Tuesday, May 1, 2018

Cabot Oil and Gas Shows How It’s Done By Lowering Operating Expenses 21%

Tom.jpg?resize=75%2C95Tom Shepstone
Shepstone Management Company, Inc.


Natural gas is a commodity business and money is made in commodities by continually lowering costs. Cabot Oil & Gas has lowered its operating expenses 21%.

Cabot Oil & Gas has done something remarkable for a commodity business where lowering costs is the key to everything good. It has lowered its year over year first quarter operating expenses by an astounding 21%. The result is not only higher net income, but also improved cash flow. More importantly, Cabot is now positioned to take advantage of increased demand likely to come from completion of the Atlantic Sunrise pipeline and two big natural gas power plants in Northeastern Pennsylvania.

141015161500-cabot-oil-and-gas-1024x576.jpgReading company financials can be boring stuff unless you know what to look for and in commodity businesses it’s always the ability to lower costs. It’s the thing that allows companies to survive price downturns and soar financially when those prices later recover as they inevitability do. Supply and demand serve to constantly correct each other. Companies who are able to consistently apply management and technology to the lowering of their operating expenses per unit position themselves for whatever the future brings.

Cabot has done that by lowering operating expenses 21% for the first quarter of this year compared the same period last year. Here’s the data:


A 21% decline in operating expenses between the first quarter of 2018 and a year earlier.

The 43¢ decline in operating expenses leaves Cabot at $1.58 in such expenses compared to a current natural gas price at the end of March of $2.44. While the price was 20¢ lower, Cabot managed to drop expenses by more than twice that. Admittedly, the biggest drop was in depreciation, depletion and amortization costs but notice direct operations, transportation and gathering and exploration costs dropped a combined 11¢ or 12%, which is still very significant. Just look at this chart showing how Cabot has continually lowered operating expenses:


It’s a beautiful thing. Notice, too, how Cabot’s depreciation, depletion and amortization costs have gone down per unit as it has grown production phenomenally, spreading its overhead. It makes a mockery of the financial doomsday predictions of goat farmer model Deborah Rogers who had a nice schtick going for a while with fractivist audiences.

Jim Willis has a much more in-depth analysis over at Marcellus Drilling News and has uploaded a very instructive Cabot presentation, as well as excerpts from the latest earnings call and a Reuters story. Here’s some of what caught my eye:

  • Cabot’s 2017 year-end proved reserves increased 13% to 9.7 Tcfe
  • Cabot’s 2017 production increased 10% to 1,878 Mmcfe/d
  • Cabot has 561 net producing horizontal wells and 3,000± more drill sites
  • Cabot shares rose as much as 4.6% amid a drop in the broader energy index after the company said its average unit cost fell by 21%t to $1.58
  • Rapid cost cuts have helped Cabot generate free cash flow, which is highly unusual  with production growth
  • Cabot’s net income rose to $117.2 million, or 26¢ per share, for the quarter ended March 31, from $105.7 million, or 23¢ per share, a year earlier

And, here are two more great charts, the first illustrating how Cabot has lowered finding and development costs by two-thirds since 2011:


The second chart depicts how Cabot has used technology to improve its performance relative to several industry peers:


This is, of course, is how Cabot is doing so well in cutting its costs relative to production. As a commodity business it has no choice. It must cut costs and Cabot has pioneered the way. It couldn’t be much more grand.

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