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Cabot Cutting Marcellus Spending 20%

Following in the footsteps of other major Marcellus Shale operators, Cabot Oil & Gas Corp. plans to reduce capital spending by about $100 million this year in response to low natural gas prices.

"We've taken our foot off the pedal somewhat," CEO Dan Dinges said during a conference call Tuesday.

The cuts will come entirely from the Houston, TX-based company's gas program, even though "the Marcellus delivers returns competitive with a vast majority of oil plays," according to Dinges. Cabot will spend about $790 million this year.

The Marcellus proved to be a major growth area for Cabot in 2011. Companywide, Cabot reported a 43.5% increase in production, largely on the back of a 42.5% increase in Marcellus gas production. Cabot drilled eight of the 10 best-producing wells in the play over the last six months of 2011, according to the Pennsylvania Department of Environmental Protection. The company is reporting an estimated ultimate recovery (EUR) rate of 7.5 Bcf for its average 10-stage Marcellus wells and said a few recent standout wells have EURs "in excess of 20 Bcf," arguably the best in the play.

Cabot also increased reserves by 12% in 2011 to slightly more than 3 Tcfe.

While record production for Cabot helped offset its lowest price environment since 2004, the company doesn't expect an encore of 2011 without changes, Dinges said. "It remains evident that Cabot has the most robust position in the Marcellus. In fact, our internal rate of return exceeds many areas in the Permian, Bakken and Eagle Ford," he said. Because of that portfolio, and efficiencies in drilling and completion, Cabot can cut Marcellus spending by 15-20% and still grow production by 35-50% this year -- down from a previous guidance of 45-55% -- without selling any acreage, according to Dinges.

"We do feel the market correction for the price of natural gas has begun. That said, though, the pace of recovery is uncertain and our 2012 program will be allocating 40-45% of our capital to our liquids plays," he said. Cabot increased oil production by 68% in 2011 and expects a 55% increase in 2012, primarily from its operations in the Eagle Ford Shale, but also from the Marmaton Shale of Oklahoma.

Whereas Talisman Energy Inc. said it would ramp up its drilling program once prices approached $4/Mcf (see Shale Daily, Feb. 16), Dinges offered a vaguer guidance, saying Cabot would increase spending once the market felt right on a macro-level while noting, "we do believe the floor has been found."

Cabot operates five rigs in the Marcellus, but plans to drop one in July and potentially a second toward the end of the third quarter if prices don't improve. Dinges said Cabot couldn't cut much further in the Marcellus without harming its program, but could theoretically cut in the Eagle Ford, if need be. "We don't anticipate doing that," he said.

Cabot does hope to continue improving efficiency in the Marcellus, according to Dinges.

When its compressed natural gas station comes online in Susquehanna County, PA, in May, Cabot will be able to use natural gas to fuel two of its five rigs. The company signed a new contract in the fourth quarter of 2011 for hydraulic fracturing services that reduces completion costs by more than 30%.

And Cabot recently commissioned a study to determine optimal lateral spacing in Susquehanna County, and is currently drilling a pilot program to test those findings. It expects to have results early next year.

With its new joint venture with Williams Partners LP to move Marcellus gas to New York and New England, Cabot expects takeaway capacity to be 1.5 Bcf by the end of the year (see related story).

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