Over the years, I have come to consider the stock market as a reflection of investor’s emotions. That is because investor emotion is at least 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 2020. 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 of last year – less than six months after the bottom – the index had not only reclaimed its pre-pandemic high but even driven above them. After temporarily consolidating in September and October, the market resumed that bullish push, rallying about 30% to a new peak and all-time high early this week.
One of the sectors that absorbed the biggest direct 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 – depends on the movement of crude to help or hinder their own prices. The collapse of crude demand created globally oversupplied conditions that kept oil prices off of their own, 2019 highs in the $60 range until the start of this year. 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 start of 2021 saw crude demand gradually start to increase, as economies staged stuttering reopenings and state governments pushed to increase vaccinations. In the U.S., more than 50% of eligible Americans have received at least one dose, and that has helped push infections and hospitalizations down to levels not seen since the early stages of the pandemic. That’s good news that has helped loosen restrictions on social gatherings and to continue the reopening of businesses, and has also continued to push for increasing demand in crude that has oil prices a bit higher, and hovering between $65 and $70 per barrel as of now.
The Energy 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 survivors 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 before troubles arise so they have cash and liquid assets to rely on when operating profits begin 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. 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 put a strict focus on cost control that played a big role over the last year in preserving a generally healthy balance sheet and maintain a healthy level of operating profitability. The stock has also diverged from the broad market’s pattern, and is currently only a little above its 52-week lows that could suggest COG is very under appreciated value opportunity.
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 $6.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 260% (not a typo), while revenues were were almost 19% higher. In the last quarter, earnings rose 44%, while Revenues were flat, but positive at 0.64%. The company’s margin profile shows that Net Income as a percentage of Revenues is healthy and strengthening, from a very healthy 17.73% over the last twelve months to 27.5% in the last quarter. These are remarkable numbers for most companies in this industry right now.
Free Cash Flow: COG’s free cash flow declined steadily in 2020, from it was a little over $660 million at the start of 2020. As of the last quarter, Free Cash Flow for the last twelve months was $313.97 million, which translates to a modest Free Cash Flow Yield of about 4.5%.
Debt to Equity: A has a debt/equity ratio of .41. This is a very conservative number. COG currently has a little over $185.24 million in cash and liquid assets against $946 million in long-term debt. The company’s balance sheet indicates their operating profits are sufficient to service the debt they have, however liquidity is a limitation. Continued strength in Net Income should help to keep Free Cash Flow growing and also to improve cash and liquid assets in the quarters ahead.
Dividend: COG’s annual divided is $.44 per share, and increased from $.40 prior to the most recent earnings announcement. This is a positive for the company’s fundamental strength, as many other stocks in this sector have reduced or eliminated their dividends altogether. It also translates to an annualized yield of 2.56% at the stock’s current price.
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 $26.50 per share. That suggests the stock is undervalued by about 54% at its current price. It is also worth noting that in late 2020, my analysis provided a value-based target price on COG at $22.
Technical Profile
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 downward trend from June to its November 2020 low at around $16; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock rallied from that low to a peak at around $19.50 at the start of the year, but after hovering around that level through March, the stock broke down at the beginning of April, finding support near the November low at the end of the month. The stock rallied to a new pivot high at around $17.50 until the beginning of this week, fading back a bit from that point. A pivot anywhere between the stock’s current price and current support at around $16 could give the stock momentum to push above resistance at around $17.50 and push tot he 38.2% retracement line, which current sits at around $18.50. The stock is currently about $1 above current support, which given the stock’s use of $16 as strong support for the past year should provide very limited downside.
Near-term Keys: COG is an interesting company, with a stock that is trading at a ver interesting valuation level. I’m not confident conditions are favorable for a long-term position in this company right now, but supply disruptions on the East Coast from a recent ransomware attack on the Colonial Pipeline should be addressed and help demand for LNG products continue to 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 $17.50; in that case, consider buying the stock or using call options with a near-term price target between $18.50, or a little above $19 where the 50% retracement line waits if bullish momentum increases. There is very limited downside right now, which actually makes a bearish trade from shorting the stock or buying put options a very low-probability trade right now.