An oversupplied market and sagging basis differentials in the Northeast will find Cabot Oil and Gas Corp. reducing its capital budget by $75 million this year and adding no rigs in either the Marcellus or Eagle Ford shales as it opts instead to complete a backlog of wells in order to grow production.
Although the company's investors remained concerned about widening differentials, CEO Dan Dinges said Cabot reported its highest production growth ever in 2013, and he described the year's cost metrics and earnings as the best in the company's history.
In 2011 and 2012, Cabot grew its overall production by 43%, driven largely by its 200,000 net acres in the Marcellus Shale. Last year, though, the company grew production by 55% to reach 413.6 Bcfe, of which 3.2 million bbl was liquids. This week, production data submitted to the Pennsylvania Department of Environmental Protection (DEP) showed that Cabot owns and operates more than 10 of the state's top-producing wells (see Shale Daily, Feb. 20).
In the Marcellus alone, Cabot's average production was 1.17 Bcf/d in 4Q2013. But higher production was partially offset last year by lower realized natural gas and oil prices, as well as an increase in operating expenses to boost production.
"We have adjusted our 2014 plan in response to the macro price environment," Dinges told analysts during a fourth quarter earnings conference call on Friday. "Specifically, we have elected to stay at eight rigs in our total program, which is what we ended 2013 with. This includes six rigs in the Marcellus and two rigs in the Eagle Ford."
Natural gas price realizations for Cabot in 2013, including hedges, were $3.56/Mcf, down 3% compared to 2012. Oil price realizations also took a hit at $101.13/bbl, down 1% year/year.
"We discussed the desire to have a good cold winter and the farmer's almanac was correct; it did show up and drove New York Mercantile Exchange (Nymex) prices above everyone's screen level," Dinges said. "However, similar to last fall, the Nymex indication remained strong, but most of the underlying sales points have remained under pressure throughout the Marcellus area.
"This dynamic has somewhat influenced our decision to maintain our rig count as we ended 2013. As we were very deliberate last September, we do not anticipate chasing gas prices lower."
The company lowered its 2014 capital expenditures budget by $75 million to $1.3-1.4 billion, but it still anticipates hitting the midpoint of its 519-598 Bcfe guidance, thanks to a backlog of more than 1,000 stages waiting to be placed into production.
However, Cabot said production in the first half of this year will likely remain flat as a result of severe weather across Cabot's footprint, which financial analysts pressed Dinges on.
"Along with severe weather conditions experienced throughout our operating area, came mechanical issues that prevented a somewhat material amount of production from reaching our interstate markets," he said. "Compressor station run time was definitely impacted by the weather, and our midstream provider is still working out the issues to provide the expected levels of service.
“This was not a surprise or an operational issue as far as infrastructure is concerned, or anything like that. It was built into our guidance, which we feel comfortable with."
Many of the company's backlogged wells are expected to be completed in April and May, and the company expects to put them into sales in the second half of the year.
"With the improved well performance and given the current backlog of more than 1,000 stages waiting to be placed on production, Cabot should have no problem achieving the top end of its guidance range," said Gabriele Sorbara, an analyst at Topeka Capital Markets.
Phillip Jungwirth of BMO Capital Markets did note, though, that with production flat in the first half of the year, the company will likely see most of its production growth during the warmer months in which basis differentials are typically restrained. This led him to revise lower his 2014 earnings outlook for the company.
Cabot reported 2013 net income of $279.8 million (67 cents/share), up from $131.7 million (31 cents/share) in 2012. Overall revenues increased from $1.2 billion in 2012 to $1.7 billion last year. For 4Q2013, the company reported a profit of $77.9 million (19 cents/share), compared to $40.9 million (10 cents/share) in 4Q2012.
Cabot also announced a sales agreement to provide 500 million Btu of takeaway for 15 years with the in-service date of Transcontinental Gas Pipeline's (Transco) Atlantic Sunrise expansion scheduled for the second half of 2017 (see Shale Daily, Feb. 20). This, the company said, should help it to realize better gains from some of its prolific production in Susquehanna County, PA.
The company booked 5.5 Tcfe of proved reserves last year, as well, up 42% from 3.8 Tcfe at the end of 2012.