"Ours is a fairly simple program," says Cabot Oil & Gas Corp. chairman, president and chief executive Dan O. Dinges. "We have a capital program funded by cash flow and asset sale proceeds allocated to the Marcellus shale in northeastern Pennsylvania and to the oil window of the Eagle Ford shale."

Houston-based Cabot is pumping virtually its entire capital budget into these two plays, which just happen to be two of the most economic resource plays in the U.S. today.

Cabot was among the first movers in the Marcellus, where it holds 200,000 acres in the dry-gas zone, mostly in prolific Susquehanna County. With a rate of return exceeding 100% at $5 natural gas, the company makes no apologies for its 96% gas weighting. It will invest 60% of its budget into the region in 2011. "Our Marcellus gas play competes with all of the best oil plays," Dinges says.

In fact, Cabot boasts seven of the top 10 producing wells in Pennsylvania. As of the beginning of August, its production from the Marcellus was a restricted 430 million cubic feet (MMcf) per day from 81 horizontal wells, plus a backlog of 40 wells drilled but waiting on completion. Ongoing infrastructure build-out will provide it with a total 1.2 billion cubic feet (Bcf) per day of firm capacity by year-end 2012.

Outside of the Marcellus, oil targets capture the remainder of Cabot's capital budget, with 40% aimed at the Eagle Ford shale in South Texas. Here, the company holds some 60,000 net acres in the oil window. Current activity is focused on its Buckhorn project in Frio County, with latest results averaging in excess of 700 barrels of oil per day on a 24-hour initial production rate. Again, returns are robust: 50% to 120% on estimated ultimate recoveries (EURs) of 400,000 to 600,000 barrels of oil per well.

Emerging oil plays are destined to gain traction and dollars in Cabot's portfolio. In particular, the company is optimistic about the Marmaton play in the Oklahoma and Texas panhandles, where it holds 32,000 acres, and the Heath in Wyoming, surpassing 100,000 acres.

Dinges, who holds a petroleum land management degree from the University of Texas, has been with Cabot since 2001 as president and chairman, and as CEO since 2002. For 20 years prior, he served with Samedan Oil Corp., a subsidiary of Noble Affiliates, now Noble Energy Inc. His role there largely concentrated on the company's offshore division.

Oil and Gas Investor recently visited with Dinges.

Cabot Oil & Gas chairman, president and chief executive Dan Dinges notes that the wells in Susquehanna County continue to exceed the company’s expectations. “We have clearly identified a sweet spot in the Marcellus.”

Investor Why are your wells some of the very best in the Marcellus?

Dinges The wells in Susquehanna continue to exceed our expectations. We have clearly identified a sweet spot in the Marcellus. Our initial thesis was the thickness of the Marcellus section coupled with the depth of burial should provide superior in-place reserves and production rates. To date, our data indicates that our thesis has proven true.

We have achieved a new one-day natural-gas-production high of 440 MMcf per day. Some of the wells contributing to this record production include five wells completed in the second quarter with 24-hour production rates between 21 MMcf and 28 MMcf per day.

Investor How have your well results improved?

Dinges Our 2010 program produced wells with a 10-billion-cubic-feet-equivalent (Bcfe) EUR. That's with a 3,600-foot lateral and 14 stages. Now, a typical average lateral length is 3,700 feet with 15 stages. We have seen an increase in our initial production by virtue of the additional stages.

Investor You have choked back some Marcellus wells. Is that because of a lack of pipeline take-away capacity, or is it more to do with managing the reservoir and getting a higher EUR?

Dinges Our curtailed wells are due entirely to the infrastructure dynamic in the area. Our team does a great job of managing our completion activity with our productive capacity. To effectively complete these wells, we want the fluid off the formation quickly. To accomplish this, we shut in producing wells to make room for newly completed wells. However, we are collecting data allowing us to evaluate the relationship between restricted initial production and ultimate EUR, but that analysis will take some time to arrive at a conclusion.

Investor What are you doing to increase takeaway capacity?

Dinges To remove this barrier, we entered into a long-term arrangement with Williams Field Services to construct the infrastructure throughout our acreage and gather our gas. By January 2013, the agreement with Williams will provide Cabot with some 1.2 Bcf per day of take-away capacity.

