Cabot Oil & Gas (NYSE:COG) was the best-performing energy stock in the S&P 500 in 2011, rewarding investors with an absolute return of 100.1% for the year. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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Context
This achievement is even more extraordinary when viewed in the context of other top performers in the energy sector in 2011. El Paso (NYSE:EP) was the second-best performing energy stock in 2011, with a 93% return, but benefited from a buyout offer from Kinder Morgan (NYSE:KMI) in October 2011. After El Paso, returns for other top-performing energy stocks drop down into the 30% range, with Range Resources (NYSE:RRC) and Williams (NYSE:WMB), at 38 and 37%, respectively.

2011 - The Beginning
Cabot Oil & Gas began 2011 with several headwinds that would seem to preclude any chance of the company ending up as the best-performing stock for the year.

Although Cabot Oil & Gas is a fast growing exploration and production company, it is oriented overwhelmingly towards natural gas, a commodity that was, and still is, out of favor with most investors. The company's production grew 27% to 130 Bcfe in 2010, but had only 4% oil and liquids content.

Cabot Oil & Gas's core area is in the Marcellus Shale, where it has several hundred-thousand acres under lease in Susquehanna County, Pennsylvania. The company also had acreage in the Haynesville Shale and an emerging position prospective for the Eagle Ford Shale.

Cabot Oil & Gas was also at the tail end of a distracting legal battle in Pennsylvania regarding environmental issues, as the company was accused by residents in one area of contaminating water wells with methane. The company reached a final settlement of this issue with the state in December 2010.

How Cabot Triumphed
Cabot Oil & Gas's leading performance in 2011 was powered by a number of external and internal factors, all of which contributed to the company's success.

Factor One
Cabot Oil & Gas made steady progress during the year on the development of oil and liquid plays in its portfolio. These include the Eagle Ford Shale, where the company has drilled 30 wells and boosted production to 6,500 barrels of oil equivalent (BOE) per day. The company also initiated a position in a second oil play, and now has 61,500 net acres exposed to the Marmaton play in Oklahoma and Texas.

Factor Two
Cabot Oil & Gas and many of its peers received a lift during the year from increased acquisition activity in the sector. In July 2011, the stock jumped 9% after BHP Billiton (NYSE:BHP) announced the purchase of Petrohawk Energy, a company with substantial positions in the onshore United States.

Factor Three
Cabot Oil & Gas divested the company's Rocky Mountain assets for $285 million in July 2011, and sold other non-core oil and gas properties during the year. The company also entered into joint ventures on its properties in East Texas. These sales removed any doubt regarding the funding of the company's 2011 capital budget, a major source of neurosis and anxiety in the institutional investment community.

Factor Four
Cabot Oil & Gas completed the construction of infrastructure at the Lathrop Compressor Station earlier than expected. This station serves the Marcellus Shale and allowed the company to quickly increase production from wells that were operating under restricted production.

Factor Five
Cabot Oil & Gas raised guidance in July 2011, moving production growth for 2011 to as much as 46%, up from the previous range of 34 to 42%. This momentum has continued and the company expects 2012 production to increase from 45 to 55% over 2011.

Factor Six
Cabot Oil & Gas benefited from an increase in the company's perceived net asset value as Marcellus Shale wells performed better than many investors expected. Wells here are now credited with an estimated ultimate recovery (EUR) of 10 Bcfe, up from 7.5 Bcfe previously.

The Bottom Line
Cabot Oil & Gas had a fantastic year and ended up the best-performing stock in the energy sector in 2011. Investors that were either lucky or smart enough to own this stock must now decide if this performance will repeat in 2012. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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