Onshore independent Cabot Oil & Gas Corp. on Tuesday reported a 41% jump in natural gas-weighted production in 3Q2010 from a year ago and said sequential output was up 18%, exceeding guidance targets.

The Houston-based producer's output year to date has risen 22% from the same period of 2009, and as of Monday production for 2010 matched full-year 2009 output, CEO Dan O. Dinges told financial analysts during an earnings conference call. "Production through the remainder of the year will represent year/year growth," he said.

"Our third quarter production level of 36 Bcfe established a new high for quarterly reported production," Dinges said. "Pennsylvania remains the focus of our capital program and is the key contributor to this production growth, as we wait for a backlog of Haynesville and Eagle Ford completions for both natural gas and oil."

Gas prices remain "very soft," down 27% year/year, Dinges said. In addition, oilfield service costs, especially for pressure pumping, continue to rise, forcing management to rethink how to allocate capital spending through the rest of 2010 and into 2011.

Because of an "expanding production base" from its onshore basins, especially in the Marcellus, full-year 2010 capital spending has been increased to $790 million. Cabot increased this year's spending by cutting spending guidance in 2011 to about $600 million.

Most of Cabot's funds through 2011 will continue to be directed to the Marcellus Shale, which continues to demonstrate a remarkable ability to compete with oil and/or gas wells.

"The Marcellus is quite a remarkable resource, even with lower gas prices," Dinges told analysts. "Our economic returns are in the top quartile of the food chain." Cabot's estimated ultimate recovery (EUR) for Marcellus wells is 5.5 Bcf. "At the current EUR and at current pricing, the rate of return will compete with most oil and wet gas projects very favorably."

The company recently completed its first Marcellus pad drilling site with three horizontal wells, Dinges said. Cabot drilled each well and then simultaneously completed them using "zipper frack" technology. The completed wells have varying lateral lengths from 4,304 to 4,865 feet, and production from the pad site has reached 47.4 MMcf/d.

"The result is impressive and highlights the prolific nature of the wells in our area of operations," he said. "We continue to expand our multi-well pad sites and are currently drilling the sixth well on our first six-well pad site."

Dinges didn't dwell on the company's continuing war of words with the Pennsylvania Department of Environmental Protection (DEP) concerning gas migration issues in Dimock Township, where the producer has extensive operations. DEP wants Cabot to pay for a $12 million water line to replace contaminated water wells for 14 affected homes in Dimock (see Daily GPI, Oct. 1).

However, Dinges maintained Tuesday that the company has affidavits from area residents confirming that methane gas had been present in their water wells there well before Cabot began its drilling operations (see Daily GPI, Oct. 20). He told analysts that the company continues to work with DEP to resolve the situation.

Cabot also has completed its third successful Eagle Ford Shale well. The Arminius Energy Trust No. 2H well was completed with a 15-stage hydraulic fracture (hydrofrack), which resulted in a 24-hour production rate of 547 boe/d (504 b/d and 256 Mcf/d).

"We completed this well with 15 [hydrofrack] stages versus 20 stages on our last well, and the well continues to clean-up with only 10% flowback to date," said Dinges. The first successful well in the play "remains at 787 boe/d (579 b/d and 1,250 Mcf/d) after six weeks..."

In Cabot's South Region, which includes Eagle Ford operations, oil production is forecast to double in 2011 with 18 to 20 net wells in the Buckhorn area and in an area of mutual interest with EOG Resources Inc. EOG, as operator, and Cabot are jointly developing about 18,000 acres in Atascosa County, TX.

However, to fund 2011 spending in the higher-priced Haynesville/Bossier operations, Cabot has begun looking for a joint venture partner, said the CEO.

"We remain committed to our plans for a cash-flow neutral program in 2011 while at the same time meeting our 2010 obligations, particularly in East Texas," said Dinges. "As I have stated before, we do not want to lose the long-term benefit of this large resource potential."

Because of lower gas prices and one-time charges, Cabot's net income fell to $32.3 million (31 cents/share) in 3Q2010, compared with $42.6 million (41 cents) in the year-ago period. Cash flow from operations was $124.2 million versus $116.7 million a year earlier. Realized natural gas prices were $5.37/Mcf versus $7.40 in 3Q2009. Realized oil prices were up 12% year/year.

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