netrashetty
Netra Shetty
Cogent Communications is a multinational internet service provider whose network spans more than 50,600 intercity fiber route miles and 14,200 metro fiber miles. Cogent provides service in over 145 markets across 28 countries in North America and Europe. Cogent carries approximately 25 petabytes per day of Internet traffic and connects to approximately 3,250 networks. Cogent has grown to become the second largest carrier of Internet traffic in the world with approximately 17% of the world's Internet traffic crossing its network.[citation needed]
Cogent's AS174 has one of the highest-ranked connectivity degrees on the Internet.[1][2]
Cabot Oil & Gas is an independent oil and gas company that participates in the exploration, development, and exploitation of oil and gas fields in North America. The company's oil and gas operations are divided into four regions: the East Region, the Gulf Coast Region, the West Region, and the Canada Region. During 2008, the company drilled 432 wells in these regions with a 97% success rate.[1] By the end of 2008, Cabot had proved reserves of 1,942 billion cubic feet of natural gas equivalents (Bcfe), which will last over 20 years at the compay's 2008 production rates.[2]
Because 80% of Cabot's revenue came from the sale of natural gas, the financial health of the company depends on the price of and demand for natural gas as an energy source.[3] Lower pricing and weakened demand continued to impact Cabot's earnings in 2009. For 2009, the company's net income dropped 30% compared to 2008 levels in response to natural gas realizations that were 10% lower in 2009. However, pricing and demand improved late in 2009. The fourth quarter of 2009 showed year-over-year improvement in Cabot's financial performance and was the only quarter to do so.
Company Overview
Contents
1 Company Overview
1.1 Business Segments
2 Trends and Forces
2.1 As natural gas production grows in America, operations face potential regulations and taxation
2.2 Natural Gas Prices and Demand Are the Primary Determinants of Cabot's Operating Revenue
2.2.1 Obama Energy policy and Environmental concerns will benefit U.S. natural gas companies
2.3 Cabot reduces spending in 2009, but concentrates financial resources on developing its Marcellus Shale fields
3 Competition
4 Notes
Cabot's 2009 earnings reflected both the weakened demand and lower natural gas prices relative to 2008. For the year, net income was $148.3 million, which was approximately 30% lower compared to 2008. On the other hand, cash flow from operations dropped 3%. Natural gas realizations were $7.47 per Mcf in 2009 versus $8.39 per Mcf in 2008, while oil declined 4% year-over-year, averaging $85.52 per barrel.[4] A decline in operating expenses as well as its hedge portfolio, which contributed $395.0 million in revenue, partially offset the revenue and cash flow declines resulting from lower commodity prices.[5] The sale of its Canadian assets also improved its balance sheet. Cash from the sale was used to pay off part of the company's debt, improving its debt to total capital ratio to 30.8.[6]
Quarterly Analysis:
2Q 2009: Lower natural gas prices had a significant impact on Cabot's profits in the second quarter of 2009.[7] Natural-gas prices fell 22% and oil prices declined 15% to from a year earlier during the second quarter of 2009. Due to lower product prices, Cabot's year-on-year profits fell 53% to $25.5 million.[8] Despite lower profits, Cabot increased its natural gas production by 10% and investments by 5% during the quarter in anticipation of higher natural gas prices.[9]
3Q 2009: In the third quarter of 2009, Cabot halted its fracing operations in Susquehanna County, Pennsylvania for nearly a month due to inspection by the Pennsylvania Department of Environmental Protection (PADEP).[10] Although drilling and pipeline work were not affected, Cabot's U.S. operations have the potential of facing similar delays as energy producers face increased pressure to comply with environmental policies.[11]
4Q 2009: While financial performance during the first three quarters of 2009 was lower than during their respective quarters in 2008, the fourth quarter financial results were higher year-over-year.[12] The main difference were improvements in commodity prices during the fourth quarter of 2009. As a result of higher commodity prices and higher production, net income excluding selected items for the fourth quarter of 2009 was $53.8 million compared to $45.8 million for the same quarter in 2008.[13] Production for the quarter showed a year-over-year rise by 2%. While gas prices were lower compared to fourth quarter 2008 levels, those declines were partially offset by increases in year-over-year crude oil prices.[14]
1Q 2010: Although natural gas prices fell year-over-year, increases in production offset losses due to lower prices.[15] Net Income for the first quarter of 2010 was $30.6 million compared to net income of $42.2 million for the same quarter in 2009.[16] Natural gas price realizations were $6.56 per Mcf in 2010 versus $7.51 per Mcf during the first quarter of 2009.[17] Half-way through the first quarter of 2010, Cabot experienced a significant increase in natural gas production.[18] The company reported production of 26.7 Bcfe for the first quarter of 2010 versus 25.6 Bcfe for the similar quarter in 2009.[19] Cabot experienced a $1.12 Mcf pick-up from its hedge position during the first quarter of 2010. Cabot also expanded its leasing efforts in the Marcellus and Eagle Ford regions. During the first quarter of 2010, Cabot accumulated 28,400 net acres in these two areas.[20]
2Q 2010: While year-over-year production rose in the second quarter 2010, lagging profits from lower natural gas realizations sufficiently offset any financial gains from higher production levels. For the second quarter 2010, Cabot reported net income of $21.7 million, versus net income of $25.5 million for the same quarter in 2009.[21] Revenues also dropped year-over-year: operating revenue came to $195.5 million in the second quarter of 2010, compared with $204.8 million in the previous second quarter.[22] Both the decline in quarterly revenue and the decline in net income can be attributed partially to the 24% decline in natural gas realizations.[23] On the other hand, oil prices rose 15% and year-over-year production increased by nearly 20%. For the second quarter, Cabot produced 30.5 billion cubic feet equivalent.[24]
