Coterra Energy (CTRA) Q2 Results - Aug 3

[dan_s]

At the time of this post CTRA was trading for $28.09.

Coterra is one of the large-cap upstream companies in our High Yield Dividend Portfolio that is committed to paying out a high percentage of their FCF as quarterly dividends and they have a well-funded stock repurchase program underway.

TipRanks: "In the last 3 months, 15 ranked analysts set 12-month price targets for CTRA. The average price target among the analysts is $35.47. The 12 price targets range from $26 to $46."

Coterra's Q2 results beat my forecast and I have raised my current valuation by $5.00 to $48.00.

Why the valuation increase?:
> Coterra was created by the merger of Cimarex and Cabot Oil & Gas that closed 10-1-2021. I continue to gain more confidence in my forecast model with each additional quarter of combined results, so I have increased my valuation multiple from 6.0 to 6.5 X annualized operating cash flow per share. 6.5 is still a conservative multiple for a company of this size that has a very strong balance sheet, will generate over $4 billion of FCF this year and has lots more running room. Lack of pipeline capacity in the Marcellus play is the only thing keeping them from ramping up production.
> I like their production mix of 73.6% natural gas, 13.9% crude oil and 12.5% NGLs.
> Next Fixed + Variable quarterly dividend will be $0.65 for annualized yield of ~9.25%
> With each passing quarter, more of their natural gas moves out from under the Swaps they placed for 2022.
> So far, less than 8% of their 2023 ngas is hedged with collars that have ceilings of $5.39 to $8.30, with most at the high end. If HH ngas averages $7.00 in Q1 2023, Coterra's FCF should be over $1.5 billion for the quarter, so I expect them to pay a big "Special Dividend" with all of that cash.

My updated forecast/valuation model for CTRA has been posted to the EPG website.