The following review of operations for the three month periods endedMarch 31, 2020 and 2019 should be read in conjunction with our Condensed Consolidated Financial Statements and the Notes included in this Quarterly Report on Form 10-Q (Form 10-Q) and with the Consolidated Financial Statements, Notes and Management's Discussion and Analysis included in theCabot Oil & Gas Corporation Annual Report on Form 10-K for the year endedDecember 31, 2019 (Form 10-K). OVERVIEW Financial and Operating Overview Financial and operating results for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 are as follows: • Natural gas production increased 10.2 Bcf, or 5 percent, from 204.8 Bcf,
or 2,276 Mmcf per day, in 2019 to 215.0 Bcf, or 2,363 Mmcf per day, in
2020, as a result of an increase in drilling and completion activities in
theMarcellus Shale . • Average realized natural gas price was$1.72 per Mcf, 49 percent lower than the$3.35 per Mcf realized in the comparable period of the prior year.
• Total capital expenditures were
in the comparable period of the prior year.
• Drilled 22 gross wells (22.0 net) with a success rate of 100 percent
compared to 25 gross wells (25.0 net) with a success rate of 100 percent
for the comparable period of the prior year. • Completed 13 gross wells (13.0 net) in 2020 compared to 14 gross wells (14.0 net) in 2019.
• Average rig count during 2020 was approximately 2.8 rigs in the Marcellus
Shale, compared to an average rig count of approximately 3.3 rigs during
2019.
Market Conditions and Commodity Prices Our financial results depend on many factors, particularly commodity prices and our ability to market our production on economically attractive terms. Commodity prices are affected by many factors outside of our control, including changes in market supply and demand, which are impacted by pipeline capacity constraints, inventory storage levels, basis differentials, weather conditions and other factors. Our realized prices are also further impacted by our hedging activities. Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing commodity prices, particularly natural gas prices. Since substantially all of our production and reserves are natural gas, significant declines in natural gas prices could have a material adverse effect on our operating results, financial condition, liquidity and ability to obtain financing. Lower natural gas prices also may reduce the amount of natural gas that we can produce economically. Historically, natural gas prices have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile. As a result, we cannot accurately predict future commodity prices and, therefore, cannot determine with any degree of certainty what effect increases or decreases in these prices will have on our capital program, production volumes or revenues. In addition to commodity prices and production volumes, finding and developing sufficient amounts of natural gas reserves at economical costs are critical to our long-term success. We account for our derivative instruments on a mark-to-market basis with changes in fair value recognized in operating revenues in the Condensed Consolidated Statement of Operations. As a result of these mark-to-market adjustments associated with our derivative instruments, we will experience volatility in our earnings due to commodity price volatility. Refer to "Impact of Derivative Instruments on Operating Revenues" below and Note 5 of the Notes to the Condensed Consolidated Financial Statements for more information. Natural gas prices have continued to remain low or decline compared to 2019. The ongoing coronavirus (COVID-19) outbreak, which theWorld Health Organization (WHO) declared as a pandemic onMarch 11, 2020 , has reached more than 200 countries and there is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as quarantines, shelter-in-place orders and business and government shutdowns and the economic impact of such actions. One of the impacts of the COVID-19 pandemic has been a significant reduction in demand for crude oil, and to a lesser extent, natural gas. The supply/demand imbalance driven by the COVID-19 pandemic, as well as recent production disagreements among members of theOrganization of Petroleum Exporting Countries and other producer countries (OPEC+), has led to significant global 17
