Cabot Oil & Gas Corp. is pulling up stakes and halting exploratory efforts for oil in one of two prospective areas it identified for tests early last year after incurring $51.1 million of dry hole costs during the second quarter.
While Cabot said it would continue tests in the other area, thought to be Ashland and Richland counties in north-central Ohio, management said the company would stop allocating capital to the Permian Basin in West Texas. Williams Capital Group LP analyst Gabriele Sorbara told NGI’s Shale Daily that the firm believes Cabot had been working in the Alpine High, in a wetter area to the west of Apache Corp.’s prolific dry gas position. The properties, he said, are in eastern Jeff Davis, northern Brewster and northern Pecos counties.
“If a new venture did not generate competitive full-cycle rates of return, provide meaningful inventory depth and resource life, and the ability to be self-funding in a low commodity price environment, we would have no problem walking away, and that is where we find ourselves today as it relates to this exploratory area,” CEO Dan Dinges said. He reminded financial analysts during a second quarter earnings call of what management had said last year when it announced the exploratory efforts.
Dinges also acknowledged that operations in the area, at the southern end of the Permian’s Delaware formation, are potentially dogged by infrastructure constraints.
Meanwhile, the company has three permits to test wells in Ashland County, OH, according to state records. It is targeting the Knox formations, which have long produced oil in the state, with unconventional drilling. Dinges said the company would have an update on those efforts on its third quarter call. The prospects have always had a “high hurdle” in terms of competing with the core Marcellus Shale asset in Susquehanna County, PA.
The story in northeast Pennsylvania has continued to improve for Cabot. As its 20-year agreement to supply Sumitomo Corp. affiliate Pacific Summit Energy takes effect, the company soon expects to be able to move 350 MMcf/d to the Dominion Cove Point liquefied natural gas export facility in Maryland on the Atlantic Sunrise pipeline. That project is expected to enter full service next month, and the company plans to place 37 wells online this quarter to help fill it. Overall, Cabot has 1 Bcf/d contracted on the long-awaited 1.7 Bcf/d project.
Two gas-fired power plants in Pennsylvania that Cabot is exclusively supplying have also started up or are nearing service. The Lackawanna Energy Center’s first train came online June 1 and is burning 70 MMcf/d, while trains two and three are set for service on Oct. 1 and Dec. 1, respectively. Service at the Moxie Freedom plant, meanwhile, has been pushed back from June 1. Dinges said it could come online as early as next month. The company is currently providing test gas for the facility.
“These are very exciting times for Cabot as our long-term infrastructure and growth plans have finally come together and will provide, I think, huge benefits for years to come,” he said of the Marcellus operations.
Cabot was forced, however, to lower the midpoint of its full-year production guidance by 1.5% because of delays in third-party compressor stations and downtime on the Transcontinental Gas Pipe Line and Millennium systems. It is now targeting 10-12% year/year production growth instead of the previously forecasted 10-15% range. Cabot still anticipates that its 2018 exit production rate in the Marcellus will be 35% higher than its 2017 rate.
Cabot is also completing additional wells in the upper Marcellus to gather more data related to its enhanced fifth generation completion design. The company has 30 older wells online in the upper Marcellus that are tracking its 2.9 Bcf per 1,000-foot of lateral type curve.
“We continue to believe that our upper Marcellus is an incremental and accretive reservoir independent of the lower,” Dinges said. “...We’re also of the opinion that our completion techniques will improve the 2.9 Bcf per thousand foot of lateral.”
The company produced 1.895 Bcfe/d in the second quarter, nearly flat from the 1.884 Bcfe/d in 1Q2018. Second quarter volumes were down from the year-ago period, when the company produced 1.902 Bcfe. Cabot has since sold assets in the Eagle Ford Shale, and it closed the sale of its Haynesville Shale assets for $29.2 million after the second quarter ended.
Second quarter revenues slipped to $453.4 million from $460.5 million at the same time last year. Average realized prices, including derivatives, also declined by 10% over the same period to $2.15/Mcf.
Cabot reported net income of $42.4 million (9 cents/share) for the second quarter, compared with $21.5 million (5 cents) in 2Q2017.