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Funds Funds

Invesco Intermediate Term Muni Inc

This is one of the larger muni credit teams in the industry, with 16 portfolio managers and 24 muni research analysts. It has grown primarily by way of Invesco’s acquisitions, though, and the current research configuration doesn’t have a significant history navigating market turbulence together. Veteran muni manager Mark Paris, Invesco’s muni-bond head, manages this strategy alongside nine other portfolio managers. The muni research team is large, and given this team’s preference for nonrated deals, the effort is adequate for this mandate.

The strategy absorbed a legacy Oppenheimer counterpart in mid-May 2020, though the portfolio’s profile largely remained intact over the past year. This team has a long-standing specialization in high-yield munis, and this portfolio can hold up to 35% of assets combined in below-investment-grade and nonrated bonds per its mandate. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment-grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risk through sector diversification and limits issuer specific risk by keeping position sizes relatively small.

The strategy’s Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate Morningstar Category peer’s 3.4% annualized gain, though it was also more volatile, with a top-quartile standard deviation over the same period.

Adequate for a higher-yielding offering

The process employed here combines top-down macro analysis and bottom-up credit research with a focus on below-investment grade fare, though it lacks a distinctive competitive edge. The 10-person management team running this strategy is responsible for portfolio construction and risk monitoring, which is essential as the managers regularly invest in nonrated bonds. Analysts provide long- and short-term outlooks and assign proprietary ratings to each bond. The credit research team leads also meet as needed to review any changes to these ratings as well as any special circumstances around distressed securities in the portfolio

This team has a long-standing specialization in high-yield muni bonds, and this portfolio can hold up to 35% of assets in below-investment-grade and nonrated bonds. Over the past five years, the portfolio has maintained anywhere from 8% to 14% exposure to below-investment grade munis and a similar range in nonrated issues. The team’s preference for smaller nonrated bonds can carry more liquidity risk than the typical muni national intermediate portfolio does. The team aims to minimize risks through sector diversification and limits issuer-specific risk by keeping position sizes relatively small.

Portfolio – Credit-oriented

As of March 2021, the portfolio’s largest sector exposures were industrial development and pollution-control (12%), hospital (12%), and dedicated tax (12%) revenue bonds. Life-care and higher education bonds were the next largest sectors at 8% and 7%, respectively. This portfolio has historically had a larger stake in nonrated fare than its typical muni national intermediate peer. As of March 2021, the portfolio’s 14% nonrated stake was more than 3 times its typical peer’s 3% stake. This exposure primarily comprises revenue bonds in continuing care retirement communities, hospitals, charter schools, and toll roads. The portfolio also has substantial exposure to tobacco settlement bonds; its 5% exposure is higher than the typical peer’s 1% exposure as well as the 0.4% in its S&P Municipal Bond Index benchmark.

Performance – Behaves as expected

The strategy’s long-term record under lead manager Mark Paris is decent, though it has seen more volatility than its typical national intermediate muni peer. Its Y shares gained 3.6% annualized from October 2015 through April 30, 2021, modestly outpacing the typical muni national intermediate peer’s 3.4% annualized gain, though it also had a top-quartile standard deviation over the same period, suggesting a more volatile ride than most.

The team’s preference to court more credit risk in this strategy than its typical peer means it may lag when muni credit markets get rough and benefit when risk is rewarded.

(Source: Morning star)

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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.

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Funds Funds

Diamond Hill High Yield Inv

Bill Zox joined Diamond Hill in 2001 as an equity analyst. He was named a portfolio manager on Diamond Hill Corporate Credit DHSTX in April 2006 before taking over lead management in 2008. John McClain joined the firm in June 2014 as a credit analyst and was also named comanager of Diamond Hill Corporate Credit in February 2015.

The strategy’s investment approach stands out relative to its high-yield bond Morningstar Category peers’. The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in its top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue. This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a high-yield Morningstar Category best-quartile return over rolling five-year periods. While the portfolio’s concentration and idiosyncratic risks are material, the managers’ analytical rigor and responsible balancing of its risks provides comfort.

A distinctive and disciplined investment process

This process combines an intrinsic value-driven and contrarian approach to build a high current income portfolio with the opportunity for capital appreciation targeting a category best-quartile return over rolling five-year periods and a 150 basis points gross excess return over the ICE BofA U.S. High Yield Index benchmark.

