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Cabot Planning Stock Buyback, Ramped-Up Drilling

Cabot Oil & Gas Corp. plans to repurchase up to 10 million shares of its stock to generate cash flow and ramp up drilling in the Marcellus and Eagle Ford shales as it moves forward from one of the best quarters in its history, executives said Friday.

On Thursday, Houston-based Cabot reported 3Q2013 production of 107.1 Bcfe, including 101.7 Bcf or more than 1 Bcf/d of natural gas. Both were significant improvements -- 61% and 62%, respectively -- over the preceding third quarter, when the company produced 66.5 Bcfe, including 62.7 Bcf of gas (see Shale Daily,Oct. 29, 2012).

During a conference call Friday with financial analysts to discuss the 3Q2013 results, CEO Dan Dinges said longer laterals and more hydraulic fracturing (fracking) stages per well were the new order at Cabot. Case in point, the company completed 13 wells in the Marcellus during the quarter using a total of 272 stages, for a peak production rate of 323 MMcf/d. Dinges said initial production (IP) rates at the 13 wells were 5.4 MMcf/d per 1,000-foot lateral, and 1.2 MMcf/d per completed frack stage.

"These are very impressive results from our team in the Marcellus," Dinges said. "It's an equally impressive demonstration of the quality of Cabot's Marcellus position. This is not just a case of our wells coming online strong with open chokes and dropping off immediately; the average 30-day rate for these wells was approximately 90% of the IP rate."

Dinges added that while the company doesn't provide updated estimated ultimate recovery (EUR) rates or reserve data until the end of the year, he said the 2013 drilling program was using laterals "several hundred feet longer" than the 2012 program. He said Cabot was also using about 200-foot spacing between frack stages on all wells.

"As a result, we're completing three to four extra stages per well in our 2013 program," Dinges said. "A portion of the increase in our 2014 program is a result of longer lateral lengths and more stages per well than our 2013 program. The 2015 program will have even longer laterals and more stages."

On Thursday, Cabot reaffirmed its 2014 production growth guidance range of 30% to 50%, and its plans to spend between $1.375 billion and $1.475 billion on capital expenditures (capex). About 85% of capex would be spent on drilling and completion activities, 75% of which would be spent in the Marcellus, where it plans to operate seven rigs. Two rigs would be deployed in the Eagle Ford.

Dinges said the company would consider adding a third rig in the Eagle Ford if returns were in the 60% to 80% range.

"Based on the results we are seeing from the longer lateral wells, and the cost savings we are realizing on the drilling and completion activities, I think those returns are achievable in a consistent manner," Dinges said. "As a result we continue to be excited about the future of our Eagle Ford program."

CFO Scott Schroeder said the company was authorized to repurchase just under 10 million shares of stock, with the splits and adjustments.

"Our blackout period will end today, and we're fully operational if we choose to go in and buy shares on weakness at various points in time," Schroeder said Friday. "In light of all the questions we have around free cash flow [and] the weakness of the stock, we wanted to be more proactive in saying that we do have that as an arrow in our quiver, and we will use it when we see it appropriate."

Dinges added that Cabot has continued adding acreage in the areas where the company operates, and would consider expanding where it is currently exploring, "if those areas yield returns that are competitive with our existing projects." But he said the company would not "pick up bolt-on acreage in an area that we are not exposed to."

Analysts reacted favorably to the news. Wells Fargo Securities LLC's Gordon Douthat, David Tameron, Stuart Gillespie and Jamil Bhatti said Cabot's move to buy 10 million shares was "probably not a needle mover at this point, [but the] company said that authorization could be bumped up if warranted.

"[This] is a positive development in our view. Any buyback [will] likely [be] funded with borrowing base capacity and ramping free cash flow profile."

The Wells Fargo analysts added that it was likely that Cabot would "meaningfully increase" its EUR assumptions for the Marcellus.

"For the 2013 drilling program, Cabot assumes 14 Bcf EURs, and if increased IP rates realized thus far of 20% do indeed correspond directly to EUR increases, we could see this number go as high as 17 Bcf.

"Given that the longer laterals and reduced spacing between frack stages cost [about] an additional $500,000  -- [and] current well costs [are] near $6.5 million -- [these are] very impressive economics [that] are likely to only [get] better."

Cabot reported net income of $69.9 million (17 cents/share) for 3Q2013, a 90.9% increase over the $36.6 million (9 cents/share) of net income reported in 3Q2012.

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