Category: Financial Markets

So there is no need to pay for cryogenic processing to extract NGLs from its wellhead gas volumes (saving it around $0.20 per thousand cubic feet). And because natural gas flows more easily out of a reservoir without liquids, the wells in this area are typically characterized by very high daily production rates.

As a result, the firm is among the lowest-cost natural gas producers in the Appalachia region, and this competitive advantage enables it to consistently deliver very strong returns on invested capital. But there is one catch: The Company’s acreage contains enough lucrative Lower Marcellus drilling opportunities to last until the late 2020s. Beyond that, the firm will have to rely on the overlying Upper Marcellus layer for growth, and such wells are typically up to 30% less productive. So it would be a mistake to think that all of the 3,000 or so potential drilling locations that the firm has access to will perform at the same level as the stellar wells it is drilling today. However, when the firm pivots to the Upper Marcellus, it will be able to reuse existing roads and pad sites, and as there are no well configuration constraints in this undeveloped interval, it could enhance returns by drilling longer laterals. As a result, we expect well costs to decrease enough to offset the dip in flow rates, leaving potential returns unchanged.

Our primary valuation tool is our net asset value forecast.

This bottom-up model projects cash flows from future drilling on a single-well basis and aggregates across the company’s inventory, discounting at the corporate weighted average cost of capital. Cash flows from current (base) production are included with a hyperbolic decline rate assumption. Our valuation also includes the mark-to-market present value of the company’s hedging program. We assume oil (West Texas Intermediate) prices in 2021 and 2022 will average $60 and $58 a barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average $3.20 per thousand cubic feet and $2.80/mcf. Terminal prices are defined by our long-term midcycle price estimates (currently $60/bbl Brent, $55/bbl WTI, and $2.80/mcf natural gas).

• After the Cimarex merger, the firm will have ideal real estate in the lowest-cost oil and natural gas basins, amplifying returns and boosting product and geographic diversification.
• By focusing on dry natural gas in the Marcellus, Cabot avoids NGL processing fees that would otherwise drive up production costs
• The firm is one of the few oil and gas producers that can consistently generate excess returns on invested capital at midcycle commodity prices.
• Cabot has less than 10 years’ worth of drilling opportunities targeting the prolific Lower Marcellus interval, and well performance could deteriorate when it is forced to pivot to the less productive Upper Marcellus.
• The firm’s midcontinent assets have significantly higher break-evens, and expanded development in the region could dilute returns.

About Cabot Oil & Gas

Houston-based Cabot Oil & Gas is an independent exploration and production company with operations in Appalachia. At year-end 2020, Cabot’s proved reserves were 13.7 trillion cubic feet of equivalent, with net production that year of approximately 2,344 million cubic feet of natural gas per day. All of Cabot’s production is Marcellus dry natural gas.

(Source: Morning star)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

The USD 19 billion PNG liquefied natural gas, or LNG, plant went a long way toward countering stagnating traditional oilfield productivity monetising isolated, but high-quality, gas resources. PNG gas is liquids-rich, which increases its value, but the entire proposition carries substantial risk because of investment needs and sovereign uncertainty. We expect near-term capital expenditure commitments to continue with expansion of the 29%-owned PNG LNG project, which produces 8.6 million metric tons per year. Production and earnings increased materially with the first LNG output in 2014. Oil Search has a debt-heavy balance sheet, as LNG was fully debt-funded.

Key consideration

• More than 80% of our Oil Search fair value estimate derives from just one product, LNG. LNG prices are referenced on a three-month running lag to the average  oil price. Any analysis of fair value depends on the successful prediction of oil prices and the maintenance of the link between them.

• Current earnings multiples are high, but the future is key. Earnings will rise when three additional PNG LNG trains are completed.

• We are not entirely comfortable with such a significant proportion of value in one project, particularly with PNG sovereign risk. We apply a high discount rate to our fair value estimate.

• Active in Papua New Guinea, or PNG, since 1929, Oil Search operates all producing oil fields in the country. The company has a long and profitable history of Highlands oil production, but the future value lies in substantial gas resources that were quarantined by a lack of infrastructure and high capital costs.

• Oil Search can service its $2.3 billion in net debt using LNG and oil cash flow. OGroup equity output tripled to 29 million barrels of oil equivalent with the startup of the PNG LNG project and can grow further with completion of additional trains.

• Past PNG LNG equity sell-downs by independents AGL Energy and IPIC were at prices considerably above levels credited in Oil Search’s share price.

• Capital costs may escalate in this difficult operating environment. The foundation LNG project cost blewout by $3.3 billion to a colossal $19 billion.

• Shareholders could see more heavy capital expenditure with a third PNG LNG train and other development projects.

• Oil Search is an all-or-nothing bet on PNG LNG. Single development- project risk and sovereign risk are concerns.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.