Cabot timing Q4 production bump to align with Leidy South Expansion in-service

Cabot Oil and Gas was one of the few Northeast producers so far this earnings season to announce intentions to increase gas production during the second half of the year, with executives highlighting the Q4 in-service of Leidy South Expansion Project and a strong winter gas price outlook as the main drivers behind the decision in a July 30 earnings call.

Cabot CEO Dan Dinges said in his formal remarks that the company anticipates gas production to increase approximately 4% in the third quarter from second quarter levels and another 10% in the fourth quarter from third quarter volumes. Cabot produced approximately 2.2 Bcfe/d in the second quarter and has averaged around 2.3 Bcfe/d so far in the third quarter.

The estimated 230 MMcf/d production growth in the fourth quarter will be supported by a 250 MMcf/d expansion of the company's firm transportation portfolio from the Leidy South Expansion Project coming on line. The 580 MMcf/d expansion project will increase flows along the existing southbound Transco pipeline corridor, which brings gas from the Northeast to the Mid-Atlantic region.

Leidy South Expansion Project

The Leidy South Expansion Project adds two greenfield compressor stations along Transco pipeline in eastern Pennsylvania: Grassroots Compressor Station 607 in Luzerne County and Grassroots Compressor Station 620 in Schuylkill County. The project also includes the installation of horsepower additions at two existing Transco compressor stations, Station 605 in Wyoming County and Station 610 in Columbia County, as well as replaces 6.3 miles of existing pipelines and adds 5.9 miles of new pipeline loop segments along the existing pipeline corridor.

Jeffrey Hutton, Cabot's Senior Vice President of Marketing, said that the company expects an in-service date of Dec. 1 for Transco's Leidy South project. He added that the greenfield compressors stations and expansion of existing compressor stations are "pretty much complete" with just testing and regulatory approval required for completion. The pipeline replacement component of the project remains on schedule, Hutton said.

With the 2022 Platts M2MS forward curve showing discounts of $0.60 - $1.20/MMBtu for Appalachian pricing benchmark Enable Gas Transmission System, South – formerly known as Dominion, South – to Henry Hub, the economics look supportive for Cabot's $0.50/MMBtu transport fee for gas to flow along the Leidy South corridor.

Bullish outlook

Despite the wider differentials, Cabot executives emphasized their bullish outlook for Northeast gas prices during the winter 2021-2022 strip and beyond to calendar year 2022.

Platts forward curve data largely supports that view, with the EGTS, South winter strip up 50 cents since July 1 to $3.28/MMBtu.

Appalachia gas prices above $3 would be a far cry from recent winters. EGTS, South spot gas averaged $2.14/MMBtu during the 2020-2021 winter months and $1.66/MMBtu for winter 2019-2020.

Hutton pointed to strong domestic and export demand and an increasingly below-average storage situation to explain the forward curve buoyancy.

The company has decided to hold off on hedging its 2022 expected production in order to fully capture the expected upside potential, according to Dinges.

For the quarter ended June 30, Cabot had a net income of $30.5 million (8 cents/share) compared with a net income of $18 million (5 cents/share) in the year-ago quarter.