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Morningstar | Narrow-Moat Cabot Continues Steady Production and Cash Flow Growth in 1Q. See Updated Analyst Note from 26 Apr 2019

We're leaving our Cabot Oil & Gas fair value estimate of $29 per share unchanged following the release of first-quarter results. Our narrow moat rating, based on cost advantage, is also intact. Quarterly production was a record 2.276 billion cubic feet per day, just slightly above the top end of management's guidance. Volumes grew 1.5% sequentially and 21% year over year. Adjusted for divestitures, production was up 25% compared with the prior-year quarter.

Gas price realizations were up 37% year over year, and importantly, the company is seeing much better price differentials compared with the last few years. In fact, the company saw its best price differential since 2013. Last year marked a turning point for Cabot with the completion of the Atlantic Sunrise pipeline and other takeaway capacity, helping to tame previously elevated price differentials.

On the cost side, operating expense per cubic foot dropped 6% year over year. All this added up to a nice quarter for profits. First-quarter EBITDAX clocked in at nearly $515 million, an 84% increase compared with the prior-year period.

In tandem with first-quarter results, Cabot announced a 29% increase to its quarterly dividend. Management still plans to return 50% of free cash flow to shareholders annually through a combination of dividends and share repurchases. 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. However, with the stock price gaining about 10% since our last update in late February, we don't see significant value in Cabot's shares.