3Q 2010: Lower natural gas prices and reduced oil production contributed to third quarter profit that was 90% lower as compared to third quarter 2009.[25] Cabot's third quarter 2010 profit was $3.9 million compared to $38.9 million in the third quarter 2009.[26] Although natural gas output rose 44% for the third quarter, prices fell 27%. Oil prices rose 12% while production declined 16%. However, production numbers have the potential of improving due to the completion of Cabot's third Eagle ford oil shale well.[27]
Cabot Oil & Gas Financials ($ Thousands)
2007 2008 2009
Revenue($ Millions) 732.1 945.8 879.2
Equivalent Production (Bcfe) N/A 95.2 103.0
Net Income($ Millions) 211.3 167.4 148.3
Average Produced Gas Sales ($/Mcf) N/A 8.39 7.47
Average Crude/Condensate Price ($/Bbl) N/A 89.11 85.52
Source: PRnewswire: Cabot Financial Results for 2009 [28]
Geographical Production Breakdown as of December 31st, 2008
East Gulf Coast Rocky Mountains Mid-Continent Canada Total
Natural Gas (Mmcf) 869,663 516,072 261,934 199,152 39,172 1,885,993
Developed 611,284 292,626 194,117 173,726 36,402 1,308,155
Undeveloped 258,379 223,446 67,817 25,426 2,770 577,838
Liquids (Mbbl) 355 4,114 1,296 784 202 9,341
Developed 355 2,782 1,600 984 179 6,728
Undeveloped - 2,306 279 5 23 2,613
Average Daily Production (Mmcfe/day) 69.1 104.1 41.3 33.9 11.7 260.1
Reserve Life Index (years) 34.4 14.6 18.0 16.4 9.5 20.4
Source: 2008 10-K Financial Report[29]
Mmcf: Million cubic feet
Mbbl: Thousand Barrels
Mmcfe: Million cubic feet equivalent
Business Segments
Cabot’s revenues come from the exploration, production, and the sale of natural gas and oil. Unlike many of its competitors, Cabot’s operating segments are by geographic region instead of by operation. In response to the global recession beginning in 2007, Cabot announced restructuring plans. In May 2009, Cabot plans to close its Charleston, WV and Denver regional offices by the end of summer.[30] Instead, Cabot is in the process of building a new office in Pittsburgh, PA to oversee the West Virginia assets along with the Rocky Mountain assets.[31] Cabot has also combined the Gulf Coast operations with its Mid-Continent operations to form a new South Region.[32]
East Region( 23% of 2008 Operating Revenue): Cabot’s East region operations are located primarily in West Virginia and Pennsylvania. With 3,382 wells located in this region, Cabot’s average daily production of natural gas was 69.1 Mmcfe in 2008.[33] Although lower than Cabot’s Gulf region in terms daily production in 2008, the East region accounts for 45% of Cabot’s proven reserves.[34] Of the 871.8 Bcfe in proved gas reserves, 613.4 Bcfe of natural gas can be extracted from Cabot’s current wells using existing equipment. In 2008, Cabot produced 62 barrels of crude oil/condensate/NGL per day from the East region, which accounted for 3% of the company’s revenue from crude oil production.[35]
Natural Gas sales in from the East region represent 28.3% of Cabot’s 2008 revenue from natural gas production. [36] 70% of the 25, 171 Mmcfe of natural gas produced in the East region during 2008 was sold at index-based prices under contracts with a term of one year.[37]
In 2008, capital spending in this region was $369.6 million, which represented 24% of its total capital and exploration expenditures in 2008.[38] Expenditures in this region increased $191 million in 2008 primarily as a result from a $103.1 million increase in lease acquisition costs. Cabot has allocated $200 million of its 2009 capital expenditures budget for well development and equipment investments in the East region. [39]
In November 2010, Cabot agreed to sell some of its midstream shale assets in Pennsylvania's Marcellus shale to Williams Partners LP in a $150 million deal that included a 25-year gathering agreement.[40] One of two sales in November 2010, this sale is part of Cabot's strategy to improve its balance sheet while simultaneously getting rid of operations that have been unprofitable in recent quarters.[41]
Gulf Coast Region(39% of 2008 Operating Revenue): During 2008, Cabot produced daily an average of 104.1 Mmcfe of natural gas from the 844 wells it owns in this region.[42] Although the Gulf Coast region was Cabot’s largest source of natural gas in 2008, the region’s proven reserves, of which 93% is natural gas, accounted for 29% of Cabot’s total proved reserves as of December 31, 2008.[43]
Cabot sells natural gas from this region to intrastate pipelines, natural gas processors and marketing companies. As Cabot's biggest operating region in terms of production and sales, the production and sale of natural gas from this region accounted for 42% of the company’s natural gas revenues.[44] From the Gulf region, the company produced a total of 578 million barrels of crude oil in 2008, which made up 72.4% of the company’s crude oil revenue.[45]
In 2008, Cabot paid $604.0 million for 25,000 acres of oil-producing properties in East Texas.[46] As a result, investments in the Gulf region accounted for 64% of Cabot’s total 2008 capital and exploration expenditures and 79% of the increase in capital expenditures in 2008.[47]
West Region( 22% of 2008 Operating Revenue): Cabot’s Rocky Mountain and Mid-Continent areas compose the company’s West region segment. In this area, the total proved reserves are 475.3 Bcfe, of which 97% is natural gas.[48] Although Cabot only operates 1,031 of the 1,560 wells it owns in the West region, Cabot produced daily an average of 75.2 Mmcfe in 2008.[49] In addition to its natural gas operations, Cabot produced approximately 451 barrels of crude oil/condensate/NGL per day in the West region.[50] Sales in the West region accounted for 25.4 % of Cabot’s natural gas revenue and 21.8% of its oil/condensate/NGL revenue.[51] Capital investments in the Rocky Mountain and Mid-Continent areas were $88.7 million and $60.3 million, respectively.[52] However, the company plans to reduce 2009 capital and exploration investments in this region by 73%.[53]
Canada Region(16% of 2008 Operating Revenue): 2% of Cabot’s proved reserves lie within its Canada region.[54] However, 93% of the region’s proved reserves are developed and can be extracted with Cabot’s current equipment.[55] Daily production in this region averaged 11.7 Mmcfe for natural gas and 59 barrels of crude oil/condensate.[56] Therefore, products from the Canada region accounted for 4.3% and 2.6% of the company’s natural gas and crude oil/condensate revenues.[57] Although Cabot plans to spend $1 million in 2009 for capital and exploration expenditures in its Canada region, the company spent $25.4 million developing this region in 2008.[58]
