Morningstar | Cabot Set Up for 20% Volume Growth in 2019. See Updated Analyst Note from 22 Feb 2019
Our fair value estimate for Cabot Oil & Gas is unchanged at $29 per share after the company released fourth-quarter and full-year results. Our narrow moat rating, based on cost advantage, is also intact. Fourth-quarter production came in just slightly below the midpoint of management's guidance at 2.24 billion cubic feet per day. Volumes were up 11% sequentially and 20% year over year. Adjusted for divestitures, production rose 26% year over year.2018 marked a turning point for Cabot with the completion of the Atlantic Sunrise pipeline and other takeaway capacity, which allowed for strong volume gains and should help tame previously large price differentials versus benchmark Henry Hub gas. In the fourth quarter, natural gas price realizations excluding derivatives improved to $3.22 per thousand cubic feet and the discount to Henry Hub shrunk to $0.42/mcf versus $0.78/mcf in the prior-year quarter. We expect price differentials will improve further in 2019 to about $0.30/mcf.
Management is sticking to its target of returning 50% of free cash flow to shareholders annually through a combination of dividends and share repurchases, and we expect Cabot will generate plenty of free cash flow in the years to come given the advantageous cost position of its dry-gas Marcellus acreage, with 2,900 drilling locations yet to be drilled--good for decades of drilling at current rates. At current price levels, we expect stock buybacks would be value-accretive with shares trading at around $24 and our fair value estimate at $29 per share.
Cabot Oil & Gas is an independent oil and gas company engaged in the development, exploitation, exploration and production of oil and gas properties. The company operates in one segment, natural gas and oil development, exploitation, exploration and production, in the continental United States. The company's operations are primarily concentrated in one unconventional play—the Marcellus Shale in northeast Pennsylvania.
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