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Coterra Energy Inc. - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
10-Q
☒      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2019
☐       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission file number 1-10447
 
CABOT OIL & GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
04-3072771
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
Three Memorial City Plaza
840 Gessner Road, Suite 1400, Houston, Texas 77024
(Address of principal executive offices including ZIP code)
(281) 589-4600
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
COG
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
 
 
 
 
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
 
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 23, 2019, there were 407,924,673 shares of Common Stock, Par Value $0.10 Per Share, outstanding.

Table of Contents

CABOT OIL & GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.    Financial Statements
CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands, except share amounts)
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
82,316

 
$
2,287

Accounts receivable, net
 
159,239

 
362,403

Income taxes receivable
 
133,028

 
109,251

Inventories
 
18,195

 
11,076

Derivative instruments
 
25,700

 
57,665

Other current assets
 
3,201

 
1,863

Total current assets
 
421,679

 
544,545

Properties and equipment, net (Successful efforts method)
 
3,787,581

 
3,463,606

Equity method investments
 
169,086

 
163,181

Other assets
 
64,319

 
27,497

 
 
$
4,442,665

 
$
4,198,829

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
172,732

 
$
241,939

Current portion of long-term debt
 
87,000

 
—

Accrued liabilities
 
27,780

 
25,227

Interest payable
 
7,273

 
20,098

Total current liabilities
 
294,785

 
287,264

Long-term debt, net
 
1,132,790

 
1,226,104

Deferred income taxes
 
647,473

 
458,597

Asset retirement obligations
 
56,968

 
50,622

Postretirement benefits
 
29,427

 
27,912

Other liabilities
 
67,646

 
60,171

Total liabilities
 
2,229,089

 
2,110,670

Commitments and contingencies
 

 

Stockholders' equity
 
 

 
 

Common stock:
 
 

 
 

Authorized — 960,000,000 shares of $0.10 par value in 2019 and 2018, respectively
 
 

 
 

Issued — 476,881,612 shares and 476,094,551 shares in 2019 and 2018, respectively
 
47,688

 
47,610

Additional paid-in capital
 
1,775,579

 
1,763,142

Retained earnings
 
2,037,066

 
1,607,658

Accumulated other comprehensive income
 
4,027

 
4,437

Less treasury stock, at cost:
 
 

 
 

68,957,318 shares and 53,409,705 shares in 2019 and 2018, respectively
 
(1,650,784
)
 
(1,334,688
)
Total stockholders' equity
 
2,213,576

 
2,088,159

 
 
$
4,442,665

 
$
4,198,829


The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES
 
 

 
 

 
 

 
 

   Natural gas
 
$
418,133

 
$
440,835

 
$
1,521,789

 
$
1,217,603

   Crude oil and condensate
 
—

 
—

 
—

 
48,722

   Gain (loss) on derivative instruments
 
11,060

 
(3,537
)
 
82,966

 
(1,628
)
   Brokered natural gas
 
—

 
105,849

 
—

 
203,375

   Other
 
(82
)
 
2,026

 
154

 
3,775

 
 
429,111

 
545,173

 
1,604,909

 
1,471,847

OPERATING EXPENSES
 
 

 
 

 
 

 
 

   Direct operations
 
19,181

 
17,030

 
55,608

 
52,757

   Transportation and gathering
 
145,681

 
129,534

 
424,703

 
355,848

   Brokered natural gas
 
—

 
93,405

 
—

 
178,437

   Taxes other than income
 
4,607

 
2,852

 
14,094

 
15,434

   Exploration
 
4,481

 
10,049

 
15,029

 
68,166

   Depreciation, depletion and amortization
 
110,889

 
121,172

 
299,294

 
288,210

   General and administrative
 
18,391

 
20,724

 
72,370

 
66,013

 
 
303,230

 
394,766

 
881,098

 
1,024,865

Earnings (loss) on equity method investments
 
3,860

 
(11
)
 
11,194

 
(1,009
)
Gain (loss) on sale of assets
 
36

 
25,655

 
(1,464
)
 
(14,850
)
INCOME FROM OPERATIONS
 
129,777

 
176,051

 
733,541

 
431,123

Interest expense, net
 
13,554

 
14,191

 
40,302

 
57,577

Other expense
 
143

 
115

 
430

 
347

Income before income taxes
 
116,080

 
161,745

 
692,809

 
373,199

Income tax expense
 
25,722

 
39,408

 
158,679

 
91,201

NET INCOME
 
$
90,358

 
$
122,337

 
$
534,130

 
$
281,998

 
 
 
 
 
 
 
 
 
Earnings per share
 
 

 
 

 
 

 
 

Basic
 
$
0.22

 
$
0.28

 
$
1.27

 
$
0.63

Diluted
 
$
0.22

 
$
0.28

 
$
1.27

 
$
0.62

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 

 
 

 
 

 
 

Basic
 
412,456

 
440,772

 
419,199

 
450,445

Diluted
 
414,462

 
443,110

 
421,101

 
452,313

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

CABOT OIL & GAS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

  Net income
 
$
534,130

 
$
281,998

  Adjustments to reconcile net income to cash provided by operating activities:
 
 

 
 

Depreciation, depletion and amortization
 
299,294

 
288,210

Deferred income tax expense
 
188,997

 
131,799

Loss on sale of assets
 
1,464

 
14,850

Exploratory dry hole cost
 
16

 
56,425

(Gain) loss on derivative instruments
 
(82,966
)
 
1,628

Net cash received (paid) in settlement of derivative instruments
 
114,931

 
(20,354
)
(Earnings) loss on equity method investments
 
(11,194
)
 
1,009

Distribution of earnings from equity method investments
 
12,610

 
—

Amortization of debt issuance costs
 
3,219

 
3,521

Stock-based compensation and other
 
22,720

 
16,472

  Changes in assets and liabilities:
 
 

 
 

Accounts receivable, net
 
203,164

 
(7,345
)
Income taxes
 
(16,746
)
 
(14,447
)
Inventories
 
(7,119
)
 
(5,326
)
Other current assets
 
(1,338
)
 
104

Accounts payable and accrued liabilities
 
(43,413
)
 
32,192

Interest payable
 
(12,825
)
 
(18,474
)
Other assets and liabilities
 
(22,133
)
 
26,590

Net cash provided by operating activities
 
1,182,811

 
788,852

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(620,696
)
 
(647,503
)
Proceeds from sale of assets
 
2,401

 
675,525

Investment in equity method investments
 
(8,977
)
 
(72,866
)
Distribution of investment from equity method investments
 
1,656

 
—

Net cash used in investing activities
 
(625,616
)
 
(44,844
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Borrowings from debt
 
95,000

 
—

Repayments of debt
 
(102,000
)
 
(237,000
)
Treasury stock repurchases
 
(347,446
)
 
(581,725
)
Dividends paid
 
(104,722
)
 
(81,185
)
Tax withholdings on vesting of stock awards
 
(10,587
)
 
(8,068
)
Capitalized debt issuance costs
 
(7,411
)
 
—

Net cash used in financing activities
 
(477,166
)
 
(907,978
)
Net increase (decrease) in cash and cash equivalents
 
80,029

 
(163,970
)
Cash and cash equivalents, beginning of period
 
2,287

 
480,047

Cash and cash equivalents, end of period
 
$
82,316

 
$
316,077

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

CABOT OIL & GAS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except per share  amounts)
 
Common Shares
 
Common Stock Par
 
Treasury Shares
 
Treasury Stock
 
Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2018
 
476,095

 
$
47,610

 
53,410

 
$
(1,334,688
)
 
$
1,763,142

 
$
4,437

 
$
1,607,658

 
$
2,088,159

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
262,763

 
262,763

Stock amortization and vesting
 
682

 
68

 
—

 
—

 
(281
)
 
—

 
—

 
(213
)
Purchase of treasury stock
 
—

 
—

 
—

 
(28
)
 
—

 
—

 
—

 
(28
)
Cash dividends at $0.07 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(29,605
)
 
(29,605
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(137
)
 
—

 
(137
)
Balance at March 31, 2019
 
476,777

 
$
47,678

 
53,410

 
$
(1,334,716
)
 
$
1,762,861

 
$
4,300

 
$
1,840,816

 
$
2,320,939

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
181,009

 
181,009

Stock amortization and vesting
 
102

 
10

 
—

 
—

 
6,334

 
—

 
—

 
6,344

Purchase of treasury stock
 
—

 
—

 
5,081

 
(125,260
)
 
—

 
—

 
—

 
(125,260
)
Cash dividends at $0.09 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(38,092
)
 
(38,092
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(136
)
 
—

 
(136
)
Balance at June 30, 2019
 
476,879

 
$
47,688

 
58,491

 
$
(1,459,976
)
 
$
1,769,195

 
$
4,164

 
$
1,983,733

 
$
2,344,804

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
90,358

 
90,358

Stock amortization and vesting
 
3

 
—

 
—

 
—

 
6,384

 
—

 
—

 
6,384

Purchase of treasury stock
 
—

 
—

 
10,466

 
(190,808
)
 
