Hidden-Value in the oil fields?

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. 

With oil going below $20 a barrel and natural gas going at $3.66 per thousand cubic square feet (Mcfe), many players in the energy sector are suffering, with many potentially defaulting on their loans. Because the energy sector covers a significant portion of the junk bond market, the junk bond market has collapsed as oil prices dive a lot lower.

With the oil glut continuing to get worse as Russia and OPEC compete to gain market share, it's times like these where we need to take the time as investors and research the companies that can do well in this new environment.

Photo by Zbynek Burival on Unsplash

Now for this blog post, we're not gonna talk about an oil producer, we're gonna talk about a natural gas producer. This company is: Cabot Oil and Gas Corporation (NYSE: COG)

The Investment Case

While energy prices decrease, companies that have a cost per barrel or a cost per thousand cubic square feet lower than the current market prices will do well during these hard times. 

With natural gas prices are $3.66 per Mcfe, Cabot's operating expense per unit is $1.44 per Mcfe. This gives them a profit of $2.22 per Mcfe, or a profit margin of 154%. That's really impressive for a company that producing natural gas in this down cycle! With that, management has been showing investors that their operating expense per unit has been decreasing, which is a great sign that they're actively looking for ways to cut costs even though their profit margins are big. With the potential for natural gas prices to continue plummeting, Cabot's management will allow the company to survive the down cycle much longer than Cabot's peers. 

With growing free cash flow, earnings per share, reductions in debt, lower operating expenses, and buybacks, Cabot Oil and Gas Corporation is a business many dream of owning for a good price. 

Valuations

Currently, Cabot's PE ratio is 10.54, which is pretty cheap but, when comparing it to peers, most of its peers don't even have a PE ratio since they're currently unprofitable. 

Interestingly, when analyzing its peers, some of them might have similar to lower operating expense per Mcfe yet they're not profitable and have received a lot of pessimism from investors and that's mostly due to their unstable leverage situation. Their balance sheet can either break them or keep them hanging on the edge. 

Conclusion

When finding contrarian investment opportunities, look for the ones that are handling the situation best, not the one that has the cheapest valuation. Cabot Oil and Gas might be trading higher than its peers but its been handling the down cycle for natural gas really well. 

Before investing, do your own research and talk to a financial advisor before making an investment decision. The energy sector might be using terms that many aren't familiar with and there's a possibility that I might be using those terms wrong.