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Marcellus Shale Results Send Cabot Stock Soaring

Better-than-expected performance in the Marcellus Shale helped Cabot Oil & Gas Corp.'s shareholders kick the stock almost 13% higher on Wednesday.

The Houston-based producer, which is pouring resources into uncovering shale gas in Pennsylvania, saw its stock price bounce higher in heavy trading to about $44.85/share after opening the day at $39.83. What investors appeared to like, which was confirmed by some analysts, were the year-end 2010 reserves numbers, which jumped 31% to 2.7 Tcfe over 2009.

Generating the growth was an organic drilling program that year/year achieved:

A huge slice of Cabot's reserve adds were in the Marcellus, said CEO Dan Dinges. He and his management team held court with financial analysts during a quarterly earnings conference call Wednesday.

Development in the play appears to be ramping back up after falling off from last fall's levels. According to NGI's Shale Daily Unconventional Rig Count (see shaledaily.com), the 140-plus oil and gas rigs actively drilling in the Marcellus marks a 20-rig improvement from the same period last year. However, the current level of drilling is still down approximately 20 rigs from last fall's peak.

Indicative of the value of Cabot's acreage position in the Marcellus: the 10 Bcf average expected ultimate recovery, or EUR, per producing well booked from its 2010 drilling program. Because of the overall small sample pool in the Marcellus play -- 44 producing horizontal wells at year-end -- management took a conservative approach to its PUD bookings by recognizing about 0.9 offset PUD locations per well drilled with an EUR of 6.5 Bcf for each, assuming each had 10 hydraulic fracture (frack) stages. The overall PUC reconciliation also reclassified 183 Bcfe as probable.

"Our 2010 drilling program illustrates the value every dollar invested yields to our shareholders," said Dinges. "On a debt-adjusted per share basis, we continue to add value with increases in reserves and production. Not only has our Marcellus operation demonstrated its prolific nature; we have also transitioned our capital allocation in our South region to 100% liquids for 2011..." Cabot's South region now is focused in the Eagle Ford Shale; it also has substantial acreage in the Haynesville Shale, a predominately dry gas play.

"I anticipate our 2011 drilling program will continue to yield similar results with an added positive of more liquids in the mix."

Dinges highlighted three recent noteworthy completions in the Marcellus that yielded initial production rates of 12.1-23.8 MMcf/d with the 30-day average production rates ranging from 10.3 MMcf/d to 19.0 MMcf/d on laterals that were between 2,600 feet and slightly more than 3,700 feet using 10-15 frack stages.

A three-well pad site in the Marcellus, which was turned in-line in late September, has produced 5.9 Bcf in 147 days and is currently producing 34 MMcf/d, said the CEO.

"These three wells were our first effort at using zipper fracks and simultaneous completion techniques," he said. "Additionally, another well has 3 Bcf of cumulative production in eight months and is currently producing 9 MMcf/d. Both of these data points far exceed any forecast we had going into this play."

Cabot also recently completed drilling a well in Pennsylvania with a 6,176-foot usable lateral, a new high water mark for the company.

"We plan to complete this well with a 26-stage frack," said Dinges. Cabot also has spudded a well in the northern area of its acreage position in Susquehanna County, PA, to further delineate its overall Marcellus footprint. Volumes from this area would free flow gas initially through the Laser Pipeline.

Construction also continues on the second phase of the Lathrop Compressor Station, which would process the company's Marcellus Shale gas. Four additional compressor units, each with 35-75 MMcf/d of planned capacity, are expected to be in service in March and April.

"As part of our discussion with the Pennsylvania Department of Environmental Protection, we were able to expand our overall Lathrop station permit to include the previously contemplated seventh compressor," said Dinges. "Once fully functional with additional dehydration units, this station will be capable of moving 450 MMcf/d, subject to interstate takeaway."

Cabot increased its 2011 production forecast in the Marcellus to reflect the ramp-up in the second quarter.

"However, we remain conservative for the full year as we see a tremendous level of gas currently being delivered to Tennessee Gas Pipeline that totals 1.2 Bcf/d from Susquehanna, Bradford and Tioga counties [PA]. As we have represented, we have several projects in the works with mid to late summer completion dates that allow our gas to move to other interstate pipelines. Until we know the absolute timing of these efforts, we will be cautious."

In the South region Cabot completed its fourth Eagle Ford well, which ramped up from a 6,000-foot lateral at 789 boe/d (654 b/d of oil, 239 Mcf/d of gas and 95 b/d of natural gas liquids.) Three additional Eagle Ford wells have been drilled and cased with lateral lengths of 6,300-6,775 feet.

"We have reached an agreement for a dedicated frack crew for 2011, and completions on these wells began Feb. 9," said Dinges. "In addition to our operated area, we have also participated in a drilled and cased well on our 18,000-acre joint venture in the Eagle Ford with EOG Resources. This well was drilled with a 7,200-foot lateral and is presently on flowback after completion operations."

This year the independent plans to operate within a "$600 million overall investment program originally disclosed publicly in October," said Dinges. "We plan to drill 70 to 80 net wells for the company in 2011 with approximately 40% being oil wells."

The CEO also disclosed that Cabot is close to finalizing three separate agreements with undisclosed parties to help defer some of the costs in its Haynesville Shale leasehold. The agreements would consist of both a carried interest in certain wells and cash consideration to sell some acreage and production, Dinges said.

Cabot would be allowed to maintain about two-thirds, or 22,000 net acres, of its existing position with held-by-production acreage or by extensions and/or renewals on a "limited number of acres." Cabot expects to spend about $5 million in 2011 to "perpetuate this acreage with proceeds generated from these transactions."

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