—

 
—

 
—

 
(190,808
)
Cash dividends at $0.09 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(37,025
)
 
(37,025
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(137
)
 
—

 
(137
)
Balance at September 30, 2019
 
476,882

 
$
47,688

 
68,957

 
$
(1,650,784
)
 
$
1,775,579

 
$
4,027

 
$
2,037,066

 
$
2,213,576

(In thousands, except per share  amounts)
 
Common Shares
 
Common Stock Par
 
Treasury Shares
 
Treasury Stock
 
Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Balance at December 31, 2017
 
475,547

 
$
47,555

 
14,936

 
$
(430,576
)
 
$
1,742,419

 
$
2,077

 
$
1,162,430

 
$
2,523,905

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
117,231

 
117,231

Stock amortization and vesting
 
534

 
53

 
—

 
—

 
249

 
—

 
—

 
302

Purchase of treasury stock
 
—

 
—

 
8,328

 
(207,135
)
 
—

 
—

 
—

 
(207,135
)
Cash dividends at $0.06 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(27,647
)
 
(27,647
)
Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
306

 
—

 
306

Cumulative impact from accounting change
 
—

 
—

 
—

 
—

 
—

 
—

 
(446
)
 
(446
)
Balance at March 31, 2018
 
476,081

 
$
47,608

 
23,264

 
$
(637,711
)
 
$
1,742,668

 
$
2,383

 
$
1,251,568

 
$
2,406,516

Net income
 
—
 
—

 
—

 
—

 
—

 
—

 
42,431

 
42,431

Exercise of stock appreciation rights
 
3

 
1

 
—

 
—

 
—

 
—

 
—

 
1

Stock amortization and vesting
 
2

 
—

 
—

 
—

 
6,769

 
—

 
—

 
6,769

Purchase of treasury stock
 
—

 
—

 
11,646

 
(274,337
)
 
—

 
—

 
—

 
(274,337
)
Cash dividends at $0.06 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(27,071
)
 
(27,071
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(135
)
 
—

 
(135
)
Balance at June 30, 2018
 
476,086

 
$
47,609

 
34,910

 
$
(912,048
)
 
$
1,749,437

 
$
2,248

 
$
1,266,928

 
$
2,154,174

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
122,337

 
122,337

Exercise of stock appreciation rights
 
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Stock amortization and vesting
 
1

 
—

 
—

 
—

 
6,900

 
—

 
—

 
6,900

Purchase of treasury stock
 
—

 
—

 
7,170

 
(162,660
)
 
—

 
—

 
—

 
(162,660
)
Cash dividends at $0.06 per share
 
—

 
—

 
—

 
—

 
—

 
—

 
(26,468
)
 
(26,468
)
Other comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
(136
)
 
—

 
(136
)
Balance at September 30, 2018
 
476,089

 
$
47,609

 
42,080

 
$
(1,074,708
)
 
$
1,756,337

 
$
2,112

 
$
1,362,797

 
$
2,094,147


The accompanying notes are an integral part of these condensed consolidated financial statements.

6
Table of Contents


CABOT OIL & GAS CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Financial Statement Presentation
During interim periods, Cabot Oil & Gas Corporation (the Company) follows the same accounting policies disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 (Form 10-K) filed with the Securities and Exchange Commission (SEC), except for any new accounting pronouncements adopted during the period as discussed below. The interim financial statements should be read in conjunction with the notes to the consolidated financial statements and information presented in the Form 10-K. In management’s opinion, the accompanying interim condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary for a fair statement. The results for any interim period are not necessarily indicative of the expected results for the entire year.
Recently Adopted Accounting Pronouncements
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new lease guidance supersedes Topic 840. The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases. This ASU does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an optional transition method that permits an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The guidance is effective for interim and annual periods beginning after December 15, 2018. This ASU was adopted using a modified retrospective approach. The Company adopted this guidance effective January 1, 2019 by applying the optional transition approach as of the beginning of the period of adoption. Comparative periods, including the disclosures related to those periods, were not restated.
On the adoption date, the Company elected the following practical expedients which are provided in the lease standard:
•
an election not to apply the recognition requirements in the lease standard to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise);
•
a package of practical expedients to not reassess whether a contract is or contains a lease, lease classification and initial direct costs;
•
a practical expedient to use hindsight when determining the lease term;
•
a practical expedient that permits combining lease and non-lease components in a contract and accounting for the combination as a lease (elected by asset class); and
•
a practical expedient to not reassess certain land easements in existence prior to January 1, 2019.
On January 1, 2019, the Company recognized a right of use asset for operating leases and an operating lease liability of $44.6 million, representing the present value of the future minimum lease payment obligations associated with office leases, drilling rig commitments, surface use agreements and other leases. The adoption of this guidance did not have an impact on the Company’s results of operations or cash flows.
Refer to Note 8 for more details regarding leases.

7
Table of Contents

2. Properties and Equipment, Net
Properties and equipment, net are comprised of the following:
(In thousands)
 
September 30,
2019
 
December 31,
2018
Proved oil and gas properties
 
$
6,339,234

 
$
5,717,145

Unproved oil and gas properties
 
164,100

 
194,435

Land, buildings and other equipment
 
101,901

 
94,797

 
 
6,605,235

 
6,006,377

Accumulated depreciation, depletion and amortization
 
(2,817,654
)
 
(2,542,771
)
 
 
$
3,787,581

 
$
3,463,606


At September 30, 2019, the Company did not have any projects that had exploratory well costs capitalized for a period of greater than one year after drilling.
3. Equity Method Investments
The Company holds a 25 percent equity interest in Constitution Pipeline Company, LLC (Constitution) and a 20 percent equity interest in Meade Pipeline Co LLC (Meade). Activity related to these equity method investments is as follows:
 
 
Constitution
 
Meade
 
Total
 
 
Nine Months Ended September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
 
$
—

 
$
732

 
$
163,181

 
$
85,345

 
$
163,181

 
$
86,077

Contributions
 
500

 
250

 
8,477

 
72,616

 
8,977

 
72,866

Distributions
 
—

 
—

 
(14,266
)
 
—

 
(14,266
)
 
—

Earnings (loss) on equity method investments
 
(500
)
 
(982
)
 
11,694

 
(27
)
 
11,194

 
(1,009
)
Balance at end of period
 
$
—

 
$
—

 
$
169,086

 
$
157,934

 
$
169,086

 
$
157,934


For further information regarding the Company’s equity method investments, refer to Note 4 of the Notes to the Consolidated Financial Statements in the Form 10-K.
Constitution Pipeline Company, LLC
In August 2019, the Federal Energy Regulatory Committee issued an order concluding the New York Department of Environmental Conservation has waived its authority under Section 401 of the Clean Water Act "to issue or deny a water quality certification" for the proposed Constitution pipeline. This decision removed one of the major remaining regulatory hurdles for the continuation of the project. In light of this decision, in September 2019, the Company, the other members of Constitution and Williams Partners L.P., the project sponsor, resumed discussions regarding the construction of the project, including evaluating the commercial feasibility of the project, the remaining legal and regulatory hurdles, projected costs and capital requirements and other aspects of the development and construction of the pipeline. The Company remains committed to continuing the process of evaluating the next steps for advancing the project. 
Meade Pipeline Co LLC
In September 2019, the Company entered into an agreement to sell its 20 percent ownership interest in Meade to a subsidiary of NextEra Energy Partners, LP for $256.0 million. This transaction is expected to close in the fourth quarter of 2019, subject to customary closing conditions and adjustments.

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4. Debt and Credit Agreements
The Company’s debt and credit agreements consisted of the following:
(In thousands)
 
September 30,
2019
 
December 31,
2018
6.51% weighted-average senior notes(1)
 
$
124,000

 
$
124,000

5.58% weighted-average senior notes
 
175,000

 
175,000

3.65% weighted-average senior notes
 
925,000

 
925,000

Revolving credit facility
 
—

 
7,000

Unamortized debt issuance costs
 
(4,210
)
 
(4,896
)
 
