To say that 2020 has been a weird year is nothing if not an understatement. Global pandemics have a way of doing that, I suppose, since health concerns really do, and should become the #1 prime consideration that people should be thinking about. Perhaps some of the weirdness comes from the disconnection that is so easy to see between the stock market’s reaction versus the reality that everybody has to contend with in some form or another. Despite continued high employment – that most experts and economists expect to get higher the longer Congress remains divided on more stimulus – that includes an increasing number of small businesses that will probably not survive without additional aid, the fact is that the market’s performance hasn’t fallen in line.
I have come to consider the stock market as a reflection of investor’s emotions. That is part of the reason that the stock market tends to anticipate news, good or bad, and then to price that anticipation into stocks. That emotion – driven by the kind of fear that only a global pandemic can produce – is part of the reason the S&P 500 plunged more than -34% in just a little over a month from February to March. That was a record drop in such a short period of time – but the recovery from that point was equally strange, because by early September – less than six months after the bottom – the index had not only reclaimed its pre-pandemic high but even driven above them. The last week or so has seen the market retrace a bit off of the latest set of highs, but as of this writing the S&P 500 remains above its February peak. The weird part for me is that the market has seemingly ignored the real indications that any true economic recovery is going to be a long-term prospect.
One of the sectors that has felt a real impact from the pandemic is the Energy sector. Energy is usually pretty volatile and sensitive to the ebb and flow of economic activity, and so it isn’t surprising that shutting down national economies on a global scale in the early part of the year had a paralyzing effect on the demand of crude. No matter what type of energy-related commodity you like to pay attention to, the truth is that every one of them – natural gas, ethanol, and so on – is going to depend on the movement of crude to help or hinder their own prices. The collapse of crude demand has created globally oversupplied conditions that have kept oil prices off of their own, 2019 highs in the $60 range. That put most energy stocks in survival mode, making them radioactive to most bullish investors, and even for a value-minded investor with a contrarian bent like me, a bit of a wild card.
The sector remains an interesting one. That’s because economic difficulties tend to weed unhealthy companies out of the marketplace pretty quickly in this industry, which also means that the ones left standing can offer some really interesting possibilities. The ones that are left standing become interesting studies in what they do to stay in business, and to ride through those difficult economic times. Some companies have the foresight to build their balance sheet as much as possible so they can cash and liquid assets to rely on when operating profits have begun to erode. Other companies might choose to shift their focus altogether and to specialize in a narrower segment of the sector.
Cabot Oil & Gas Corp (COG) is a good example of a company that started shifting its business focus before the pandemic – and the shift seems to have been working in their favor so far. This is an energy exploration, development, and production company that used to be like most of its competitors, with significant portions of its operations in the shale oil fields of Texas and Oklahoma, but in 2018 divested itself of those assets to focus almost completely on liquified natural gas (LNG) from fields in Pennsylvania. While that hasn’t made the company immune from the effects of COVID-driven slowdowns, it has helped the company preserve a generally healthy balance sheet and maintain a healthy level of operating profitability. The stock has also held up better than most energy-related stocks – it is actually up a little under 10% year to date and looks like its latest wave of bullish momentum to could drive it even higher. Does that make the stock a good value?
Fundamental and Value Profile
Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development, exploitation and exploration of oil and gas properties. The Company operates in the segment of natural gas and oil development, exploitation, exploration and production, in the continental United States. Its assets are concentrated in areas with known hydrocarbon resources, which are conducive to multi-well, repeatable drilling programs. As of December 31, 2016, its exploration, development and production operations were primarily concentrated in two unconventional plays: the Marcellus Shale in northeast Pennsylvania and the Eagle Ford Shale in south Texas. The Company also has operations in various other unconventional and conventional plays throughout the continental United States. Its Marcellus Shale properties are principally located in Susquehanna County, Pennsylvania. Its properties in the Eagle Ford Shale are principally located in Atascosa, Frio and La Salle Counties, Texas. COG has a current market cap of about $7.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about -91%, while revenues were nearly -38% lower. In the last quarter, earnings declined -70% higher, while were -14% lower. The company’s margin profile shows that Net Income as a percentage of Revenues is narrowing, from a very healthy 19.98% over the last twelve months to 9.14% in the last quarter. The decline isn’t all that surprising, but the fact that it is still relatively healthy is one area where COG differs from many of its competitors.
Free Cash Flow: COG’s free cash flow declined steadily since the beginning of the year, when it was a little over $660 million, to about $128.74 million in the last quarter. That translates to a modest Free Cash Flow Yield of about 2.33%.
Debt to Equity: A has a debt/equity ratio of .48. This is a conservative number. COG currently has a little over $128.7 million in cash and liquid assets against $1 billion in long-term debt. The company’s balance sheet indicates their operating profits are sufficient to service the debt they have, however liquidity could be an issue if it continues to deteriorate.
Dividend: COG’s annual divided is $.40 per share, and has remained consistent throughout the year. This is a positive for the company’s fundamental strength for the time being, as many other stocks in this sector have reduced or eliminated their dividends altogether.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $22 per share. That suggests the stock is undervalued by about 15% at its current price. COG’s bargain price is a bit lower, at around $17.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend from March to its June peak at around $23; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After that peak, the stock fell back quickly to a new low at around $17 before the beginning of July. Its trend since June is mostly down given that the stock is still below that high, with quite a bit of volatility between its $17 low and $19-$20 at the high end; but since the beginning of October the stock has been rallying strongly off of that low at around $17, and in the last week appears to be settling a little above $19, inline with the 38.2% retracement line. A push above $20 is likely to have limited immediate upside, with next resistance at around $20.50; but continued bullish momentum past that point should give the stock room to test its 52-week highs between $22 and $23. A drop below $19 should see the stock fall to about $17.50, based on previous pivot activity around that level, with additional downside from that point to a little below $17 where the 61.8% retracement line rests.
Near-term Keys: COG is an interesting company, with a stock that is trading at an interesting, but not yet compelling valuation level. I’m not confident conditions are favorable to a long-term position in this company, but with the colder months of winter approaching in North America, the demand for LNG products could provide a useful headwind for the company’s prospects in the quarters ahead. If you prefer to focus on short-term opportunities, the best probabilities on the bullish side lie in a push above $20.50; in that case, consider buying the stock or using call options with a near-term price target between $22 and $23 per share. If the stock drops below $19, you might consider shorting the stock or working with put options; but keep your price targets close, at $17.50 first, and around $16.75 if bearish momentum picks up.