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Cabot Oil & Gas Corp. plans to ramp up production as the year unfolds to meet about 1.5 Bcf/d of new demand that’s scheduled to soon come online with pipelines and gas-fired power plants in the Northeast.
With an exit from the Eagle Ford Shale set to close by the end of the month, the company is now essentially a Marcellus Shale pure-play operator leaning on production that primarily comes from Susquehanna County in Northeast Pennsylvania. CEO Dan Dinges said Cabot anticipates sequential production growth of 6%, 11% and 13% in the second, third and fourth quarters as the Atlantic Sunrise and PennEast pipelines, along with the Lackawanna Energy Center and Moxie Freedom power plants, are expected to enter service between the middle of this year and next.
Cabot holds 1 Bcf/d on the 1.7 Bcf/d Atlantic Sunrise project. It’s also committed to another 50 MMcf/d on the 1 Bcf/d-plus PennEast project, which is scheduled to enter service next year. Cabot would also provide 400 MMcf/d to the power plants as their exclusive supplier. The new demand, along with other takeaway initiatives being considered, and the possibility of new production from exploratory areas, factors into an improved three-year outlook.
However, even with the latest projects drawing near, some uncertainty remains.
PennEast, for example, is facing increasing resistance in New Jersey, where the project’s leading customers are located. Under Democratic Gov. Phil Murphy, the state Department of Environmental Protection (DEP) has asked FERC to throw out the pipeline’s certificate, claiming its environmental review is flawed.
“We’re watching very closely, of course, as an active shipper and supplier on that pipe,” said Senior Vice President of Marketing Jeffrey Hutton. “We have been in discussions with the owners, shippers and markets associated with PennEast trying to understand the timeline, and more importantly, the timing of when those utilities will be out searching for new supplies. Obviously, that’ll be closer to when there’s more clarity on the in-service.”
Like other projects, PennEast has resorted to using eminent domain to resolve remaining land issues now that it has a Federal Energy Regulatory Commission certificate. The company is concluding surveys on hold-out properties to get more information to state regulators for the last remaining permits, which has attracted attention.
“There has been some news and some resistance by some of the environmental groups and some information requested by the New Jersey DEP as of last week with FERC,” Hutton said. “But a lot of that is work in progress. And yes, it slows down the pace. As kind of an outsider on this project, but close to it, we’re still expecting construction to be in 2018, but it could be later in the year rather than sooner.”
Nonetheless, Cabot has revised its three-year production outlook higher. Adjusted for divestitures, it now calls for a compound annual growth rate of up to 24%, compared to the previous range of about 20%. In addition to the Eagle Ford sale, the company also sold other properties in East Texas and legacy assets in West Virginia.
The outlook could also be positively impacted by exploratory efforts. The company still plans to spend $75 million on exploration this year. In early 2017, Cabot said it had identified two new areas in unspecified locations where it’s wildcatting for oil. Currently, crews are gathering data for a decision about whether to move forward with additional delineation and development.
“When we get the adequate data to be able to make that call, I think it’s going to come down to a fairly bright line of, do we move forward with the project, or do we monetize what we have and go about our business,” Dinges said, adding that he doesn’t expect to provide specific details about the prospects before the third quarter.
In any event, the company plans to continue leaning on its core in the Marcellus to support production growth. In addition to new supply coming online, Cabot could look to increase its in-basin market share or pursue other greenfield projects such as laying “a pipeline right across the fence line from Pennsylvania into New York,” to supply fuel oil power plants with natural gas, Dinges said of one idea.
However, the company hasn’t had too much luck in the state. It’s continuing the fight to get the Constitution Pipeline built. New York denied the project’s water quality certification about two years ago, and the company has had to work around the regulatory snag to fill the void, which Dinges said does not affect longer term plans.
Cabot is moving forward with a strong balance sheet at a time when some of its peers are realigning performance metrics and focusing more on shareholder returns. It outperformed the S&P 500 index last year, returned $202.6 million of cash to shareholders through dividends and share repurchases, and it generated positive free cash flow for the seventh consecutive time in the fourth quarter. The board has also authorized an increase in the share repurchase program to 30 million shares, or 6.5% of those outstanding.
Cabot produced 172.6 Bcfe in 4Q2017, up 4% sequentially and 8% from the year-ago quarter after adjusting for divestitures. For the full-year, Cabot reported production of 685.3 Bcfe, compared to 627.1 Bcfe in 2016.
The company reported a fourth quarter net loss of $44.4 million (minus 10 cents/share), compared with a net loss of $292.8 million (63 cents) in 4Q2016. Full-year net income was $100.4 million (22 cents), compared with a net loss of $417.1 million (minus 91 cents) in 2016.
Full-year natural gas price realizations, including hedges, increased to $2.31/Mcf in 2017, a 36% improvement from 2016. That helped lift revenue to $1.8 billion last year, compared with $1.2 billion in 2016.