 
$
1,219,790

 
$
1,226,104

_______________________________________________________________________________
(1)
Includes $87.0 million of current portion of long-term debt at September 30, 2019 due in July 2020.
At September 30, 2019, the Company was in compliance with all restrictive financial covenants for both its revolving credit facility and senior notes.
Revolving Credit Agreement
On April 22, 2019, the Company entered into a second amended and restated credit agreement (revolving credit facility). The Company's revolving credit facility is unsecured and the borrowing base is redetermined annually on April 1. In addition, either the Company or the banks may request an interim redetermination twice a year or in connection with certain acquisitions or divestitures of oil and gas properties. The Company’s borrowing base and available commitments under the revolving credit facility were $3.2 billion and $1.5 billion, respectively. The maximum revolving credit available to the Company is the lesser of the available commitments or the difference of the borrowing base less outstanding senior notes. The Company's revolving credit facility matures in April 2024 and can be extended by one year upon the agreement of the Company and lenders holding at least 50 percent of the commitments under the revolving credit facility.
Interest rates under the revolving credit facility are based on LIBOR or ABR indications, plus a margin which ranges from 150 to 225 basis points for LIBOR loans and from 50 to 125 basis points for ABR loans when not in an Investment Grade Period (as defined in the amended and restated credit agreement) and from 112.5 to 175 basis points for LIBOR loans and from 12.5 to 75 basis points for ABR loans during an Investment Grade Period. The revolving credit facility also provides for a commitment fee on the unused available balance and is calculated at annual rates ranging from 30 to 42.5 basis points when not in an Investment Grade Period and from 12.5 to 27.5 basis points during an Investment Grade Period. The Company is currently not in an Investment Grade Period.
The revolving credit facility contains various customary covenants, which include the following (with all calculations based on definitions contained in the amended and restated credit agreement):
•
Maintenance of a minimum asset coverage ratio of 1.75 to 1.0;
•
Maintenance of a minimum annual coverage ratio of consolidated cash flow to interest expense for the trailing four quarters of 2.8 to 1.0; and
•
Maintenance of a minimum current ratio of 1.0 to 1.0.
At September 30, 2019, the Company had no borrowings outstanding under its revolving credit facility and had unused commitments of $1.5 billion.
The Company incurred $7.4 million of debt issuance costs in connection with the amended and restated credit agreement, which were capitalized and will be amortized over the term of the amended and restated agreement. The remaining unamortized costs of $3.4 million will also be amortized over the term of the amended and restated agreement in accordance with ASC 470-50, Debt Modifications and Extinguishments.

9
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5. Derivative Instruments
As of September 30, 2019, the Company had the following outstanding financial commodity derivatives:
 
 
 
 
 
 
Swaps
 
Basis Swaps
Type of Contract
 
Volume (Mmbtu)
 
Contract Period
 
Weighted-Average ($/Mmbtu)
 
Weighted-Average ($/Mmbtu)

Natural gas (IFERC TRANSCO Z6 non-NY)
 
2,760,000

 
Oct. 2019 - Dec. 2019
 
 
 
$
0.41

Natural gas (IFERC TRANSCO Z6 non-NY)
 
4,650,000

 
Oct. 2019
 
$
2.61

 
 
Natural gas (IFERC TRANSCO Leidy Line Receipts)
 
13,800,000

 
Oct. 2019 - Dec. 2019
 
 
 
$
(0.53
)
Natural gas (NYMEX)
 
10,850,000

 
Oct. 2019
 
$
2.85

 
 
Natural gas (NYMEX)
 
27,600,000

 
Oct. 2019 - Dec. 2019
 
$
2.86

 
 

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet
 
 
 
 
Derivative Assets
 
Derivative Liabilities
(In thousands)
 
Balance Sheet Location
 
September 30,
2019
 
December 31,
2018
 
September 30,
2019
 
December 31,
2018
Commodity contracts
 
Derivative instruments (current)
 
$
25,700

 
$
57,665

 
$
—

 
$
—

 
 
 
 
$
25,700

 
$
57,665

 
$
—

 
$
—


Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet
(In thousands)
 
September 30,
2019
 
December 31,
2018
Derivative assets
 
 

 
 

Gross amounts of recognized assets
 
$
25,700

 
$
60,105

Gross amounts offset in the statement of financial position
 
—

 
(2,440
)
Net amounts of assets presented in the statement of financial position
 
25,700

 
57,665

Gross amounts of financial instruments not offset in the statement of financial position
 
—

 
—

Net amount
 
$
25,700

 
$
57,665

 
 
 
 
 
Derivative liabilities
 
 

 
 

Gross amounts of recognized liabilities
 
$
—

 
$
2,440

Gross amounts offset in the statement of financial position
 
—

 
(2,440
)
Net amounts of liabilities presented in the statement of financial position
 
—

 
—

Gross amounts of financial instruments not offset in the statement of financial position
 
—

 
—

Net amount
 
$
—

 
$
—


Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Cash received (paid) on settlement of derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
$
46,555

 
$
(41
)
 
$
114,931

 
$
(20,354
)
Non-cash gain (loss) on derivative instruments
 
 

 
 

 
 

 
 

Gain (loss) on derivative instruments
 
(35,495
)
 
(3,496
)
 
(31,965
)
 
18,726

 
 
$
11,060

 
$
(3,537
)
 
$
82,966

 
$
(1,628
)

6. Fair Value Measurements
The Company follows the authoritative guidance for measuring fair value of assets and liabilities in its financial statements. For further information regarding the fair value hierarchy, refer to Note 1 of the Notes to the Consolidated Financial Statements in the Form 10-K.

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Table of Contents

Financial Assets and Liabilities
The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:
(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 September 30, 2019
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
17,080

 
$
—

 
$
—

 
$
17,080

Derivative instruments
 
—

 
16,542

 
9,158

 
25,700

 
 
$
17,080

 
$
16,542

 
$
9,158

 
$
42,780

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
25,791

 
$
—

 
$
—

 
$
25,791

Derivative instruments
 
—

 
—

 
—

 
—

 
 
$
25,791

 
$
—

 
$
—

 
$
25,791

(In thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
 
Balance at  
 December 31, 2018
Assets
 
 

 
 

 
 

 
 

Deferred compensation plan
 
$
14,699

 
$
—

 
$
—

 
$
14,699

Derivative instruments
 
—

 
35,689

 
24,416

 
60,105

 
 
$
14,699

 
$
35,689

 
$
24,416

 
$
74,804

Liabilities
 
 
 
 

 
 

 
 

Deferred compensation plan
 
$
25,780

 
$
—

 
$
—

 
$
25,780

Derivative instruments
 
—

 
—

 
2,440

 
2,440

 
 
$
25,780

 
$
—

 
$
2,440

 
$
28,220


The Company's investments associated with its deferred compensation plan consist of mutual funds and deferred shares of the Company's common stock that are publicly traded and for which market prices are readily available.
The derivative instruments were measured based on quotes from the Company's counterparties and/or internal models. Such quotes and models have been derived using an income approach that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward commodity prices, basis differentials, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. Estimates are derived from or verified using relevant NYMEX futures contracts and/or are compared to multiple quotes obtained from counterparties for reasonableness. The determination of the fair values presented above also incorporates a credit adjustment for non-performance risk. The Company measured the non-performance risk of its counterparties by reviewing credit default swap spreads for the various financial institutions with which it has derivative transactions while non-performance risk of the Company is evaluated using a market credit spread provided by the Company's bank. The Company has not incurred any losses related to non-performance risk of its counterparties and does not anticipate any material impact on its financial results due to non-performance by third parties.
The most significant unobservable inputs relative to the Company's Level 3 derivative contracts are basis differentials. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties' valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

11
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The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy:
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
Balance at beginning of period
 
$
21,976

 
$
(28,398
)
Total gain (loss) included in earnings
 
24,931

 
6,333

Settlement (gain) loss
 
(37,749
)
 
17,114

Balance at end of period
 
$
9,158

 
$
(4,951
)
 
 
 
 
 
Change in unrealized gains (losses) relating to assets and liabilities still held at the end of the period
 
$
7,388

 
$
(6,685
)

There were no transfers between Level 1, Level 2 and Level 3 fair value measurements for the nine months ended September 30, 2019 and 2018.
Non-Financial Assets and Liabilities
The Company discloses or recognizes its non-financial assets and liabilities, such as impairments or acquisitions, at fair value on a nonrecurring basis. As none of the Company’s other non-financial assets and liabilities were measured at fair value as of September 30, 2019, additional disclosures were not required.
The estimated fair value of the Company’s asset retirement obligations at inception is determined by utilizing the income approach by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state to the undiscounted expected abandonment cash flows. Given the unobservable nature of the inputs, the measurement of the asset retirement obligations was classified as Level 3 in the fair value hierarchy.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments. Cash and cash equivalents are classified as Level 1 in the fair value hierarchy and the remaining financial instruments are classified as Level 2.
The Company uses available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount the Company would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is the Company’s default or repayment risk. The credit spread (premium or discount) is determined by comparing the Company’s senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes is based on interest rates currently available to the Company. The Company’s debt is valued using an income approach and classified as Level 3 in the fair value hierarchy.
The carrying amount and fair value of debt is as follows:
 
 
September 30, 2019
 
December 31, 2018
(In thousands)
 
Carrying
Amount
 
Estimated Fair
Value
 
Carrying
Amount
 
Estimated Fair
Value
Long-term debt
 
$
1,219,790

 
$
1,258,674

 
$
1,226,104

 
$
1,202,994

Current maturities
 
(87,000
)
 
(89,210
)
 
—

 
—

Long-term debt, excluding current maturities
 
$
1,132,790

 
$
1,169,464

 
$
1,226,104

 
$
1,202,994




12
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7. Asset Retirement Obligations
Activity related to the Company’s asset retirement obligations is as follows:
(In thousands)
 
Nine Months Ended 
 September 30, 2019
Balance at beginning of period(1)
 
$
51,622

Liabilities incurred
 
4,776

Liabilities settled
 
(1,232
)
Liabilities divested
 
(187
)
Accretion expense
 
2,489

Balance at end of period(2)
 
