After turning in a strong quarterly earnings report with positive free cash flow and a dividend raise, Cabot Oil & Gas Corp. CEO Dan Dinges said that the Appalachian shale gas driller is ready to dial its original 2020 spending back to no-growth levels if natural gas prices continue to stay below $2.50/MMBtu.
"We'll continue to look at the market and look at the tea leaves and what our best estimate it is for natural gas prices as it rolls forward," Dinges told analysts on Cabot's Oct. 25 earnings conference call. Under its current 2020 plan, Cabot will spend $700 million to $725 million in capital for 5% growth from its 2019 2.4 Bcf/d production. Under the maintenance scenario, Cabot said it will spend roughly $125 million less and show no volume growth.
Financial considerations driven by the commodity price of gas will drive the decision, Dinges said, with Cabot spending and producing enough to continue to have positive cash flows and return cash to investors through share buybacks or dividend increases.
"In a sub-$2.50 NYMEX environment, we believe the maintenance capital scenario allows us to optimize our free cash flow available to opportunistically repurchase more of our outstanding shares," Dinges said. "Which you believe is prudent if the expectation for natural gas prices remains challenged in 2020 and 2021."
Dinges declined to pin down a specific price point that would trigger the decision to roll back drilling, only saying the company would keep an eye on the gas market and make the call by February 2020's fourth-quarter earnings announcement.
According to Cabot's presentation, the company's break-even price for natural gas to date this year is $1.44/Mcfe.
Cabot's adjusted third-quarter earnings of $119.7 million, 29 cents per share, were a 10% increase over the same period a year ago and beat analysts' expectations. Cabot used its $72 million in positive cash flow to help hike its quarterly dividend 11% to 10 cents per share. Cabot also spent $191 million buying back 10.5 million share in the third quarter and still has authority to purchase another 21 million shares.
Cabot's 2.4 Bcf/d of third-quarter gas production was also above analysts' expectations and was 18% more than the third quarter of 2018. The earnings increase came despite an 11% decrease in gas realizations to $2.11/Mcf, when compared to 2018. Cabot said its well operating expenses of $1.43/Mcf were a 15% decrease over the year prior. Fourth-quarter production will be roughly 2.4 Bcf/d, Cabot said, sticking to its current 2019 capital spending of $800 million to $820 million.
"Our [initial] take on 'maintenance scenario' is positive both from the company and gas macro standpoint, the jury is still out whether investment community will like it too," Stifel Nicolaus & Co. shale analyst Jane Trotsenko told her clients before the call.
In trading Oct. 25, Cabot shares gained 4% by midday, to $19.10 per share, on light trading.
Guggenheim Securities LLC oil and gas analyst Subash Chandra wondered if Cabot might be tempted to use its spare cash to grow inside or outside of Appalachia with land prices cheap in the current market.
"The question is whether [Cabot] is content with the current plan or seeks inventory through acquisitions, given that exploration has ceased and it is a buyer's market for assets," Chandra said before the call. "We still wonder whether [Cabot] is content in this strategy or would seek to use Appalachia as a source of free cash flows for another project. It has sought to diversify previously through exploration, but in a buyer's market for assets, maybe acquisitions can compete with exploration."
Cabot briefly launched projects targeting crude oil in the Texas' Permian Basin and Ohio's Utica Shale before shutting them down by the first quarter of this year.