Cabot Oil & Gas (COG) looks set to generate over $600 million in positive cash flow in 2021 at current strip prices. This would be a significant improvement over 2020, where it is expected to have a modest amount of cash burn after its dividend.
The long-term average for natural gas prices appears likely to be somewhere between 2020 and 2021. This is a scenario where Cabot could generate a bit over $300 million in positive cash flow per year while covering its current dividend.
Cabot appears to be close to fairly valued at around $18 per share, but is worth a look on any dips in price.
2021 Outlook
Cabot’s outlook looks quite strong for 2021 current, as NYMEX strip prices have gone up to approximately $2.98 per Mcf. Even if Cabot’s natural gas differential widens to around negative $0.53 per Mcf (due to Appalachian takeaway issues), that would still result in it generating around $2.119 billion in revenue.
| Type | Units | $ Per Mcf | $ Million |
| Natural Gas [BCF] | 865 | $2.45 | $2,119 |
| Total Revenue | $2,119 |
Cabot indicated that a maintenance capex budget for 2021 would be slightly less than 2020’s $575 million capex budget. Thus it may be able to maintain production with $550 million in capex. This would result in Cabot generating around $605 million in positive cash flow in 2021 after dividends. Some of that will go towards paying Cabot’s $188 million in unsecured notes due in 2021, but that would still leave $417 million for growth capex and potentially items such as share repurchases and an increased dividend.
| Type | $ Million |
| Direct Operations | $82 |
| Transportation & Gathering | $580 |
| Taxes Other Than Income | $27 |
| Exploration | $10 |
| Cash G&A | $64 |
| Cash Interest | $42 |
| Capital Expenditures | $550 |
| Dividends | $159 |
| Total Expenses | $1,514 |
Cabot did not have any 2021 hedges at last report, but current strip prices for 2021 are quite favorable for Cabot, so it would seem like a good idea for it to add hedges at near $3.00 per Mcf.
Longer-Term Price Expectations
Next year is probably going to be one of the better years for natural gas prices, after very weak prices in 2020 help rebalance the market. Although average prices fluctuate from year-to-year, the longer-term average has settled around the mid-$2 range.
For example, the average price for natural gas from 2016 to 2020 is expected to end up around $2.66. The current strip for 2021 to 2025 is around $2.63.
Source: Cabot Oil & Gas
At a $2.63 average price, Cabot looks capable of generating a bit over $300 million in positive cash flow per year, after including its current dividend. This assumes a $550 million per year capital expenditure budget.
From 2021 to 2025, Cabot has $825 million in debt becoming due. After repaying this debt, it has approximately $700 million that it could put towards growth capex, share repurchases or an increased dividend.
Source: Cabot Oil & Gas
An increase to a $0.15 per share quarterly dividend could probably be supported in the long term. With its current share count, that would cost Cabot a bit under $400 million in additional dividend payments over a five year period.
Conclusion
Cabot looks set to generate over $600 million in positive cash flow after dividends in 2021 after being on track to generate slightly negative cash flow after dividends in 2020.
If one averages the two years, that would give a reasonably accurate picture of what Cabot is expected to do in the longer term. While there are significant fluctuations in average natural gas prices from year-to-year, the longer-term average appears to be sticking in the mid-$2 range. This is a scenario where Cabot could generate around $300 million in positive cash flow per year after its current dividend, and it could probably manage to increase its quarterly dividend to around $0.15 per share while still paying off its debt maturities as they become due.
The improved cash flow outlook for 2021 boosts my estimated value for Cabot to approximately $18.50 per share, which reflects an 7.5x EV/EBITDAX multiple based on long term natural gas prices.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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