Marcellus, New York (Photo credit: Dougtone)
If you Must Love Nat Gas –
COG : NYSE : US$33.00 | Target US$65.00
Drilling inventory surges; remains top gas-weighted idea
Thesis
Following minor model refinements. Cabot’s capital productivity is almost twice
the peer average (EQT, RRC, SWN and UPL). Our ’13 estimates clearly
demonstrate the power of the company’s productivity. Next year, we believe
Cabot should generate almost 4x the production growth while spending almost
40% less than cash flow as the peers spend ~30% beyond cash flow. Accordingly,
we see ~40% upside to COG shares even in a long-term $4 gas price environment
while EQT, RRC, SWN and UPL have ~30% downside potential in this bear-case
scenario.
Highlights
Marcellus locations increase ~50%: Five Marcellus wells seven miles east of the nearest production averaged 15+ Mmcfepd over the first 20 days. This iscomparable to ’10/’11 Marcellus wells and suggests a well recovery of ~11 Bcfe in our view. Our estimate of remaining core Marcellus locations rose ~400 to ~1,300, which represents a 15+ year drilling inventory at the ’12E
pace. These estimates are predicated on 100-acre spacing.
Cabot is testing 50-acre spacing.
Eagle Ford locations double: Two recent Eagle Ford downspacing tests (55-
acre spacing) each commenced at almost 800 Boepd, in line with prior results
and implying a recovery of ~400 Mboe.Our estimate of remaining Eagle Ford
locations doubled to ~400, which represents ~15 years of drilling inventory at
the ’12E pace.
Long laterals improve productivity: Two long lateral Marcellus wells should
each recover ~17 Bcfe for $7+ million. These relationships imply an
improvement in capital productivity from ’11 levels.
Five-year discounted cash flow analysis Our target price is based on the net present value of free cash flow over the life of
a company using a reasonable discount rate. COG’s valuation applies a 13.75%
discount rate to determine the net present value of its free cash flow.
Our reasoning for using a 13.75% equity return includes the long-term nominal
performance of the broader equity market (10-12%), the greater volatility of
cyclical energy investments and the company’s mid-cap market capitalization.
Would you chose Cabot or Chesapeake ?