In April 2009, Cabot sold its Canadian operations to a private Canadian company in exchange for CAD$78 million in cash and CAD$24 million in new equity. At the end of 2008, Cabot's Canadian properties had approximately 40.4 Bcfe in natural gas reserves.[59] Prior to the sale, Cabot had halted all 2009 capital expenditures for its Canadian operations in order to increase investment in its more profitable American operations.[60]
In November 2010, Cabot sold its Canadian subsidiary toTourmaline Oil Corp. in a deal valued at $61.3 million.[61] The sale is part of Cabot's strategy to improve its balance sheet while simultaneously getting rid of operations that have been unprofitable in recent quarters.[62]
Trends and Forces
As natural gas production grows in America, operations face potential regulations and taxation
In August 2009, natural gas futures dropped more than 5% to the sub-$3 mark for the first time since 2002. Prices fell in response to reports on the U.S. government's natural gas inventory buildup.[63] Average daily production peaked several months before the government reported on its inventory and has the potential of declining significantly as prices drop. Domestic production already flatlined among the majors like BP, Chevron, and ConocoPhillips.[64] However, independent producers like Chesapeake Energy and XTO Energy have been slow to cut production because they do not have many alternative sources of revenue. Falling prices and rising inventory levels have the potential of reducing earnings for independent natural gas producers.[65]
Natural gas producers operating in Pennsylvania have the potential of facing "severance taxes" on their leased lands in an effort by state governments to boost state revenues. In particular, the Marcellus shale field, much of which is in Pennsylvania, is receiving attention from the Pennsylvania governor's office.[66] Natural Gas producers believe the Marcellus shale field is capable of being one of the U.S.'s largest natural gas finds and have devouted a lot of financial resources to developing the region.[67] A state tax has the potential of severly reducing the profitability of producing from the region.[68] As a result, several natural gas producers operating in Pennsylvania have put money into various PACs to lobby the state government on their behalf. Although the size and impact of the proposed taxes have not been disclosed, they have the potential of significantly effecting Cabot's operations in Pennsylvania, which are the third largest in the state by acres lease.[69]
In March 2010, the Pennsylvania state House Majority Policy Committee held hearings regarding a five-year moratorium on additional leasing of state forest land for drilling in the Marcellus Shale.[70] The moratorium, which was voted out of committee in March, has the potential of effecting the nearly 700,000 acres of state forest land that are leased for drilling as well as the ability of companies operating in the region to expand operations in the Marcellus Shale region.[71] Although the fate of the moratorium has yet to be determined, its proposal is capable of impacting how companies operate and plan their future strategy for operation in the Marcellus shale.[72]
In September 2010, water testing results from a private environmental engineering firm suggests that toxic chemicals have appeared in wells located in Pennsylvania.[73] Cabot was preforming drilling tests in the region.[74] As a result, the Department of Environmental Projection is investigating the possible contamination as well as the possible side-effects of hydraulic fracturing.[75] Not only is Cabot potentially subject to stricter regulations from federal and state organizations, but is also likely to face several lawsuits in the event that the DEP can link the contaminated water supplies to Cabot's operations in the area.[76]
In December 2010, Cabot finalized its settlement with the Pennsylvania Department of Environmental Protection.[77] The agreement sets out obligations regarding claims related to water quality.[78] The total of the escrow funding is approximately $4.1 million. For an established time period, Cabot will offer the whole house water treatment systems for those that accept this application.[79]
In January 2011, investors filed shareholder resolutions urging Cabot and other companies to disclose the risks behind their U.S. nautral gas fracturing operations.[80] The resolutions requested that companies disclose their policies for reducing environmental and financial risks from the use of their chemicals.[81] The resolution also asked that Cabot start recycling and reusing waste while simultaneously reducing volumes of toxic chemicals.[82] While these requests for more shareholder transparency may not have a financial impact, the disclosure of fracking chemicals and process risks have the potential of affecting how shareholders view the risks of holding Cabot shares as well as inviting possible federal scrutiny.[83]
Natural Gas Prices and Demand Are the Primary Determinants of Cabot's Operating Revenue
After rising 81% during the first six months of 2008, natural gas prices ended February 2009 $4.79 per Mmbtu lower than their July high of $13.11 per Mmbtu.[84] In the second half of 2008, the low demand for energy led to price decreases for crude oil and natural gas while simultaneously increasing natural gas inventory levels.[85] Changing natural gas supplies, the global recession beginning in 2007, and market speculation have played an important role in natural gas price volatility in 2008 and early 2009.
80% of Cabot’s 2008 revenue came from its natural gas operations.[86] In 2008, the average price of natural gas impacted Cabot’s revenue growth significantly; the average price of natural gas in 2008 was 16% higher than in 2007 and was responsible for nearly 56% of the $177 million increase in Cabot’s operating revenues.[87] Natural gas prices also influence Cabot’s production levels and the size of it capital and exploration budget.[88] In order to profit more from rising natural gas prices in 2007 and 2008, Cabot increased capital expenditures by 86.3% and overall natural gas production by 12% in 2008.[89] The increase in production capacity accounted for the remaining 44% of the revenue increase in 2008.[90]
In February 2009, when natural gas prices were $8.61 per Mmbtu lower than July 2008 highs, Cabot released a 2009 capital expenditures budget that was less than one third of its 2008 budget.[91] If low demand for natural gas continues is 2009, the company expects that overall production will be less in 2009 than in 2008.
