Is Cabot Oil and Gas Corporation (COG) A Smart Long-Term Buy?

Palm Valley Capital Management, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here.  A quarterly portfolio return of 1.16% was recorded by the fund for the second quarter of 2021, trailing the S&P SmallCap 600 and Morningstar Small Cap Index that delivered a 4.50%, and 4.23% returns respectively for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Palm Valley Capital Management, the fund mentioned Cabot Oil & Gas Corporation (NYSE: COG), and discussed its stance on the firm. Cabot Oil & Gas Corporation is a Houston, Texas-based natural gas company, that currently has a $7.04 billion market capitalization. COG delivered an 8.17% return since the beginning of the year, while its 12-month revenues are up by 0.06%. The stock closed at $17.61 per share on July 09, 2021.

Here is what Palm Valley Capital Management has to say about Cabot Oil & Gas Corporation in its Q2 2021 investor letter:

“During the quarter we purchased Cabot Oil & Gas (ticker: COG). Cabot is an exploration and production company focused on natural gas and the Marcellus Shale. Cabot prides itself on being a low-cost producer that generates attractive returns on capital and free cash flow. Due to its reserve base and low-cost structure (all-in operating expenses were $1.43/mcf in 2020), Cabot has been able to generate free cash flow for five consecutive years. The company has used its free cash flow to pay a dividend, buy back stock, and reduce debt. Cabot’s dividend is currently yielding 2.7%. The company is committed to returning at least of 50% of free cash flow to shareholders. We think Cabot, along with several other exploration and production companies, are transforming from focusing on growing production to generating and returning free cash flow.

We initially purchased Cabot on April 30, 2021. On May 24th, Cabot announced a merger agreement with Cimarex Energy. Cimarex is an exploration and production company with reserves in the Permian and Anadarko basins. Cimarex is also considered a low-cost producer, but with a higher mix of oil. The merger is expected to diversify the combined company’s asset mix, which management believes will allow it to generate free cash flow across a wide range of commodity price scenarios. At $60 oil and $3 natural gas, the merged firm is expected to generate $5.7 billion in free cash flow over the next three years, or a 12% annualized free cash flow yield. We expect a meaningful portion of this free cash flow to be distributed to shareholders in the form of regular and variable dividends. Assuming current energy prices hold, we believe the combined company will generate a dividend yield greater than most regulated utilities.”


Based on our calculations, Cabot Oil & Gas Corporation (NYSE: COG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Cabot Oil & Gas Corporation was in 20 hedge fund portfolios at the end of the first quarter of 2021, compared to 19 funds in the fourth quarter of 2020. COG delivered a 1.32% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.