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economic contraction generally and is having disruptive impacts on the oil and gas industry. Consequently, crude oil prices have declined at unprecedented rates while NYMEX natural gas futures prices have shown significant improvements since the implementation of pandemic-related restrictions and OPEC+ price disagreements. The recent improvements in natural gas futures prices are based on market expectations that declines in future natural gas supplies due to a substantial reduction of associated gas related to the curtailment of operations in oil basins throughoutthe United States will more than offset the lower demand recently experienced with the COVID-19 pandemic. While the current outlook on natural gas prices is favorable and our operations have not been significantly impacted in the short-term, in the event these disruptions continue for an extended period of time, our operations could be adversely impacted, commodity prices could continue to decline further and our costs may increase. While we are unable to predict future commodity prices, at current natural gas price levels, we do not believe that an impairment of our oil and gas properties is reasonably likely to occur in the near future; however, in the event that commodity prices significantly decline from current levels, management would evaluate the recoverability of the carrying value of its oil and gas properties. We have implemented preventative measures and developed response plans intended to minimize unnecessary risk of exposure and prevent infection among our employees and the communities in which we operate. We also have modified certain business practices (including those related to non-operational employee work locations and the cancellation of physical participation in meetings, events and conferences) to conform to government restrictions and best practices encouraged by theCenter for Disease Control and Prevention , the WHO and other governmental and regulatory authorities. In addition, we are working with our customers and service providers to understand the potential impacts to our operations, including to mitigate any disruptions and to plan for longer-term emergency response protocols. We will continue to monitor developments affecting our workforce, our customers, our service providers and the communities in which we operate and take additional precautions as we believe are warranted. As of the date of this Form 10-Q, our efforts to respond to the challenges presented by the pandemic, as well as certain operational decisions we previously implemented such as our maintenance capital program, have helped to minimize the impact, and any resulting disruptions, of the pandemic to our business and operations. We have not required any funding under any federal or other governmental programs to support our operations, and we do not expect to have to utilize any such funding. As a result, we currently believe that we are well-positioned to manage the challenges presented in a lower commodity pricing environment and can endure the current cyclical downturn in the energy industry and continued volatility in current and future commodity prices by: • Continuing to exercise discipline in our capital program with the
expectation of funding our capital expenditures with cash on hand,
operating cash flows, and if required, borrowings under our revolving
credit facility. • Continuing to optimize our drilling, completion and operational
efficiencies, resulting in lower operating costs per unit of production.
• Continuing to manage our balance sheet, which we believe provides
sufficient availability under our revolving credit facility and existing
cash balances to meet our capital requirements and maintain compliance
with our debt covenants.
• Continuing to manage price risk by strategically hedging our production.
The impact that COVID-19 will have on our business, cash flows, liquidity, financial condition and results of operations will depend on future developments, including, among others, the ultimate geographic spread and severity of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. For information about the impact of realized commodity prices on our revenues, refer to "Results of Operations" below. Outlook Our 2020 capital program is expected to be approximately$575.0 million , a 27 percent reduction from our 2019 capital program of$783.3 million . We reduced our planned capital program as a result of the lower natural gas price environment. We expect to fund our capital expenditures with our cash on hand, operating cash flow and, if required, borrowings under our revolving credit facility. In 2019, we drilled 96 gross wells (94.0 net) and completed 99 gross wells (97.0 net), of which 29 gross wells (29.0 net) were drilled but uncompleted in prior years. For the full year of 2020, our capital program will focus on theMarcellus Shale , where we expect to drill, complete and place on production 60 to 70 net wells. We will continue to assess the natural gas price environment and may increase or decrease our capital expenditures accordingly. 18
