Cabot Oil & Gas Corp. said Friday it would slightly increase spending this year to push out laterals and utilize three rigs contracted for the remainder of 2019, but it plans to cut the budget and grow production at a more moderate rate in 2020 on weak commodity prices.
The Appalachian pure-play bumped up its 2019 capital expenditures to $800-820 million from the previous forecast of $800 million. The move in part comes after Cabot bolted-on acreage near an eight-well pad in northeastern Pennsylvania to extend average lateral lengths to 12,450 feet from 8,950 feet. The turn-in-line (TIL) schedule has been delayed, which prompted Cabot to lower year/year production growth outlook from 20% to 16-18%.
“Frankly, this decision was not too difficult,” CEO Dan Dinges said during a call to discuss second quarter results. “I was asked...'do you want to purchase this offset acreage, slightly delay our TIL date and add another 100 Bcf-plus to these eight wells, or do we remain on our schedule?' I took the slight delay in the 100 Bcf."
The company also plans to drill an additional four wells to avoid dayrates for rigs that already are contracted. Moreover, Dinges said, a slowdown at the eight-well pad would also help keep gas from hitting a weak market. Benchmark gas prices, he noted, hit a three-year low during the second quarter.
In response to repeated inquiries in recent weeks, Dinges said the company also elected to release its preliminary 2020 outlook early. Cabot is forecasting year/year production growth of 5% on a 2020 budget of $700-725 million. Other Appalachian producers are expected to follow suit as they’ve indicated that more restrained growth is necessary to ease oversupply and in reaction to low prices.
While the landscape is shifting across the Lower 48 as operators tighten purse strings, gas producers are facing acute pressure to curb output as a deluge of supply hits the market as demand is ebbing. The forward curve is reflecting that with balance-of-summer (August-to-October) prices hovering around $2.21, according to NGI's Forward Look.
"We know we need to continue to be laser-focused on free cash flow (FCF) generation rather than production growth for its own sake, particularly given the outlook for future supply growth,” Dinges said. “Going forward, we see absolutely no rationale for continuing to chase double-digit production growth, when supply growth could outpace expected demand growth at this point in time."
He added that management remains keenly aware of the grim macro forecasts facing the oil and gas industry.
"This commodity strip, if it's persistent, is going to be a challenge for a number of companies...We're in good shape, but overall the industry is not healthy right now in this space...and something is going to have to change.”
Cabot operates only in Susquehanna County, PA, where it focuses on the Marcellus Shale. At a time when investors are demanding capital discipline and better returns, the company has generated positive FCF in 12 of the last 13 quarters. Year-to-date, the company has reported $381 million of FCF, with more forecast under next year’s plans. It’s also reduced outstanding shares by 10% since reactivating its repurchase program two years ago.
The company produced 2.349 Bcfe/d in the second quarter (100% natural gas), up from 1.895 Bcfe/d in the year-ago period and 2.276 Bcfe/d in 1Q2019.
Average realized prices, including hedges, were $2.27/Mcf during the second quarter, or 6% higher year/year. The company has seen prices increase as more takeaway and local demand has come online over the last year in the rural area of northeastern Pennsylvania where it operates.
Jeffrey Hutton, senior vice president of marketing, said Cabot and other operators are still clamoring for takeaway as a pipeline buildout has slowed. Opportunities remain, but Hutton said the market is competitive and management won’t disclose too many details about its midstream strategy.
Cabot reported second quarter net income of $181 million (43 cents/share), compared with $42.4 million (9 cents) in the year-ago period. Revenue increased to $534.1 million from $453.4 million.