Strong Earnings Pit Cabot Against Range In Marcellus ‘Beauty Pageant’

Where things stand: Natural gas production, squeezed by prices, is on the ropes. E&P companies have largely shifted to oil production in the Eagle Ford.

Offshore drilling’s momentum is relentless.

But in at least one place, gas drillers are standing their ground: the Marcellus. In the first half of the year, Cabot Oil and Gas (NYSE: COG) and Range Resources (NYSE: RRC) in particular excelled, delivering second quarter results analysts celebrated.

“Today’s earnings results and accompanying commentary from RRC and COG show why the Marcellus players reign supreme in the U.S. natural gas space,” said Bob Brackett, a senior analyst with Bernstein Research.

Cabot and Range each brought different strengths to bear in the play.

“It’s difficult to judge a beauty contest between core Marcellus operators. But we’d ascribe the more positive surprise to COG, whom we’d expect to be a relatively stronger performer on the day, although RRC was arguably easier to model given pre-announced volumes and realizations,” Brackett said.

Cabot, based in Houston, produced 95.2 billion cubic feet equivalent (Bcfe) of natural gas, a 52% increase from the same time period in 2012. Net income came in at $89.1 million, or $0.42 per share. And total unit costs were $3.10 per thousand cubic feet equivalent (Mcfe), a 28% decrease from second-quarter 2012

Cabot’s net income increased 148% percent and cash flow 109%, said Dan O. Dinges, chairman, president and CEO.

"Our success for the quarter was primarily attributable to the company's Marcellus shale drilling program, where operating efficiencies continue to reduce our already low-cost structure,” Dinges said.

The company raised projected 2013 production growth guidance to 44-54% from 35-50%, “reflecting confidence in the timing of infrastructure build-out in the second half of the year,” Brackett said.

He noted that Cabot also announced the addition of a sixth rig in its Marcellus position, which will spud its first well in August with production likely to come online in early 2014.

David Tameron, senior analyst for Wells Fargo Securities, said Cabot had a “steady-as-she-goes quarter with great execution for COG.”

He said a number of catalysts, such as downspacing tests and reduced well costs from increased pad drilling, will be the story that unfolds in 2014-2015.

He said COG appears to be scaling back liquids-rich development in southern properties “given impressive returns in Marcellus.”

Fort Worth’s Range second quarter wasn’t too shabby, either. As it has previously announced, the company had record production of 910 million cubic feet equivalent (MMcfe), an increase of 27%.

But the company’s projects for its estimated ultimate recoveries (EUR) jumped considerably. Tighter spacing positive test results with 500 feet between laterals in Marcellus adds 12 to 15 trillion cubic feet (Tcfe) of unproved resource potential attributable to the super-rich and wet areas in the southwest

Range sees its 2013 production toward the “higher end” of its 20-25% year-over-year guidance, Brackett said.

The company increased type curve guidance on its southwest Pennsylvania acreage, increasing estimated ultimate recoveries (EURs) by:

• 38% in the super-rich areas to 10.9 Bcfe;

• 41% in the wet and dry areas to 12.3 Bcfe

• 63% in the dry areas to 12.2 Bcf

“Range had an impressive first half of 2013, continuing to set record production results while decreasing our unit costs,” said Jeff Ventura, Range’s president and CEO. “Our balance sheet and liquidity are set for continued growth as outlined in our business plan of growing production 20% to 25% for many years. Importantly, cash flow growth is expected to outpace our production growth percentage.”

Tameron said that given improving economics and EURs in the Marcellus, “we could see less focus on the HZ (horizontal) Mississippian going forward.”

The company’s capex was likely front-loaded in 2013, so the second half of the year will likely slow. Ranger has a backlog of about 70 uncompleted wells, which should be reduced by year end, but without additional spending.

The company is also confident that the Mariner West Pipeline, which recently came online, will help alleviate pricing pressures seen in Marcellus by providing ethane takeaway to the region.