Cabot Oil & Gas Corporation, Company Intelligence Report

Tuesday 29 May 2012, Amsterdam

Cabot Oil & Gas Corporation, Company Intelligence Report
Moving Towards Oil; Development of the Eagle Ford Shale to Drive the Transition

Cabot reported total production of 187.5bcfe in 2011, of which 95.4% was natural gas and the remaining 4.6% was crude oil. The company’s crude oil and natural gas mix shows that it is a natural gas driven company, as natural gas accounted for more than 95% of Cabot’s total production in 2011. Cabot’s commodity mix clearly shows the company’s dependence on natural gas prices to grow its revenue. This dependency was quite evident from the company’s 2011 performance, as Cabot increased its production by 43.5% over 2010. However, the company’s revenue from the sale of oil and gas increased only by 16.4% in the same year. The slower growth rate in Cabot’s revenue in 2011 was primarily driven by the prevailing low natural gas prices, which reduced the company’s average realized price and, as a result, its revenue generation capacity.

Considering the low natural gas prices scenario compared to crude oil prices, coupled with Cabot’s imbalanced commodity mix, the company has decided to move towards the development of oil-rich assets. Cabot has allocated 40% of its total capex towards oil-rich drilling in 2012 compared to around 33% in 2011. The company expects to increase the share of oil in total capex in 2013. Cabot’s enhanced focus on oil-rich drilling is expected to improve its overall profitability. In line with this objective, the company entered into the Eagle Ford Shale in 2009 and purchased geophysical and geological seismic data for the shale in 2010. Cabot intends to concentrate on the development of the Eagle Ford shale to
increase the oil content in its commodity mix in the near-future. This shale is expected to be the key driver for its oil production growth in the long run. The company has increased its acreage position in the Eagle Ford shale from 33,000 acres in 2009 to more than 60,000 acres in Q1 2012. The figure below compares Cabot’s net acreage position with other players in the Eagle Ford Shale.

Cabot’s acreage in the Eagle Ford shale is primarily located in the oil window of the shale, where the majority of the resources consist of oil and liquids. The company’s drilling activities in this shale are mainly focused in the Frio, La Salle and Atascosa counties, in the Buckhorn area of the field. Cabot reported an average Estimated Ultimate Recovery (EUR) of 400 thousand barrels of oil equivalent (Mboe) per well in the Buckhorn area of the Eagle Ford shale in Q1 2012. However, Cabot’s wells drilled so far in this area have shown EUR in the range of 380-500 Mboe/ well.

The company has been focusing on drilling activities in the Eagle Ford shale since 2009 and drilled a total 29 wells during 2009–2011, of which 27 wells were producing at the end of 2011. Currently, Cabot is working on reducing the spacing between its drilling locations in this shale, thereby increasing the scope for drilling activities in the Eagle Ford shale. The company was conducting various studies required to evaluate downspacing to 50 acres in this shale at the end of 2011. Cabot planned to study drilling results for its wells drilled in the shale so far and analyzing the information to evaluate downspacing. Moreover, the company drilled two wells as a part of its downspacing pilot program in Q1 2012. These wells were drilled at a spacing of 400 feet (compared to spacing of 1,000-1,200 feet for previous drilling activities of the company in this area) and showed initial production (IP) rate of 788 and 791bbl/d. Furthermore, the company succeeded in increasing its EUR, peak production and gross production rates in this shale in 2011 compared to 2010. The company reported an average IP rate of 861 barrels of oil equivalent per day (boe/d) from its seven wells drilled in this shale in Q4 2011. Three of these seven wells showed an IP
rate of more than 1,000boe/d. Cabot reported gross resource potential of 150-300 MMboe in the Eagle Ford shale in Q3 2011. Thus, the Eagle Ford shale provides the company with substantial scope for development activities, and this will increase Cabot’s oil production and support its strategic transition towards crude oil.

Apart from the Buckhorn area in the Eagle Ford shale, the company is also involved into drilling activities through a 50:50 JV agreement with EOG Resources Inc. (EOG), which it signed in 2011. EOG is a major player in the Eagle Ford shale and currently holds nearly 647,000 acres in this shale. The JV covers more than 18,000 acres in the shale, which will be developed jointly by both the companies. The company had nine wells producing in the joint venture acreage in the Presidio area of mutual interest (AMI) area at the
end of 2011. It reported an average EUR of 300-500 Mboe in the Presidio AMI area in this shale in December 2011. Cabot plans to drill 25-30 net total wells in the Eagle Ford shale in 2012. Also, the company’s 2012 capex towards oil-rich drilling is expected to be invested in this shale mainly.

Cabot’s plan to shift its focus on the Eagle Ford shale has been a continuing trend in the oil and gas sector, as many oil and gas companies have been moving towards oil assets, especially through the development of this shale. This move towards the Eagle Ford shale is quite clear from the recent transaction activity in this shale. Many large oil and gas companies such as Kinder Morgan Energy Partners, Mitsui, Statoil, Talisman and CNOOC have acquired an interest in the Eagle Ford shale.

Most of the major oil and gas companies have entered into the Eagle Ford shale in the past two years. Thus, Cabot’s strategy to shift its focus from natural gas drilling to oil-rich drilling through developing this shale is in line with the emerging market trends.

Apart from the Eagle Ford shale, the company focused its oil-rich drilling activities in the Pettit oil formation during 2010. As a result of this, its oil and liquids production increased slightly by approximately 1.7% in 2010 compared to 2009. However, Cabot’s wells drilled in the Pettit oil formation showed a higher decline rate than expected. Therefore, the company reduced its focus on this formation and increased drilling activities in other oil-rich formations such as the Marmaton shale in Oklahoma, where Cabot drilled
its first well in Q2 2011. This well was a 10-staged non-operated well. The company reported an average daily production of 368bbl/d and 130 Mcf/d during the first month and 320bbl/d and 189 Mcf/d for the first two months from this well. It reported 175-225 Mboe of estimated potential reserves and 150-250 net drilling locations in the Marmaton shale in Q3 2011. Cabot held around 61,500 net acres in the Marmaton shale as in Q1 2012. Moreover, the company had 14 wells producing and seven wells were drilling, drilled
or planned as in March, 2012. It plans to drill 10 wells in the Marmaton shale in 2012.

Thus, the company has been aligning itself towards the development of oil assets through increased investment in the Eagle Ford shale and other oil-rich targets. Cabot’s strategy to accelerate its development activities in the Eagle Ford shale provides the company with ample opportunity to increase its production of oil and liquids and create a balanced commodity mix. The increased percentage of oil production will support Cabot’s revenue growth, with the high premium received for oil prices compared to gas prices. This will improve the company’s overall profitability and valuation statistics in the future.
Cabot Oil and Gas Corporation, Company Intelligence Report

Cabot Oil and Gas Corporation, Company Intelligence Report

Publish date : October 2011
Report code : ASDR-22265
Pages : 102

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