Obama Energy policy and Environmental concerns will benefit U.S. natural gas companies
When compared to oil, natural gas is more abundant, burns cleaner, and is more plentiful in the U.S..[92] Approximately 22% of United State’s energy consumption in 2007 came from natural gas, but that percentage has the potential to increase considerably with a new Obama energy plan.[93] Clean energy policies are likely to benefit natural gas companies because their product has fewer emissions of sulfur, carbon, and nitrogen than coal or oil. Of the $787 billion stimulus package President Obama signed in February 2009, $38 billion will be spent on renewable energy sources and there will be $20 billion in tax incentives over the next 10 years.[94] The stimulus package includes a 50% tax credit worth up to $50,000 for gas stations or business that install fuel pumps that dispense E85 fuel, electricity, or natural gas.[95]
Additionally, burning natural gas for energy produces half the carbon emissions that come from burning coal.[96] The amount of energy generated by natural gas fired plants grew by 10.8% in 2007 because rising coal prices and growing environmental concerns over coal’s emissions made natural gas a more practical alternative.[97] Despite being a “cleaner” form of energy, natural gas remained a more expensive energy source at the end of 2008; the cost of producing energy by using natural gas was 50% higher than the price of producing energy from coal.[98]
In order to profit from the rising demand for cleaner forms of energy, many oil & gas majors will increase their natural gas exploration and capital investments budget in 2009. In particular, much of Exxon’s 2009 production growth will come from natural gas. The oil major has nine projects scheduled to begin in 2009, several of which are focused on the development of large gas fields in Qatar.[99] Overall, Exxon's 2009 energy exploration and production budget is $29 billion, which is significantly larger than Cabot's 2009 budget of $200 million.[100] Companies like Exxon Mobil (XOM) and BP (BP) are capable of using their large capital expenditures budgets to outspend independent producers like Cabot when bidding for natural gas fields and investing in production equipment.[101]
Although the White House's environmental policy has the potential of benefiting natural gas producers, compliance with environmental regulations and inspection is capable of slowing Cabot's expansions and projects.[102] In the third quarter of 2009, Cabot halted its fracing operations in Susquehanna County, Pennsylvania for nearly a month due to inspection by the Pennsylvania Department of Environmental Protection (PADEP).[103] Although drilling and pipeline work were not affected, Cabot's U.S. operations have the potential of facing similar delays as energy producers face increased pressure to comply with environmental policies.[104]
In addition to federal regulation, state governments are also enforcing environmental regulations.[105] Shale gas is being extracted by advanced horizontal drilling and by hydraulic fracking, techniques that allegedly contaminate drinking water and cause other harm to the environment. In particular, the Marcellus region is receiving increased governmental attention in 2009. The number of drilling inspectors focusing on the region have increased from 75 in February 2009 to 120 in December.[106] For companies operating out of the region, increased inspections and regulation has the potential of leading to heavy fines and production restrictions.[107] In September 2009, regulators fined Cabot $56,000 for three spills of a drilling lubricant and banned the lubricant from its hydraulic drilling until proper safeguards are in place.[108]
Cabot reduces spending in 2009, but concentrates financial resources on developing its Marcellus Shale fields
In March 2009, Cabot completed its second and third horizontal wells in the Marcellus Shale, a region located in eastern Pennsylvania.[109] In the Marcellus Shale region, Cabot has 150,000 acres under lease and has completed successfully three horizontal wells as of March 05, 2009.[110] Cabot’s management believes that the Marcellus Shale territory is one of the company’s largest regions in terms of potential reserves and has allocated $100 million towards developing this region.[111] Drilling additional wells in this region not only requires a substantial investment in rigs and pipelines but also forced Cabot to shut down several of its vertical wells.[112] However, Cabot’s horizontal wells are more efficient than its vertical ones in this region and are able to extract more natural gas as a result.[113] Prior to the development of its second and third horizontal wells, Cabot produced 21 Mmcf per day of natural gas with one horizontal well and several vertical wells.[114] By completing these additional horizontal wells, Cabot will add an additional 17.1 Mmcf of daily production capacity.[115] While Cabot is cutting total capital expenditures by approximately two-third of its 2008 budget, the company will continue to invest in rigs and pipelines for its Marcellus Shale operations.[116] Cabot’s investments in this area have the potential to increase daily production capacity by 30 Mmcf by March 2009 and 65 Mmcf by the end of May 2009.[117]
However, Cabot’s investments in developing the Marcellus Shale region could run into legal trouble.[118] In March 2009, homeowners in Susquehanna County accused Cabot of leaking gas into homes as well as the local water supply.[119] Although still under investigation, the accusations have the potential to turn into lawsuits if Cabot knowingly allowed gas to leak into homes.[120]
Competition
Anadarko Petroleum (APC): Anadarko Petroleum is an independent oil and gas company that operates in the exploration and production of crude oil, natural gas, and natural gas liquids.[121] The company has operations primarily located in the United States, the deepwater of the Gulf of Mexico, and Algeria, but also operates in China, Ghana, and Brazil.[122] In 2008, Anadarko produced on average 206 million barrels of oil equivalents daily and ended the year with 2.28 billion barrels of oil equivalent in proved reserves.[123]
Petroleum Development (PETD): The Petroleum Development Corporation is an independent energy company that operates in the exploration and production of natural gas and crude oil.[124] By the end of 2008, the company had 4,712 gross wells located primarily in the Rocky Mountain region and the Appalachian and Michigan Basins.[125] Petroleum Development Corporation had an average daily production of 106.1 Mmcfe in 2008. The company has 753 Bcfe in proved reserves.[126]
Comstock Resources (CRK): Comstock Resources operates in the development and production of oil and natural gas. The company operates in Texas, Louisiana and offshore the Gulf of Mexico.[127] As of December 31, 2008, Comstock had proved reserves of 581.7 Bcfe as of December 2008 of which 90% is natural gas.[128]
Cogent's AS174 has one of the highest-ranked connectivity degrees on the Internet.[1][2]
Cabot Oil & Gas is an independent oil and gas company that participates in the exploration, development, and exploitation of oil and gas fields in North America. The company's oil and gas operations are divided into four regions: the East Region, the Gulf Coast Region, the West Region, and the Canada Region. During 2008, the company drilled 432 wells in these regions with a 97% success rate.[1] By the end of 2008, Cabot had proved reserves of 1,942 billion cubic feet of natural gas equivalents (Bcfe), which will last over 20 years at the compay's 2008 production rates.[2]
Because 80% of Cabot's revenue came from the sale of natural gas, the financial health of the company depends on the price of and demand for natural gas as an energy source.[3] Lower pricing and weakened demand continued to impact Cabot's earnings in 2009. For 2009, the company's net income dropped 30% compared to 2008 levels in response to natural gas realizations that were 10% lower in 2009. However, pricing and demand improved late in 2009. The fourth quarter of 2009 showed year-over-year improvement in Cabot's financial performance and was the only quarter to do so.