Investor How much production is choked back?

Dinges It is tough to say how much of our existing Marcellus production is constrained. Most recently, we brought on two new wells and increased the rates on our currently producing wells, which allowed us to fill, within a 24-hour period, an incremental 100 MMcf per day of additional infrastructure capacity we had just commissioned.

Investor Cabot has a backlog of more than 500 frac stages to be completed in the Marcellus. How many frac crews are dedicated to Cabot?

Dinges We currently have one frac crew dedicated to Cabot in the Marcellus. This crew is averaging 60 to 70 frac-stage completions per month. If you assume the midpoint at 65 stages per month, this equates to 52 wells completed annually on an average of 15 stages per well.

We also recently took advantage of a couple of frac crews that were down when a peer company had its evaluation process going on with a well in Bradford County. The displaced crew was looking for additional work, and we had projects ready to go. We picked up an additional 100 to 150 stages by utilizing those crews.

We could catch up fairly quickly by bringing in another frac crew, but with the number of wells that are being restrained, we don't have a sense of urgency with catching up with that number. We are only able to produce as much as the infrastructure will hold. As capacity becomes available, and as we get into later parts of 2012, I envision that we would work through some of the backlog with an additional frac crew.

Investor How is take-away capacity affecting your Marcellus drilling program?

Dinges Take-away capacity simply limits our timing for monetizing those investment dollars. We have five rigs running in the Marcellus. The wells are very prolific, and we've seen good consistencies. Our biggest constraint is that the take-away capacity limits our ability to place unlimited frac stages on production.

Looking at the amount of potential production we have restrained, and the number of wells that we're going to be adding to the queue with the existing five rigs, we're able to stay current with the debottlenecking process we have in place.

Investor How much additional capacity do you expect to flow through when the Springville line comes on later this year?

Dinges The Springville line is designed for an additional 300 MMcf per day. However, we would then reach the capacity constraints of our Lathrop and Teel compressor stations, which is about 550 MMcf per day total. That line allows additional capacity, but transfers the bottleneck back to the compressor stations. Some of that is affected by the meter size going into the Tennessee line.

It's a high-class problem. Once we have the next bottleneck taken care of, we're going to feel comfortable about being able to produce that excess capacity in a fairly good time frame.

Investor How are the economics shaping up for your Eagle Ford program?

Dinges As in any new shale play, our initial effort in the Eagle Ford has produced a fairly large delta regarding results as we implement different drilling and completion techniques. With that said, our results to date have exceeded our pre-drill expectations. The Eagle Ford offers the second-best rate-of-return projects in our portfolio at this time, making it an important effort going forward. It also gives us a natural hedge against the volatility of natural gas prices, as all of our acreage is in the oil window.

We have added a partner, EOG Resources Inc., through an area of mutual interest on an 18,000-plus-acre area of the Eagle Ford to best exploit this portion of our acreage. This is a heads-up deal with no promote where each party has a 50% working interest. Two wells are currently drilling. Cabot intends to participate, in total, in 25 to 30 net Eagle Ford wells in 2011.

Investor How important is this position to your forward plans?

Dinges We like to hedge the gas price with some liquids production. We have a fairly substantial investment of $250 million out of a $600-million program going to liquids production. That's a pretty good statement that it's important to our overall product mix.

Investor To what extent do you want to increase your oil production?

Dinges With the robust natural gas production profile coming from the Marcellus, Cabot's oil/gas mix will not change based on the investment in the Eagle Ford. We have no predetermined target mix; these are simply our best projects. However, with the percentage of our capital being allocated toward oil production, we do expect our liquids production to nearly double. Investor What more can you tell us about the Heath shale play? The Marmaton?

Dinges Both of these plays are emerging. We have one well completed in each with one of the wells producing and the other well in the early stages of flowing back.

There's not much industry information available in the Heath; just a couple of companies are gathering information through the drill bit. It is very early stage. We've drilled a very short lateral well to get an idea of what it might be able to do. The expectation is we will be able to produce oil at a rate that would yield a competitive return. We don't have enough information at this stage to be able to say how much capital we're going to allocate.

