Cabot Oil & Gas Corp., the best performer in the Standard & Poor’s 500 index last year, may curtail drilling to cope with natural-gas prices that slumped to a 10-year low because of a supply glut it helped create.
Cabot will fall about $75 million short in funding its drilling program after the benchmark U.S. gas price lost almost half its value in the past year, Anish Patel, a managing director with ISI Group in New York, estimated. With gas selling for $2.53 per million British thermal units, the Houston-based company may join other explorers in postponing or canceling wells amid dwindling returns, said John Lutz at Frost Investment Advisors in San Antonio.
“Even the best companies are going to struggle with natural-gas prices under $3,” Lutz said in an interview. “Cabot’s not immune to that.”
Cabot, whose stock price doubled last year, outpacing every other U.S. gas producer, hasn’t curtailed its drilling and its fields remain profitable at current prices, George Stark, a company spokesman, said. Cabot fell 1.6 percent to close at $64.04 in New York.
Chief Executive Officer Dan Dinges is counting on cash flow to fund an $850 million to $900 million drilling program that will add more than 100 wells and boost production as much as 55 percent this year.
Fueled by escalating output in shale deposits from Texas to Pennsylvania, U.S. gas production rose a record 7.4 percent in 2011, swelling stockpiles and depressing prices, the Energy Department said in a Jan. 10 report.
Rivals’ Drilling Cutbacks
Rival gas producers including Chesapeake Energy Corp., the second-largest U.S. producer of the fuel, and EQT Corp. have announced plans to reduce drilling in response to the glut-induced price decline.
Cabot, based in Houston, has lost about 16 percent of its market value this year, following the trajectory of fellow producers for whom profits are inextricably linked to the price of gas used to run furnaces, factories and power plants. Chesapeake and gas producers including Range Resources Corp. and Southwestern Energy Co. followed Cabot lower today.
Yesterday, the Energy Department in Washington reduced its estimate for gas reserves in the Marcellus shale by 66 percent, citing improved data on drilling and production.
About 141 trillion cubic feet of gas can be recovered from the Marcellus shale using current technology, down from the previous estimate of 410 trillion, the department said in its Annual Energy Outlook. About 482 trillion cubic feet can be produced from shale basins across the U.S., down 42 percent from 827 trillion in last year’s outlook.
Cabot also has drawn the ire of environmental regulators and landowners for allegedly polluting drinking water with its wells in Pennsylvania.
The company probably is better-positioned than peers to withstand rock-bottom commodity prices, by virtue of its control of the richest portion of the gas-soaked Marcellus Shale in the U.S. northeast, Patel said in an interview.
Cabot’s wells are so prolific that a gas price of $2.44 per million Btu still captures a 15 percent return, compared to the $3.50 minimum price competitors need to generate similar profits, he said.
“The economic profile of their wells is much better than other wells in the Marcellus,” Patel said. Any gap between cash flow and Dinges’s spending plan could be filled with borrowed money, he said.
Cabot and other explorers that produce mostly gas rather than crude, including Range Resources Corp. of Fort Worth, Texas, and Houston-based Southwestern Energy Co., have been battered this month by investors worried that profits are disappearing as gas prices plunge.
Dinges told investors and analysts during an Oct. 27 conference call that cash flow will be more than ample to support his 2012 capital projects. The plan calls for five rigs to drill 70 to 78 wells in the Marcellus region, and one rig each in Texas’s Eagle Ford Shale and an Oklahoma formation called the Marmaton, he said during the call.
Eagle Ford, Marmaton
In the Eagle Ford and Marmaton regions, Cabot’s plans include drilling or owning stakes in a combined 45 to 60 new wells by the end of this year, Dinges told the analysts and investors on the call.
Gas traded for $3.52 per million Btu on the day Dinges made those comments, 40 percent more than yesterday’s price. Dinges declined through Stark, the company spokesman, to be interviewed for this article.
“No decision has been made on limiting the amount of drilling that we’re doing,” Stark said in a telephone interview yesterday.
Cabot has energy contracts in place covering half its daily January output that locked in a price of $5.20 per thousand cubic feet, the company said in a Jan. 12 statement.
“These commodity prices, while not where we want them, still afford our Marcellus project a significant rate of return of around 55 to 60 percent before hedges because of their best-in-class characteristics,” the company said in the statement.
Cash generated by Marcellus gas will be used to extract higher-profit oil from the company’s Texas and Oklahoma leaseholds, Dinges said during the October call. Gas accounted for 96 percent of Cabot’s output during the first nine months of 2011, a company filing showed.
Focusing some attention on crude will assuage investors concerned about the impact of depressed gas prices on cash flow and profits, said Biju Perincheril, an analyst at Jefferies & Co. in New York, who has a “buy” on Cabot shares and doesn’t own any. At $98 a barrel, oil sells for six times as much as gas, on an energy-equivalent basis, based on Bloomberg calculations.
“The only concern is gas price,” Perincheril said in a telephone interview. A shift into more crude output “would get investors more interested.”
Cabot’s drilling success has been marred by water contamination near its Marcellus drilling operations. Pennsylvania regulators in September cited Cabot for “improper” well construction after a liner intended to prevent seepage failed and methane showed up in a private water well in Lenox, Pennsylvania. Cabot was cited for three violations and given 30 days to correct the flaws in its well.
The company vented household water wells to eliminate risk of fire or explosion and “tightened down” its gas wells, Stark, the Cabot spokesman, said in a Jan. 9 interview. Methane levels in the water wells fell during a period of two weeks, Stark said.
In another Pennsylvania town, Dimock, Cabot agreed in a December 2010 settlement with the state to provide fresh drinking water, install water filters in homes and pay each family twice the value of their home. Of $4.1 million set aside to cover claims, $1.9 million has been claimed, the company said earlier this month.
Providing Clean Water
On Jan. 19, the U.S. Environmental Protection Agency said it was stepping in to provide clean water to four families in Dimock, and testing water at 60 homes to assess whether contamination lingers.
Cabot’s environmental missteps contributed to an international debate over the safety of the intensive drilling techniques that have enabled explorers to tap shale, a type of formation previously too hard to be profitably drilled. The process, known as hydraulic fracturing, involves shooting high-pressure jets of water, chemicals and sand underground to crack rock so gas and oil can flow.
Dinges’s background as a former land supervisor for Mobil Corp. helped him discern the most-promising tracts in the Marcellus formation from those less likely to yield gas bonanzas, said Drew Venker, an analyst with Lazard Capital Markets, who has a ‘neutral’ rating on Cabot shares and doesn’t own any.
When Cabot first ventured into the Marcellus region in 2007 and 2008, the company cobbled together leaseholds in Pennsylvania that later would prove to be the richest in the geologic formation, ISI’s Patel said.
The section of the Marcellus Shale under Cabot’s control is about 370 feet thick, compared with 75 feet for other parts of the formation, Patel said. In shale-gas fields, thickness equates to the size of the resource.
“It all comes down to the rock,” Patel said. “I don’t think they’re doing anything differently in the way they’re drilling these wells. They just happened to have leased acreage in the best part of the play.”