MKM On Cabot Oil & Gas: Buy The Dip

Shares of Cabot Oil & Gas Corporation COG are down around 30% since the middle of April and now reflects a potential 20% intrinsic equity value upside potential, according to MKM.

The Analyst

MKM Partners's John Gerdes upgraded Cabot Oil's stock from Neutral to Buy with a price target lowered from $26 to $25.

The Thesis

Cabot earns the title of operating the lowest capital intensity business among the North American E&P space with a full-cycle return of 210% versus the gas industry median full-cycle return of 100%-105%, Gerdes wrote in the note. The company should be able to show an 8% production compounded annual growth rate through 2021 with capital spending 40%-45% less than cash generation.

By comparison, peers operating in the Marcellus region are expected to show a 4% CAGR production rate while with growth spending at 5-10% beyond cash generation.

Assuming a reasonable 12.5% equity discount rate, the research firm's net present value model implies a 30% upside potential to $25 per share. This is based in part on 2019 production growth of 18%, which is consistent with management's own 16%-18% range and a 2020 growth outlook of 5%. These growth rates are within the company's capital intensity measurement error and reflects expectations of using a three-rig drilling program in 2020.

Price Action

Shares of Cabot Oil & Gas were trading flat at $19.16 Monday afternoon.

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