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After the Boom: A shale driller embraces its 'lifetime' match

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Essential Energy Insights - September 17, 2020

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After the Boom: A shale driller embraces its 'lifetime' match

This is the third article of a three-part series lookinginto what Marcellus Shale gas extraction did and did not do for one of theleading areas in the shale boom and what comes next for residents, business andindustry. Part oneexamined whether bust must follow boom in the northeast corner of Pennsylvania.Part two traced thepain of local contractors, among the first to be hurt by the price slump.

None of its competitors love Susquehanna County shalelike Cabot Oil & Gas Corp.

Despite the one-two punch of a overwell water pollution and the rejectionof a crucial pipeline permit by regulators in nearby New York,Cabot is still betting its fortune on dry gas from the county.

Its new regional headquarters in Dimock — the town at thecenter of the pollution verdict, which Cabot said it will appeal — ismetal-and-stone testimony to the company's plans to be a permanent part of acounty where it spent more than $1 billion drilling in 2014. The parking lot islined with CNG-powered trucks, and pipe is stacked and ready in the yard justup Pennsylvania Route 29 toward the county seat of Montrose.

Cabot's regional headquarters in Dimock, Pa.

Source: Cabot Oil & Gas Corp.

Putting roots even deeper into the community, Cabot has alsosponsored construction of a new clinic at the hospital in Montrose and endoweda community college program to train its future workforce.

Calling it a "golden calf," the boss of Cabot'sSusquehanna County operations, B.J. Cline, said the county "has a lifetimeof drilling" to do, and at 33 years old, Cline hopes that lifetime is his.Cabot says it has 3,450 more locations to drillin the county, which lies in Pennsylvania's northeast corner.

Cabot's director of external relations, George Stark, listedall the ways Susquehanna works for Cabot: a thick 350 to 600 feet of shale, gasso pure it goes direct to the pipe with minimal processing and depths shallowenough for the gas to be cheaper to drill than almost anywhere else in America.

In the first quarter of 2016, Cabot's out-of-pocket cashcosts to produce gas were $1.18/Mcf for a product it sold for an average of$1.49. (Throw in interest payments and depletion, and those costs went to $2.26in the quarter, when Cabot posted adjusted losses of $51.2 million, compared toprofit of $40.3 million in the same period a year before.)

Cline said Susquehanna shale is like a bond: He needs tomake 6% to stay in business. But if prices go higher, the shine comes back. In2014, Cabot posted adjusted profits of $405 million when it realized arelatively modest average price of $3.28/Mcf.

Cabot's confidence comes from the top. CEO Dan Dinges toldanalysts April 29 that the glory days will arrive sooner rather than laterbecause of the almost complete shutdown by drillers in the county and acrossthe region holding back production totals.

"Even when assuming all shut-in production comes backonline after the summer, we can still see a 25% decline from year-end 2015 toyear-end 2016," Dinges said on the earnings call. "Our best estimateis … approximately 120 wells will be completed in our area this year, andmodeling suggests that that is simply not enough activity to backfill thedeclining production we see. This is very positive for Cabot."

Cabot's core

But even after cutting back to one rig and one frack crewworking only the daytime shift, Cabot's Marcellus production is almost tooefficient. It just keeps growing, first from 1.4 Bcf/d in 2014 when Cabotstarted tapping the brakes on spending and drilling to 1.55 Bcf/d in 2015. NowCabot is guiding analysts to 1.6 Bcf/d for the year, but it averaged 1.68 Bcf/din the first quarter, with a peak of 1.9 Bcf/d in February.

SouthwesternEnergy Co. has 130,000 acres in the county and runs one frack crewon an as-needed basis. It completed only six wells in the county in the firstquarter, according to Investor Relations Director Michael Hancock, and isreleasing capacity on the 1.3 Bcf/d of pipeline space it holds in the region.

Unlike at Cabot, Southwestern's capital can flow to severalcompeting plays. Its focus now is to in the wet Marcellus and Utica shaleformations of West Virginia and southwest Pennsylvania.

"Probably half those are wet Marcellus, half those aredry Marcellus," Southwestern CEO William Way said of his company's futuredrilling locations on the company's April 22 conference call.

Cabot has every reason to talk its book in SusquehannaCounty — it is the core of the company. While Cabot has a small stake in Texas'Eagle Ford Shale, its crude and condensate production there is dwarfed by theSusquehanna County gas output. And that singular focus on one drilling locationmakes some analysts uneasy.

"When we asked on the call, they said that they werecomfortable with their northeast Marcellus portfolio and were not looking tomake acquisitions that would 'dilute' their asset base," Sanford C.Bernstein & Co. analyst Bob Brackett told his clients May 2.

One of the purestplays

That attitude, coupled with pipeline permitting delayscaused by intense opposition from activists, has Guggenheim Securities analystSubash Chandra wishing Cabot would put some of its eggs in new baskets.

"Cabot has strongly argued against assetdiversification," Chandra said April 25. "We think that should bereviewed. Our opinion has been that market forces would, in any case, limittheir productive capacity in an over-supplied basin. Now politics is piling on[with the denial of the Constitution pipeline]. Companies can sometimes be tooenamored of the rock to see profound changes in market dynamics."

Nonetheless, many analysts like Cabot as a pure play on gasprices in the producing region closest to premium New England and New York markets.Thirteen analysts who closely cover Cabot's stock think it will outperform themarket, according to data from S&P Global Market Intelligence, and none ofthem think it will underperform.

Topeka Capital Markets analyst Gabriele Sorbara summed up thebullish analysts' feelings after April 29's earnings release.

"We reaffirm our buy, especially when considering theincreasing optimism for natural gas/E&Ps with growing demand and theforthcoming supply response with the significantly reduced activity, as well asexpectations for La Niña seasonal weather pattern," Sorbara told hisclients. "Despite infrastructure bottlenecks and delays with the timing ofAtlantic Sunrise and Constitution pipelines, [Cabot] remains one of thebest plays on an improving price environment."