It now looks like natural gas prices etched a multi-month bottom in the $3.30 to $3.50 area, and the latest gallop to $4.50 or so makes it look like the longer-term trend could be turning up. I’m less concerned with a new uptrend, though, than focusing on the fact that prices aren’t likely to plunge anew.
That’s huge news for my favorite play in the group, Cabot Oil & Gas (COG)—no relation to us. I almost never use the word revolutionary when it comes to an energy stock, but the amazing returns Cabot is generating in the Marcellus Shale in Pennsylvania, along with its vast, multi-year growth potential, are almost hard to believe—production has been growing at 50% annual rates, and 2014 production growth is targeted at 35% to 50%. And, even at prices of $3.50 for natural gas, its returns on its wells are north of 100%!
Moreover, the company recently announced a new well pad experiment, and the results were outstanding, with solid output but, more importantly, about 10% lower costs per well drilled. That will boost returns even more.
Lastly, Cabot is one of the few drillers that are starting to produce free cash flow (most have to plow all of their cash back into new wells). It pays a token dividend, but with management firmly believing the stock is undervalued, it went ahead and bought back about 1% of the company this quarter. Whether the free cash flow in 2014 is used to buy back shares, boost the dividend or accelerate its drilling program, it will be all to the good for shareholders.
As for the stock, COG topped around 40 in September and slipped to 32 in November; at that point, shares had made no progress since early March. But the stock’s begun to perk up of late, pushing back into the upper 30s, giving the chart a nice, proper rounded look.
Because it hasn’t broken out (and the RP line is lagging the price somewhat), I’m not pounding the table here; COG might need a few more weeks to consolidate, or it might fail here. But I do love the story, and the action of the stock and of natural gas prices is encouraging. Keep it on your watch list, or, if you prefer, you could start with a half-sized position here (stop around 35) and look to add shares on a decisive, big-volume push above 41.
For more information on Cabot Top Ten Trader, click here.