Cabot Oil & Gas Corporation (NYSE: COG)

Cabot Oil & Gas Corporation (NYSE: COG) reported another strong annual report last week. The company reported quarterly earnings of $0.43 per share compared with analysts’ estimates of $0.42 per share. Annual net income was $1.73 per share, the second best result ever. In 2006 the company reported income of $3.32 per share, but that included the one-time sale of assets. Ex-asset sales 2006 came in at $1.84 per share or 6 percent higher than in 2007. Cabot is an independent oil and gas company engaged in exploration, development, acquisition and exploitation of natural gas and oil properties. The company functions in five principal areas, including the Appalachian Basin, the Rocky Mountains, the Anadarko Basin, onshore and offshore the Texas and Louisiana Gulf Coast, and western Canada.

The company is emerging as one of the best managed natural gas companies in the United States. 2007 marked the fourth year in a row that COG reported an increase in proved reserves, growing some 14 percent in 2007. The company’s strongest growth comes from the Eastern US and its burgeoning activity in Canada (41 percent increase in reserves). For the year the company averaged $7.23 $/mcf a 1.4% increase over 2006. The company’s hedging activities helped buoy this number (+$1.00), but hurt the oil side (-$5.12). Oil made up 8.2% of Cabot’s operating revenue in 2007.
Cabot Oil & Gas Corporation had success with its initial wells at Trawick field and in its early initiatives in the Marcellus shale in Appalachia. The company experience continued success with its horizontal drilling program at County Line in Texas and more success at Hinton in Canada. It seems the Marcellus shale may be the next big thing in natural gas exploration and many of the industry leaders, like Chesapeake Energy (NYSE: CHK) and Range Resources (NYSE: RRC), are moving aggressively into this territory. Cabot’s success in this area will be an important factor to watch. Goldman seems to agree with this and led its company highlight sheet with this fact after the company 4Q conference call.

Thanks to the positive earnings announcement and bullish natural gas prices, many believe that Cabot shares are rather expensive at the moment, offering limited upside potential. There is some truth to this, with COG sitting at the top of its trailing four quarters P/E history over the past two years. However, with management executing on all cylinders and strong prospects for growth in Texas, Appalachia, and Canada, it seems likely that significant positive catalysts could emerge in 2008. Compared to the industry, the management is especially strong with its 5-year return-on-equity (ROE), operating margins, and 5-year return-on-assets (ROA). Key risks for the company include those in the industry.

Please do all necessary due diligence before considering investing in COG. This article is in no way a recommendation to open an interest in COG. The author has no open positions in the company.