Earnings season is in full swing, and I will be closely examining the earnings of each portfolio holding to ensure that company fundamentals continue to meet expectations. Last week Chevron and Cabot Oil&Gas released earnings, and both exceeded expectations. In this update, I want to take a close look at Cabot’s earnings. I will follow up with an examination of Chevron’s earnings.

Cabot shares have disappointed over the past two years. The company has the most prolific onshore natural gas resource play in the Marcellus Shale, and they are a low-cost producer. But its share price has suffered due to insufficient takeaway capacity for its gas. Nevertheless, results for the most recent quarter were outstanding. 

For the first quarter of 2017, Cabot reported net income of $105.7 million compared to a net loss of $51.2 million in the prior-year comparable quarter. Cash flow from operations was $269.4 million, a 301% year-over-year increase. Cash from operations has improved in each of the past four quarters. Cabot also reported earnings before interest, tax, depreciation and amortization (EBITDA) of $326.7 million, versus $103.4 million for Q1 2016.

Equivalent production for the first quarter of 2017 was 170.1 billion cubic feet equivalent (Bcfe), of which 96% was natural gas. Production was 6% higher than in Q1 2016, but the primary driver behind the improved results was higher natural gas prices. Realized natural gas prices for Q1 were $2.64 per thousand cubic feet (Mcf) for the first quarter of 2017, a 77% improvement compared to first quarter of 2016 and a 36% sequential increase compared to the fourth quarter of 2016.

Net debt to EBITDA continues to decline. Net debt to trailing twelve months (TTM) EBITDA was 1.3x, compared to 1.8x at the end of 2016 and 2.5x at the end of 2015. Net debt to annualized Q1 EBITDA was 0.8x.

On top of the fantastic Q1 results, Cabot guided toward even better results for the full year. Based on recent outperformance from its fourth generation Marcellus wells, Cabot increased its 2017 production growth guidance range from 5% – 10% to 8% – 12%. The Company also increased its capital budget for the year to $125 million for exploratory leasing and testing, resulting in full-year 2017 exploration and production (E&P) spending of up to $775 million. Despite the increase in spending, Cabot is forecasting over $250 million of positive free cash flow for the year based on recent Strip prices.

Cabot’s share price performance is out of step with Cabot’s performance as a company. Keep in mind that the company’s outstanding quarter comes ahead of pipeline relief that will come this year and next year that will further boost Cabot’s bottom line. Based on guidance from the company, it has the potential to nearly double production by the end of next year based on new pipeline capacity and new contracts with power plants:

Source: Company Presentation

Patience here should be rewarded. Buy Cabot Oil and Gas up to $30.