Is COG a Good Investment? How This Marcellus Producer Is Coping With Low Regional Gas Prices

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It’s safe to say that the Marcellus has exceeded most expectations about production growth. In the first half of this year, output from the prolific shale gas play increased 50% year over year, according to Bentek Energy, an energy market analytics company.

Cabot Oil & Gas Corporation (NYSE:COG)

Ironically, however, this supply growth has led to depressed regional prices that have proved a major challenge for the very same Marcellus producers that drove the surge in production in the first place. Let’s take a closer look at what Cabot Oil & Gas Corporation (NYSE:COG), one of the largest gas producers in the Marcellus, is doing to combat low regional gas prices.

Low gas prices in the Marcellus
The collapse of regional gas prices in the Marcellus has been one of the biggest causes for concern among investors recently. In a nutshell, the combination of soaring production from the play and inadequate infrastructure has caused basis differentials to widen significantly. Last month, for instance, gas at a Pennsylvania trading hub known as TGP Zone 4-Marcellus traded for as little as $1 per Mcf, a more than $2 per Mcf discount to benchmark prices at Henry Hub.

Even Cabot, despite its industry-leading low costs of production, hasn’t been immune to the impact of widening basis differentials. According to CEO Dan Dinges, the company’s gas production during the month of July sold at an average $0.15 per Mcf discount to NYMEX futures prices on a pre-hedged basis. These types of heavy discounts for Marcellus gas have left regional producers scrambling to market their production profitably.

To alleviate this problem, Cabot Oil & Gas Corporation (NYSE:COG) is diversifying its transportation network through multiple pipelines while also pursuing a rigorous hedging program to mitigate its exposure to regional price volatility. In the company’s second-quarter earnings conference call, Dinges explained the various measures Cabot Oil & Gas Corporation (NYSE:COG) is taking to accomplish these objectives:

“…We have pursued many different avenues, including: diversifying all multiple pipelines; firm transportation agreements; long-term sales agreements, that’s our firm sales; investing in new projects like the Constitution Pipeline; and opportunistically hedging a portion of our production. All of this provides us diverse opportunities to maximize the value of this tremendous resource.”

Cabot’s gas marketing efforts
Cabot Oil & Gas Corporation (NYSE:COG) currently moves its production to market through three large interstate pipeline systems: Tennessee Gas Pipeline’s 300 Line, which is owned by Kinder Morgan Inc (NYSE:KMI), the Transco Gas Pipeline, owned by the Williams Companies, Inc. (NYSE:WMB), and the Millennium Gas Pipeline, owned by affiliates of NiSource Inc. (NYSE:NI), National Grid plc (ADR) (NYSE:NGG) and DTE Energy.

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