Comanagers Bill Zox and John McClain execute a disciplined value approach: They buy issues when their market prices are lower than the team’s estimate of intrinsic business value and sell them when their initial thesis has played out or when there are better opportunities in the market. When valuations get rich and opportunities get scarce, the managers may run a larger-thanpeers allocation to investment-grade bonds to reduce the portfolio’s market risk

The team focuses on relatively small issues and tends to make sizable bets on its best ideas (up to 10% per issuer), thereby increasing idiosyncratic and liquidity risk. The portfolio has on average about 30% of assets concentrated in the top 10 positions. That said, the team offsets those risks somewhat by treading lightly in the market’s lowest-quality names and limiting how much it will own of an individual issue

An opportunistically managed portfolio driven by valuations

In response to the 2019 credit rally, the team raised its investment-grade bond exposure up to 20% at the end of that year, its highest level since the strategy’s January 2015 inception, leaving the strategy in a relatively good position to face the coronavirus-driven sell-off that started at the end of February 2020. As the market plunged, the team rotated capital and pushed the portfolio’s credit quality profile even higher as it found numerous investment-grade opportunities in names that included Nvidia, TJX, and Sysco. At the end of 2020’s first quarter, bonds rated BBB or higher represented close to 34% of assets.

After riding the Fed’s wave of purchases and betting on the economy reopening through the second half of 2020, the managers shifted gears. As valuations got rich, they rotated the portfolio out of some higher-rated longer-duration fare into shorter-maturity higher-yielding securities. At the end of March 2021, investmentgrade bonds represented less than 5% of the strategy’s assets, and its allocation to BB-rated bonds went down to 35% from almost 42% at the end of 2020 while bonds rated B moved the other way to 48% from 41% over the same period.

A category leader with a best-in-class long-term volatility-adjusted record

The team’s attention to valuations together with strong credit selection have helped the strategy hold up better than most rivals during high-yield sell-offs. For instance, despite the energy-led sell-off that started in June 2015, an investment in McDermott International MDR was the largest contributor that year, and the portfolio’s energy stake was the largest relative contributor to the strategy’s 0.3% return, which bested 90% of its category peers. Likewise, the strategy outperformed its typical peer by 184 basis points in the last quarter of 2018 and ended that year ahead of 97% of competitors.

(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.

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Technical Picks

Sonic Healthcare– Earnings To Retrace

Key Investment Considerations

  • Sonic has a strong market position in a consolidating industry. As a result, and in line with its strategy, we expect ongoing acquisitions to boost organic growth
  • Pathology labs benefit from scale, however, we expect operational efficiencies to be offset by a combination of pricing pressure and constrained volumes and thus limited improvement in underlying operating margins OFree cash conversion of net income is healthy and we forecast 95% of earnings result in free cash. After paying dividends, this gives Sonic the capacity to acquire 1% of revenue growth annually from free cash resources which we factor into our valuation
  • Sonic’s “medical leadership” model recognises the importance of the relationship with the referring doctor as the company seeks to differentiate itself on service levels rather than purely price. Evidence of the success of the model is the organic growth rate ahead of the market, suggesting market share gains. In an industry where absolute volumes are an important component in achieving cost advantage, Sonic’s source of moat, the organic growth supplemented by acquisitions continues to add value for shareholders.
  • Sonic has a leading market position in most of itsgeographies and as a result is well placed to take advantage of a consolidating industry.
  • Demographics and the focus on value-based based healthcare support the ongoing global volume growth in preventative diagnostics such pathology and imaging.
  • There is potential upside to margins in both Laboratories, from synergies and operational efficiencies, and Imaging from re-indexation of prices.
  • Organic growth is potentially slowing and acquisitive growth is more expensive to achieve. OPricing pressure is not over. Anatomical pathology, which is a strategic growth area of Sonic in the U.S., is a targeted area for cost savings by large private health insurers.
  • Returns on invested capital including goodwill of approximately 8% are only marginally above the 7% weighted average cost of capital suggesting the company is paying full prices for its acquisitions.

 (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.

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Shares

Scentre Group – Shares Still Look Undervalued

However, the group faces challenges from consumers closing their wallets in 2020 due to the coronavirus, and from e-commerce taking a greater share of spending over time. The business has been allocating more space to food, entertainment and services in response to online competition undermining the rent it receives from discretionary retailers. We expect tenants will resist agreeing to traditional annual increases above CPI without corresponding revenue growth. As such, we forecast lower income growth in the long run, weighing on property values.

