A High Yielding Play on the Marcellus Shale
A constant conundrum for investors in the exploration and production sector is deriving a valid valuation based on normalized pricing for the commodity produced. The issue has come to the forefront with the quick rise of shale regions that see explosive growth that outstrips infrastructure, leading to lower pricing realizations for a period of time. Typically, it's only a matter of time before the bottlenecks are worked out; the short-term impact is difficult to derive, however.
A prime example is Cabot Oil & Gas (NYSE: COG ) . The company achieved production of 1 trillion cubic feet (Tcf) in the Marcellus shale within six years of starting drilling. Due to this massive production growth, the company is struggling with the price it obtains for natural gas. In the first quarter, Cabot only obtained a price realization of $3.74 per million cubic feet (Mcf) compared to substantially higher prices. In total, the company had price realizations of $0.60 to $0.65 below NYMEX settlement prices.
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