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Cabot Lays Groundwork to Build on Marcellus Success

Cabot Oil & Gas Corp. will spend more in the Marcellus Shale through the rest of this year to lay the groundwork for a big drilling expansion in 2010, CEO Dan O. Dinges said last week.

Dinges helmed a conference call with energy analysts to detail 3Q2009 earnings and to announce the company's expanded push into northeastern Pennsylvania. The Houston-based producer now has a 170,000 gross-acre leasehold in the Appalachian Basin play. Nine of its horizontal wells are producing, and three have produced more than 1 Bcf to date, Dinges told analysts.

Seventeen horizontal wells have been drilled to date this year, and 16 are drilling or remain to be drilled from six horizontal rigs. The initial production rates of 24 wells have tested at 4.6-11.5 MMcf/d, with 30-day rates of 3.5-10.9 MMcf/d. All of this bodes well for future success, said the CEO.

"One year ago Cabot was producing about 5 MMcf/d from its Marcellus position in northeast Pennsylvania," said Dinges. "Today we are producing over 50 MMcf/d with a backlog of completions scheduled for the last two months of the year." Two of Cabot's "most recent completions have now been online for about 40 days and are currently producing 6.5 MMcf/d each."

Based on this year's success, in 2010 Cabot plans to expand its efforts in northeastern Pennsylvania "to 73 horizontal wells and 10 vertical wells," said Dinges. "This is more than a doubling of our effort and will account for two-thirds of our investment program for 2010."

The other one-third of Cabot's 2010 spending is to be directed toward East Texas, where the producer and its partners are flow testing their first horizontal well in the Haynesville Shale. The well, operated by Common Resources, is hooked up to sales flowing back at this point at around 21 MMcf/d with a flowing casing pressure of 7,800 pounds per square inch after 11 days online. Cabot holds a 42% stake.

"Our 2010 drilling program...is focused entirely on the Marcellus and in the East Texas region," said Dinges. But based on the early success in East Texas, Cabot may "rethink our capital allocation in this area with an eye toward expanding our Haynesville exposure."

Besides tapping into the shale rock in Pennsylvania and Texas, Cabot also plans to boost its gathering and processing systems in the Marcellus Shale play. Cabot now has the "ability to push through 110 MMcf/d," but by next June plans are in place to have 275 MMcf/d of processing capacity available, said Dinges.

Cabot reported a 5% increase in 3Q2009 production from the same period a year ago, lifted mostly by a 24% jump in output in the Marcellus Shale. The increase in Marcellus output came despite operational problems, which forced the company to cease production in Pennsylvania in the last few days of the quarter (see NGI, Oct. 26; Sept. 28).

Production gains by Cabot failed to overcome low natural gas prices, however. Quarterly net profits totaled $38.9 million (38 cents/share), compared with net income of $67 million (65 cents) in 3Q2008. Cash flow was $116.7 million and discretionary cash flow was $158.9 million, versus cash flow of $148.3 million and discretionary cash flow of $161 million in the year-ago period.

"In light of the general market conditions for natural gas, the metrics are very good," said Dinges. "Weighing on the overall growth rate was the sale of our Canadian assets."

Realized gas prices in 3Q2009 were $7.40/Mcf, compared with $8.66 in 3Q2008. Cabot said its overall costs in the latest quarter were up only slightly and were flat on a per-unit basis, with the largest increases occurring in stock-based compensation and exploration.

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