With U.S. natural gas prices still extremely low, one might wonder how some natural gas companies continue to generate solid profits. It’s quite simple, really: The ones that are prospering are the ones drilling in the right areas.
Most of these companies have piled into a shale gas play known as the Marcellus, a vast formation that extends from southern New York to West Virginia and spans most of Pennsylvania, the eastern part of Ohio, and parts of Maryland, Virginia, and Tennessee.
The main reason the Marcellus is still profitable for many of these companies is its extremely low cost of production — by many measures, the lowest of any shale gas play in the country. With that said, let’s take a closer look at Cabot Oil & Gas Corporation (NYSE:COG), a Marcellus-focused oil and gas producer that continues to thrive despite depressed gas prices.
Cabot’s solid second quarter
Houston-based Cabot Oil & Gas Corporation (NYSE:COG) recently wrapped up its best quarter ever from an operational and financial perspective. In the second quarter, the company grew its production to a record 95.2 billion cubic feet equivalent, or Bcfe, of which 90.7 Bcf was natural gas and 763,000 barrels were liquids, representing a 52% year-over-year increase in output.
The majority of that growth was driven by its robust performance in the Marcellus, where the company’s current gross production is around 1.2 Bcf per day from 226 horizontal wells. Thanks to solid operational results, the company managed to boost its net income by 148% over the same quarter a year earlier and its discretionary cash flows by an equally impressive 109% year over year.
Cabot’s solid economics
What makes Cabot Oil & Gas Corporation (NYSE:COG)’s drilling program so successful is its extremely attractive cost structure, especially for its Marcellus wells. According to a study by Howard Weil, an energy investment boutique, Cabot’s drilling F&D costs — finding and development — were among the lowest in its peer group and compared quite favorably even with its closest low-cost competitors in the Marcellus.
Last year, Cabot Oil & Gas Corporation (NYSE:COG)’s drilling F&D costs came in at $6.28 per BOE, as compared with $5.88 for Ultra Petroleum Corp. (NYSE:UPL), $5.48 for Range Resources Corp. (NYSE:RRC), $3.53 for EQT Corporation (NYSE:EQT), and an impressive $3.13 for CONSOL Energy Inc. (NYSE:CNX). In fact, Cabot’s typical Marcellus well generates a whopping 120% return even at a 10%-15% differential at current prices, according to the company’s CEO, Dan Dinges.
In addition to having industry-leading low break-even costs, Cabot Oil & Gas Corporation (NYSE:COG) continues to make progress through efficiency gains. In the second quarter, the company reduced its average number of drilling days (from spud to total depth) to just 14 days, down from an average of 16 days last year. Importantly, the company achieved the reduction despite drilling longer laterals during the second quarter.
More good times ahead?
Going forward, the good times look likely to keep rolling for Cabot, especially as infrastructure constraints in the Marcellus ease up over the next year and a half. Though Cabot had an exceptional second quarter, it could have been even better if all its wells had been producing. As of the end of the second quarter, the company had a backlog of 37 Marcellus wells, which were either waiting to be completed or waiting on a pipeline.
