January 16, 2015 Cabot Oil & Gas Corporation Current Recommendation Prior Recommendation Neutral Date of Last Change 01/16/2015 Current Price (01/15/15) $28.78 Target Price $26.00 UNDERPERFORM SUMMARY (COG-NYSE) Based on the number of near-term challenges, we are lowering our recommendation for Cabot Oil & Gas to Underperform from Neutral. With oil in a freefall, the company s earnings and cash flows are bound to suffer, at least in the near-to-medium term. This is expected to limit its ability to deliver positive earnings surprises. Natural gas volatile fundamentals and Cabot s high exposure to the commodity are also causes for concern. As it is, Cabot s steep valuation and miniscule payout keep us worried. Considering these factors, we see Cabot as a risky bet. SUMMARY DATA 52-Week High $41.61 52-Week Low $28.05 One-Year Return (%) -23.22 Beta 0.70 Average Daily Volume (sh) 6,117,242 Shares Outstanding (mil) 413 Market Capitalization ($mil) $11,887 Short Interest Ratio (days) 2.88 Institutional Ownership (%) 97 Insider Ownership (%) 2 Annual Cash Dividend $0.08 Dividend Yield (%) 0.28 5-Yr. Historical Growth Rates Sales (%) 22.7 Earnings Per Share (%) 24.7 Dividend (%) 27.8 using TTM EPS 31.6 using 2015 Estimate 38.4 using 2016 Estimate 16.5 Zacks Rank *: Short Term 1 3 months outlook 5 Strong Sell * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Growth Industry Oil-Us Exp & Prod Zacks Industry Rank * 246 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 373 A 450 A 436 A 487 A 1,746 A 2014 510 A 533 A 512 A 545 E 2,100 E 2015 576 E 563 E 592 E 552 E 2,283 E 2016 3,115 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.13 A $0.22 A $0.18 A $0.18 A $0.71 A 2014 $0.26 A $0.28 A $0.19 A $0.25 E $0.98 E 2015 $0.19 E $0.16 E $0.15 E $0.25 E $0.75 E 2016 $1.74 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Cabot Oil and Gas (COG), based in Houston, Texas, is an independent oil and gas exploration company with producing properties mainly in the U.S. Founded over 100 years ago in Pennsylvania, Cabot originally operated in the Appalachian Mountains of the eastern U.S. before moving the bulk of its activities to the Gulf Coast. Today, the company has four domestic focus areas: the Appalachia, east and south Texas, and Oklahoma. As of year-end 2013, the company had 5.45 trillion cubic feet equivalent (Tcfe) in proved reserves (97% natural gas). Cabot s output totaled 413.6 billion cubic feet equivalent (Bcfe) in 2013, of which more than 95% was natural gas. REASONS TO SELL With crude prices dipping below $50 a barrel and gas prices unable to break past $3, Cabot has been able to extract less value for its products. This has pressured the group s profit margins. Cabot s capital expenditure guidance for 2014 stands at $1.45 $1.55 billion. We do not believe this rate of capital spending at current gas price levels will be matched by increased cash flows, thereby leading to a free cash flow deficit in 2014. Cabot s company s steep valuation currently selling at 32 times trailing 12-month earnings and miniscule payout, keep us worried. Being a relatively small player, Cabot lacks the financial resources of larger industry giants. As such, during the current prolonged credit crunch, the company is forced to spend within its internal cash generation. This may prove detrimental to its growth plans. Cabot has often run into trouble with state regulators. The driller has been sued by 15 families in Pennsylvania, with accusations of drinking water contamination. RISKS The overall macro backdrop remains unfavorable due to low oil and gas prices along with a slowly reviving economic environment. However, a quicker-than-expected rebound in industrial activity and oil and gas supply-demand equilibrium will impact our recommendation. In the scenario that exploration and production spending rebounds at a faster rate than our expectation, it will positively impact Cabot s cash flows and earnings. Our recommendation will most likely underperform in such an environment. Cabot's production and reserve growth profile is reliant on high-risk exploration results. The natural gas reserves on certain areas can be larger-than-expected. Cabot shares could outperform our target price in that case.. Equity Research COG Page 2