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Financial Condition Capital Resources and Liquidity Our primary source of cash for the three months endedMarch 31, 2020 was from the sale of natural gas production. These cash flows were used to fund our capital expenditures, interest payments on debt and payment of dividends. See below for additional discussion and analysis of cash flow. The borrowing base under the terms of our revolving credit facility is redetermined annually in April. In addition, either we or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. As ofMarch 31, 2020 , there were no borrowings outstanding under our revolving credit facility and our unused commitments were$1.5 billion . Refer to Note 4 of the Notes to the Condensed Consolidated Financial Statements for more information. EffectiveApril 23, 2020 , the borrowing base and available commitments were reaffirmed at$3.2 billion and$1.5 billion , respectively, and our revolving credit facility remained undrawn as of the date of the filing of this Form 10-Q. A decline in commodity prices could result in the future reduction of our borrowing base and related commitments under our revolving credit facility. Unless commodity prices decline significantly from current levels, we do not believe that any such reductions would have a significant impact on our ability to service our debt and fund our drilling program and related operations. We strive to manage our debt at a level below the available credit line in order to maintain borrowing capacity. Our revolving credit facility includes a covenant limiting our total debt. We believe that, with operating cash flow, cash on hand and availability under our revolving credit facility, we have the capacity to fund our spending plans. AtMarch 31, 2020 , we were in compliance with all restrictive financial covenants for both the revolving credit facility and senior notes. Refer to our Form 10-K for further discussion of our restrictive financial covenants. Cash Flows Our cash flows from operating activities, investing activities and financing activities are as follows: Three Months Ended March 31, (In thousands) 2020 2019 Cash flows provided by operating activities$ 204,897 $ 585,287 Cash flows used in investing activities (158,113 ) (195,132 ) Cash flows used in financing activities (46,130 )
(77,553 )
Net increase in cash, cash equivalents and restricted cash
Operating Activities. Operating cash flow fluctuations are substantially driven by commodity prices, changes in our production volumes and operating expenses. Commodity prices have historically been volatile, primarily as a result of supply and demand for natural gas, pipeline infrastructure constraints, basis differentials, inventory storage levels, seasonal influences and other factors. In addition, fluctuations in cash flow may result in an increase or decrease in our capital expenditures. Our working capital is substantially influenced by the variables discussed above and fluctuates based on the timing and amount of borrowings and repayments under our revolving credit facility, repayments of debt, the timing of cash collections and payments on our trade accounts receivable and payable, respectively, payment of dividends, repurchases of our securities and changes in the fair value of our commodity derivative activity. From time to time, our working capital will reflect a deficit, while at other times it will reflect a surplus. This fluctuation is not unusual. AtMarch 31, 2020 andDecember 31, 2019 , we had a working capital surplus of$154.6 million and$240.2 million , respectively. We believe that we have adequate liquidity and availability under our revolving credit facility to meet our working capital requirements over the next twelve months. Net cash provided by operating activities in the first three months of 2020 decreased by$380.4 million compared to the first three months of 2019. This decrease was primarily due to lower operating revenues, unfavorable changes in working capital and higher operating expenses. The decrease in operating revenues was primarily due to lower realized natural gas prices, partially offset by higher equivalent production. Average realized natural gas prices decreased by 49 percent for the first three months of 2020 compared to the first three months of 2019. Equivalent production increased by 5 percent for the first three months of 2020 compared to the first three months of 2019 due to higher natural gas production in theMarcellus Shale . 19