Key Investment Consideration

Under pressure specialty tenants pay higher rent per square metre than anchor tenants, and therefore drive Scentre Group’s profitability.

Scentre Group has high leverage, and has so far resisted raising equity in 2020, unlike other retail REITs. It can persevere, but we think it needs an improved operating environment in calendar 2021 to avoid an equity raise. OThe quality of Scentre’s assets will ensure they remain pre-eminent shopping destinations in Australia, but we expect e commerce will undermine its pricing power.

Our base case is Scentre either avoids an equity raise, or takes advantage of a rally in sentiment towards REITs to issue equity at less dilutive prices. But we include a dilutive equity raise in our bear case. A realistic possibility is something in between, perhaps a smaller rights issue at a less dilutive price, when markets are optimistic about recovery.

It’s possible our very high uncertainty rating could reduce if operational performance improves once distancing requirements fade, and Scentre reduces debt. With income underpinned by contractual leases under nearly all circumstances, Scentre’s revenue is much more predictable than many other companies. However, the pandemic is one of those rare circumstances, and until that subsides uncertainty remains.

Australian shopping centres are in better shape than their counterparts in the United States, due to lower retail space per person, and a larger share of anchor tenants such as supermarkets.

Population growth in Australia was among the fastest in the developed world until coronavirus. If immigration recovers it would provide infill demand at Scentre’s assets.

Despite retail spending switching online, retailers still need a physical presence to maintain their brand. Premium retailers have little choice but to locate shops in the malls of Scentre and a handful of other groups, given the quality of locations and centres.

While Scentre has one of the highest-quality shopping centre portfolios in Australia, rents are higher than for convenience focused centres, and high end consumer goods are most at risk from online competition.

In response to online competition, Scentre Group has remixed its tenant profile towards food, entertainment and services. However, these categories are more sensitive to social distancing preferences, and typically require higher tenant incentives and maintenance capital expenditure.

Retail space per person is higher in Australia than it is in Europe, and the amount of floorspace devoted to under pressure department stores is high. High end malls in the U.S. may benefit from the closure of marginal malls, but outright closures of rival malls is likely to be less frequent in Australia.

 (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.

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Dividend Stocks

Regis Resources

Gold grades for resources yet to be converted to reserves at Duketon are on about 30% below reserves and if converted will likely be far less profitable. If developed, the McPhillamys mine should add another mine with just under 10 years of reserves in the medium term. Excess returns for the five-year forecast period are a function of sound acquisitions and developments. However, it will be difficult to replicate this investment success. The potential development of McPhillamys is likely to come at a higher unit capital cost and generate lower returns than the existing operations.

Regis’ gold mines do not represent in-perpetuity businesses, and this is a key reason we see the shares as overvalued. To illustrate the importance of finite life, if we were to assume production continued indefinitely, our fair value estimate would almost double to around AUD 7 per share. Reserves at the operating Duketon mines are sufficient for just over five years production at forecast fiscal 2020 rate. Short reserve life means additional resources, in the shape of exploration and development expenditure, will need to be spent to extend operations. But ultimately there’s no guarantee exploration will be successful.

Profile

Regis Resources is one of Australia’s largest gold companies, producing around 350,000 ounces of gold per year. Cash costs are below the industry average. Operating mines are located in Western Australia, which brings relatively low sovereign risk. Management has a sound operating track record and an appropriate bias towards strong balance sheets and dividends; however, the gold price and new investments will be the primary arbiters of long-term returns. Development of the McPhillamys deposit in New South Wales, if approved, should add approximately 200,000 ounces of gold production a year in the medium term.

 (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.

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Dividend Stocks

Qube Holdings Ltd– Weathering the Storm

However, Qube’s strategy to consolidate a fragmented industry should deliver above-market rates of growth and scale benefits. Qube is developing the Moorebank intermodal terminal and warehouses, located on the Southern Sydney Freight Line, to help alleviate congestion at Port Botany and drive efficiencies in the distribution supply chain. Moorebank, on full completion and ramp-up, should materially contribute to group earnings and deliver a strong competitive advantage for the group’s logistics operations.

