Today’s Daily Alert contains two important updates.
The Energy Strategist analysts are raising their buy target on a recent recommendation, giving new subscribers and anyone else who doesn’t own this stock yet a chance to get in on their “favorite idea in the entire energy universe.”
Following their update, we have a sell alert from Global Investment Strategist on an ETF that has faced some bad news recently.
New Buy Limit: Cabot Oil & Gas (COG)
from The Energy Strategist, recommended around $68 in Investment Digest issue 739, dated March 20, 2013.
In the energy sector, you can have very rapid production growth or capital spending within the limits of free cash flow. But very seldom do you get both from the same company, much less one with a track record of delivering on a variety of other operational and financial metrics.
When you find a unicorn like that, you’ve got to ride it as far as it will go. This is why Cabot Oil & Gas (COG) remains not just a Growth Portfolio Best Buy but our favorite idea in the entire energy universe.
The quarterly results reported last week continued to exceed those high expectations. The leading gas driller in Pennsylvania’s Marcellus shale formation reported adjusted second-quarter earnings of 45 cents a share, 6 cents above the consensus estimate, along with a 52 percent year-over-year increase in production and a near-doubling of cash flow from operations.
Those results don’t even reflect the recent startup of a compression station that appears to have given a 15% production boost to the connected Cabot wells, encouraging the company to lift its annual production growth forecast to a range of 44% to 54%, up from 35% to 50% previously. Cabot also continued to see strong flows from “step-out” wells outside its main production area in northeast Pennsylvania, and as a result is bringing in a sixth drilling rig and possibly a seventh one next year, providing a further boost to its already bright outlook for 2014 and beyond.
Meanwhile, total unit costs were down 28% year-over-year, so growth will continue to be financed by the swelling cash from operations. While natural gas prices have been weak of late, Cabot is well hedged in the near-term and is unlikely to sustain a material hit so long as prices stay above $3 per thousand cubic feet (Mcf). At the same time, the company retains the upside exposure to a long-term move above $5 per Mcf, expected by many analysts once exports of liquefied natural gas (LNG) begin in 2016.
Cabot celebrated its recent good fortune by doubling the quarterly dividend to 16 cents a share as part of the forthcoming 2:1 stock split.
The company also reported strong oil drilling results in the Eagle Ford shale in south Texas, and is shifting a rig there from its Marmaton Oklahoma play. But this remains primarily a natural gas story, one that is already strongly profitable and is poised to get more lucrative still.
In the aftermath of the report, the stock shot up to a record high, moving well above our buying point. Stifel raised its price target up to $85, while Howard Weil raised its sights to $91 and Oppenheimer bid $100, suggesting upside into triple digits should natural gas get significantly more expensive.
The stock is likely to oblige, barring another collapse in natgas prices that seems like a remote possibility at this point. This is a position still very much worth building and we’re raising our price target accordingly. Buy COG below $85.
Robert Rapier and Igor Greenwald, The Energy Strategist, www.energystrategist.com, 800-832-2330, July 29, 2013