the total expected return for investing in Cabot is 24.53%, which we believe is an attractive stock return.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 18.57% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.28 vs $0.21). During the past fiscal year, the company increased its bottom line. It earned $0.67 versus $0.31 in the prior year. This year, Wall Street expects an improvement in earnings ($1.15 versus $0.67).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| COG | Cabot | 12.69 |
| ECA | Encana Corp. | 4.59 |
| CPG | Crescent Point Energy Corp. | 1.70 |
| CXO | Concho Resources Inc. | 6.68 |
| EQT | EQT Corp. | 9.68 |
| Industry Median | -1.00 |
The company has a current ROE of 12.69% which is higher than the industry median and the ones exhibit by Encana (ECA), Crescent Point Energy (CPG), Concho Resources (CXO) and EQT (EQT). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 37.8x, trading at a discount compared to the average of the industry. To use another metric, its price-to-book ratio of 5.8x indicates a premium versus the industry average of 1.86x while the price-to-sales ratio of 7.2x is above the industry average of 4.2x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $35.458, which represents a 28.8% compound annual growth rate (CAGR).
Final Comment
With a good asset quality, Cabot is well positioned among the E&P firms, with good number of available drilling locations, reasonable per-unit production costs and not excessive prices.
The Marcellus assets continued to have good productivity and we think this trend will continue. The U.S. natural gas industry could remain under pressure but we think Cabot has good drivers for growth. The Marcellus will reach 90% of Cabot's production in the near future. Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Leon Cooperman (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), John Burbank (Trades, Portfolio), Jim Simons (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ron Baron (Trades, Portfolio) and John Keeley (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
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