The second stock in which we hope to add to the Independent Stock Analysis Portfolio is Cabot Oil & Gas. Cabot (COG) has 100% of it’s production as natural gas and is the lowest cost producer in the lowest cost basin. The combination of management’s prudence and being a low cost producer has Cabot sporting the rare strong balance sheet in the industry; that is, Cabot is not drowning in debt payments, dependent on capital markets to roll over coming due maturity’s while managing the business for such external factors, nor considering selling crown jewel royalty’s to survive as are competitors.
Obviously a potential investor needs a view on the fourteen year bear market in natural gas to consider investing in the industry. Our perspective at ISA is that the United States and the rest of the world became addicted to natural gas over that last decade, that natural gas in an outstanding product, cleaner than oil and coal, abundant, safe and affordable.
At present natural gas is priced below a price where the industry can hold production. For natural gas investors an endearing feature of the market is the high natural decline rate of production: An oversupplied market can be alleviated quickly by underinvestment.
The stretched industry balance sheets and final end to the seemingly never ending increase in associated gas production appear to have reached a resolution while production is finally rolling over. But wait! The depressed industry still needs to reconcile this warm winter, ISA’s bearish macro outlook and now the coronavirus trigger.
The rise in U.S. natural gas production was remarkable enough to crush the global LNG market. Significant slowing non U.S. economy’s have in some foreign nations have ground to a halt with the coronavirus. LNG loads have been rejected. The tankers have begun to be used as floating storage.
ISA expects one more significant down leg in the industry this spring shoulder season into the summer perhaps creating a generational buying opportunity. Purchasing outstanding business’s at excellent value and then holding tight creates massive wealth. That’s the plan, we’ll see if it works. After much time examining the industry and other industry players, Cabot is our horse. Do your own due diligence.
Meanwhile, we are content with the ISA Portfolio being 100% invested in PHYS; Gold as cash.