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Cabot Continues Curtailing Marcellus Gas; Constitution Pipeline Delays Persist

Construction that was soon expected to begin with a late 2016 target in-service date for the Constitution Pipeline -- a crucial linchpin for plans to unlock stranded natural gas in Northeast Pennsylvania -- appears increasingly unlikely as New York regulators continue holding up the project.

The pipeline, which would deliver Marcellus gas to the Northeast, is backed by Cabot Oil & Gas Corp., Williams, Piedmont Natural Gas Co. and WGL Holdings. In a third quarter earnings conference call on Friday, Cabot CEO Dan Dinges sounded slightly agitated about the continued delays from the New York Department of Environmental Conservation (DEC). He rattled off the benefits the pipeline would generate in the state, including millions in tax revenues, jobs and gas service for rural communities that have never had any, saying those benefits have too often been overlooked in discussing the pipeline.

"To be blunt and to the point, we have not received the [water quality permit] from New York, which is necessary for the mainline construction of the pipeline," Dinges told analysts. "There remains a few other outstanding approvals as well, but these issues should fall into place fairly quickly once New York issues" the water quality permit.

In December, Constitution was given the green light by the Federal Energy Regulatory Commission to begin construction, but it hit administrative snags with the DEC (see Shale DailyDec. 3, 2014). The project had to resubmit an application for a water quality permit. Construction was expected to begin this fall, but if Constitution does not receive the water quality permit and finalize other aspects of the project by January, Dinges said the project would likely be delayed for another year.

"Further delays in issuing the final permit risk the project's 2016 in-service date, which means New York energy consumers will have to wait another full year to receive relief from the extraordinarily high energy prices seen during the heating season," Dinges added.

For Cabot, the pipeline is key to its operations in Northeast Pennsylvania, where its work has made the company one of the state's top producers. Cabot curtailed 500 MMcf/d of natural gas on lower prices and a lack of takeaway in the second quarter (see Shale DailyJuly 24). Those shut-ins persisted throughout the third quarter.

"Similar to our discussion in the second quarter, we continued to curtail production in the Marcellus in the third quarter due to the weak pricing throughout Appalachia," Dinges said. "We are cautiously optimistic for an improvement in price realizations in 2016 due to the impact of new takeaway capacity coming online over the next few quarters, on the demand side and on the impact of reduction in industry activity on the supply side."

Cabot is currently operating three rigs in the Marcellus, but it plans to drop one of those by the end of the year. When asked exactly how much gas Cabot curtailed in the third quarter, Dinges couldn't say.

"In regard to curtailed volumes we might get the question about how much is shut-in and what ability do we have to move incremental volumes," he said. "We have adjusted our capital program as we've gone through 2015 to take into consideration the curtailments...As we roll through the year, and with the amount of activity we're conducting right now and the various swings we have in our marketing group, that curtailed volume is a variable number."

Cabot produced 142.1 Bcfe in 3Q2015, up just 7% from the year-ago period and up slightly from the 138 Bcfe it produced in 2Q2015. In the Eagle Ford Shale, where the company plans to drop its sole rig by the end of the year, liquids volumes declined by 8%. Overall, third quarter production consisted of 133 Bcf of natural gas and 1.5 million bbl of crude oil, natural gas liquids and condensate.

The flattish production growth, Dinges said, is the result of curtailments. The company also cut its full year financial guidance from $900 million to $850 million (see Shale DailyFeb. 20).

The capital spending decrease was also aided by fewer rigs, drilling efficiencies and lower service costs. If both Constitution and Williams' Atlantic Sunrise project come online late next year, Dinges said the company would be prepared to ramp-up activity in the Marcellus by 3Q2016. But management said Cabot's preliminary 2016 budget would likely be cut to $615 million unless commodity prices increase meaningfully.

Including hedges, Cabot's average realized natural price for the quarter was $2.02/Mcf, down 34% from the year-ago period. It earned $43.17/bbl for oil during the third quarter or 54% less than it did at the same time last year.

As a result, Cabot reported a net loss of $15.5 million (minus 4 cents/share) in 3Q2015, compared to net income of $100.8 million (24 cents/share) in 3Q2014. At the end of the third quarter, Cabot's debt exceeded $2 billion, of which $425 million was outstanding under its $1.8 billion credit facility.

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