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Cabot expects at least $1.6B in free cash, triples share buyback program

Share prices for Appalachian shale gas driller Cabot Oil & Gas Corp. rose more tepidly than some of its peers despite a fourth-quarter 2017 earnings report that beat the Street and an announcement that it would triple the size of its share buyback program to 30 million shares, or about $720 million.

Cabot said it intends to grow its natural gas production, almost all from Susquehanna County in northeastern Pennsylvania, by 10% to 15% in 2018 with a 16% increase in capital spending. Over the next three years, Cabot expects to increase production by roughly 19% and generate between $1.6 billion and $2.5 billion of free cash flow, some of which will finance immediate share buybacks, CEO Dan Dinges told analysts on a conference call.

"In light of where we are right now with the growth of our free cash flow estimates and our programs still growing in production and generating the levels of free cash, we do anticipate — I'm not going to give you a sideboard on the time consideration — but we do anticipate fully executing on this authorization that we have in a timely fashion," Dinges said. "When you look at the buyback program and it being opportunistic today, it's today."

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Cabot shares are trading in the middle of their 52-week range and had gained 1.3% to $24.20 in moderate trading by midday Feb. 23. Cabot's shares had been in a slide, losing 15% since the beginning of the year. Shares of rival Appalachian drillers Chesapeake Energy Corp. and Gulfport Energy Corp. jumped 22% and 14%, respectively, Feb. 22 after those companies' earnings calls.

The uptick came after Cabot reported adjusted fourth-quarter 2017 profits of $59.5 million, compared to $5.1 million reported in the fourth quarter of 2016. For the full year, Cabot reported adjusted profits of $244.5 million, reversing $97.3 million in losses in 2016. Cabot's fourth-quarter adjusted profit of 13 cents per share beat analysts' expectations of 11 cents per share, according to S&P Global Market Intelligence's compilation of normalized estimates. For full year 2017, Cabot's 53 cents per share of adjusted earnings beat expectations of 51 cents per share.

"Market likely to reward an expansion of the share repurchase authorization to 30 million shares ($720MM at today's prices, 6.5% of shares outstanding) given recent equity weakness and cash in the door from recent asset sales," analysts at energy investment bank Tudor Pickering Holt & Co. said before the call.

"Slight positive" was Jefferies LLC analyst Zach Parham's opinion. The company "continues to focus on generating growth and free cash flow following the expected in-service of Atlantic Sunrise later in 2018."

Cabot has plans to increase production when Williams Partners LP's 1.7-Bcf/d Atlantic Sunrise starts service and to pick up more capacity on Transcontinental Gas Pipe Line Co. LLC's and Tennessee Gas Pipeline Co.'s lines as drillers shift to Atlantic Sunrise, Dinges said. Cabot reported 1.8 Bcf/d of gas production in the fourth quarter.

"Our expectations here in the next six months is we are going to see quite a bit of ... gas leave some of the existing pipes, particularly Tennessee and Transco, as some of the producer shippers up there get ready for Atlantic Sunrise and also as we look down the road with PennEast," Senior Vice President for Marketing Jeffrey Hutton told analysts. "So there is going to be some freed-up capacity ... on the existing pipes going forward. And, quite frankly, we're going to be part of that initially."

Dinges continued to hold information on the company's two oil or gas exploration operations close to the chest. Cabot expects to spend $75 million drilling exploratory holes somewhere in the U.S. Cabot will not disclose the location, but Dinges promised to reveal more information by the third quarter.

"I stand by that," Dinges said. "We will remain disciplined with our capital allocation to exploration and … being methodical in our testing of these concepts to determine if they have the attributes that can create long-term value for our shareholders, which is no easy task, given that we have set high hurdles internally for these projects."