Coterra Energy (CTRA) Valuation Update - Aug 5

[dan_s]

Coterra's Q2 production exceeded my forecast, but their adjusted operating cash flow came in at $725 million, $72 million below my forecast. Recent well results are very good and they have raised their production guidance for 2024.
I have lowered my stock valuation by $1.50 to $30.50 per share.

Since Coterra announced Q2 results on August 1, eight analysts have updated their price targets. They all rate CTRA a BUY with price targets of $35 to $39. Coterra has a pristine balance sheet and a lot of high-quality "Running Room". < See last paragraph below.

2024 revenues are heavily weighted to liquid sales, but their current production mix is approximately 69.25% natural gas, 16.25% crude oil and 14.25% NGLs. Their 2024 drilling program is focused on increasing oil production.

The Company is holding its dividend at $0.21/quarter and they have a stock buyback underway. I expect the stock buybacks to slow down unless natural gas prices improve.

Key Takeaways & Updates

For the second quarter of 2024, total barrels of oil equivalent (BOE) production, natural gas production, and oil production all beat the high-end of guidance, and incurred capital expenditures (non-GAAP) came in near the low-end of guidance.

Increasing full-year 2024 BOE production guidance by 1% and oil production guidance by 2.4% from guidance provided in May, driven by faster cycle times and strong well performance. Maintaining full-year 2024 incurred capital expenditure (non-GAAP) guidance. < Completed well costs are coming down.

For the second quarter of 2024, shareholder returns totaled 120% of Free Cash Flow (non-GAAP), inclusive of our declared quarterly base dividend and $140 million of share repurchases during the quarter (cash basis, excluding 1% excise tax). The Company remains committed to returning 50% or greater of its annual Free Cash Flow (non-GAAP) to shareholders and has returned 103% year to date.

Simul-frac efficiencies are exceeding expectations on our Windham Row Development. To date, 21 of the planned wells in the row have come online an average of 4 days ahead of schedule. We now plan to add an additional 3 Harkey wells to the project, bringing total wells in the row to 57, and further improving the capital efficiency of the project. Furthermore, due to early success, we now plan to simul-frac 45 of the 57 wells in the row.

Tom Jorden, Chairman, CEO and President of Coterra, noted, "Coterra's second quarter results continue the trend of delivering outstanding performance. The ingenuity and hard work of our operating team are driving results that exceed expectations across our portfolio of high-quality assets. As we move into the second half of 2024, we remain focused on executing our plan while maintaining significant investment optionality between oil and gas in 2025. Coterra's investment thesis remains strong. Operational excellence, efficient development of our diversified, low-cost, long-life assets, our fortress balance sheet, and an unwavering commitment to shareholder returns underpin our value proposition."

Second-Quarter 2024 Highlights

Net Income (GAAP) totaled $220 million, or $0.30 per share. Adjusted Net Income (non-GAAP) was $272 million, or $0.37 per share.

Cash Flow From Operating Activities (GAAP) totaled $558 million. Discretionary Cash Flow (non-GAAP) totaled $725 million. < This is what I call "Adjusted Operating Cash Flow"

Cash paid for capital expenditures for drilling, completion and other fixed asset additions (GAAP) totaled $479 million. Incurred capital expenditures from drilling, completion and other fixed asset additions (non-GAAP) totaled $477 million, near the low end of our guidance range of $470 to $550 million.

Free Cash Flow (non-GAAP) totaled $246 million.

Unit operating cost (reflecting costs from direct operations, transportation, production taxes and G&A) totaled $8.35 per BOE, within our annual guidance range of $7.45 to $9.55 per BOE.

Total equivalent production of 669 MBoepd (thousand barrels of oil equivalent per day), was above the high end of guidance (625 to 655 MBoepd), driven by improved cycle times and strong well performance in all three of our regions.

Oil production averaged 107.2 MBopd (thousand barrels of oil per day), slightly exceeding the high end of guidance (103 to 107 MBopd).

Natural gas production averaged 2,780 MMcfpd (million cubic feet per day), exceeding the high end of guidance (2,600 to 2,700 MMcfpd) as Marcellus base production outperformed expectations.

NGLs production averaged 98.8 MBoepd.

Realized average prices:

Oil was $79.37 per Bbl (barrel), excluding the effect of commodity derivatives, and $79.39 per Bbl, including the effect of commodity derivatives.

Natural Gas was $1.26 per Mcf (thousand cubic feet), excluding the effect of commodity derivatives, and $1.40 per Mcf, including the effect of commodity derivatives.

NGLs were $19.53 per Bbl.

Shareholder Return Highlights

Common Dividend: On August 1, 2024, Coterra's Board of Directors (the "Board") approved a quarterly base dividend of $0.21 per share, equating to a 3.3% annualized yield, based on the Company's $25.80 closing share price on July 31, 2024. The dividend will be paid on August 29, 2024 to holders of record on August 15, 2024.

Share Repurchases: During the quarter, the Company repurchased 5.0 million shares for $140 million (cash basis, excluding 1% excise tax) at a weighted-average price of approximately $27.72 per share, leaving $1.3 billion remaining as of June 30, 2024 on its $2.0 billion share repurchase authorization.

Total Shareholder Return: During the quarter, total shareholder returns amounted to $295 million, comprised of $155 million of declared dividends and $140 million of share repurchases (cash basis, excluding 1% excise tax).

Reiterate Shareholder Return Strategy: Coterra is committed to returning 50% or greater of annual Free Cash Flow (non-GAAP) to shareholders through its $0.84 per share annual dividend and share repurchases. Year to date, Coterra has returned 103% of Free Cash Flow (non-GAAP) to shareholders.

Guidance Updates:

Reiterated 2024 incurred capital expenditures (non-GAAP) of $1.75 to $1.95 billion.

Increased 2024 oil production guidance to 105.5 to 108.5 MBopd, up 2.4% at the mid-point versus prior guidance.

Maintained 2024 natural gas production guidance at the mid-point, tightened range to 2,675 to 2,775 MMcfpd.

Increased 2024 BOE production guidance to 645 to 675, up 1% at the mid-point versus prior guidance.

Announced third-quarter 2024 total equivalent production of 620 to 650 MBoepd, oil production of 107.0 to 111.0 MBopd, natural gas production of 2,500 to 2,630 MMcfpd, and incurred capital expenditures (non-GAAP) of $450 to $530 million.

Estimate 2024 Discretionary Cash Flow (non-GAAP) of approximately $3.2 billion and 2024 Free Cash Flow (non-GAAP) of approximately $1.3 billion, at $80/bbl WTI and $2.37/mmbtu annual average NYMEX assumptions.

For more details on annual and third quarter 2024 guidance, see 2024 Guidance Section in the tables below.

Strong Financial Position

As of June 30, 2024, Coterra had total debt outstanding of $2.646 billion, of which $575 million is due in September 2024. Coterra expects to retire its September 2024 maturity with cash on hand. The Company exited the quarter with cash and cash equivalents of $1.07 billion, $250 million in short-term investments, and no debt outstanding under its $1.5 billion revolving credit facility, resulting in total liquidity of approximately $2.82 billion. Coterra's net debt to trailing twelve-month EBITDAX ratio (non-GAAP) at June 30, 2024 was 0.4x.