Positives Priced Into Cabot Oil
Cabot Oil & Gas Corporation (COG) has made a $600 million acquisition of producing East Texas properties in the vicinity of its existing operations. The transaction increases the company's exposure to the highly prospective Haynesville Shale play, and is in line with the management's asset repositioning program that has transformed Cabot into a relatively low risk onshore player with longer-lived reserves.
We, however, maintain our Hold recommendation as we continue to believe that the stock's premium valuation relative to peer group already reflects these positives. We see better opportunities in the exploration and production (E&P) space.
Cabot's diversified asset portfolio is spread between low-risk/long reserve-life Appalachian assets and large-volume/rapid-payout Gulf Coast properties, with further variety from large prospect inventories in the Rocky Mountains, Anadarko Basin, and Alberta that have a broad mix of production and payout profiles.
On the whole, Cabot's natural gas-weighted asset base should help it generate steady production growth going forward. The company hopes to increase its production by 10% to 13% with replacement rate of more than 300% and at a competitive all-in finding cost of $2.00 per Mcfe in 2008. Cabot's stable balance sheet should continue providing it with the flexibility to pursue growth opportunities.
Cabot shares rebounded nicely in response to management's repositioning program, which converted it into an onshore player with a relatively low-risk profile and long-lived reserves. Hence, Cabot shares have been one of the best-performing in our E&P universe. While we like Cabot's transformation, we think that the emerging positives have already been adequately reflected in its premium valuation, leaving little room for upside from current levels.
Upping Eastman Chemical Target
Eastman Chemical Co. (EMN) has a strong fibers business and solid financials. The company had an impressive first quarter, marked by increasing prices, volume gains and strength in several end markets. The company is likely to benefit from its recent focus on the industrial gasification business. Thus, we rates EMN shares a Buy. Accordingly, we have set a new price target of $80.00.
Eastman is benefiting from an improved product mix. The company is seeing strong demand in several end-markets including PCI, Specialty Plastics, and Fibers. Eastman is hiking prices of major products, a policy which is likely to offset higher operating costs and help earnings.
The company is undergoing continuous restructuring and cost cutting. The company closed its polyethylene terephthalate (PET) polymer operations in Mexico and Argentina. It further plans to abandon operations at a facility in South Carolina. Apart from this, Eastman is planning to shut down the DMT intermediates facility in South Carolina.
Eastman plans to expand PET capacity based on IntegRex technology by 50% in 2008.
