RiverPark sees a value in investing in Cabot Oil & Gas Corporation (NYSE:COG) because the company has the ability to “return substantial excess cash to shareholders over the next several years,” while also boosting its production growth rate. The New York-based fund initiated a new position in Cabot Oil & Gas during the fourth quarter, holding 64,242 shares, worth $1.84 million, as of the end of December. In this article, we’re going to take a look at RiverPark’s investment thesis on Cabot Oil & Gas that was published in the fund’s Long/Short Opportunity Fund Q4 Investor Letter.
Here is why RiverPark decided to buy COG shares:
Cabot Oil & Gas, which we owned previously and have been following for years, is the premier natural gas producer in the highly prolific Marcellus shale play in the Northeast U.S. The company is the dominant producer in this area with among the lowest finding costs and highest full cycle returns of any shale gas asset in the United States. Despite a highly volatile natural gas pricing environment, Cabot has grown production at a 35% compound annual growth rate since 2010 with over 3,000 locations remaining for future production. The company has grown with a highly disciplined capital allocation philosophy in which all growth and exploration has been funded through internally-generated cash flow, leaving the company with only $1 billion of net debt as compared with over $1 billion of EBITDA and over $12 billion of equity market capitalization.
Cabot has a unique combination of high quality acreage with low production costs and a building portfolio of high quality takeaway capacity (including substantial capacity on the Atlantic Sunrise line that is scheduled to be in service during 2018) that provides the opportunity for accelerating production growth and increasing free cash flow over the next several years.
Management’s guidance for the next three years projects a 20% compound annual growth rate for production from its Marcellus Shale in N.E. Pennsylvania and a 25% compound annual growth rate for discretionary cash flow, resulting in over $2.5 billion of cumulative pre-tax free cash flow. Given its already low leverage, the company has the opportunity to return substantial excess cash to shareholders over the next several years, while also increasing its production growth rate – a relative rarity in the capital intensive E&P industry. Despite this projection, its history of success, and proven track record in all natural gas pricing environments, COG’s stock price is little changed over the past five years. We believe that the combination of accelerating production growth with expanding free cash flow generation should lead to a material revaluation higher in COG shares over the next several years – a move that would be greatly enhanced by any recovery in the depressed price of natural gas. As a result, we decided to initiate a small position in COG and would look to use any incremental weakness or gas price volatility to add to our position.
Houston, Texas-based Cabot Oil & Gas Corporation (NYSE:COG) is an independent oil and gas producer, which operates in the Marcellus Shale and Eagle Ford Shale. COG was one the best-performing energy stocks of the Energy Select Sector SPDR ETF in 2017. It outperformed XLE by gaining 22.42% during the last year, while the index fell 4.05% in 2017.
However, shares of Cabot Oil & Gas have dropped more than 16% since the beginning of the year. The company’s stock has received a consensus target price $32.18 from analysts polled by Factset. On Friday, the stock was closed at $23.89.
Meanwhile, Cabot Oil & Gas Corporation (NYSE:COG) is also favorite stock among the hedge funds covered by Insider Monkey. As of September 30, 2017, there were 37 funds in our database with position in the oil and gas producer.