Company Overview
Contents
1 Company Overview
1.1 Business Segments
2 Trends and Forces
2.1 As natural gas production grows in America, operations face potential regulations and taxation
2.2 Natural Gas Prices and Demand Are the Primary Determinants of Cabot's Operating Revenue
2.2.1 Obama Energy policy and Environmental concerns will benefit U.S. natural gas companies
2.3 Cabot reduces spending in 2009, but concentrates financial resources on developing its Marcellus Shale fields
3 Competition
4 Notes
Cabot's 2009 earnings reflected both the weakened demand and lower natural gas prices relative to 2008. For the year, net income was $148.3 million, which was approximately 30% lower compared to 2008. On the other hand, cash flow from operations dropped 3%. Natural gas realizations were $7.47 per Mcf in 2009 versus $8.39 per Mcf in 2008, while oil declined 4% year-over-year, averaging $85.52 per barrel.[4] A decline in operating expenses as well as its hedge portfolio, which contributed $395.0 million in revenue, partially offset the revenue and cash flow declines resulting from lower commodity prices.[5] The sale of its Canadian assets also improved its balance sheet. Cash from the sale was used to pay off part of the company's debt, improving its debt to total capital ratio to 30.8.[6]
Quarterly Analysis:
2Q 2009: Lower natural gas prices had a significant impact on Cabot's profits in the second quarter of 2009.[7] Natural-gas prices fell 22% and oil prices declined 15% to from a year earlier during the second quarter of 2009. Due to lower product prices, Cabot's year-on-year profits fell 53% to $25.5 million.[8] Despite lower profits, Cabot increased its natural gas production by 10% and investments by 5% during the quarter in anticipation of higher natural gas prices.[9]
3Q 2009: In the third quarter of 2009, Cabot halted its fracing operations in Susquehanna County, Pennsylvania for nearly a month due to inspection by the Pennsylvania Department of Environmental Protection (PADEP).[10] Although drilling and pipeline work were not affected, Cabot's U.S. operations have the potential of facing similar delays as energy producers face increased pressure to comply with environmental policies.[11]
4Q 2009: While financial performance during the first three quarters of 2009 was lower than during their respective quarters in 2008, the fourth quarter financial results were higher year-over-year.[12] The main difference were improvements in commodity prices during the fourth quarter of 2009. As a result of higher commodity prices and higher production, net income excluding selected items for the fourth quarter of 2009 was $53.8 million compared to $45.8 million for the same quarter in 2008.[13] Production for the quarter showed a year-over-year rise by 2%. While gas prices were lower compared to fourth quarter 2008 levels, those declines were partially offset by increases in year-over-year crude oil prices.[14]
1Q 2010: Although natural gas prices fell year-over-year, increases in production offset losses due to lower prices.[15] Net Income for the first quarter of 2010 was $30.6 million compared to net income of $42.2 million for the same quarter in 2009.[16] Natural gas price realizations were $6.56 per Mcf in 2010 versus $7.51 per Mcf during the first quarter of 2009.[17] Half-way through the first quarter of 2010, Cabot experienced a significant increase in natural gas production.[18] The company reported production of 26.7 Bcfe for the first quarter of 2010 versus 25.6 Bcfe for the similar quarter in 2009.[19] Cabot experienced a $1.12 Mcf pick-up from its hedge position during the first quarter of 2010. Cabot also expanded its leasing efforts in the Marcellus and Eagle Ford regions. During the first quarter of 2010, Cabot accumulated 28,400 net acres in these two areas.[20]
2Q 2010: While year-over-year production rose in the second quarter 2010, lagging profits from lower natural gas realizations sufficiently offset any financial gains from higher production levels. For the second quarter 2010, Cabot reported net income of $21.7 million, versus net income of $25.5 million for the same quarter in 2009.[21] Revenues also dropped year-over-year: operating revenue came to $195.5 million in the second quarter of 2010, compared with $204.8 million in the previous second quarter.[22] Both the decline in quarterly revenue and the decline in net income can be attributed partially to the 24% decline in natural gas realizations.[23] On the other hand, oil prices rose 15% and year-over-year production increased by nearly 20%. For the second quarter, Cabot produced 30.5 billion cubic feet equivalent.[24]
3Q 2010: Lower natural gas prices and reduced oil production contributed to third quarter profit that was 90% lower as compared to third quarter 2009.[25] Cabot's third quarter 2010 profit was $3.9 million compared to $38.9 million in the third quarter 2009.[26] Although natural gas output rose 44% for the third quarter, prices fell 27%. Oil prices rose 12% while production declined 16%. However, production numbers have the potential of improving due to the completion of Cabot's third Eagle ford oil shale well.[27]
Cabot Oil & Gas Financials ($ Thousands)
2007 2008 2009
Revenue($ Millions) 732.1 945.8 879.2
Equivalent Production (Bcfe) N/A 95.2 103.0
Net Income($ Millions) 211.3 167.4 148.3
Average Produced Gas Sales ($/Mcf) N/A 8.39 7.47
Average Crude/Condensate Price ($/Bbl) N/A 89.11 85.52
Source: PRnewswire: Cabot Financial Results for 2009 [28]
Geographical Production Breakdown as of December 31st, 2008
East Gulf Coast Rocky Mountains Mid-Continent Canada Total
Natural Gas (Mmcf) 869,663 516,072 261,934 199,152 39,172 1,885,993
Developed 611,284 292,626 194,117 173,726 36,402 1,308,155
Undeveloped 258,379 223,446 67,817 25,426 2,770 577,838
Liquids (Mbbl) 355 4,114 1,296 784 202 9,341
Developed 355 2,782 1,600 984 179 6,728
Undeveloped - 2,306 279 5 23 2,613
Average Daily Production (Mmcfe/day) 69.1 104.1 41.3 33.9 11.7 260.1
