Cabot Oil and Gas – Rated A Double – Target $36

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Cabot Oil & Gas

 April 9


COG : NYSE : US$31.94  Buy  Target US$66.00

A favorite gas-weighted name following minor outage


Investment thesis

COG target price at $66 per share after a minor production  outage related to a Lathrop compressor station fire.

 2012 Production Growth

AT 60% though is 10 percentage points above company guidance (35-50%).

Superior capital productivity underpins rating COG shares have twice the potential upside to our target as comparable gasweighted peers such as HOLD-rated EQT, RRC and SWN and BUY-rated UPL as the company’s capital productivity is almost twice the peer average.

2013 Estimates STIL REGUIRE $4 Commodity Price

Next year, we believe Cabot should generate almost 4x the production growth while spending ~40% less than cash flow as these peers spend ~40% beyond cash flow.

We see ~50% upside to COG shares even in a long-term $4 gas price environment while EQT, RRC, SWN and UPL have ~30% downside in this bear-case scenario.

Gas macro thoughts

With storage already ~900 Bcf above year-ago levels, the gas market would need to be ~4.25 Bcfpd undersupplied over the cooling season to pull storage below the year-ago level of 3.8 Tcf come November 1. To pull storage below peak demonstrated working gas capacity of ~4.1 Bcf by November 1, the gas market would need to be ~2.5 Bcfpd unders supplied versus year-ago levels.


News: we believe the market is ~4 Bcfpd undersupplied versus year-ago levels excluding weather effects on a four-week moving average basis. We see a less than 50% chance the gas market experiences acute price weakness this autumn. In fact, the downside for gas prices now appears quite limited.


Five-year discounted cash flow analysis

Our target price is based on the net present value of free cash flow over the life of a company using a reasonable discount rate. COG’s valuation applies a 13.75% discount rate to determine the net present value of its free cash flow.

Our reasoning for using a 13.75% equity return includes the long-term nominal performance of the broader equity market (10-12%), the greater volatility of cyclical energy investments and the company’s mid-cap market capitalization.

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