Cabot Continues Growth Trajectory

Over the past year, we've seen many natural gas producers cutting back on their production thanks to low realized prices. While gas has managed to rebound from the extremely low level of below $2 per million BTUs to well over $3 today, the price is still not a favorable level for producers. Given that backdrop, it's rare to see companies still aiming to increase production rapidly -- yet that's exactly what Cabot Oil & Gas (NYS: COG) has been doing.

Last quarter, Cabot posted total production of 66.5 billion cubic feet equivalent, or bcfe. While the company has been increasing its liquids output, it still only accounted for 6% of total production. Year-over-year, gas production grew 31% and liquids production grew 61%. For the full year, total production growth is expected to come in at 38% to 44%, with the liquids component clocking in at 60% to 70% growth.

Looking ahead, the company raised its 2013 production growth target to 35%-50%. This will be helped by continued drilling in the company's oil portfolio, which includes the Eagle Ford, Pearsall, and Marmaton targets. The company has amassed 225,800 net acres in these oil targets and hopes to increase its oil mix as time goes on. Cabot is currently running five rigs combined in these areas, with four rigs currently drilling its main asset, the Marcellus shale.

Thanks to the quality of its Marcellus acreage, Cabot expects to deliver positive cash flow at $3.50 gas and $90 oil in 2013. That's a big deal because natural gas comprises over 90% of its production. At the moment, the company plans to add a fifth rig in the Marcellus shale in 2013, and a sixth in 2014. That means Cabot will likely continue the strong production increases into 2013 and 2014, when many in the industry expect gas prices will be higher.

As of Friday's close, the company trades at 17 times trailing cash flow. I liken buying Cabot to paying up for a growth stock where the upcoming growth is very likely to happen. While many of its peers have been receiving very low multiples, there are other growth stories out there such as Range Resources (NYS: RRC) , another Marcellus growth story that is currently trading at 16 times trailing cash flow.

Cabot and Range both have attractive asset portfolios, but that is not the main differentiator. There are other similarly sized companies with strong assets that aren't receiving similarly favorable valuations. I believe the reason for the market's enthusiasm for these companies lies in the above-average growth, which it seems both companies will continue for the time being.

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