Key Investment Consideration

  • Logistics and bulk operations are cyclical and highly dependent on container and bulk volumes. Operating conditions are challenging, with COVID-19 and tough competition pressuring margins and volumes.
  • Our forecasts assume mid single-digit revenue growth in the medium term for Qube, supported by organic growth, scale benefits, investment in new projects, and acquisitions.
  • The development of Moorebank as an intermodal precinct should significantly improve the economics and efficiency of managing container volumes to and from Port Botany over rail.
  • Qube’s strategy is to consolidate the fragmented logistics chain surrounding the export and import of containers, bulk products, automobiles, and general cargo, to create a more efficient and cost-effective supply chain. The business has enjoyed some successes to date, though significant scope for industry consolidation remains.
  • There is significant potential to increase efficiency through vertical integration of port logistics services. Qube will attempt to deliver on this strategy through consolidation and integration.
  • The Moorebank Intermodal Terminal should become a key piece of Sydney’s transport infrastructure, driving
  • strong returns for Qube.
  • Senior management has a proven track record in the port logistics segment and has demonstrated an ability to generate strong returns for shareholders.
  • A corporate structure of associate companies, acquired businesses, and newly purchased assets limits transparency. Meanwhile, a strategy focused on acquisitions adds integration risk. OWhile Qube’s long-term prospects are attractive, its businesses are cyclical and cash flow may be affected by a deterioration in economic conditions.
  • There are still risks surrounding the development of Moorebank and other projects. Currently trading on a high P/E ratio, any disappointments could hit the share price hard.
  • A key positive is the firm’s strengthening financial health, which will get a major boost if the Moorebank Logistics Park, or MLP, is sold. Net debt/EBITDA was a relatively aggressive 3.8 times in fiscal 2020, and could fall below 1 times if Moorebank sells, which we consider conservative.
  • The sale of MLP is progressing well. After receiving nonbinding indicative offers from a range of potential suitors, Qube has entered exclusive negotiation with LOGOS Property Group, an Asia Pacific property investor. There is no guarantee an attractive offer will be made but values for good-quality industrial property are holding up well, as seen in Goodman Group’s security price. The coronavirus hasn’t hurt–online shopping, which requires investment in logistics and industrial property, is booming and interest rates have reduced.

 (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.

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Dividend Stocks

Medibank Private Ltd– Will Grow Earnings

Operating in a heavily regulated industry, Australian health insurers typically produce stable and defensive earnings and, in our opinion, Medibank is well placed to produce solid long-term earnings growth. Future changes to regulations could hurt Medibank’s prospects, but we don’t believe the government would materially damage the viability of the private health insurance sector in Australia. Growth is supported by government reliance on private health insurers to partially fund escalating healthcare costs. Government policies and incentives encourage participation, with 53% of the population covered for private hospital and/or ancillary health insurance.

Key Investment Considerations

  • Smaller players on thin margins may need to reign in customer acquisition spend if industry wide claim inflation is not slowed. Medibank can continue to generate attractive returns.
  • Mid-single digit earnings and dividend growth, with Medibank’s ability to pay out 75% to 85% of earnings as dividends sustainable.
  • Medibank is Australia’s largest private health insurer, with 1.8 million policyholders covering approximately 3.5 million people under the Medibank and ahm brands. Medibank Private was established in 1976 to bring increased competition to the private health insurance industry, with the government selling the business in 2014 via an initial public offering. The ahm business was acquired in 2009, with Medibank successfully using the brand to grow its share of younger customers. The dual brand strategy has successfully allowed the group to offer differentiated pricing and messaging to grow members and profits. Medibank has over 400,000 policyholders under the ahm brand, up from only 160,000 in 2010. In our opinion, Medibank offers steady long-term defensive earnings growth.
  • There are 37 registered health insurers in Australia, with the top five accounting for around 80% of the market by policy numbers. Despite the “free” universal public system in Australia, close to 44% of Australia’s population of 25.5 million have private hospital cover due to taxation benefits and penalties, shorter wait times, and a choice of doctor and hospital. We expect government policy settings, which promote the take up and retention of private health insurance products, to remain in place. Long-term growth prospects are supported by government reliance on private health insurers to partially fund escalating healthcare costs. With an ageing population, higher demand for more intense healthcare will further pressure the public health system.

 (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.

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Dividend Stocks

McMillan Shakespeare Ltd

McMillan is the leader in providing salary packaging and novated leases in Australia, and enjoys strong long-term relationships stemming from also being the first outsourced salary packaging service provider in the country. Its integrated business model allows cross-selling of products and also provides bargaining power when sourcing motor vehicles from dealers.