$
57,468

_______________________________________________________________________________
(1)
Includes $1.0 million of current asset retirement obligations included in accrued liabilities at December 31, 2018.
(2)
Includes $0.5 million of current asset retirement obligations included in accrued liabilities at September 30, 2019.
8. Commitments and Contingencies
Contractual Obligations
The Company has various contractual obligations in the normal course of its operations. There have been no material changes to the Company’s contractual obligations described under “Transportation and Gathering Agreements” as disclosed in Note 9 of the Notes to Consolidated Financial Statements in the Form 10-K.
Lease Commitments (Topic 840)
Future minimum rental commitments under non-cancelable leases in effect at December 31, 2018 are as follows:
(In thousands)
 
2019
$
5,571

2020
5,684

2021
4,777

2022
1,659

2023
1,691

Thereafter
2,852

 
$
22,234



The table above was prepared under the guidance of Topic 840. As discussed in Note 1 above, the Company adopted the guidance of Topic 842 effective January 1, 2019.
Leases (Topic 842)
The Company determines if an arrangement is, or contains, a lease at inception based on whether that contract conveys the right to control the use of an identified asset in exchange for consideration for a period of time. Operating leases are included in operating lease right-of-use assets (ROU assets) and operating lease liabilities (current and noncurrent) on the Condensed Consolidated Balance Sheet. The Company does not have any finance leases at September 30, 2019.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of minimum lease payments over the lease term. Most leases do not provide an implicit interest rate; therefore, the Company used its incremental borrowing rate based on the information available at the inception date to determine the present value of the lease payments. Lease terms include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease cost for lease payments is recognized on a straight-line basis over the lease term. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable lease payments are not included in ROU assets and lease liabilities.
For all operating leases, lease and non-lease components are accounted for as a single lease component.

13
Table of Contents

The Company has operating leases for office space, drilling rig commitments, surface use agreements, compressor services and other leases. The leases have remaining terms ranging from two months to 26.3 years, including options to extend leases that the Company is reasonably certain to exercise. During the nine months ended September 30, 2019, the Company recognized operating lease cost and variable lease cost of $9.0 million and $3.7 million, respectively.
Short-term leases. The Company leases drilling rigs, fracturing and other equipment under lease terms ranging from 30 days to one year. Lease cost of $224.0 million was recognized on short-term leases during the nine months ended September 30, 2019. Certain lease costs are capitalized and included in Properties and equipment, net in the Condensed Consolidated Balance Sheet because they relate to drilling and completion activities, while other costs are expensed because they relate to production and administrative activities.
As of September 30, 2019, the Company’s future undiscounted minimum cash payment obligations for its operating lease liabilities are as follows:
(In thousands)
 
Year Ending December 31,
2019 (excluding the nine months ended September 30, 2019)
 
$
2,419

2020
 
4,819

2021
 
4,755

2022
 
4,577

2023
 
4,613

Thereafter
 
29,824

Total undiscounted lease payments
 
51,007

Present value adjustment
 
(13,401
)
Net operating lease liabilities
 
$
37,606


Supplemental cash flow information related to leases was as follows:
(In thousands)
 
Three Months Ended 
 September 30, 2019
 
Nine Months Ended 
 September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
$
1,149

 
$
3,395

Investing cash flows from operating leases
 
$
1,831

 
$
5,433



Information regarding the weighted-average remaining lease term and the weighted-average discount rate for operating leases is summarized below:
 
 
September 30, 2019
Weighted-average remaining lease term (in years)
 
 
Operating leases
 
11.9

Weighted-average discount rate
 
 
Operating leases
 
5.0
%


Legal Matters
The Company is a defendant in various legal proceedings arising in the normal course of business. All known liabilities are accrued when management determines they are probable based on its best estimate of the potential loss. While the outcome and impact of these legal proceedings on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings will not have a material effect on the Company’s financial position, results of operations or cash flows.
Contingency Reserves. When deemed necessary, the Company establishes reserves for certain legal proceedings. The establishment of a reserve is based on an estimation process that includes the advice of legal counsel and subjective judgment of management. While management believes these reserves to be adequate, it is reasonably possible that the Company could incur additional losses with respect to those matters for which reserves have been established. The Company believes that any

14
Table of Contents

such amount above the amounts accrued would not be material to the Condensed Consolidated Financial Statements. Future changes in facts and circumstances not currently foreseeable could result in the actual liability exceeding the estimated ranges of loss and amounts accrued.
9. Revenue Recognition
Disaggregation of Revenue
The following table presents revenues disaggregated by product:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
OPERATING REVENUES
 
 
 
 
 
 
 
 
   Natural gas
 
$
418,133

 
$
440,835

 
$
1,521,789

 
$
1,217,603

   Crude oil and condensate
 
—

 
—

 
—

 
48,722

   Brokered natural gas
 
—

 
105,849

 
—

 
203,375

   Other
 
(82
)
 
2,026

 
154

 
3,775

Total revenue from contracts with customers
 
418,051

 
548,710

 
1,521,943

 
1,473,475

   Gain (loss) on derivative instruments
 
11,060

 
(3,537
)
 
82,966

 
(1,628
)
 
 
$
429,111

 
$
545,173

 
$
1,604,909

 
$
1,471,847


All of the Company’s revenues from contracts with customers represent products transferred at a point in time as control is transferred to the customer and generated in the United States of America.
Transaction Price Allocated to Remaining Performance Obligations
A significant number of the Company’s product sales contracts are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient exempting the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
As of September 30, 2019, the Company has $9.7 billion of unsatisfied performance obligations related to natural gas sales that have a fixed pricing component and a contract term greater than one year. The Company expects to recognize these obligations over periods ranging from four to 19 years.
Contract Balances
Receivables from contracts with customers are recorded when the right to consideration becomes unconditional, generally when control of the product has been transferred to the customer. Receivables from contracts with customers were $159.2 million and $363.0 million as of September 30, 2019 and December 31, 2018, respectively, and are reported in accounts receivable, net on the Condensed Consolidated Balance Sheet. The Company currently has no assets or liabilities related to its revenue contracts, including no upfront payments or rights to deficiency payments.
10. Capital Stock
Treasury Stock
In July 2019, the Board of Directors authorized an increase of 25.0 million shares to the Company’s share repurchase program. During the first nine months of 2019, the Company repurchased 15.5 million shares for a total cost of $316.1 million. As of September 30, 2019, 21.0 million shares were available for repurchase under the share repurchase program.
Dividends
In April 2019, the Board of Directors approved an increase in the quarterly dividend on the Company's common stock from $0.07 per share to $0.09 per share. In October 2019, the Board of Directors approved an additional increase in the quarterly dividend on the Company's common stock from $0.09 per share to $0.10 per share.
11. Stock-based Compensation
General
The Company grants certain stock-based compensation awards, including restricted stock awards, restricted stock units and performance share awards. Stock-based compensation expense associated with these awards was $2.1 million and $6.5 million in the third quarter of 2019 and 2018, respectively, and $24.0 million and $17.6 million during the first nine months of

15
Table of Contents

2019 and 2018, respectively. Stock-based compensation expense is included in general and administrative expense in the Condensed Consolidated Statement of Operations.
For the first nine months of 2019, the Company recorded a decrease to tax expense of $0.9 million as a result of federal and state tax deductions exceeding the book compensation expense for employee stock-based compensation awards that vested during the period. For the first nine months of 2018, the Company recorded an increase to tax expense of $0.3 million 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.
Refer to Note 13 of the Notes to the Consolidated Financial Statements in the Form 10-K for further description of the various types of stock-based compensation awards and the applicable award terms.
Restricted Stock Units
During the first nine months of 2019, 80,675 restricted stock units were granted to non-employee directors of the Company with a weighted-average grant date value of $24.96 per unit. The fair value of these units is measured based on the closing stock price on grant date and compensation expense is recorded immediately. These units immediately vest and are issued when the director ceases to be a director of the Company.
Performance Share Awards
The performance period for the awards granted during the first nine months of 2019 commenced on January 1, 2019 and ends on December 31, 2021. The Company used an annual forfeiture rate assumption ranging from zero percent to seven percent for purposes of recognizing stock-based compensation expense for its performance share awards.
Performance Share Awards Based on Internal Performance Metrics
The fair value of performance share award grants based on internal performance metrics is based on the closing stock price on the grant date. Each performance share award represents the right to receive up to 100 percent of the award in shares of common stock. Based on the Company’s probability assessment at September 30, 2019, it is considered probable that the criteria for all performance awards based on internal metrics awards will be met.
Employee Performance Share Awards. During the first nine months of 2019, 526,730 Employee Performance Share Awards were granted at a grant date value of $24.95 per share. The performance metrics are set by the Company’s compensation committee and are based on the Company’s average production, average finding costs and average reserve replacement over a three-year performance period.
Hybrid Performance Share Awards. During the first nine months of 2019, 315,029 Hybrid Performance Share Awards were granted at a grant date value of $24.95 per share. The 2019 awards vest 25 percent on each of the first and second anniversary dates and 50 percent on the third anniversary, provided that the Company has $100 million or more of operating cash flow for the year preceding the vesting date, as set by the Company’s compensation committee. If the Company does not meet the performance metric for the applicable period, then the portion of the performance shares that would have been issued on that anniversary date will be forfeited.
Performance Share Awards Based on Market Conditions
These awards have both an equity and liability component, with the right to receive up to the first 100 percent of the award in shares of common stock and the right to receive up to an additional 100 percent of the value of the award in excess of the equity component in cash. The equity portion of these awards is valued on the grant date and is not marked to market, while the liability portion of the awards is valued as of the end of each reporting period on a mark-to-market basis. The Company calculates the fair value of the equity and liability portions of the awards using a Monte Carlo simulation model.
TSR Performance Share Awards. During the first nine months of 2019, 536,673 TSR Performance Share Awards were granted and are earned, or not earned, based on the comparative performance of the Company’s common stock measured against a predetermined group of companies in the Company’s peer group over a three-year performance period.