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Refer to "Results of Operations" for additional information relative to commodity price, production and operating expense fluctuations. We are unable to predict future commodity prices and, as a result, cannot provide any assurance about future levels of net cash provided by operating activities. Investing Activities. Cash flows used in investing activities decreased by$37.0 million for the first three months of 2020 compared to the first three months of 2019. The decrease was primarily due to$46.9 million lower capital expenditures as a result of the implementation of our maintenance capital program in 2020. This decrease was partially offset by a decrease in contributions and proceeds of$7.6 million related to the sale of our equity method investments and a decrease in proceeds from the sale of assets of$2.3 million . Financing Activities. Cash flows used in financing activities decreased by$31.4 million for the first three months of 2020 compared to the first three months of 2019. This decrease was primarily due to$31.4 million of lower repurchases of our common stock in 2020 compared to 2019,$7.0 million of lower net repayments of debt and$3.3 million of lower tax withholdings on vesting of stock awards. These decreases were partially offset by higher dividend payments of$10.2 million related to an increase in our quarterly dividend rate from$0.07 per share in the first three months of 2019 to$0.10 per share in the first three months of 2020. Capitalization Information about our capitalization is as follows: March 31, December 31, (In thousands) 2020 2019 Debt (1)$ 1,220,260 $ 1,220,025 Stockholders' equity 2,168,395 2,151,487 Total capitalization$ 3,388,655 $ 3,371,512 Debt to total capitalization 36 % 36 % Cash and cash equivalents$ 202,842 $ 200,227
_______________________________________________________________________________
(1) Includes
debt at
borrowings outstanding under our revolving credit facility as of
2020 and
We did not repurchase any shares of our common stock during the first three months of 2020 and 2019, respectively. During the first three months of 2020 and 2019, we paid dividends of$39.8 million ($0.10 per share) and$29.6 million ($0.07 per share), respectively, on our common stock. Capital and Exploration Expenditures On an annual basis, we generally fund most of our capital expenditures, excluding any significant property acquisitions, with cash on hand, cash generated from operations, and if required, borrowings under our revolving credit facility. We budget these expenditures based on our projected cash flows for the year. The following table presents major components of our capital and exploration expenditures: Three Months Ended March 31, (In thousands) 2020 2019 Capital expenditures Drilling and facilities$ 157,992 $ 202,394 Leasehold acquisitions 879 630 Other 1,434 1,247 160,305 204,271 Exploration expenditures 2,190 6,044$ 162,495 $ 210,315 20
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For the full year of 2020, we plan to allocate substantially all of our capital to theMarcellus Shale , where we expect to drill, complete and place on production 60 to 70 net wells. Our 2020 capital program is expected to be approximately$575.0 million . Refer to "Outlook" for additional information regarding the current year drilling program. We will continue to assess the commodity price environment and may increase or decrease our capital expenditures accordingly. Contractual Obligations We have various contractual obligations in the normal course of our operations. There have been no material changes to our contractual obligations described under "Transportation and Gathering Agreements" and "Lease Commitments" as disclosed in Note 9 of the Notes to the Consolidated Financial Statements and the obligations described under "Contractual Obligations" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Refer to our Form 10-K for further discussion of our critical accounting policies. Recently Adopted Accounting Pronouncements Refer to Note 1 of the Notes to the Condensed Consolidated Financial Statements, "Financial Statement Presentation," for a discussion of new accounting pronouncements that affect us. Results of Operations First Three Months of 2020 and 2019 Compared We reported net income in the first three months of 2020 of$53.9 million , or$0.14 per share, compared to net income of$262.8 million , or$0.62 per share, in the first three months of 2019. The decrease in net income was primarily due to lower operating revenues and earnings on equity method investments and higher operating expenses and interest expense, partially offset by lower income tax expense. Revenue, Price and Volume Variances Our revenues vary from year to year as a result of changes in commodity prices and production volumes. Below is a discussion of revenue, price and volume variances. Three Months Ended March 31, Variance (In thousands) 2020 2019 Amount Percent Operating Revenues Natural gas$ 370,340 $ 633,174 $ (262,834 ) (42 )% Gain on derivative instruments 16,062 8,257 7,805 95 % Other 55 250 (195 ) (78 )%$ 386,457 $ 641,681 $ (255,224 ) (40 )% Natural Gas Revenues Three Months Ended March 31, Variance Increase (Decrease) 2020 2019 Amount Percent (In thousands) Price variance (Mcf) $ 1.72$ 3.09 $ (1.37 ) (44 )%$ (294,352 ) Volume variance (Bcf) 215.0 204.8 10.2 5 % 31,518 Total$ (262,834 ) The decrease in natural gas revenues of$262.8 million was due to lower natural gas prices partially offset by an increase in production. The increase in production was a result of an increase in our drilling and completion activities in theMarcellus Shale . 21
