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Cabot Pushing Through Low NatGas Prices, Ramping 2018 Production to Meet Demand

Cabot Oil & Gas Corp. plans to increase capital spending and production next year, primarily in the Marcellus Shale of northeastern Pennsylvania, as it gears up to fill a series of infrastructure projects that are slated to come online.

The company is targeting 15-20% year/year production growth in 2018. After budgeting up to $720 million for 2017, it plans to spend $1.025-1.150 billion next year, with up to $850 million allocated for the Marcellus. In Appalachia, the Atlantic Sunrise and Orion projects are under construction, as well as two natural gas-fired power plants that Cabot would exclusively supply. The company plans to add a rig and completion crew next year for a total of three rigs and two crews.

“We are entirely comfortable with the production growth we have indicated,” said CEO Dan Dinges during a third quarter earnings call on Friday. “It is our plan to certainly fill the new infrastructure with some of the existing gas that we’re producing today and also have incremental volumes that go into filling the Atlantic Sunrise and those two power plants.”

Dinges echoed the sentiments of other Appalachian operators that have so far reported this earnings season. Both Range Resources Corp. and EQT Corp. expect a busy 2018 as they ramp-up production to fill infrastructure projects coming online. Roughly 14 Bcf/d of takeaway capacity is in the works in Appalachia, according to various estimates.

Cabot is committed to moving 1 Bcf/d alone on the 1.7 Bcf/d Atlantic Sunrise project, which is scheduled to enter service in mid-2018. The operator is one of a handful of dominant producers active in the bottlenecked northern tier of the Marcellus. The company struggles at various points throughout the year with low regional prices as it did in the third quarter, but Dinges said he soon expects differentials to tighten as more pipelines and in-basin demand comes online.

As for the long-delayed Constitution Pipeline, which Cabot has contracted for 500 MMcf/d of takeaway, Dinges reminded financial analysts that it still should not be counted out as all of its sponsors are still committed. Even so, the pipeline has not been figured into the long-term outlook. Constitution has filed for a declaratory order at the Federal Energy Regulatory Commission, asking commissioners to waive New York state’s authority because it argues regulators took too long to make a decision about the project’s water quality certificate.

Average realized natural gas prices during the third quarter, including hedges, rose 16% year/year to $2.03/Mcf but fell sequentially from $2.38/Mcf.

“As we have reiterated many times before, while production is a byproduct of our capital allocation to high return products, we are not chasing top-line production growth for the sake of it and have absolutely no problem holding back production if the prices do not warrant additional gas at certain times,” Dinges said. “I’m not overly concerned about the recent price dynamics given that over the last few years we’ve seen some of the widest differentials during the month of October, which has been followed by a significant improvement in basis.”

Cabot produced 169.5 Bcfe in the third quarter, up from 150.8 Bcfe in the year-ago period, but down from 173.1 Bcfe in 2Q2017. The company came in at the low-end of its guidance due to curtailments it made in reaction to slips in the daily gas market. Appalachian basis, management said, periodically slipped below $1.00/Mcf throughout the quarter. Pipeline maintenance issues, which have appeared to affect other operators so far this earnings season, also cut into the period's volumes.

“There was a lot of similarities between this summer and last summer in terms of mild weather and low demand, storage being at pretty much the same levels and a lot of gas on the market,” said Senior Vice President of Marketing Jeffrey Hutton. “I think one of the more unique characteristics this year was probably more pipeline maintenance than we’ve seen in years past. It seems to me they’ve been lasting longer and going later into the year. That’s probably the only unique thing.”

The weaker Appalachian basis found Cabot widening its gas production range in the fourth quarter to 1.775-1.850/MMcf/d. It has also tightened its annual production forecast to 9-11% from the previous range of 8-12% to reflect potential price-related curtailments.

In the Eagle Ford Shale, Cabot plans to spend $125-150 million next year, where it will continue running one rig and one completion crew to help generate free cash flow. Natural gas liquids production in the field came in below guidance because of downtime at a third-party processing plant that was impacted by Hurricane Harvey.

In all, the Marcellus continued to account for the bulk of 3Q2017 production at 1.706 Bcf/d, with the Eagle Ford contributing 15,656 boe/d, up 19% from 2Q2017 volumes.

Earlier this year, Cabot said it had identified two new exploration areas in unspecified locations, where it is wildcatting for oil. It plans to spend up to $75 million in the new fields next year, but Dinges said asset sales could help drive more activity if results through the first half of the year warrant it. For example, Cabot is currently marketing its remaining assets in the Haynesville Shale.

Cabot reported net income of $17.6 million (4 cents/share) in the third quarter, compared with a net loss of $10.3 million (minus 2 cents) in the year-ago period. Revenue increased to $385.4 million from $310.4 million. 

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