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Cabot Looking Beyond Latest Constitution Pipeline Delay

A week after the New York Department of Environmental Conservation (NYDEC) denied a key water quality permit for its Constitution Pipeline, Cabot Oil & Gas Corp. management said it refused to "dwell on the specifics" and couldn't "expand on the legal strategy going forward."

CEO Dan Dinges, however, told financial analysts during a call to discuss first quarter earnings on Friday that the company remains totally committed to the project and said the other sponsors, which include Williams and natural gas utilities, remain confident that the pipeline will prevail.

The project's sponsors have vowed to challenge the legality of the NYDEC's decision (see Shale Daily, April 25). The 125-mile pipeline would carry Marcellus Shale gas from Susquehanna County, PA and interconnect with the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in New York.

Constitution was expected to be in service later this year, but the NYDEC took more than two years to issue the denial, and Cabot said Friday that the in-service date would be pushed back to the second half of 2018. While the company continues to build its transportation portfolio, its financial results last quarter demonstrate a need for more takeaway from Cabot's core area of operations in Northeast Pennsylvania. The company has struggled with lower price realizations in the northeast part of the state for years.

As supply from the area has dwindled during the commodities downturn, Cabot's differentials narrowed in the first quarter, but its overall natural gas price realizations still took a beating.

"The company experienced its lowest price realizations in many years, the lower realizations were the result of an average [New York Mercantile Exchange] settlement of $2.09/MMBtu during the first quarter, which was the lowest average NYMEX price we have witnessed since the first quarter of 1999," Dinges said.

Cabot's natural gas price realizations, excluding hedges, were $1.49/Mcf during the period, down from $2.23/Mcf in 1Q2015. Better basis, however, implied a 60-cent discount to NYMEX, compared to a 75-cent discount during the year-ago period. Cabot has been mining all available data to determine the supply outlook for its core area in Northeast Pennsylvania. The company is forecasting a 50-55 cent discount to NYMEX in the second quarter, as supply is expected to decline further, according to its research.

"While lower prices have certainly had an impact on industry-wide margins and cash flows, including Cabot's, the good news is that the outlook for natural gas prices continues to improve as the country is beginning to experience a decline in dry gas production stemming from a significant reduction in drilling and completion activities and an improvement in natural gas demand driven by increased power demand and exports," Dinges said.

According to Cabot's estimates, operators were producing about 8.4 Bcf/d in Northeast Pennsylvania in February, compared to about 7.6 Bcf/d in April, which positively impacted local hubs such as Leidy and Tennessee. While Dinges stressed that Constitution remains important to the company's future plans, he said Cabot is working to secure more capacity beyond New York and New England, including two new projects that it can't yet discuss in detail.

One of those, Senior Vice President Jeffrey Hutton said, is a large, long-term demand-pull project for an "end-user" that would provide more capacity beginning in 2018. Cabot still reduced its 2016 capital expenditures range for equity investments in Constitution and Atlantic Sunrise to $30-35 million from $80-150 million. Atlantic Sunrise would expand capacity on the Transcontinental pipeline beginning in late 2017.

Cabot produced 160.3 Bcfe in the first quarter, or more than 1.6 Bcf/d, down from 171.4 Bcfe in the year-ago period on curtailments, lower activity across its footprint and unexpected downtime at a processing facility in the Eagle Ford Shale. Production was up from 4Q2015, when the company produced 151 Bcfe.

Last year, Cabot curtailed about 75 Bcf of production (see Shale Daily, Feb. 19). Those curtailments continued during the first quarter, and Cabot has baked more into this year’s guidance. The company is forecasting a sequential production decline of up to 6% in the second quarter.

When asked, Dinges said he didn't want to provide specifics about exactly how much gas the company curtailed during the first quarter, saying only that "I think it's safe to say everybody is working-off their level of curtailed volumes and getting close to a base line production." The company also exited the first quarter with 54 drilled but uncompleted wells, down from 63 at the end of last year.

Revenue declined on lower oil and gas prices to $281.9 million in the first quarter from $464.8 million during the year-ago period. Cabot reported a net loss of $51.2 million (minus 12 cents/share), compared to net income of $40.3 million (10 cents/share) in 1Q2015.

The company funded its $91.7 million of spending during the first quarter with operating cash flow and proceeds from the $57 million sale of non-core assets in East Texas to an undisclosed buyer.

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