Morningstar | With Atlantic Sunrise Now in Service, Cabot Is Set Up for Production and Cash Flow Growth
Our fair value estimate for Cabot Oil & Gas is unchanged at $30 per share following the release of third-quarter results. Our narrow-moat rating, based on cost advantage, is also intact. The company's production just missed the low end of management's guidance, coming in at 2.029 billion cubic feet per day. Production was up 7% sequentially and 10% year over year. Adjusted for divestitures, production was up 19% year over year.Realized prices came in at $2.36 per thousand cubic feet with no effect from derivatives. Discounts to the Nymex gas benchmark improved $0.45 year over year. We expect continued improvement in natural gas pricing differentials as needed infrastructure, including the now in-service Atlantic Sunrise pipeline project, improve Cabot's takeaway capacity and get more gas out of the Marcellus region, improving local prices.
With Atlantic Sunrise complete, Cabot raised its dividend and continues to repurchase shares. Management has stated a target of returning over 50% of free cash flow to shareholders going forward. The company also announced its preliminary operating plan for 2019, generally meeting our expectations.
Cabot's asset portfolio remains very focused. The company is a pure-play, dry gas, Marcellus operator with an attractive cost structure and decades of drilling opportunities. With Atlantic Sunrise now in service, we think the company has a clear path to significant production growth. As such, Cabot is set up to deliver solid free cash flow in the years to come, with more than half of that cash likely to make its way to shareholders through dividends and stock buybacks.
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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