16
Table of Contents

The following assumptions were used to determine the grant date fair value of the equity component (February 19, 2019) and the period-end fair value of the liability component of the TSR Performance Share Awards:
 
 
Grant Date
 
September 30, 2019
Fair value per performance share award
 
$
20.63

 
$7.92-$16.23
Assumptions:
 
 

 
 
     Stock price volatility
 
31.3
%
 
29.0%-37.1%
     Risk free rate of return
 
2.46
%
 
1.61%-1.87%

12. Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS is similarly calculated except that the common shares outstanding for the period is increased using the treasury stock method to reflect the potential dilution that could occur if outstanding stock awards were vested at the end of the applicable period. Anti-dilutive shares represent potentially dilutive securities that are excluded from the computation of diluted income or loss per share as their impact would be anti-dilutive.
The following is a calculation of basic and diluted weighted-average shares outstanding:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Weighted-average shares - basic
 
412,456

 
440,772

 
419,199

 
450,445

Dilution effect of stock awards at end of period
 
2,006

 
2,338

 
1,902

 
1,868

Weighted-average shares - diluted
 
414,462

 
443,110

 
421,101

 
452,313


The following is a calculation of weighted-average shares excluded from diluted EPS due to the anti-dilutive effect:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Weighted-average stock awards excluded from diluted EPS due to the anti-dilutive effect calculated using the treasury stock method
 
484

 
1

 
633

 
1



17
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13. Additional Balance Sheet Information
Certain balance sheet amounts are comprised of the following:
(In thousands)
 
September 30,
2019
 
December 31,
2018
Accounts receivable, net
 
 

 
 

Trade accounts
 
$
159,167

 
$
362,973

Joint interest accounts
 
393

 
101

Other accounts
 
863

 
567

 
 
160,423

 
363,641

Allowance for doubtful accounts
 
(1,184
)
 
(1,238
)
 
 
$
159,239

 
$
362,403

Other assets
 
 

 
 

Deferred compensation plan
 
$
17,080

 
$
14,699

Debt issuance costs
 
9,450

 
4,572

Income taxes receivable
 
—

 
8,165

Operating lease right-of-use assets
 
37,715

 
—

Other accounts
 
74

 
61

 
 
$
64,319

 
$
27,497

Accounts payable
 
 

 
 

Trade accounts
 
$
29,157

 
$
30,033

Royalty and other owners
 
30,242

 
61,507

Accrued transportation
 
50,795

 
50,540

Accrued capital costs
 
44,643

 
43,207

Taxes other than income
 
13,105

 
19,824

Income taxes payable
 
—

 
1,134

Other accounts
 
4,790

 
35,694

 
 
$
172,732

 
$
241,939

Accrued liabilities
 
 

 
 

Employee benefits
 
$
18,411

 
$
21,761

Taxes other than income
 
3,660

 
1,472

Operating lease liabilities
 
4,280

 
—

Asset retirement obligations
 
500

 
1,000

Other accounts
 
929

 
994

 
 
$
27,780

 
$
25,227

Other liabilities
 
 

 
 

Deferred compensation plan
 
$
25,791

 
$
25,780

Operating lease liabilities
 
33,326

 
—

Other accounts
 
8,529

 
34,391

 
 
$
67,646

 
$
60,171



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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following review of operations for the three and nine month periods ended September 30, 2019 and 2018 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 the Cabot Oil & Gas Corporation Annual Report on Form 10-K for the year ended December 31, 2018 (Form 10-K).
OVERVIEW
Financial and Operating Overview
Financial and operating results for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 are as follows:
•
Natural gas production increased 115.7 Bcf, or 22 percent, from 523.6 Bcf in 2018 to 639.3 Bcf in 2019, as a result of drilling and completion activities in Pennsylvania.
•
Equivalent production increased 110.7 Bcfe, or 21 percent, from 528.6 Bcfe, or 1,936.4 Mmcfe per day, in 2018 to 639.3 Bcfe, or 2,341.8 Mmcfe per day, in 2019. The increase is primarily due to drilling and completion activities in Pennsylvania, partially offset by the sale of our Eagle Ford Shale assets in south Texas in February 2018.
•
Average realized natural gas price was $2.56 per Mcf, 10 percent higher than the $2.32 per Mcf realized in the comparable period of the prior year.
•
Total capital expenditures were $622.1 million compared to $593.1 million in the comparable period of the prior year.
•
Drilled 71 gross wells (71.0 net) with a success rate of 100 percent compared to 60 gross wells (60.0 net) with a success rate of 91.7 percent for the comparable period of the prior year.
•
Completed 71 gross wells (71.0 net) in 2019 compared to 61 gross wells (61.0 net) in 2018.
•
Average rig count during 2019 was approximately 3.1 rigs in the Marcellus Shale, compared to an average rig count in the Marcellus Shale of approximately 3.3 rigs and approximately 0.7 rigs in other areas during 2018.
•
Repurchased 15.5 million shares of our common stock for a total cost of $316.1 million in 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. In addition, our realized prices are further impacted by our hedging activities. 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. We expect commodity prices to remain volatile. In addition to production volumes and commodity prices, finding and developing sufficient amounts of natural gas and crude oil reserves at economical costs are critical to our long-term success. For information about the impact of realized commodity prices on our revenues, refer to “Results of Operations” below.
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.
Commodity prices have been and are expected to remain volatile. We believe that we are well-positioned to manage the challenges presented in a volatile commodity pricing environment 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.

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•
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.
While we are unable to predict future commodity prices, in the event that commodity prices significantly decline, management would test the recoverability of the carrying value of its oil and gas properties and, if necessary, record an impairment charge.
Outlook
Our 2019 capital program is expected to be approximately $800.0 million to $820.0 million. We expect to fund these expenditures with our cash on hand, operating cash flow and, if required, borrowings under our revolving credit facility.
In 2018, we drilled 97 gross wells (95.1 net) and completed 94 gross wells (93.0 net), of which 27 gross wells (27.0 net) were drilled but uncompleted in prior years. For the full year of 2019, our capital program will focus on the Marcellus Shale, where we expect to drill and complete approximately 90.0 net wells and place approximately 90 net wells on production. We will continue to assess the natural gas environment along with our liquidity position and may increase or decrease our capital expenditures accordingly.
Financial Condition
Capital Resources and Liquidity
Our primary sources of cash for the nine months ended September 30, 2019 were from the sale of natural gas production. These cash flows were used to fund our capital expenditures, interest payments on debt, payment of dividends, repurchases of shares of common stock and contributions to our equity method investments. See below for additional discussion and analysis of cash flow.
On April 22, 2019, we entered into a second amended and restated credit agreement (revolving credit facility) . 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 of September 30, 2019, 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.
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.
At September 30, 2019, we were in compliance with all restrictive financial covenants for both the revolving credit facility and senior notes. See 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:
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
Cash flows provided by operating activities
 
$
1,182,811

 
$
788,852

Cash flows used in investing activities
 
(625,616
)
 
(44,844
)
Cash flows used in financing activities
 
(477,166
)
 
(907,978
)
Net increase (decrease) in cash and cash equivalents
 
$
80,029

 
$
(163,970
)

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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 and crude oil, pipeline infrastructure constraints, basis differentials, inventory storage levels and seasonal influences. 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. At September 30, 2019 and December 31, 2018, we had a working capital surplus of $126.9 million and $257.3 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 nine months of 2019 increased by $394.0 million compared to the first nine months of 2018. This increase was primarily due to higher operating revenues and favorable changes in working capital, partially offset by higher operating expenses. The increase in operating revenues was primarily due to higher equivalent production and higher realized natural gas prices. Average realized natural gas prices increased by 10 percent for the first nine months of 2019 compared to the first nine months of 2018. Equivalent production increased by 21 percent for the first nine months of 2019 compared to the first nine months of 2018 due to higher natural gas production in the Marcellus Shale.
See “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 increased by $580.8 million for the first nine months of 2019 compared to the first nine months of 2018. The increase was due to $673.1 million lower proceeds from the sale of assets. This increase was partially offset by $26.8 million lower capital expenditures and $63.9 million lower capital contributions associated with our equity method investments.
Financing Activities. Cash flows used in financing activities decreased by $430.8 million for the first nine months of 2019 compared to the first nine months of 2018. This decrease was primarily due to $234.3 million of lower repurchases of our common stock in 2019 and $230.0 million lower net repayments of debt primarily related to maturities of certain of our senior notes during 2018. This decrease was partially offset by $23.5 million higher dividend payments related to an increase in our dividend rate from $0.18 per share in the first nine months of 2018 to $0.25 per share in the first nine months of 2019, a $7.4 million increase in debt issuance costs related to amending our revolving credit facility in early 2019 and $2.5 million higher tax withholdings on vesting stock awards. Treasury stock repurchases for the nine months ended September 30, 2019 include $31.4 million of share repurchases that were accrued in 2018 and paid in 2019.
Capitalization
Information about our capitalization is as follows:
(In thousands)
 
