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Winter Knocks Down 1Q Production at Cabot, But Company Shaking Off the Cold

Despite severe winter weather that curtailed some of Cabot Oil & Gas Inc.'s production in both Texas and Pennsylvania in the first quarter, newfound momentum and a growing confidence in its assets will find it deploying another rig in the third quarter and scrapping its year-end plans to cut its budget by $75 million.

Cabot produced 119.9 Bcfe in the first quarter, but while that figure exceeded its 1Q2013 volumes by 34%, it fell below the 121.9 Bcfe that the company produced in 4Q2013 as a result of compressor station downtime and the cold's effect on infrastructure build-out for new wells as management had predicted (seeShale Daily, Feb. 21).

Although management had expected production to remain flat heading into the second quarter after having only turned in-line eight wells during the first three months of the year, production is off to a stronger start.

"Our production growth for 2014 is weighted more to the second half of the year; however, we do expect higher sequential growth in the second quarter versus the flattish production profile we had discussed on the year-end call," CEO Dan Dinges told financial analysts during a call to discuss first quarter earnings on Thursday. "The second quarter has started off strong, with Cabot averaging 1.48 Bcf/d of gross production in the Marcellus, an increase of about 5% over the first quarter average."

At the end of last year, Cabot said it would slash its 2014 capital budget by $75 million and add no new rigs in either the Marcellus or Eagle Ford shales. But with momentum growing, more firm transportation and better than expected first quarter results in the Eagle Ford, it increased capex to the previously announced level of between $1.37 billion and $1.47 billion (see Shale Daily, Oct. 25, 2013) and plans to add a third rig in the Eagle Ford later this year.

An oversupplied market and sagging basis differentials in the Northeast that gained momentary relief last winter had the company down on its outlook in 4Q2013. Yet while the Northeast price environment is projected to remain volatile in the coming years, Cabot seemed to calm analysts’ nerves on Thursday by providing an update on the incremental midstream capacity it will add through 2015 to keep that year's production growth guidance of 20-30% on track.

"Based on this additional incremental capacity, in addition to what we know about some of the expansion projects...along with the opportunity to increase our market share on three major pipes in the [Northeast] we do remain confident that we can continue to grow our Marcellus production levels in 2014 and beyond," Dinges said.

Last month, Cabot added 70 MMcf/d of incremental firm capacity on the Millennium pipeline, with another 150 MMcf/d of firm capacity on that line slated for September. Dinges also said that the company's production will be connected to one of the region’s largest local distribution companies by the fourth quarter, which will allow for another 200 MMcf/d of capacity. He added that plans remain on track for the Constitution Pipeline's planned in-service date of early 2015, on which Cabot has agreed to ship 500 MMcf/d (see Shale Daily, April 27, 2012).

"We do believe the 2015 guidance relieves investor concerns that without firm takeaway the production profile could be flattish through 2015," said Topeka Capital Markets analyst Gabriele Sorbara in a note to clients after the call.

During the first quarter, Cabot produced 1.2 Bcf/d in the Marcellus. It also said that at the end of the quarter it had reached a six year milestone of 1 Tcf of cummulative production there. In the Eagle Ford, first quarter production was 7,271 boe/d, up 42% from 1Q2013. It also completed its first six-well pad there, with a 24-hour initial production rate of 1,045 boe/d and an 89% oil cut.

Cabot reported first quarter net income of $107 million (26 cents/share), largely in line with the Street's expectations, compared to $42.9 million (10 cents/share) in the prior-year quarter.

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