This is a Z4 Pre Call Note
COG Reported In Line 4Q19 Results As Volumes Exceed Guidance; Free Cash Flowing At Low Natural Gas Prices; Guidance Reiterated
The 4Q19 Numbers:
- Volumes were above the top end of guidance,
- Differentials: $0.45 discount to Nymex, in line with 4Q18’s $0.42 discount,
- Cash costs with interest were $1.43, down 24% vs 4Q18.
- Free Cash Flow of $109.5 for the quarter was down 54% YoY due to the 31% drop in natural gas prices between the two periods.
- ROCE for the trailing twelve months was 22.2% vs 25.2% at 3Q and 2018 ROCE of 15.9%.
Guidance: No change to recent 2020 annual production or capex guidance.
- They previously guided volumes guided to essentially flat at 2.4 Bcfgpd for the year.
- Capex to support that maintenance mode level is $575 mm.
- 60-70 net wells placed on production.
- Front end loaded program.
- We had previously noted an expectation that Cabot could improve on both as the year progresses.
- New – they guided 1Q down 3% sequentially to a range of 2.35 to 2.4 Bcfgpd – cited well turn to sales timing and our guess is that they saw no rush, given prices to attempt hold the line on production in 1Q.
- New – they guided 2Q down as well without putting a number on it and then they guided 2H20 higher, with the goal of arriving at flat.
- Cabot does not want to be part of the gas growth glut problem. We still see room for improvement on the capex side this year as they are notoriously conservative guides.
- Favorite Quote Watch: “Based on the current NYMEX futures curve, this plan is expected to generate enough free cash flow to cover the Company’s dividend while also providing a modest amount of excess free cash flow for further return of capital to shareholders or debt repayment. At a $2.25 average NYMEX price, the plan is expected to deliver between $275 and $300 million of free cash flow and generate a return on capital employed between 11 and 12 percent.”
- Upper Marcellus: Good to see a more granular update for the play:
- 25 wells placed on production from the Upper in 2018-2019,
- Excluding 4 wells that were non conforming due to a lateral placement test on the pad, the 21 remaining wells show recovery of 2.7 Bcf/1,000′ of lateral, a number which should be well received.
- Favorite Quote Watch: “”We believe the results from our recent Upper Marcellus wells highlight the Upper Marcellus as a distinct, economic interval that exceeds the average well productivity across the basin,”
- Core locations remain high: Cabot claims over two decades of drilling locations including 9 years at the current drill pace in their bread and butter Lower Marcellus.
- Shorts have been attempting to portray Cabot as almost out of locations.
Balance Sheet and Other:
- Net debt to TTM EBITDAX of 0.7x vs 1.0x at YE18.
- Cash built in the quarter from $82 to $200 mm.
- The revolver remains undrawn yielding liquidity of $1.7 B.
- This was their 4th consecutive year of free cash flow generation.
- Reserves were up 11% to 12.9 Tcfe (TEV now at just $0.52 / Mcfe) and they replaced 250% of production at a drill bit only F&D cost $0.37 per Mcfe (vs $0.39 per Mcfe in 2019.
- Interesting perspective to note that at $2.54 realized gas in 2018 they had EPS of $1.19 and free cash of $297 mm but at $2.45 gas average in 2019 they had EPS of $1.68 and free cash of $563 mm.
- 2020 Hedges: For 2Q-4Q they’d added hedges on about 5% of expected volumes (full year basis) via swaps at $2.27 and collars with floors at $2.15. Small but this is new.
- Dividend: Boosted 11% to $0.10 per quarter with the 3Q call; current implied yield at $15 is 2.7%.
- Share repurchase: Share count is down to 398.6 mm, down 3% since the time of the 3Q update.
Nutshell: Good quarter and update. Stock dipped shortly after the announcement, presumably on the guidance. This is silly. If Cabot produces less gas at what we see as the lower priced portion of the year and more at the higher prices we expect for the rest of 2020, see our last update on the improving fundamentals in the natural gas market, we saw good call. Cabot has fallen with natural gas prices this year and as of last night’s close was off 19% since the 3Q19 report which is better than most of its gassy peers while prompt natural gas is down 16% in that time frame. Close enough to see people are missing the boat on the dividend and the buyback. We see management speaking to the Upper Marcellus a little more directly now as an effort to communicate that they are nowhere nearing some kind of runway depletion issue. The balance sheet remains strong and the cost structure remains best in show in the gassy space.
Disclosure: I am/we are long COG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.