The money-making Marcellus machine known as Cabot Oil & Gas continues to crank out the hits. On Friday Cabot held a conference call to discuss the company’s first quarter 2019 performance. And wow! What a performance! The company made $308 million in net income/profit (up 141% from $128 million in 1Q18), and produced 2.3 billion cubic feet per day equivalent (Bcfe/d) of mostly Marcellus (little bit of Haynesville) gas, up 21% from 1Q18.
Although the company produced more gas in the first quarter, the key to making money is to get a higher price for that gas, which Cabot did, getting an average of $3.35 per thousand cubic feet (Mcf), an increase of 37% when compared to the first quarter of 2018.
Cabot drilled 25 new Marcellus wells and completed 14 wells (13 went online to production) in 1Q19. They still plan to bring online 80-85 new wells this year.
Here’s a copy of the 1Q19 full update:
Cabot Oil & Gas Corporation Announces First-Quarter 2019 Results, Increases Dividend by 29 Percent
Cabot conducted a conference call with analysts on Friday. As usual, there were some interesting tidbits coming from the call. In his opening remarks, CEO Dan Dinges said this was “one of the best quarters in Cabot’s history.”
During the Q&A portion of the call, we found a couple of exchanges quite interesting. Like this one about how productive (or not) the Upper Marcellus rock layer is for Cabot:
Leo Mariani
Okay, very helpful color for sure. Any further update in terms of the Upper Marcellus well performance now that you’ve had a couple more months to kind of view those wells?
Dan Dinges
No, it be a similar comment that I’ve made previously. We have not seen anything to deter our expectations that the production curve, the decline curve, if you will would be above what we have out there currently as our 2.9 EUR for the Upper Marcellus. That is holding true with the early time production curve and quite frankly, we do expect that, but as prudency would necessitate we’re going to get more production before we make a firm statement on that. But we’re pleased with what we’re seeing and we’re continuing to drill representative wells in that section throughout this year.*
Another analyst challenged Dinges, observing Cabot is a one commodity, one play, one county (Susquehanna County, PA) company, asking if that isn’t a bit risky? What are you doing Danny boy, to make it less risky? And oh, by the way, is a bigger fish going to buy you out soon?
Michael Kelly
Great, thanks. Dan, industry consolidation has obviously been the hot topic in space right now and as has been a leading question, but if I look at Cabot, you guys are really kind of a one commodity, and really is a one county levered operator, and I’d love your thoughts on adding diversification to the portfolio and just kind of get your general take on what Cabot’s role if any is likely to be kind of a period of increased consolidation. Thanks.
Dan Dinges
Thanks, Mike. It’s going to be, I think you’ll continue to hear a lot of the chatter and expectations on the M&A side. When we look at our assets and where – how we’re located to your point of a single commodity, single basin, single regulatory environment, it’s a two-edge sword. We’re there, but we’re there with the – what I think is probably the best natural gas assets in North America. I think our numbers and financials do reflect that.
So looking at what we can deliver with just those assets, manage the risk profile of it being same commodity or same jurisdiction, we’re comfortable with that. We’re comfortable with how we’ve been able to manage it and we’re comfortable with working through both the regulatory environment and the commodity price expectations that we can still deliver financial results.
And when you look at long-term and assess from a Board level, strategic level, Cabot has always made decisions that are I think beneficial to shareholders to deliver the maximum value and any strategic decision we would make would also take that in consideration. So if it’s good for the shareholder, my job one, two and three is to deliver value to the shareholder and if it’s good for the shareholder, my job is to evaluate it.
So if it’s a strategic, it’s strategic. If it’s doing what we’re doing and that’s organic growth, delivering value through dividend increases and buybacks and organic growth with a very clean balance sheet, I think we have one of the best looking companies on a macro level and delivery to shareholders that you can find out there with a high degree and level of consistency on delivery. So we’re happy with the cards we have and again, if there is significant value enhancement in any other direction, then I’m paid to look at it.*
So our interpretation of Dan’s answer is: We’re doing just fine, we’re a money-making machine, and there’s no plans to change that. As for someone else buying us out, you may hear rumors. But no comment.
We’d also like to point out to the questioner (Michael Kelly from Seaport Global), that Cabot does, from time to time, go shopping for “what’s next” in other plays, although it doesn’t always work out (see Cabot Pulls the Plug on Drilling in Ohio’s Knox Layer).
One of the analysts asked Cabot to update them on what they see in the way of new pipeline projects:
Brian Singer
Can you or Jeff give us the latest update on the midstream chalkboard, any local demand projects or pipelines out of the region that are moving earlier, later added or subtracted from the schedule?
Dan Dinges
Yes. I’ll turn that to Jeff.
Jeffrey Hutton
Hi. Good morning, Brian. I guess, two areas on in-basin demand. Obviously, it’s key on our radar. We were out there looking very, very hard at a number of different things. Nothing to announce today of course, but I would add that we were also being very maybe selective in our approach. We want to find the right project, the right scale, timing. We also want to find the right project for the community, and there is a lot of factors going into it, but we are looking around. We have a lot of leads and lot of prospects. I’ll kind of leave it at that.