September 30,
2019
 
December 31,
2018
Debt (1)
 
$
1,219,790

 
$
1,226,104

Stockholders' equity
 
2,213,576

 
2,088,159

Total capitalization
 
$
3,433,366

 
$
3,314,263

Debt to total capitalization
 
36
%
 
37
%
Cash and cash equivalents
 
$
82,316

 
$
2,287

_______________________________________________________________________________
(1)
Includes $87.0 million of current portion of long-term debt at September 30, 2019. Includes $7.0 million of borrowings outstanding under our revolving credit facility as of December 31, 2018.
During the first nine months of 2019 and 2018, we repurchased 15.5 million shares of our common stock for $316.1 million and 27.1 million shares of our common stock for $644.2 million, respectively. During the first nine months of 2019 and 2018, we paid dividends of $104.7 million ($0.25 per share) and $81.2 million ($0.18 per share), respectively, on our common stock.

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In April 2019, the Board of Directors approved an increase in the quarterly dividend on our common stock from $0.07 per share to $0.09 per share. In October 2019, the Board of Directors approved an additional increase in the quarterly dividend on our common stock from $0.09 per share to $0.10 per share.
Capital and Exploration Expenditures
On an annual basis, we generally fund most of our capital expenditures, excluding any significant property acquisitions, with 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:
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
Capital expenditures
 
 

 
 

Drilling and facilities
 
$
605,938

 
$
551,351

Leasehold acquisitions
 
5,261

 
27,487

Other
 
10,917

 
14,260

 
 
622,116

 
593,098

Exploration expenditures(1)
 
15,029

 
68,166

 
 
$
637,145

 
$
661,264

 
_______________________________________________________________________________
(1)
Exploratory dry hole expenditures included in exploration expenditures for the first nine months of 2019 were not significant. Exploration expenditures include $56.4 million of exploratory dry hole expenditures for the first nine months of 2018.
For the full year of 2019, our capital program will focus on the Marcellus Shale, where we expect to drill and complete approximately 90.0 net wells and place approximately 90 net wells on production. In 2019, our drilling program includes approximately $800.0 million to $820.0 million in total capital expenditures compared to $816.1 million in 2018. See “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 in the 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. See 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.

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Results of Operations
Third Quarters of 2019 and 2018 Compared
We reported net income in the third quarter of 2019 of $90.4 million, or $0.22 per share, compared to net income of $122.3 million, or $0.28 per share, in the third quarter of 2018. The decrease in net income was primarily due to lower operating revenues and gain on sale of assets, partially offset by lower operating expenses and 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 September 30,
 
Variance
(In thousands)
 
2019
 
2018
 
Amount
 
Percent
Operating Revenues
 
 
 
 
 
 
 
 
   Natural gas
 
$
418,133

 
$
440,835

 
$
(22,702
)
 
(5
)%
   Gain (loss) on derivative instruments
 
11,060

 
(3,537
)
 
14,597

 
413
 %
   Brokered natural gas
 
—

 
105,849

 
(105,849
)
 
(100
)%
   Other
 
(82
)
 
2,026

 
(2,108
)
 
(104
)%
 
 
$
429,111

 
$
545,173

 
$
(116,062
)
 
(21
)%
 
 
Three Months Ended September 30,
 
Variance
 
Increase
(Decrease)
(In thousands)
 
 
2019
 
2018
 
Amount
 
Percent
 
Price Variances
 
 

 
 

 
 

 
 

 
 

Natural gas
 
$
1.89

 
$
2.36

 
$
(0.47
)
 
(20
)%
 
$
(103,414
)
Volume Variances
 
 

 
 

 
 

 
 

 
 

Natural gas (Bcf)
 
220.7

 
186.5

 
34.2

 
18
 %
 
$
80,712

Total
 
 

 
 

 
 

 
 

 
$
(22,702
)
Natural Gas Revenues
The decrease in natural gas revenues of $22.7 million was due to lower natural gas prices, partially offset by higher production. The increase in production was a result of an increase in our drilling and completion activities in Pennsylvania.
Impact of Derivative Instruments on Operating Revenues
 
 
Three Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
Cash received (paid) on settlement of derivative instruments
 
 

 
 

Gain (loss) on derivative instruments
 
$
46,555

 
$
(41
)
Non-cash gain (loss) on derivative instruments
 
 

 
 

Gain (loss) on derivative instruments
 
(35,495
)
 
(3,496
)
 
 
$
11,060

 
$
(3,537
)
Brokered Natural Gas
Brokered natural gas decreased $105.8 million. There was no brokered natural gas activity in the current period.

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Operating and Other Expenses
 
 
Three Months Ended September 30,
 
Variance
(In thousands)
 
2019
 
2018
 
Amount
 
Percent
Operating and Other Expenses
 
 

 
 

 
 

 
 

   Direct operations
 
$
19,181

 
$
17,030

 
$
2,151

 
13
 %
   Transportation and gathering
 
145,681

 
129,534

 
16,147

 
12
 %
   Brokered natural gas
 
—

 
93,405

 
(93,405
)
 
(100
)%
   Taxes other than income
 
4,607

 
2,852

 
1,755

 
62
 %
   Exploration
 
4,481

 
10,049

 
(5,568
)
 
(55
)%
   Depreciation, depletion and amortization
 
110,889

 
121,172

 
(10,283
)
 
(8
)%
   General and administrative
 
18,391

 
20,724

 
(2,333
)
 
(11
)%
 
 
$
303,230

 
$
394,766

 
$
(91,536
)
 
(23
)%
 
 
 
 
 
 
 
 
 
Earnings (loss) on equity method investments
 
$
3,860

 
$
(11
)
 
$
3,871

 
35,191
 %
Gain on sale of assets
 
36

 
25,655

 
(25,619
)
 
(100
)%
Interest expense, net
 
13,554

 
14,191

 
(637
)
 
(4
)%
Other expense
 
143

 
115

 
28

 
24
 %
Income tax expense
 
25,722

 
39,408

 
(13,686
)
 
(35
)%
Total costs and expenses from operations decreased by $91.5 million, or 23 percent, in the third quarter of 2019 compared to the same period of 2018. The primary reasons for this fluctuation are as follows:
•
Direct operations increased $2.2 million primarily driven by higher Marcellus Shale production.
•
Transportation and gathering increased $16.1 million due to higher Marcellus Shale production.
•
Brokered natural gas decreased $93.4 million. There was no brokered natural gas activity in the current period.
•
Taxes other than income increased $1.8 million primarily due to $2.0 million higher drilling impact fees as a result of an increase in drilling activity in Pennsylvania.
•
Exploration decreased $5.6 million due to a decrease in exploratory dry hole costs of $5.3 million. The exploratory dry hole costs in 2018 were related to our activities in west Texas.
•
Depreciation, depletion and amortization decreased $10.3 million primarily due to lower amortization of unproved properties of $16.5 million, partially offset by higher DD&A of $6.1 million in the third quarter of 2019. The increase in DD&A was primarily due to an increase of $15.9 million related to higher production volumes in the Marcellus Shale, partially offset by a $9.8 million decrease due to a lower DD&A rate of $0.42 per Mcfe for the third quarter of 2019 compared to $0.46 per Mcfe for the third quarter of 2018. The lower DD&A rate was due to positive reserve revisions related to our year end reserve estimation process. Amortization of unproved properties decreased due to lower amortization rates as a result of a decrease in exploratory activities.
•
General and administrative decreased $2.3 million primarily due to $4.4 million lower stock-based compensation expense associated with certain of our market-based performance awards in the third quarter of 2019. This decrease was partially offset by changes in other general and administrative expenses that were not individually significant.
Earnings (Loss) on Equity Method Investments
Earnings on equity method investments increased $3.9 million as a result of an increase in our proportionate share of net income from our equity method investments during the third quarter of 2019 compared to the third quarter of 2018 primarily from our investment in Meade, which commenced operations in late 2018.
Gain on Sale of Assets
There were no significant sales of assets in the third quarter of 2019. During the third quarter of 2018, we recognized a net aggregate gain of $25.7 million primarily due to the sale of certain of our oil and gas assets in east Texas.

