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Undeterred by Commodity Prices, Cabot Plans Robust 2015 Program With Eagle Ford Focus

Despite admitting that 2015 could be one of the toughest years yet for oil and gas prices, Cabot Oil & Gas Corp. management on Friday reaffirmed the company’s plans to grow annual production by 20-30%, with a drilling program that could eventually lean more heavily on the Eagle Ford Shale of South Texas.

Although Cabot's stronghold remains in northeast Pennsylvania's Marcellus Shale, where it is one of the state's largest producers (see Shale Daily,Aug. 19), for the second quarter in a row management underscored the company's growing focus on the Eagle Ford, where oil production and satisfactory returns are earning a bigger slice of its capital budget going forward.

"We certainly like the returns. We currently have a 50% return at $80/bbl. Some of the new acreage is going to require drilling to maintain that acreage and so on the near-term outlook, certainly with the returns we get, our group is gearing up to expand our operations -- moving our operations around a little bit more than say what we had done a couple months ago," CEO Dan Dinges said about next year's plans for the play during a conference call. "If we have oil prices that stay in the range they are today or better -- or even lower than that $80/bbl -- we do not anticipate pulling any capital from the Eagle Ford. We expect to keep these rigs busy and keep a couple frack crews busy throughout the year."

Last October, the company cut two deals to sell non-core assets in the Midcontinent and West Texas, leaving it to focus on the Eagle Ford, where its position has grown to 83,000 net acres after an acquisition near its Buckhorn operating area in September (see Shale Daily, Sept. 24; Oct. 18, 2013

That purchase will allow the company to extend its laterals with additional acreage, management said. Cabot has also been testing tighter downspacing in the Eagle Ford with the hopes that it will increase the number of available drilling locations there. The company's move toward reducing the length of of its horizontal hydraulic fracturing stages in the Eagle Ford and pumping more proppant per lateral foot helped boost year-over-year liquids production in the second quarter to 961,000 bbl (see Shale Daily, July 25).

Next year, Cabot is counting on the Eagle Ford to help increase its liquids production to 18,000-20,000 b/d

Still, modifications to its completions cost the company in the third quarter, with liquids production staying flat at 961,000 bbl due to the timing of its pads coming online and downtime associated with well shut-ins for offset completions. Net income was up more than 10% year-over-year, but the Street had expected more oil, and the company narrowly missed earnings-per-share estimates, according to Topeka Capital Markets analyst Gabriele Sorbara.

Overall, Cabot produced 132.4 Bcfe in the third quarter, up 24% from 3Q2013, with 1.3 Bcf/d coming from the Marcellus. Net income was $85 million (20 cents/share), versus $74.6 million (18 cents/share) in the year-ago period.

Oil prices have fallen substantially over the last several weeks. West Texas Intermediate (WTI) fell below $90/bbl on Oct. 2 for the first time in 17 months, and analysts don't expect it to move much higher  next year (see Shale Daily, Oct. 9). Dinges said it would take $70/bbl, or lower, before Cabot pulled back the reins in South Texas. The company was running just two rigs in the play earlier this year and now has four drilling that will run through 2015, while its land team is putting together packages to expand the asset base there.

Including hedges, Cabot's realized oil price for the third quarter was $94.79/bbl, down 9% from the $103.76/bbl it earned at the same time last year. It's natural gas price realizations didn't fare much better at $3.06/Mcf, which included hedges, dropping from the $3.36/Mcf in 3Q2013.

But Dinges reminded analysts that Cabot has been coping with depressed Northeast natural gas prices for more than a year now (see Shale Daily, Feb. 21). The company contended with similarly weak commodity prices last year.

"If you look out at 2015, I think everyone is kind of on the same page that 2015 is probably going to be the most challenging year," he said. "Cabot has weathered this period, if you will, for the last six months to a year. We do expect that realizations would go down for all players out there, probably in gas and oil price for 2015, but we are in a position with our program to deliver decent returns through the period and come out on the other side, which we think is going to be a better market."

Heading into the end of the year and into next, Cabot's Marcellus program will remain strong. It is, however, dropping one rig and running five in the play next year instead. Company officials said they're aiming for 1.8-2 Bcf/d in the fourth quarter and throughout 2015. The company expects to drill about 185 wells next year, with plans for 100 in the Marcellus and 85 in the Eagle Ford. Cabot estimates that it will spend between $1.5-1.6 billion on its 2015 operations.

"The addition of high-margin production in the Eagle Ford should help offset some of the lost margins we are seeing from our natural gas sales with the current price margins," Dinges said. "Production rates will be set upon various factors throughout the year, including natural gas price realizations and, to a lesser extent, logistics around the infrastructure such as planned and unplanned maintenance."

Cabot has for sometime expressed frustration about bottlenecks in northeast Pennsylvania. But on Friday, it noted that FERC issued its final environmental impact statement for the Constitution pipeline, which the company has partnered on with Williams, Piedmont Natural Gas and WGL Holdings to deliver Marcellus gas to lucrative Northeast markets (see related story; Shale Daily, Feb. 22, 2012).

Dinges said Cabot remains "cautiously optimistic" about Constitution's remaining regulatory approvals, adding that it should be in-service by late 2015 or mid-2016. Senior Vice President of Marketing Jeffrey Hutton said negotiations with buyers are ongoing for Cabot's gas, which will be priced at Tennessee Zone 5 Line 200.

"The Constitution is just one component to several infrastructure projects that will be implemented up in the Northeast. But certainly the Constitution is one of the most impactful near-term inflection points, and we think we're going to be able to get a half a Bcf of our gas to a different price point and that price point, certainly currently and historically, has been a better price point than the general market," he said. "We think with the other projects, as they unfold into 2016, 2017, 2018, that the market will rationalize the supply side. Certainly demand is going to be enhanced, and we think that we will be able to get gas to a broader index, if you will, on a weighted average basis, that from today will improve significantly."

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