We're further along in the Marmaton. Cabot completed its first Marmaton well in Beaver County with a 24-hour rate of 592 barrels of oil and 325,000 cubic feet of gas per day for an equivalent total of 646 barrels. The well was drilled with a 4,000-foot lateral and completed with a 10-stage frac for around $4 million. It averaged 368 barrels plus 130,000 cubic feet per day for the first 30 days, and 320 barrels of oil and 189,000 cubic feet of gas per day for the first 60 days. It's a little early to discuss EURs, but based on early results, a range we could throw out would be an expectation of 175,000 to 225,000 barrels of oil equivalent.

Clearly, a 10-stage completed well with initial production competitive with the Eagle Ford play and at a lower cost is an attractive place to allocate capital. Our plan would be to move in another rig at some point in time.

Investor How does your Haynesville shale position fit into your forward plans?

Dinges We recently executed three different arrangements—two joint ventures and one outright sale—around our Haynesville acreage. These negotiated agreements afford Cabot the ability to HBP (hold by production) the acreage with no dollars invested in the near term. We will then evaluate the productive nature of each well and in 2013 may continue a development program on the acreage.

Investor What is your capital plan for 2012?

Dinges If you take the midpoint of our current guidance, which is about where we're producing right now, and hold that flat for 2012, at the current prices we should see a cash flow in the range of $850- to $950 million. We've asked our group to build out a program for 2012 of about $850 million. With that, we will allocate a higher percentage to the Marcellus and the remainder to the oil activity, whether the Eagle Ford or other areas we are currently looking at.

We are committed to a net investment program that approximates anticipated cash flow.

Investor Do you plan to use asset sales to boost capex?

Dinges Asset sale proceeds may help fund an increment above this. With our wealth of opportunities in northeastern Pennsylvania and our improved efficiencies and returns of our new liquids-rich ideas, we decided to monetize a portion of our Rocky Mountain legacy Green River Basin assets for $285 million and deploy some of those dollars toward additional drilling in both our north and south regions.

Essentially, we've monetized an asset not valued by the market. We'll be able to drill a few incremental Marcellus wells and replace the sold production as we expand our efforts into high-return areas. We've also gathered some capital by selling off some nonoperated interests in the Haynesville area.

Investor How will these funds be used?

Dinges We are likely to deliver a debt-reduction program after applying proceeds from the sales. We are evaluating adding $80 million to $100 million to our Marcellus program to drill 10 to 15 additional wells for the full year, along with about $50 million for the Eagle Ford and Marmaton oil projects. A small portion of the $50 million will be allocated toward another liquids-rich idea we are working on.

We made the decision to use some of the proceeds from the asset sale because of the clarity and comfort we now have in getting infrastructure capacity in place.

Investor How much do you want to raise through sales?

Dinges We do not have a preconceived idea of needing to raise funds. We look at it opportunistically. We have an adequate balance sheet and a lot of capacity remaining, if it were just money we were after.

Investor Do you foresee going to the market in 2011 to raise any public equity or debt?

Dinges We have no plans to tap any public equity or debt markets. With the significant growth of our production profile, we see a cash-flow-positive program in the not-too-distant future.

Investor Any plans to grow the company through acquisitions?

Dinges We have so much organic growth in our mix right now that growth through acquisitions is not a high priority for us currently.

Investor Is your 38% production-growth guidance conservative?

Dinges When we made our forecast, the infrastructure build-out in the Marcellus was in process. We felt we would be able to reach our capacity, but decided on the side of conservatism. Today, with what we've been able to move through in both the Teel and Lathrop stations, our guidance proved to be a little on the conservative side.

The company has now posted a 47.5% growth rate between comparable second quarters, producing 45 Bcfe. That's the highest quarterly production that Cabot has ever reported. We continue to enjoy high growth rates from our gas portfolio, but I'm particularly pleased to see the results of our liquids initiative, with over 20% growth in oil volumes.

Following our second-quarter results, we posted a new full-year 2011 guidance, increasing the overall growth rate range of 40% to 46%. This is driven by growth in both natural gas and oil/liquid volumes.