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Interest Expense, net
Interest expense, net decreased $0.6 million due to $2.2 million lower interest expense resulting from the repayment of $237.0 million of our 6.51% weighted-average senior notes which matured in July 2018 and $67.0 million of our 9.78% senior notes which matured in December 2018 and a decrease in commitment fees on our revolving credit facility of $0.9 million. These decreases are offset by a decrease in reversals of interest expense related to certain income tax reserves of $1.9 million and a $1.0 million decrease in interest income.
Income Tax Expense
Income tax expense decreased $13.7 million due to lower pre-tax income and a lower effective tax rate. The effective tax rates for the third quarter of 2019 and 2018 were 22.2 percent and 24.4 percent, respectively. The effective tax rate was lower for the third quarter of 2019 due to the impact of non-recurring discrete items recorded during the third quarter of 2019 as compared to the third quarter of 2018.
First Nine Months of 2019 and 2018 Compared
We reported net income in the first nine months of 2019 of $534.1 million, or $1.27 per share, compared to net income of $282.0 million, or $0.63 per share, in the first nine months of 2018. The increase in net income was primarily due to higher operating revenues and earnings on equity method investments and lower operating expenses, interest expense and loss on sale of assets, partially offset by higher 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.
 
 
Nine Months Ended September 30,
 
Variance
(In thousands)
 
2019
 
2018
 
Amount
 
Percent
Operating Revenues
 
 
 
 
 
 
 
 
   Natural gas
 
$
1,521,789

 
$
1,217,603

 
$
304,186

 
25
 %
   Crude oil and condensate
 
—

 
48,722

 
(48,722
)
 
(100
)%
   Gain (loss) on derivative instruments
 
82,966

 
(1,628
)
 
84,594

 
5,196
 %
   Brokered natural gas
 
—

 
203,375

 
(203,375
)
 
(100
)%
   Other
 
154

 
3,775

 
(3,621
)
 
(96
)%
 
 
$
1,604,909

 
$
1,471,847

 
$
133,062

 
9
 %
 
 
Nine Months Ended September 30,
 
Variance
 
Increase
(Decrease)
(In thousands)
 
 
2019
 
2018
 
Amount
 
Percent
 
Price Variances
 
 

 
 

 
 

 
 

 
 

Natural gas
 
$
2.38

 
$
2.33

 
$
0.05

 
2
 %
 
$
34,605

Crude oil and condensate
 
$
—

 
$
64.68

 
$
(64.68
)
 
(100
)%
 
—

Total
 
 

 
 

 
 

 
 

 
$
34,605

Volume Variances
 
 

 
 

 
 

 
 

 
 

Natural gas (Bcf)
 
639.3

 
523.6

 
115.7

 
22
 %
 
$
269,581

Crude oil and condensate (Mbbl)
 
—

 
754

 
(754
)
 
(100
)%
 
(48,722
)
Total
 
 

 
 

 
 

 
 

 
$
220,859

Natural Gas Revenues
The increase in natural gas revenues of $304.2 million was due to an increase in production and higher natural gas prices. The increase in production was a result of an increase in our drilling and completion activities in Pennsylvania.
Crude Oil and Condensate Revenues
The decrease in crude oil and condensate revenues of $48.7 million was primarily due to the sale of our Eagle Ford Shale assets in February 2018.

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Impact of Derivative Instruments on Operating Revenues
 
 
Nine Months Ended 
 September 30,
(In thousands)
 
2019
 
2018
Cash received (paid) on settlement of derivative instruments
 
 

 
 

Gain (loss) on derivative instruments
 
$
114,931

 
$
(20,354
)
Non-cash gain (loss) on derivative instruments
 
 
 
 
Gain (loss) on derivative instruments
 
(31,965
)
 
18,726

 
 
$
82,966

 
$
(1,628
)
Brokered Natural Gas
Brokered natural gas decreased $203.4 million. There was no brokered natural gas activity in the current period.
Operating and Other Expenses
 
 
Nine Months Ended September 30,
 
Variance
(In thousands)
 
2019
 
2018
 
Amount
 
Percent
Operating and Other Expenses
 
 

 
 

 
 

 
 

   Direct operations
 
$
55,608

 
$
52,757

 
$
2,851

 
5
 %
   Transportation and gathering
 
424,703

 
355,848

 
68,855

 
19
 %
   Brokered natural gas
 
—

 
178,437

 
(178,437
)
 
(100
)%
   Taxes other than income
 
14,094

 
15,434

 
(1,340
)
 
(9
)%
   Exploration
 
15,029

 
68,166

 
(53,137
)
 
(78
)%
   Depreciation, depletion and amortization
 
299,294

 
288,210

 
11,084

 
4
 %
   General and administrative
 
72,370

 
66,013

 
6,357

 
10
 %
 
 
$
881,098

 
$
1,024,865

 
$
(143,767
)
 
(14
)%
 
 
 
 
 
 
 
 
 
Earnings (loss) on equity method investments
 
$
11,194

 
$
(1,009
)
 
$
12,203

 
1,209
 %
Loss on sale of assets
 
(1,464
)
 
(14,850
)
 
(13,386
)
 
(90
)%
Interest expense, net
 
40,302

 
57,577

 
(17,275
)
 
(30
)%
Other expense
 
430

 
347

 
83

 
24
 %
Income tax expense
 
158,679

 
91,201

 
67,478

 
74
 %
Total costs and expenses from operations decreased by $143.8 million, or 14 percent, in the first nine months of 2019 compared to the same period of 2018. The primary reasons for this fluctuation are as follows:
•
Direct operations increased $2.9 million primarily driven by $13.0 million higher operating costs due to higher Marcellus Shale production partially offset by lower operating costs of $10.2 million primarily as a result of the the sale of our Eagle Ford Shale assets in February 2018.
•
Transportation and gathering increased $68.9 million largely due to higher Marcellus Shale production.
•
Brokered natural gas decreased $178.4 million. There was no brokered natural gas activity in the current period.
•
Taxes other than income decreased $1.3 million primarily due to $2.4 million lower production taxes resulting from the sale of our Eagle Ford Shale assets in February 2018 partially offset by $1.5 million higher drilling impact fees due to increased drilling activity in Pennsylvania.
•
Exploration decreased $53.1 million due to a decrease in exploratory dry hole costs of $56.4 million, partially offset by an increase of $4.7 million in geological and geophysical expenses. The exploratory dry hole costs in 2018 were related to our activities in west Texas.
•
Depreciation, depletion and amortization increased $11.1 million primarily due to higher DD&A of $31.3 million, partially offset by lower amortization of unproved properties of $20.9 million. The increase in DD&A was primarily

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due to an increase of $49.8 million related to higher production volumes in the Marcellus Shale, partially offset by a decrease of $18.5 million related to a lower DD&A rate of $0.42 per Mcfe for the first nine months of 2019 compared to $0.45 per Mcfe for the first nine months of 2018. The lower DD&A rate was due to positive reserve revisions related to our year end reserve estimation process. Amortization of unproved properties decreased due to lower amortization rates as a result of a decrease in exploratory activities.
•
General and administrative increased $6.4 million primarily due to higher stock-based compensation expense of $6.3 million associated with certain of our market-based performance awards, $2.5 million of severance costs and $2.6 million of higher employee costs. These increases were partially offset by $6.3 million of lower professional services and legal fees. The remaining changes in other general and administrative expenses were not individually significant.
Earnings (Loss) on Equity Method Investments
Earnings on equity method investments increased $12.2 million as a result of an increase in our proportionate share of net income from our equity method investments in the first nine months of 2019 compared to the first nine months of 2018 primarily from our investment in Meade, which commenced operations in late 2018.
Gain (Loss) on Sale of Assets
There were no significant asset sales during the first nine months of 2019. During the first nine months of 2018, we recognized a net aggregate loss of $14.9 million primarily due to the sale of our Eagle Ford Shale assets, partially offset by a gain on the sale of oil and gas properties in east Texas.
Interest Expense, net
Interest expense, net decreased $17.3 million due to $13.0 million lower interest expense resulting from the repayment of $237.0 million of our 6.51% weighted-average senior notes which matured in July 2018 and $67.0 million of our 9.78% senior notes that matured in December 2018 and a $6.7 million decrease related to income tax reserves. These decreases are partially offset by a $3.2 million decrease in interest income.
Income Tax Expense
Income tax expense increased $67.5 million due to higher pre-tax income, partially offset by a lower effective tax rate. The effective tax rates for the first nine months of 2019 and 2018 were 22.9 percent and 24.4 percent, respectively. The effective tax rate was higher for the first nine months of 2018 due to an increase in the blended state statutory tax rate as a result of changes in our state apportionment factors attributable to the Eagle Ford Shale asset divestiture in February 2018. There were no significant apportionment changes recorded during the first nine months of 2019.
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, market factors, market prices (including geographic basis differentials) of natural gas and crude oil, results of future drilling and marketing activity, future production and costs, pipeline projects, legislative and regulatory initiatives, electronic, cyber or physical security breaches and other factors detailed herein and in our other Securities and Exchange Commission filings. See “Risk Factors” in Item 1A of the Form 10-K 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.
ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our primary market risk is exposure to natural gas prices. Realized prices are mainly driven by spot market prices for North American natural gas production, which can be volatile and unpredictable.
Derivative Instruments and Risk Management Activities
Our risk management strategy is designed to reduce the risk of commodity price volatility for our production in the natural gas markets through the use of financial commodity derivatives. A committee that consists of members of senior
management oversees our risk management activities. Our financial commodity derivatives generally cover a portion of our production and provide only partial price protection by limiting the benefit to us of increases in prices, while protecting us in the event of price declines. Further, if any of our counterparties defaulted, this protection might be limited as we might not receive the full benefit of our financial commodity derivatives. Please read the discussion below as well as Note 6 of the Notes to the Consolidated Financial Statements in our Form 10-K for a more detailed discussion of our derivative instruments.
Periodically, we enter into financial commodity derivatives including collar, swap and basis swap agreements, to protect against exposure to commodity price declines related to our natural gas production. Our credit agreement restricts our ability to enter into financial commodity derivatives other than to hedge or mitigate risks to which we have actual or projected exposure or as permitted under our risk management policies and not subjecting us to material speculative risks. All of our financial derivatives are used for risk management purposes and are not held for trading purposes. Under the collar agreements, if the index price rises above the ceiling price, we pay the counterparty. If the index price falls below the floor price, the counterparty pays us. Under the swap agreements, we receive a fixed price on a notional quantity of natural gas in exchange for paying a variable price based on a market-based index, such as the NYMEX natural gas futures.
As of September 30, 2019, we had the following outstanding financial commodity derivatives:
 