RECENT NEWS Third Quarter 2014 Results On Oct 24, 2014, Cabot Oil & Gas Corp. reported weaker-than-expected third quarter results, hamstrung by falling gas prices (which make up the lion s share of the company's output). The exploration and production firm reported earnings per share adjusted for special items of $0.19, underperforming the Zacks Consensus Estimate of $0.23. Operating revenues, at $512 million, also failed to surpass the Zacks Consensus Estimate of $516 million. However, Houston TX-based Cabot s performance improved from the year-ago period amid rising production. Adjusted profit improved $0.01 from the third quarter 2013 level of $0.18 per share, while revenues were up 17.5%. Volume Analysis Cabot s overall production during the quarter totaled 132.4 billion cubic feet equivalent (Bcfe) 96% gas up 23.6% from the prior-year quarter. Natural gas volumes surged 24.6% year over year to 126.7 Bcf, while liquids output increased 7% to 961 thousand barrels (MBbl). Strength in natural gas production was driven by the Marcellus and Eagle Ford regions, where volumes swelled by 30% and 37%, respectively. Realized Prices The average realized natural gas price was down 8.9% from the corresponding period of 2013 to $3.06 per thousand cubic feet, while average oil price realization decreased 8.6% to $94.79 per barrel. Costs & Expenses Transportation and gathering costs were up 41.4% year over year to $86 million, while exploration expenses skyrocketed 126.5% to $8.8 million. As a result, total operating expenses were 4.6% higher than the third quarter of 2013, reaching $322.8 million. However, Cabot was able to cut depreciation, depletion and amortization expenses by 8.9% from the year-ago period to $154 million. Drilling Statistics, Capital Expenditure & Balance Sheet Net wells drilled during the quarter increased to 46 (from 41 in the year-ago period) with a 98% success rate. Operating cash flows were $358.3 million for the quarter, while capital expenditures totaled $347.1 million. As of Sep 30, 2014, the company had $1,612 million in long-term debt, with a debt-tocapitalization ratio of 40.5%. Company Guidance Cabot reaffirmed that it remains on track to generate production growth of 20 30% for the full-year 2015. Further, the company expects to drill 180-190 net wells in the upcoming year, 95-100 of those in the Marcellus Shale and 80-85 in the Eagle Ford Shale. Finally, Cabot has pegged its 2015 capital budget at $1,530-1,600 million. Equity Research COG Page 3
VALUATION Cabot Oil s trailing 12-month P/CF multiple is 13.5, compared to the 9.5 average for the peer group and 15.9 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 11.2, compared to the industry average of 5.0. We remain worried about oil and natural gas volatile fundamentals and Cabot s high exposure to the commodity prices. Unless the outlook for prices improves, we do not see any significant price upside for Cabot shares. The company s steep valuation (31.6 times trailing 12-month earnings) and miniscule payout also keep us on the sidelines. Finally, Cabot s frequent brush with state regulators adds to the bearish sentiment. Our new Underperform recommendation and $26 price target, based on a multiple of 12.2X trailing twelve-month cash flow, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Cabot Oil & Gas Corp. COG) 38.4 16.5 N/A 13.5 31.6 111.7 20.9 Industry Average 54.7 29.9 11.5 9.5 17.2 126.0 20.6 S&P 500 16.0 15.0 10.7 15.9 18.5 19.4 12.0 EQT Corp. (EQT) 25.7 17.1 20.0 10.7 25.2 51.2 22.3 Range Resources Corp. (RRC) 82.7 19.9 11.5 40.6 139.7 45.3 Energen Corp. (EGN) 38.8 57.2 14.0 6.0 21.2 32.1 10.1 Antero Resources Corp. (AR) 64.8 51.2 40.0 229.9 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Cabot Oil & Gas Corp. COG) 5.3 7.7 1.6 15.9 0.7 0.3 11.2 Industry Average 5.3 5.3 5.3-31.1 5.8 3.3 5.0 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research COG Page 4
Earnings Surprise and Estimate Revision History Equity Research COG Page 5
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of COG. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1109 companies covered: Outperform - 15.3%, Neutral - 78.4%, Underperform 6.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research COG Page 6