But I might add that others are going at it as well and in the six-county area up there, I think there’s been something like 1.4 Bcf of in-basin demand added in the last year and a half, of course, a lot of that was power growth and we are continuing to get calls about additional projects up there, but on the power side, but we’ll see how those play out.
In terms of infrastructure, I’ll just talk about why these staff to begin with. Publicly you all will see a filing notice a FERC problem in June on the project, we’ve completed pre-filing, completed open houses to the projects moving along and see nothing at this point to move us away from November 20, 21 in-service on that project.
Talk a little bit about PennEast, I think publicly they have said that they will submit their DEP permit to New Jersey sometime in June. I think they also have said administratively they are complete in Pennsylvania. So that’s good. So we’ll see how the DEP and their 401 is treated once it’s submitted. Also it could be anywhere from six months to a year and I believe they’ve stated they’ll start construction as soon as they get that final permit. That’s about it on the projects out at this point.*
An interesting question to Cabot about what the company will do if the price of natgas once again sinks into the basement. Dinges’ answer? Cabot can still make money with gas below $2/Mcf, whereas other drillers can’t:
Holly Stewart
Dan, maybe the first one just, I know you’ve provided your kind of key forecasted financial metrics at different pricing, but any updated thoughts around your activity levels, should strip move substantially below this kind of $2.75 level and obviously recognizing different tools are substantially better than they have been when we were at sort of similarly depressed NYMEX prices?
Dan Dinges
Yes. We have bandwidth of $2.50 to $3.00 and if it moves substantially below our bandwidth as an average for the year at any point during the year, we’re not going to have a knee-jerk reaction to our capital allocation, we’ll continue to look at the macro and make some projections on where we think the strip is going to go, but you need to keep in mind that we deliver significant amount of earnings and return to the shareholders even below our $2.50 low end that we’ve used for 2019.
I understand the metrics and I understand the cost and I understand the return from our peer group out there and I know that if Cabot gets stressed in any particular way, I think there’s going to be a self-correcting mechanism because Cabot can make money below $2, but I’m fairly confident with my knowledge that there is not going to be a lot of money made below $2 and I think it’s going to have an impact on the macro environment.*
Another question about diversifying outside (or even inside) the Marcellus. Would Cabot consider other plays. Dinges responds (our words): You betcha. And if they go to another region, they’d likely be looking for oil.
Jeffrey Campbell
Okay. Thanks. And another kind of higher level question. When Cabot is asked about M&A or exploration, it seems like the assumption is always that it would be about oil and be in other basins. I was just wondering if you ever look for other dry gas opportunities within Appalachia and I realize your Lower Marcellus acreage is clearly at best, but there are some other dry gas areas in Northeast PA that are starting to show dramatic improvements. So I wondered if that’s something you keep an eye on.
Dan Dinges
Yes, we monitor all the activity up there and we do keep an eye on it. If from a decision standpoint and how we monitor or consider capital allocation or strategic opportunity, we look at what the financial returns would be of any investment we’ve made at agnostic, quite frankly, to the commodity. If we feel like we can deliver significantly more of the same then if it comes through natural gas asset or oil asset, we’re indifferent.
The benefit, if you do get out of basins it mitigates the single commodity. If you do also get out of a basin it would probably be an oil consideration also which also is not only the commodity differential, but it is also out of the jurisdictional confines of PA. So we look at both, but one, two and three is what deliveries of the financial metrics would occur if we did anything.*
How much spare capacity is there with various pipelines Cabot uses to get their gas to market?
Jane Trotsenko
Good morning. I have a question for Jeff. Atlantic Sunrise is obviously running full. I’m curious how much spare capacity do you see available on Millennium and Tennessee pipelines?
Jeffrey Hutton
Okay. Well, it obviously it varies quite a bit and – but from a high level, we added the in-basin demand kind of offset any kind of production growth over the last couple of years in Northeast PA and you take a look at some of the Southwest PA volumes that are now headed out on Rover and Nexus and some of the Columbia XPress projects and other new projects and you take a look at Sunrise and the 1.7 Bcf, that was probably removed the majority from Transco and from Tennessee and a little bit from Millennium.
And then look at some of the new demand that Millennium added new competitive power plant in New York. It all adds up to spare capacity on the interstates, putting a definitive number on it is difficult because we believe there were spare capacity in these pipes before anything I just mentioned. So it is a moving number, but 2 Bcf to 3 Bcf a day of spare capacity is, is not out of the ballpark.*
*Seeking Alpha (Apr 26, 2019) – Cabot Oil & Gas Corporation (COG) CEO Dan Dinges on Q1 2019 Results – Earnings Call Transcript
The slide deck used for Friday’s update/conference call:
Cabot Oil and Gas – Q1 2019 Earnings Call Presentation vFINAL
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