 
 
 
 
 
Swaps
 
Basis Swaps
 
Estimated 
Fair Value 
Asset (Liability)
(In thousands)
 
 
 
 
 
 
 
 
Type of Contract
 
Volume (Mmbtu)
 
Contract Period
 
Weighted-Average ($/Mmbtu)
 
Weighted-Average ($/Mmbtu)
 
Natural gas (IFERC TRANSCO Z6 non-NY)
 
2,760,000

 
Oct. 2019 - Dec. 2019
 
 
 
$
0.41

 
$
1,477

Natural gas (IFERC TRANSCO Z6 non-NY)
 
4,650,000

 
Oct. 2019
 
$
2.61

 
 
 
5,253

Natural gas (IFERC TRANSCO Leidy Line Receipts)
 
13,800,000

 
Oct. 2019 - Dec. 2019
 
 
 
$
(0.53
)
 
2,429

Natural gas (NYMEX)
 
10,850,000

 
Oct. 2019
 
$
2.85

 
 
 
4,553

Natural gas (NYMEX)
 
27,600,000

 
Oct. 2019 - Dec. 2019
 
$
2.86

 
 
 
11,993

 
 
 
 
 
 
 
 
 
 
$
25,705

The amounts set forth in the table above represent our total unrealized derivative position at September 30, 2019 and exclude the impact of non-performance risk. Non-performance risk is considered in the fair value of our derivative instruments that are recorded in our Condensed Consolidated Financial Statements and is primarily evaluated by reviewing credit default swap spreads for the various financial institutions with which we have derivative contracts, while our non-performance risk is evaluated using a market credit spread provided by one of our banks.
During the first nine months of 2019, natural gas basis swaps covered 47.7 Bcf, or seven percent, of natural gas production at an average price of $2.36 per Mcf. Natural gas swaps covered 184.2 Bcf, or 29 percent, of natural gas production at an average price of $3.39 per Mcf.
We are exposed to market risk on financial commodity derivative instruments to the extent of changes in market prices of natural gas. However, the market risk exposure on these derivative contracts is generally offset by the gain or loss recognized upon the ultimate sale of the commodity. Although notional contract amounts are used to express the volume of natural gas agreements, the amounts that can be subject to credit risk in the event of non-performance by third parties are substantially smaller. Our counterparties are primarily commercial banks and financial service institutions that management believes present minimal credit risk and our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty. We perform both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. We have not incurred any losses related to non-performance risk of our counterparties and we do not anticipate any material impact on our financial results due to non-performance by third parties. However, we cannot be certain that we will not experience such losses in the future.
The preceding paragraphs contain forward-looking information concerning future production and projected gains and losses, which may be impacted both by production and by changes in the future commodity prices. See “Forward-Looking Information” for further details.
Fair Value of Other Financial Instruments
The estimated fair value of other financial instruments is the amount at which the instrument could be exchanged currently between willing parties. The carrying amount reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents approximates fair value due to the short-term maturities of these instruments.

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We use available market data and valuation methodologies to estimate the fair value of debt. The fair value of debt is the estimated amount we would have to pay a third party to assume the debt, including a credit spread for the difference between the issue rate and the period end market rate. The credit spread is our default or repayment risk. The credit spread (premium or discount) is determined by comparing our senior notes and revolving credit facility to new issuances (secured and unsecured) and secondary trades of similar size and credit statistics for both public and private debt. The fair value of all senior notes and the revolving credit facility is based on interest rates currently available to us.
The carrying amount and fair value of debt is as follow:
 
 
September 30, 2019
 
December 31, 2018
(In thousands)
 
Carrying
Amount
 
Estimated Fair
Value
 
Carrying
Amount
 
Estimated Fair
Value
Long-term debt
 
$
1,219,790

 
$
1,258,674

 
$
1,226,104

 
$
1,202,994

Current maturities
 
(87,000
)
 
(89,210
)
 
—

 
—

Long-term debt, excluding current maturities
 
$
1,132,790

 
$
1,169,464

 
$
1,226,104

 
$
1,202,994

ITEM 4.    Controls and Procedures
As of September 30, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the Commission’s rules and forms, of information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
There were no changes in the Company's internal control over financial reporting that occurred during the third quarter of 2019 that have materially affected, or are reasonably likely to materially effect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.      Legal Proceedings
Legal Matters
The information set forth under the heading “Legal Matters” in Note 8 of the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q is incorporated by reference in response to this item.

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Environmental Matters
On June 17, 2019, we received two proposed Consent Order and Agreements (“CO&A”) from the Pennsylvania Department of Environmental Protection (PaDEP) relating to gas migration allegations in areas surrounding several wells owned and operated by us in Susquehanna County, Pennsylvania. The allegations relating to these wells were initially raised by residents in the area in March and June 2017, respectively, in the form of complaints about their drinking water supply. Since then, we have been engaged with the PaDEP in investigating the incidents and have performed appropriate remediation efforts, including the provision of alternative sources of drinking water to the affected residents.  We received Notices of Violation (“NOV”) from the PaDEP in June and November, 2017, respectively, for failure to prevent the migration of gas into fresh groundwater sources in the area surrounding these wells.  With regard to the June 2017 NOV, we believe these water quality complaints have been resolved, and we are working with the PaDEP to reach agreement on the disposition of this matter. The proposed CO&A is the culmination of this effort and, if finalized, would result in the payment of a civil monetary penalty in an amount likely to exceed $100,000, up to approximately $215,000. We will continue to work with the PaDEP to finalize the CO&A, and to bring this matter to a close. With regard to the November 2017 NOV, The proposed CO&A, if finalized as drafted, would require Cabot to submit a detailed written remediation plan, continue water sampling and other investigative measures and restore or replace affected water supplies and would result in the payment of a civil monetary penalty in an amount likely to exceed $100,000, up to approximately $355,000. We will continue to work with the PaDEP to finalize the CO&A, and to complete the ongoing investigation and remediation.
From time to time we receive notices of violation from governmental and regulatory authorities in areas in which we operate relating to alleged violations of environmental statutes or the rules and regulations promulgated thereunder. While we cannot predict with certainty whether these notices of violation will result in fines and/or penalties, if fines and/or penalties are imposed, they may result in monetary sanctions, individually or in the aggregate, in excess of $100,000.
ITEM 1A.    Risk Factors
For additional information about the risk factors that affect us, see Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2.     Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Our Board of Directors has authorized a share repurchase program under which we may purchase shares of common stock in the open market or in negotiated transactions. There is no expiration date associated with the authorization. In July 2019, our Board of Directors authorized an increase of 25.0 million shares to our share repurchase program. After this authorization, the total number of shares available for repurchase was 31.5 million shares. The shares included in the table below were purchased on the open market and were held as treasury stock as of September 30, 2019.
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
July 2019
 
4,200,000

 
$
19.22

 
4,200,000

 
27,299,362

August 2019
 
6,259,780

 
$
17.53

 
6,259,780

 
21,039,582

September 2019
 
6,900

 
$
16.99

 
6,900

 
21,032,682

Total
 
10,466,680

 
 
 
10,466,680

 
 

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ITEM 6.    Exhibits
Exhibit
Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
104
 
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CABOT OIL & GAS CORPORATION
 
(Registrant)
 
 
October 25, 2019
By:
/s/ DAN O. DINGES
 
 
Dan O. Dinges
 
 
Chairman, President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
October 25, 2019
By:
/s/ SCOTT C. SCHROEDER
 
 
Scott C. Schroeder
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
October 25, 2019
By:
/s/ TODD M. ROEMER
 
 
Todd M. Roemer
 
 
Vice President and Chief Accounting Officer
 
 
(Principal Accounting Officer)

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