Profit from record natural gas prices

Peter-FallonThis winter will go down as one for the record books. January is already the coldest month on record this century.

As a result, the demand for natural gas has been unprecedented. January’s bitter cold resulted in seven of the highest demand days for natural gas since record keeping started.

One of the most prolific natural gas shale plays is Pennsylvania’s Marcellus shale. Annual Marcellus production continues to confound analysts, handily beating their forecasts.

Look at the latest Drilling Productivity Report below, courtesy of the Energy Information Administration (EIA).


It’s clear why natural gas producers are focusing their drilling efforts on the Marcellus. It’s producing more natural gas than the Haynesville, Bakken and Eagle Ford plays combined.

Now let’s look at the new well production numbers from the EIA report.


Marcellus drillers are producing more gas per well than any other play in the country. More importantly, the monthly increase per well is nearly ten times that of any other play.

That’s all good news for Cabot Oil & Gas Corporation (NYSE:COG). Cabot, an independent exploration and production (E&P) company, has a big focus on the Marcellus.

Its annual production growth over the last three years has been greater than 40%. Cabot has a cost structure that allows it to generate internal rates of return of 115%.

That’s on a typical Marcellus well. Even more incredibly, it’s with natural gas prices at just $3.50 per MMBtu. When’s the last time we saw those prices?

Fast-forward to January, with gas prices of $4.50 per MMbtu and Cabot’s return jumps to over 200% per well.

As I write this, natural gas is selling for $5.11 per MMBtu. At that price, Cabot prints even more money.

Well Drilling Costs: Out of the Box Thinking

When horizontal drilling and hydraulic fracturing began, companies drilled and fracked one well at a time. That costs about $8 million per well.

Now, Cabot drills and fracks ten wells per drill-pad. That drives the economics down considerably. Cabot’s average per-well cost on a 10-well pad is $5.8 million. The picture below is a typical Cabot ten-well setup.


Cabot’s first 10-well Marcellus pad produced outstanding results. Total initial production was 201 million cubic feet per day (Mmcf/d).

Even after 30 days, the 10 wells were still producing a combined 168 Mmcf/d. The company realized cost savings of $6 million for the 10-well pad.

In 2014, Cabot plans to drill more than 60% of its Marcellus acreage on pads with five or more wells. That compares to just 23% in 2013.

Cabot’s identified over 3,000 drilling locations in the Marcellus shale sweet spot. That implies over 25 years of drilling at current rates.

As a result of Cabot’s industry-leading multiple well per pad drilling, it has the highest rates of return in the industry. It also boasts the highest estimated ultimate return per lateral foot in the Marcellus.

This past December, Cabot reaffirmed its 2013 production growth guidance of 44-54%. It also initiated its 2014 production growth guidance of 30-50%.

That’s a big upside from 2013’s production. But it gets even better: Cabot only has 30% of its production hedged.

That means it will be able to take advantage of what I believe will be higher natural gas prices ($4.00-$5.00 per MMbtu) in 2014. That means even more upside earnings for Cabot.

Those earnings will ultimately mean a higher share price. Savvy investors wanting to grab hold of a high-flying growth stock for 2014 should consider purchasing a few shares of Cabot Oil & Gas.

Profitably yours,

Peter Fallon.

Note from Midas Legacy Editor: Peter retired in his early 50’s after a successful career in the fields of energy and technology. His success as an investor and business owner spans over 40 years, and he has now combined his experience with his knowledge and passion for energy, technology, and investing. He is also the editor of our energy stocks recommendation service, ‘Wealth from Power’, available by invitation only.


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