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Impact of Derivative Instruments on Operating Revenues
Three Months Ended March 31, (In thousands) 2020 2019
Cash received (paid) on settlement of derivative instruments Gain (loss) on derivative instruments
$ -$ 52,980 Non-cash gain (loss) on derivative instruments Gain (loss) on derivative instruments 16,062 (44,723 )$ 16,062 $ 8,257
Operating and Other Expenses
Three Months Ended March 31, Variance (In thousands) 2020 2019 Amount Percent Operating and Other Expenses Direct operations$ 17,244 $ 18,334 $ (1,090 ) (6 )% Transportation and gathering 143,332 137,333 5,999 4 % Taxes other than income 3,738 5,847 (2,109 ) (36 )% Exploration 2,190 6,044 (3,854 ) (64 )% Depreciation, depletion and amortization 100,135 92,258 7,877 9 % General and administrative 33,429 31,090 2,339 8 %$ 300,068 $ 290,906 $ 9,162 3 % Earnings (loss) on equity method investments $ (59 )$ 3,684 $ (3,743 ) (102 )% Gain (loss) on sale of assets 71 (1,500 ) (1,571 ) (105 )% Interest expense, net 14,211 12,181 2,030 17 % Other expense 66 144 (78 ) (54 )% Income tax expense 18,214 77,871 (59,657 ) (77 )%
Total costs and expenses from operations increased by
production volumes period over period. The decrease was attributable to continued efficiencies in our operations in theMarcellus Shale . • Transportation and gathering increased$6.0 million due to higherMarcellus Shale production. • Taxes other than income decreased$2.1 million due to$2.1 million lower drilling impact fees driven by a decrease in rates associated with lower natural gas prices. • Exploration decreased$3.9 million due to a$2.4 million decrease in geological and geophysical expenses and other costs.
• Depreciation, depletion and amortization increased
due to higher DD&A of
of unproved properties of
increase of
of
Mcfe for the first three months of 2019. The higher DD&A rate was due to
higher cost reserve additions.
• General and administrative increased
stock-based compensation expense of
of our market-based performance awards and by$1.4 million of higher professional services. The remaining changes in other general and administrative expenses were not individually significant. 22
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Earnings (Loss) on Equity Method Investments Earnings on equity method investments decreased$3.7 million primarily due to the sale of our investments inMeade Pipeline Co LLC (Meade) inNovember 2019 andConstitution Pipeline Company, LLC (Constitution ) inFebruary 2020 . Interest Expense, net Interest expense, net increased$2.0 million due to a$2.9 million decrease in interest expense in 2019 related to the reversal of certain income tax reserves, partially offset by a$1.0 million decrease in interest and fees associated with our revolving credit facility. There were no borrowings under our revolving credit facility during 2020. Income Tax Expense Income tax expense decreased$59.7 million due to lower pre-tax income, partially offset by a higher effective tax rate. The effective tax rates for the first three months of 2020 and 2019 were 25.3 percent and 22.9 percent, respectively. The effective tax rate was higher for the first three months of 2020 compared to the first three months of 2019 due to an increase in tax expense as a result of book compensation expense exceeding the federal and state tax deductions for employee stock-based compensation awards that vested during the period. Forward-Looking Information The statements regarding future financial and operating performance and results, strategic pursuits and goals, market prices, future hedging and risk management activities, and other statements that are not historical facts contained in this report are forward-looking statements. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "budget," "plan," "forecast," "target," "predict," "may," "should," "could," "will" and similar expressions are also intended to identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, the continuing effects of the COVID-19 pandemic and the impact thereof on our business, financial condition and results of operations, actions by, or disputes among or between, members of OPEC+, market factors, market prices (including geographic basis differentials) of natural gas, results of future drilling and marketing activity, future production and costs, legislative and regulatory initiatives, electronic, cyber or physical security breaches and other factors detailed herein and in our otherSecurities and Exchange Commission filings. Refer to "Risk Factors" in Item 1A of the Form 10-K and in this Quarterly Report on Form 10-Q for additional information about these risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
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