Reserve Life Index (years) 34.4 14.6 18.0 16.4 9.5 20.4
Source: 2008 10-K Financial Report[29]
Mmcf: Million cubic feet
Mbbl: Thousand Barrels
Mmcfe: Million cubic feet equivalent
Business Segments
Cabot’s revenues come from the exploration, production, and the sale of natural gas and oil. Unlike many of its competitors, Cabot’s operating segments are by geographic region instead of by operation. In response to the global recession beginning in 2007, Cabot announced restructuring plans. In May 2009, Cabot plans to close its Charleston, WV and Denver regional offices by the end of summer.[30] Instead, Cabot is in the process of building a new office in Pittsburgh, PA to oversee the West Virginia assets along with the Rocky Mountain assets.[31] Cabot has also combined the Gulf Coast operations with its Mid-Continent operations to form a new South Region.[32]
East Region( 23% of 2008 Operating Revenue): Cabot’s East region operations are located primarily in West Virginia and Pennsylvania. With 3,382 wells located in this region, Cabot’s average daily production of natural gas was 69.1 Mmcfe in 2008.[33] Although lower than Cabot’s Gulf region in terms daily production in 2008, the East region accounts for 45% of Cabot’s proven reserves.[34] Of the 871.8 Bcfe in proved gas reserves, 613.4 Bcfe of natural gas can be extracted from Cabot’s current wells using existing equipment. In 2008, Cabot produced 62 barrels of crude oil/condensate/NGL per day from the East region, which accounted for 3% of the company’s revenue from crude oil production.[35]
Natural Gas sales in from the East region represent 28.3% of Cabot’s 2008 revenue from natural gas production. [36] 70% of the 25, 171 Mmcfe of natural gas produced in the East region during 2008 was sold at index-based prices under contracts with a term of one year.[37]
In 2008, capital spending in this region was $369.6 million, which represented 24% of its total capital and exploration expenditures in 2008.[38] Expenditures in this region increased $191 million in 2008 primarily as a result from a $103.1 million increase in lease acquisition costs. Cabot has allocated $200 million of its 2009 capital expenditures budget for well development and equipment investments in the East region. [39]
In November 2010, Cabot agreed to sell some of its midstream shale assets in Pennsylvania's Marcellus shale to Williams Partners LP in a $150 million deal that included a 25-year gathering agreement.[40] One of two sales in November 2010, this sale is part of Cabot's strategy to improve its balance sheet while simultaneously getting rid of operations that have been unprofitable in recent quarters.[41]
Gulf Coast Region(39% of 2008 Operating Revenue): During 2008, Cabot produced daily an average of 104.1 Mmcfe of natural gas from the 844 wells it owns in this region.[42] Although the Gulf Coast region was Cabot’s largest source of natural gas in 2008, the region’s proven reserves, of which 93% is natural gas, accounted for 29% of Cabot’s total proved reserves as of December 31, 2008.[43]
Cabot sells natural gas from this region to intrastate pipelines, natural gas processors and marketing companies. As Cabot's biggest operating region in terms of production and sales, the production and sale of natural gas from this region accounted for 42% of the company’s natural gas revenues.[44] From the Gulf region, the company produced a total of 578 million barrels of crude oil in 2008, which made up 72.4% of the company’s crude oil revenue.[45]
In 2008, Cabot paid $604.0 million for 25,000 acres of oil-producing properties in East Texas.[46] As a result, investments in the Gulf region accounted for 64% of Cabot’s total 2008 capital and exploration expenditures and 79% of the increase in capital expenditures in 2008.[47]
West Region( 22% of 2008 Operating Revenue): Cabot’s Rocky Mountain and Mid-Continent areas compose the company’s West region segment. In this area, the total proved reserves are 475.3 Bcfe, of which 97% is natural gas.[48] Although Cabot only operates 1,031 of the 1,560 wells it owns in the West region, Cabot produced daily an average of 75.2 Mmcfe in 2008.[49] In addition to its natural gas operations, Cabot produced approximately 451 barrels of crude oil/condensate/NGL per day in the West region.[50] Sales in the West region accounted for 25.4 % of Cabot’s natural gas revenue and 21.8% of its oil/condensate/NGL revenue.[51] Capital investments in the Rocky Mountain and Mid-Continent areas were $88.7 million and $60.3 million, respectively.[52] However, the company plans to reduce 2009 capital and exploration investments in this region by 73%.[53]
Canada Region(16% of 2008 Operating Revenue): 2% of Cabot’s proved reserves lie within its Canada region.[54] However, 93% of the region’s proved reserves are developed and can be extracted with Cabot’s current equipment.[55] Daily production in this region averaged 11.7 Mmcfe for natural gas and 59 barrels of crude oil/condensate.[56] Therefore, products from the Canada region accounted for 4.3% and 2.6% of the company’s natural gas and crude oil/condensate revenues.[57] Although Cabot plans to spend $1 million in 2009 for capital and exploration expenditures in its Canada region, the company spent $25.4 million developing this region in 2008.[58]
In April 2009, Cabot sold its Canadian operations to a private Canadian company in exchange for CAD$78 million in cash and CAD$24 million in new equity. At the end of 2008, Cabot's Canadian properties had approximately 40.4 Bcfe in natural gas reserves.[59] Prior to the sale, Cabot had halted all 2009 capital expenditures for its Canadian operations in order to increase investment in its more profitable American operations.[60]
In November 2010, Cabot sold its Canadian subsidiary toTourmaline Oil Corp. in a deal valued at $61.3 million.[61] The sale is part of Cabot's strategy to improve its balance sheet while simultaneously getting rid of operations that have been unprofitable in recent quarters.[62]
