Cabot Oil & Gas Stock Is Soaring While the S&P 500 Tanks. Here’s Why.
Cabot Oil & Gas is the top stock in the S&P 500 during Monday’s market rout as investors anticipate that the sharp drop in crude oil prices will reduce the U.S. supply of natural gas and lift depressed gas prices.
Cabot shares (ticker: COG) were up $1.68, or 10%, to $18.08 in recent trading. Cabot is one of the largest and lowest-cost U.S. producers of gas in the prolific Marcellus region of Pennsylvania. Cabot also has one of the best balance sheets in the group with debt of about $1 billion and a debt-to-cash-flow ratio of less than one based on its 2019 earnings before interest, taxes, depreciation, and amortization, or Ebitda. Cabot is one of the best-performing energy stocks this year with a gain of about 5%.
EQT (EQT), another big gas producer, also has gained Monday, rising 49 cents, to $6.88. Among other major gas stocks, Range Resources (RRC) is down 2 cents at $2.38 and Southwestern Energy (SWN) is up four cents at $1.35.
Spot natural gas prices are up two cents to $1.73 per million BTUs, and deferred-month contracts are showing increases of 4 to 5 cents, even as crude oil, as measured by West Texas Intermediate, is down $8.73 a barrel at $32.55.
Wall Street is anticipating that the drop in crude will result in curtailments to U.S. oil production that in turn will cut the output of “associated gas,” which is gas output directly related to oil production, mostly from shale formations in the Permian basin and other energy-producing regions. Associated gas accounts for about a third of U.S. gas production and the growth in associated gas output has weighed on the gas market in the past few years.
“If you believe $30 oil has any sort of duration, it’s hard not be bullish on gas as we see the roll-off of associated volumes driving gas back toward $3/mcf,” wrote Tudor, Pickering, & Holt analysts in a client note Monday. Mcf refers to a thousand cubic feet, which is equivalent to a million BTUs.
The analysts went through the math on gas production and wrote: “Add it all up, and it’s possible we exit the year with a 3 bcfd [billion cubic feet per day] undersupplied gas market.” U.S. gas production is around 90 billion cubic feet per day. Tudor, Pickering, & Holt added that the bullish outlook for gas hinges on oil prices holding below $40 per barrel “for an extended period of time, but we think adding high quality gas exposure at this time is prudent and are looking to COG” (Cabot) as one of the firm’s “preferred names.” Barron’s has written favorably on Cabot.
In a flash note this morning, commodity analysts at Citigroup had a bullish view on gas, writing that, “The further that oil prices fall, the higher that gas prices rise… in winter and beyond. The market could tighten up more in 2021, lifting prices above $3/MMBtu.”