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Eagle Ford Helped Cabot Beat Expectations, Drive Up 2Q Liquids Production

Despite falling slightly short of its expectations in the Marcellus Shale, Cabot Oil & Gas Corp. continued making the kind of progress in the Eagle Ford Shale that surprised financial analysts and helped it to surpass their expectations for second quarter earnings and production.

The company reported 127.6 Bcfe of production on Thursday, a 34% increase from the 95.2 Bcfe it produced in 2Q2013. Liquids production increased 26% year-over-year to 961,000 bbl, mainly through a bump in oil and condensate production from the company's wells in the Eagle Ford of South Texas.

"This asset is garnering greater interest with wells outperforming [Cabot's] 500 million boe type curve and considering the 2Q2014 production beat was driven by the Eagle Ford oil volumes," wrote Topeka Capital Markets analyst Gabriele Sorbara in a note to clients. "We feel confident in the inventory increase, as management has indicated that early results from its first 300 foot downspaced well are encouraging. The company expects to continue to add acreage in the play. We would not be surprised with a larger bolt-on acquisition."

Cabot CEO Dan Dinges said during a call to discuss earnings Thursday that the company wasn't so much focused last quarter on adding to its current assets in the Eagle Ford as it was with optimizing well performance there. In addition to downspacing tests, which the company hopes will add drilling locations, Dinges said Cabot has been working for most of this year on longer laterals, reducing the length of horizontal hydraulic fracturing (frack) stages and pumping more proppant per foot in the Eagle Ford. He added, however, that it will focus on acquiring more leasehold going forward, given how the asset has already performed.

On average, Dinges said the company's Eagle Ford laterals were drilled 25% longer during the first half of this year, compared with the same time period in 2013. He also said the length of frack stages have been been reduced by 15% and added that those changes, combined with reduced drilling time, have increased both production and profit.

Cabot placed 10 Eagle Ford wells online during the second quarter that had an average 30-day production rate of 840 boe/d, with a 92% percent oil cut. The company reported overall production in the play of 10,308 boe/d, a 76% increase from the year-ago period.

The story was different in the Marcellus Shale, where Cabot has a basin-leading position and ran six rigs versus the three it had running in the Eagle Ford last quarter. Production in the play was 41% higher than the year-ago period at 1.26 Bcf/d, but largely flat in comparison to the first quarter when the company produced 1.20 Bcf/d. Dinges said second quarter production missed the company's internal expectations and was caused mainly by midstream issues.

"This shortfall was the result of ongoing issues directly related to gathering operations and not related to well performance," he said. "As we pointed out in the first quarter (see Shale Daily,April 24), Williams had experienced significant downtime with their operations due to extreme weather conditions. Unfortunately, some difficulties persisted into the second quarter, which were not related to weather.

"We've been in constant contact with Williams and have recently seen operational improvements," Dinges added. "In our recent conversations with Williams, we've made it very clear what our expectations are moving forward."

The company plans to add 60,000 hp of compression to its Marcellus gathering system during the third quarter.

"This new capacity will alleviate high line pressure in certain areas and will also provide for compressor redundancies throughout the system," Dinges said. "Having this spare capacity will definitely mitigate a significant amount of the compressor downtime experienced during the first half of this year."

It wasn't all bad news in Appalachia, though. Cabot recently placed on production three pads that encompass the northern- and eastern-most reaches of its acreage in Pennsylvania. Those wells had an average initial production rate of 238 MMcf/d.

"The consistency of our acreage to the north and east, while we expected these results, was confirmed by some of these step-out wells," Dinges said. "It's still early in the production cycle, but we're pleased with the results to date and expect the estimated ultimate recoveries per foot on these wells to be in line with others we reported at year's end."

Cabot has focused primarily on northeast Pennsylvania, but Dinges said Thursday that it has 50,000 acres prospective for the Utica Shale in West Virginia, where more operators are increasingly making plans (see Shale Daily, May 16; March 26). The company has permitted a Utica well in Wood County, WV, and Dinges said that although he couldn't guarantee it, the company was not ruling out providing test results from that well before the end of the year.

While liquids production helped insulate the company's earnings, Cabot said natural gas price realizations of $3.47/Mcf during the second quarter were 15% lower than 2Q2013 prices. Before hedges, the company saw an 89 cent discount to the New York Mercantile Exchange average.

Cabot reported net income of $115.3 million, or 28 cents/share, compared to $95 million, or 22 cents/share in 2Q2013.

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