Trends and Forces
As natural gas production grows in America, operations face potential regulations and taxation
In August 2009, natural gas futures dropped more than 5% to the sub-$3 mark for the first time since 2002. Prices fell in response to reports on the U.S. government's natural gas inventory buildup.[63] Average daily production peaked several months before the government reported on its inventory and has the potential of declining significantly as prices drop. Domestic production already flatlined among the majors like BP, Chevron, and ConocoPhillips.[64] However, independent producers like Chesapeake Energy and XTO Energy have been slow to cut production because they do not have many alternative sources of revenue. Falling prices and rising inventory levels have the potential of reducing earnings for independent natural gas producers.[65]
Natural gas producers operating in Pennsylvania have the potential of facing "severance taxes" on their leased lands in an effort by state governments to boost state revenues. In particular, the Marcellus shale field, much of which is in Pennsylvania, is receiving attention from the Pennsylvania governor's office.[66] Natural Gas producers believe the Marcellus shale field is capable of being one of the U.S.'s largest natural gas finds and have devouted a lot of financial resources to developing the region.[67] A state tax has the potential of severly reducing the profitability of producing from the region.[68] As a result, several natural gas producers operating in Pennsylvania have put money into various PACs to lobby the state government on their behalf. Although the size and impact of the proposed taxes have not been disclosed, they have the potential of significantly effecting Cabot's operations in Pennsylvania, which are the third largest in the state by acres lease.[69]
In March 2010, the Pennsylvania state House Majority Policy Committee held hearings regarding a five-year moratorium on additional leasing of state forest land for drilling in the Marcellus Shale.[70] The moratorium, which was voted out of committee in March, has the potential of effecting the nearly 700,000 acres of state forest land that are leased for drilling as well as the ability of companies operating in the region to expand operations in the Marcellus Shale region.[71] Although the fate of the moratorium has yet to be determined, its proposal is capable of impacting how companies operate and plan their future strategy for operation in the Marcellus shale.[72]
In September 2010, water testing results from a private environmental engineering firm suggests that toxic chemicals have appeared in wells located in Pennsylvania.[73] Cabot was preforming drilling tests in the region.[74] As a result, the Department of Environmental Projection is investigating the possible contamination as well as the possible side-effects of hydraulic fracturing.[75] Not only is Cabot potentially subject to stricter regulations from federal and state organizations, but is also likely to face several lawsuits in the event that the DEP can link the contaminated water supplies to Cabot's operations in the area.[76]
In December 2010, Cabot finalized its settlement with the Pennsylvania Department of Environmental Protection.[77] The agreement sets out obligations regarding claims related to water quality.[78] The total of the escrow funding is approximately $4.1 million. For an established time period, Cabot will offer the whole house water treatment systems for those that accept this application.[79]
In January 2011, investors filed shareholder resolutions urging Cabot and other companies to disclose the risks behind their U.S. nautral gas fracturing operations.[80] The resolutions requested that companies disclose their policies for reducing environmental and financial risks from the use of their chemicals.[81] The resolution also asked that Cabot start recycling and reusing waste while simultaneously reducing volumes of toxic chemicals.[82] While these requests for more shareholder transparency may not have a financial impact, the disclosure of fracking chemicals and process risks have the potential of affecting how shareholders view the risks of holding Cabot shares as well as inviting possible federal scrutiny.[83]
Natural Gas Prices and Demand Are the Primary Determinants of Cabot's Operating Revenue
After rising 81% during the first six months of 2008, natural gas prices ended February 2009 $4.79 per Mmbtu lower than their July high of $13.11 per Mmbtu.[84] In the second half of 2008, the low demand for energy led to price decreases for crude oil and natural gas while simultaneously increasing natural gas inventory levels.[85] Changing natural gas supplies, the global recession beginning in 2007, and market speculation have played an important role in natural gas price volatility in 2008 and early 2009.
80% of Cabot’s 2008 revenue came from its natural gas operations.[86] In 2008, the average price of natural gas impacted Cabot’s revenue growth significantly; the average price of natural gas in 2008 was 16% higher than in 2007 and was responsible for nearly 56% of the $177 million increase in Cabot’s operating revenues.[87] Natural gas prices also influence Cabot’s production levels and the size of it capital and exploration budget.[88] In order to profit more from rising natural gas prices in 2007 and 2008, Cabot increased capital expenditures by 86.3% and overall natural gas production by 12% in 2008.[89] The increase in production capacity accounted for the remaining 44% of the revenue increase in 2008.[90]
In February 2009, when natural gas prices were $8.61 per Mmbtu lower than July 2008 highs, Cabot released a 2009 capital expenditures budget that was less than one third of its 2008 budget.[91] If low demand for natural gas continues is 2009, the company expects that overall production will be less in 2009 than in 2008.
