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Cabot to Meet Quarterly Output Guidance

Cabot Oil & Gas Corp. has stopped hydraulic fracturing (hydrofracing) of its natural gas wells in Susquehanna County, PA, until it completes a state-ordered compliance plan, but the independent said last week it still expects to meet its production guidance in 3Q2009.

Following three spills of a hydrofrac lubricant at a Cabot drilling site in less than a week in September, the Pennsylvania Department of Environmental Protection (DEP) issued two notices of violation and ordered the independent to cease hydrofracing gas wells in the county until it developed an updated and accurate Pollution Prevention and Contingency Plan and a Control and Disposal Plan for all of its permitted well pad sites (see NGI, Sept. 28).

"Based on the facts as we know them, we disagree with several of the allegations made in the order," said CEO Dan Dinges. "However, Cabot is fully committed to understanding the cause of these releases, improving our contractor's procedures and to the timely resumption of our fracing operations, all of which we will communicate to the market as new information becomes available. This order has no impact on our drilling, which will continue as planned, and there will be no disruption to existing production.

"The only acceptable practice for Cabot is to be in full compliance with all environmental and regulatory policy; therefore, we are working cooperatively with the regulators. A resolution of the DEP action will occur following a review of the causes associated with these releases and approval of future operating procedures."

All three frac fluid releases occurred at Cabot's Heitsman 4H well location in Dimock Township; the first two incidents occurred Sept. 16 and the third incident occurred Sept. 22. According to Cabot, on Sept. 16 during fracing operations being performed by Cabot contractors Baker Corp. and Halliburton, there were two releases of 7,980 gallons of frac fluid, some of which entered Stevens Creek.

The first two releases "were caused by failed piping connections between the frac tanks holding a fresh water supply and the equipment used to pump the fluid into the shale formation located more than a mile underground," said Cabot. The frac fluid release last Tuesday "occurred on the same location of approximately 420 gallons. Cabot has determined this release was caused by a pressure surge, which caused a hose to rupture...The frac fluid is 99.5% fresh water and 0.5% gel. This mixture is not hazardous or dangerous."

After each incident, and in conjunction with DEP, Cabot said it mobilized a crew to pump the released fluid into on-site storage tanks and clean up any remaining fluid.

"Cabot has a zero tolerance for releases on Cabot properties, and takes its obligations very seriously in this regard," said Dinges. Tests indicated a "minimal impact resulted from the initial spill containment measures, and there is no further impact to the environment as a result of the releases."

Cabot is working with Halliburton and Baker "to fully determine the cause of the releases and the appropriate additional measures to prevent reoccurrence in the future," said the CEO.

Despite the stop-work order by state officials, Cabot's Marcellus Shale production is stronger than ever, the company said. The producer's gas output hit a record 52 MMcf/d in the play at the end of September.

"Contributing to the increase was our most recent horizontal completion, which experienced a 24-hour initial production rate greater than 10 MMcf/d and a 30-day average rate of 10.8 MMcf/d," said Dinges. "This well is currently producing at 11.1 MMcf/d...Additionally, from the first seven horizontal wells that have been producing for varying time frames, we have two that have produced over 1 Bcf and, combined, these wells have a 90-day production average of approximately 6.0 MMcf/d."

At the end of 2008 Cabot had more than one million acres in the Marcellus Shale. The company estimated at year-end 2008 that it had 871.8 Bcfe of proved reserves, including 613.4 Bcfe of proved developed reserves and 258.4 Bcfe of proved undeveloped reserves.

"With the recent record level of production coming from Susquehanna, we expect to exit the third quarter with production slightly above the upper level of our current published production guidance," said Dinges. "Because of this fact and the expeditious effort to resolve the DEP matter, we see no reason to adjust guidance at this point."

Analysts with SunTrust Robinson Humphrey/the Gerdes Group said last week the issue "is likely to be resolved expeditiously. As DEP's action does not prohibit Cabot from drilling wells, the production impact should be minor and, assuming quick resolution and acceleration in fracture completions, limited to 4Q2009. Consequently, we view the share price weakness as an overreaction and are upgrading COG from Neutral to Buy."

Tudor, Pickering, Holt & Co. Securities Inc. said the compliance order was "an inconvenience/egg-on-face, but not a game changer." Cabot also made "lemonade out of lemons" in updating its Marcellus Shale drilling results, said analysts. However, it was "not great timing for problems given proposed FRAC Act legislation to protect water" (see NGI, June 15).

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