This is a Z4 Research pre-call note.
The 2Q20 Numbers:
- Cabot Oil & Gas (NYSE:COG) volumes were above the high end of guidance taking the Street by surprise. The second quarter was meant to show a stronger sequential decline due largely to a lighter completion schedule with pads of longer lateral wells taking longer to complete. Activity in the quarter, however, was robust, much of it clearly towards quarter-end and despite capex that was markedly lower than expected ($175 mm spent vs Street at $213 mm), some price-related curtailments during the quarter, and downtime at one well for remedial operations, they still turned out a production beat.
- COG realized a pre-hedge natural gas price of $0.30 off Nymex vs. a $0.23 discount last quarter which is not bad in our view given some results in Appalachia we’ve seen this quarter. This also should be noted as solid in light of the quarter’s underlying natural gas price environment weakness which registered the lowest average quarterly NYMEX price since 3Q95 (yeah, this century has seen no weaker average pricing).
- Direct Operating Costs (LOE, T&G, Production taxes) of $0.78 per Mcfe vs. guidance of $0.77 to $0.81 per Mcfe. Cash G&A on a per unit basis was a tame $0.07 per Mcfe.
- This combination of stronger than expected volumes, relatively strong price realizations and almost best in show operating costs yielded the EBITDA and EPS beats for the quarter.
- 2020 Volumes: Cabot reaffirmed prior guidance of 2.35 to 2.375 Bcfepd which equates to essentially flat volumes relative to 2019. COG still expects to exit 2020 flat with the 2019 exit level.
- 2020 Capex: Maintained prior guidance of $575 mm, almost entirely D&C to fund this year’s 60 to 70 well program.
- 2020 Price Differential: They reaffirmed prior guidance of $0.30 to $0.35 off NYMEX for the full year average. We note prices are less tied to notoriously weaker pricing points in 3Q than in 2Q.
- 2020 operating cost guidance was also left unaltered.
- 3Q20 Volumes of 2.4 to 2.45 Bcfgpd
- Vs. Street consensus of 2.44 Bcfgpd.
- Last quarter COG noted that given the timing of wells being placed on production, 3Q would see a substantial increase in volumes.
- 4Q20 volumes are expected to be in line with 3Q.
- They plan to offer official guidance for 2021 early next year but management did note that on the current 2021 strip, they can fund the dividend and a maintenance budget next year while leaving space for opportunistic further returns to shareholders which may be further share repurchases or could potentially be code for a variable dividend.
- Favorite Quote Watch: “Based on the current NYMEX futures, we anticipate a significant expansion in our free cash flow during the second half of 2020 driven by an improvement in realized prices, higher production volumes, and lower capital expenditures, allowing Cabot to deliver positive free cash flow for a fifth consecutive year.”
- Favorite Quote Watch: “Our modest free cash flow deficit during the first half of the year was a result of our capital program being heavily weighted towards the first half of the year, while our production volumes are more heavily weighted towards the second half of the year. We expect that our planned sequential increase in production during the third and fourth quarters, in addition to a declining capital spending profile, will allow for a return to positive free cash flow generation during the second half of the year.”
Balance Sheet: In good shape
- Net debt to annualized quarterly EBITDAX of 1.7x vs. 1.1x last quarter. Net debt to TTM EBITDAX of 1.2x vs. 0.9x as of 1Q20.
- Following the quarter, they reduced total debt from $1.2 B to just under $1.1 B as they paid down some 2020 maturities.
- The revolver remains undrawn.
- Liquidity is $1.6 B vs. $1.7 B at the end of 1Q20.
- The dividend was maintained at $0.10 per quarter earlier this week.
- No share repurchases so far this year.
- Hedge: Still lightly hedged in 2020 and still have no hedges on for 2021.
- Short Interest: 3.5% of outstanding shares are short which is one of the more lightly-shorted names in the gassy space (the average of 10 names we actively track in the gassy space excluding COG is 9%). This is likely due to the low-cost structure, strong balance sheet, and resilient dividend.
- 2020 EBITDA estimates are off 13% since the 1Q20 update on a combination of slightly lower expected volumes and weaker prices.
- 2021 EBITDA estimates are up 9% on higher forward price thoughts now vs. 90 days ago. This yields the much lower multiple next year vs. this year and vs. COG’s history in general as noted in the table above.
Nutshell: Strong quarter
Beyond that though, our view is that the name should perform better than it has been in the wake of the call. Natural gas fundamentals are slowly improving. We note in our quarterly update that 2021 estimates have actually risen since the time of our 1Q20 and this is a function of little-changed thoughts on volumes between the updates and a higher natural gas price assumed by the Street. However, the stock itself is off 16% since the date of the 1Q call due to the malaise in prompt natural gas prices, weakness in upstream names in general, and within the mostly debt-laden gassy space itself. COG is not debt-laden. COG is set up for free cash flow this year and more free cash flow next year. We further note that while 2020 trades at a TEV/EBITDAX multiple of 11x, the 2021 figure is now down to a not-customary-for-COG level of just ~6.3x. We are long-term holders here. We see natural gas production falling this year and next. COG remains our 5th largest position.
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.