However, these advantages have not delivered significantly higher operating margins than its other major peer, SmartGroup Corporation. McMillan also lacks pricing power, having had to reduce margins to retain its largest employer customer–the Queensland state government—in 2016. Furthermore, the industry’s relatively low capital requirements suggests that barriers to entry are low.

Major risks include material changes to the current fringe benefits tax, or FBT, concessions in Australia, and an economic downturn which will affect employment conditions. These risks have certainly been amplified in the prevailing COVID-19 outbreak, which is likely to see higher unemployment and a recession. Such an environment would reduce demand for salary packaging and novated leases.

Australian government has laid out around AUD 320 billion in fiscal stimulus to date (or about 16% of GDP), with potentially more follow-ups. It’s possible that a future Australian government could revisit the FBT regime to generate more revenue in the face of federal budget deficits. If this were to occur, the high growth and returns generated by McMillan’s salary packaging and novated leasing business–its main source of revenue–would be compromised.

 (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.

Categories
Shares Small Cap

Federated Hermes MDT Small Cap Growth

Modern financier with papers sitting in front of computer monitor with chart and graph of sales rate

He is responsible for the model and research and draws on seven managers/analysts. Frederick Konopka also became a manager in 2008 and handles portfolio construction and trading for the team. MDT looks to group companies into different baskets producing various streams of alpha potential using valuation, growth, momentum, and quality indicators.

By using classification and regression tree analysis, the team can test thousands of potential combinations of factors based on 30-plus years of U.S. stock data to find the best mixtures of alpha using a three-month investment horizon. Still, such a short investment horizon can be difficult to implement. It leads to annual portfolio turnover that can be lofty and varies greatly. Over the past five years, turnover ranged from 188% to 227%, well above the 59%-66% range for the typical small-growth. The portfolio’s holdings have varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless they’re spread out across more holdings.

Since Mahr became lead manager in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 lagged the small growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. The fund has performed better since the team’s 2013 process switch to multiple decision trees, but the fund’s high volatility has kept its risk-adjusted results in line with the index.

Quantitative approach with short focus

MDT groups companies into different baskets of alpha potential. The team forecasts three month returns using valuation factors based on structural earnings, tangible book value, and forward earnings estimates; growth factors like analyst conviction and long-term earnings growth; quality factors measuring free cash flow, leverage, and reliance on external capital; and momentum factors like relative stock price trend. The team uses classification and regression tree analysis to test thousands of potential combinations based on 30-plus years of U.S. stock data.

Prior to 2013, the team used one large decision tree to forecast alpha, but that approach was subject to overfitting issues. Switching to regression analysis using multiple decision trees resulted in combinations of subsets of the factors with the best alpha potential. This leads to the fund holding stocks with different avenues to produce alpha, potentially leading to more opportunities to outperform. The MDT team continues to refine its model, usually updating the model twice a year. These revisions are typically on the margin, though. In 2020, for example, they adjusted their structural earnings indicator by using an industry relative basis.

Diversified, but high turnover

The strategy’s short-term approach has led to higher turnover than most smallgrowth peers. Its annual portfolio turnover range of 118%-227% the past five years is much higher than the median range of 59%-66%. The fund might struggle to maintain its fast-trading ways if assets hit the team’s $8 billion-$10 billion estimate of its small-cap capacity, which includes this strategy, Federated MDT Small Cap Core QISCX, and Federated MDT Small Cap Value. So far, the team is not near that limit, with around $2 billion across its small-cap charges. However, the portfolio’s number of holdings has varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless their potential alpha is spread out across more holdings. This could become more pronounced as the asset base grows

Performance – Volatile

The fund’s absolute and risk-adjusted returns lag the Russell 2000 Growth Index during lead manager Dan Mahr’s tenure. Since Mahr took over in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 trailed the small-growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. It has done so with more volatility than the benchmark, resulting in subpar riskadjusted performance measures, like the Sharpe ratio. Most of the fund’s underperformance has come during market turbulence. Mahr’s Aug. 31, 2008,start date means he took over amid the credit crisis, and the fund barely edged the benchmark through that period’s March 9, 2009, bottom. The fund lagged the bogy’s ensuing trough-to-peak (April 23, 2010) performance by 26.6 percentage points, annualized.

(Source: Morning star)

Disclaimer

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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.

Categories
Commodities Trading Ideas & Charts

Cabot Oil & Gas Corp

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.