Cabot Oil & Gas Corp. on Friday said exploratory efforts in north-central Ohio, where it has been working over the last two years to breathe new life into old oilfields with unconventional drilling, would end because of poor results.
“After further evaluation of our remaining exploration prospect, we have determined that this area is unlikely to yield results that generate long-term value creation for our shareholders,” CEO Dan Dinges said.
Cabot had been testing formations in the Knox Group in Ashland and Richland counties. After identifying the area for wildcatting in 2017, along with another in West Texas. Last year, however, the company scrapped tests in the Permian Basin, where it had been working in the Alpine High in a wetter area to the west of Apache Corp.’s prolific position. The Knox’s three main members — the Beekmantown, Rose Run and Copper Ridge — have been widely developed by legacy oil and gas producers in Ohio, but Cabot said it hit dry holes.
“Right now, we have no interest in allocating any additional capital to exploration,” Dinges told analysts during a year-end earnings call. “That’s where we stand.”
The decision again leaves Cabot with its Marcellus Shale operations, which are centered in Susquehanna County, PA. Those assets helped deliver “the best year” of the company’s 30 year history in 2018, when it notched profit and production records.
Infrastructure that recently came online in northeast Pennsylvania to further support the production and market signals have Cabot joining its peers to scale back plans for this year. The company revised full-year guidance to the lower end of the ranges announced last October. It now plans to spend $800 million this year, compared with $816 million in 2018, on a program aimed at 20% year/year production growth.
“Our decision to target the lower end of our preliminary capital guidance range is the direct result of current market conditions, feedback from shareholders and the broader investment community,” Dinges said, adding that the plans also support its strategic focus on investor returns and free cash flow.
Dinges said two power plants and the Atlantic Sunrise project that came online late last year led to a “fairly drastic narrowing” of the company’s differentials. But things are now quiet on the midstream front in the Marcellus’ northern tier. Jeffrey Hutton, senior vice president of marketing, said the company has been approached by midstream companies with some new projects that have yet to be publicly announced. Those run the gamut, he said, and could move gas in various directions, including to the Northeast and even New York, where the fuel has faced staunch opposition.
“I don’t think anyone has given up on building pipe out of Pennsylvania and to even New Jersey or New York,” Hutton said. Dinges seized on that comment to tell analysts that the company still hasn’t given up on the Constitution Pipeline, which has been in regulatory limbosince New York denied a key permit nearly three years ago, stopping the project altogether.
New York Gov. Andrew Cuomo’s administration has stymied other pipeline projects and banned high-volume hydraulic fracturing in favor of environmental goals. Last month, Consolidated Edison Co. announced that it would stop accepting new gas customers because it didn’t have access to additional supplies. Companies in New England are starting to follow suit for the same reasons.
“I think it’s clear businesses are going to be turning away from New York,” Dinges said, citing Cuomo’s “crusade against natural gas.” He added that “I think these are all the early signs of a policy that is creating significant calamity in New York.”
With its exploratory efforts concluded, Cabot noted it has thousands of drilling locations left in Susquehanna County. Management said it would also need about a year more to continue testing its fifth generation completion design on the Upper Marcellus interval before it can update estimated ultimate recoveries for the target.
“The long-term plan of fully developing the Lower Marcellus before beginning full development mode in the Upper Marcellus remains unchanged,” Dinges said, calling the targets “two distinct, highly-economic intervals” that can be developed on the same pads.
The company produced 2.243 Bcfe/d in 4Q2018, up 20% from the year-ago period and 11% from 3Q2018. Cabot set a record for full-year production, reporting 735 Bcfe, or about 2 Bcfe/d in 2018, up 7% from 2017. Production is 100% natural gas.
Full year natural gas price realizations, including derivatives, increased 10% to $2.54/Mcf. Revenue Increased to $2.2 billion in 2018, compared to $1.8 billion in 2017.
Cabot reported net income of $275 million (64 cents/share) for 4Q2018, versus a net loss of $44.4 million (minus 10 cents) in 4Q2017.
For 2018, Cabot set a record by netting $557 million ($1.25/share) versus $100.4 million (22 cents) in 2017. The company also reported free cash flow (FCF) for the third consecutive year of $296.6 million for 2018.
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