Obama Energy policy and Environmental concerns will benefit U.S. natural gas companies
When compared to oil, natural gas is more abundant, burns cleaner, and is more plentiful in the U.S..[92] Approximately 22% of United State’s energy consumption in 2007 came from natural gas, but that percentage has the potential to increase considerably with a new Obama energy plan.[93] Clean energy policies are likely to benefit natural gas companies because their product has fewer emissions of sulfur, carbon, and nitrogen than coal or oil. Of the $787 billion stimulus package President Obama signed in February 2009, $38 billion will be spent on renewable energy sources and there will be $20 billion in tax incentives over the next 10 years.[94] The stimulus package includes a 50% tax credit worth up to $50,000 for gas stations or business that install fuel pumps that dispense E85 fuel, electricity, or natural gas.[95]
Additionally, burning natural gas for energy produces half the carbon emissions that come from burning coal.[96] The amount of energy generated by natural gas fired plants grew by 10.8% in 2007 because rising coal prices and growing environmental concerns over coal’s emissions made natural gas a more practical alternative.[97] Despite being a “cleaner” form of energy, natural gas remained a more expensive energy source at the end of 2008; the cost of producing energy by using natural gas was 50% higher than the price of producing energy from coal.[98]
In order to profit from the rising demand for cleaner forms of energy, many oil & gas majors will increase their natural gas exploration and capital investments budget in 2009. In particular, much of Exxon’s 2009 production growth will come from natural gas. The oil major has nine projects scheduled to begin in 2009, several of which are focused on the development of large gas fields in Qatar.[99] Overall, Exxon's 2009 energy exploration and production budget is $29 billion, which is significantly larger than Cabot's 2009 budget of $200 million.[100] Companies like Exxon Mobil (XOM) and BP (BP) are capable of using their large capital expenditures budgets to outspend independent producers like Cabot when bidding for natural gas fields and investing in production equipment.[101]
Although the White House's environmental policy has the potential of benefiting natural gas producers, compliance with environmental regulations and inspection is capable of slowing Cabot's expansions and projects.[102] In the third quarter of 2009, Cabot halted its fracing operations in Susquehanna County, Pennsylvania for nearly a month due to inspection by the Pennsylvania Department of Environmental Protection (PADEP).[103] Although drilling and pipeline work were not affected, Cabot's U.S. operations have the potential of facing similar delays as energy producers face increased pressure to comply with environmental policies.[104]
In addition to federal regulation, state governments are also enforcing environmental regulations.[105] Shale gas is being extracted by advanced horizontal drilling and by hydraulic fracking, techniques that allegedly contaminate drinking water and cause other harm to the environment. In particular, the Marcellus region is receiving increased governmental attention in 2009. The number of drilling inspectors focusing on the region have increased from 75 in February 2009 to 120 in December.[106] For companies operating out of the region, increased inspections and regulation has the potential of leading to heavy fines and production restrictions.[107] In September 2009, regulators fined Cabot $56,000 for three spills of a drilling lubricant and banned the lubricant from its hydraulic drilling until proper safeguards are in place.[108]
Cabot reduces spending in 2009, but concentrates financial resources on developing its Marcellus Shale fields
In March 2009, Cabot completed its second and third horizontal wells in the Marcellus Shale, a region located in eastern Pennsylvania.[109] In the Marcellus Shale region, Cabot has 150,000 acres under lease and has completed successfully three horizontal wells as of March 05, 2009.[110] Cabot’s management believes that the Marcellus Shale territory is one of the company’s largest regions in terms of potential reserves and has allocated $100 million towards developing this region.[111] Drilling additional wells in this region not only requires a substantial investment in rigs and pipelines but also forced Cabot to shut down several of its vertical wells.[112] However, Cabot’s horizontal wells are more efficient than its vertical ones in this region and are able to extract more natural gas as a result.[113] Prior to the development of its second and third horizontal wells, Cabot produced 21 Mmcf per day of natural gas with one horizontal well and several vertical wells.[114] By completing these additional horizontal wells, Cabot will add an additional 17.1 Mmcf of daily production capacity.[115] While Cabot is cutting total capital expenditures by approximately two-third of its 2008 budget, the company will continue to invest in rigs and pipelines for its Marcellus Shale operations.[116] Cabot’s investments in this area have the potential to increase daily production capacity by 30 Mmcf by March 2009 and 65 Mmcf by the end of May 2009.[117]
However, Cabot’s investments in developing the Marcellus Shale region could run into legal trouble.[118] In March 2009, homeowners in Susquehanna County accused Cabot of leaking gas into homes as well as the local water supply.[119] Although still under investigation, the accusations have the potential to turn into lawsuits if Cabot knowingly allowed gas to leak into homes.[120]
Competition
Anadarko Petroleum (APC): Anadarko Petroleum is an independent oil and gas company that operates in the exploration and production of crude oil, natural gas, and natural gas liquids.[121] The company has operations primarily located in the United States, the deepwater of the Gulf of Mexico, and Algeria, but also operates in China, Ghana, and Brazil.[122] In 2008, Anadarko produced on average 206 million barrels of oil equivalents daily and ended the year with 2.28 billion barrels of oil equivalent in proved reserves.[123]
Petroleum Development (PETD): The Petroleum Development Corporation is an independent energy company that operates in the exploration and production of natural gas and crude oil.[124] By the end of 2008, the company had 4,712 gross wells located primarily in the Rocky Mountain region and the Appalachian and Michigan Basins.[125] Petroleum Development Corporation had an average daily production of 106.1 Mmcfe in 2008. The company has 753 Bcfe in proved reserves.[126]
Comstock Resources (CRK): Comstock Resources operates in the development and production of oil and natural gas. The company operates in Texas, Louisiana and offshore the Gulf of Mexico.[127] As of December 31, 2008, Comstock had proved reserves of 581.7 Bcfe as of December 2008 of which 90% is natural gas.[128]