September 19, 2011 at 05:24 AM EDT
4 Reasons To Love Cabot Oil & Gas
Even if COG loses out on tax breaks, the company's shale play might be enough to compensate.

With the economy starting to circle the drain again and a presidential election looming, there is growing sentiment in Washington to boost revenue by ending tax breaks for oil and gas companies like Cabot Oil & Gas (NYSE:COG). And should debt hawks beat out the industry’s deep-pocketed lobbyists, the entire sector will feel the pain, at least in the short run.

But for the long term, oil and gas stocks will rise or fall on other macro issues like supply and demand. And the companies that best manage operations and exploit new energy plays are likely to be rewarded. After all, cold weather will always be with us, as will the need to achieve cleaner energy that’s domestically produced.

Cabot is heavily focused on natural gas — the easiest green solution around given recent jitters about nuclear plants. About 98% of Cabot’s reserves — and 96% of its production — are in natural gas. That exposure might make you cringe at today’s prices — and that formula looks a lot worse if a double-dip recession rears its head.

But despite the challenges, Cabot’s still got game. Here are four reasons to love COG:

  1. Marcellus Shale Play. Cabot has a huge position in the blockbuster Marcellus Shale play. In nearly every well drilled in the formation since the 1930s, “noticeable quantities” of natural gas have been found, according to the U.S. Geological Survey. The USGS recently said Marcellus Shale still contains at least 84 trillion cubic feet of gas and 3.4 billion barrels of natural gas liquids.
  2. Pipeline Approval. Federal Regulators on Friday approved a pipeline network that would carry natural gas from Marcellus Shale, which extends along the Appalachian Basin, through the East Coast states.
  3. Production Efficiency. In the second quarter, COG reported net earnings of $54.7 million, up from $21.7 million in the same quarter last year. During the first six months of this year, natural gas prices plummeted by more than 24%. But COG’s production increased by more than 45% over that same period. That means the company’s economies of scale and management efficiency can go a long way toward offsetting lower natural gas prices
  4. Solid Fundamentals. At $70.28, is trading about 11% lower than its 52-week high on July 28 — but 160% above its 52-week low of $26.62 last September. With a market cap of $7.36 billion, the stock has a price/earnings-to-growth ratio of 1.41, indicating that it is overvalued. The balance sheet raises an eyebrow — $39.31 million in total cash versus $1.1 billion in total debt — but that’s a common challenge in this sector.

Bottom Line: COG is a solid company with a strong market position and a power edge in the Marcellus Shale. Flooding from Hurricane Irene that disrupted the transport of natural gas largely was built into the company’s third- and fourth-quarter assumptions, which the company advised this week were still on track. And by the end of this month, COG is expected to surpass its production levels for all of 2010. Because we’re settling into the notorious “shoulder months” (September-October; May-June), natural gas prices are likely to slump until we hit winter’s first blast. If there’s a corresponding slip in GOG shares, this stock would be a good value at $65 and a bargain at $58.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


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