Coterra Energy (CTRA) Valuation Update - May 17

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dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Coterra Energy (CTRA) Valuation Update - May 17

Post by dan_s »

I have updated my forecast/valuation model for Coterra for their Q1 results that beat my forecast and their updated guidance.
My valuation increases by $1.50 to $29.00.

At the time of this post, CTRA was trading at $24.66.

Coterra raised their base dividend to $0.20, but they did not pay a variable dividend for Q1. They are increasing their stock repurchases instead of paying out higher dividends. < Diamondback Energy (FANG) is also focusing more on stock repurchases.

TipRanks: "In the last 3 months, 16 ranked analysts set 12-month price targets for CTRA. The average price target among the analysts is $29.94." < Since the Company released Q1 results, 5 analysts have adjusted their price targets from $27 (Morgan Stanley) to $38 (Mizuho Securities). The five new price targets average $32.60.

Coterra has a super strong balance sheet and they will generate a lot of free cash flow despite having a production mix of 72.4% natural gas, 14.5% oil and 11.1% NGLs. Their realized natural gas price of $3.72/mcf in Q1 was the primary reason they beat my forecast.

Coterra is going to drop two of their operated drilling rigs in Appalachia that were drilling for natural gas. Their production mix should move to more liquids in 2H 2023, which is one of the reasons I raised my valuation.
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First-Quarter 2023 Highlights
• Net Income (GAAP) totaled $677 million, or $0.88 per share. Adjusted Net Income (non-GAAP) was $661
million, or $0.87 per share.
• Cash Flow From Operating Activities (GAAP) totaled $1,494 million. Discretionary Cash Flow (non-GAAP)
totaled $1,039 million.
• Cash capital expenditures for drilling, completion and other fixed asset additions (GAAP) totaled $483 million.
Accrued capital expenditures totaled $569 million, in line with our 1H23-weighted capital program.
• Free Cash Flow (non-GAAP) equaled $556 million.
• Total equivalent production of 635 MBoepd (thousand barrels of oil equivalent per day), exceeded the high-end
of guidance, driven by strong well performance and improved cycle times. Oil production averaged 92.2
MBopd (thousand barrels of oil per day), exceeding the high-end of guidance. Natural gas production
averaged 2,757 MMcfpd (million cubic feet per day), exceeding the high-end of guidance.
• Realized average prices:
◦ Oil: $74.03 per barrel (Bbl), excluding the effect of commodity derivatives, and $74.09 per Bbl of oil,
including the effect of commodity derivatives
◦ Natural Gas: $3.31 per thousand cubic feet (Mcf), excluding the effect of commodity derivatives, and
$3.72 per Mcf of natural gas, including the effect of commodity derivatives

◦ Natural Gas Liquids (NGLs): $23.66 per barrel of natural gas liquids

First-Quarter 2023 Shareholder Return Highlights
Jorden noted, “Based on first quarter results, Coterra will return $420 million to shareholders, which equals 76% of the
company’s Free Cash Flow. The return will include $152 million from our recently increased base dividend ($0.20 per
quarter, $0.80 annum) and $268 million via share buybacks. We reiterate our commitment to return 50%+ of Free
Cash Flow to shareholders, with an emphasis on the base dividend and buybacks, in the near-term.”
• On May 3, 2023, Coterra's Board of Directors (the "Board") approved a quarterly base dividend of $0.20 per
share, which will be paid on June 9, 2023 to holders of record on May 26, 2023.
• During the quarter, the Company repurchased 11 million shares for $268 million, averaging $24.36 per share
and leaving $1,732 million remaining on the $2.0 billion share repurchase authorization as of March 31, 2023.

Guidance Update and Activity Outlook:
2023 cash flow guidance updates include:
• Estimate full-year 2023 Discretionary Cash Flow of approximately $3.6 billion, at recent strip prices
• 2023 capital budget remains unchanged at $2.0-2.2 billion (accrued); see potential for 2H23 deflation
• Estimate 2023 Free Cash Flow of approximately $1.6 billion at recent strip prices
• 2023 oil production range increasing by 1.0 MBopd, to 87.0-93.0 MBopd
2023 cash unit cost mid-point remains unchanged at $7.35-$9.55/Boe, with a few updates listed below:
• LOE updated to $1.75-$2.25/Boe, with the high-end of the range up by $0.25/Boe, driven primarily by a
reclassification of expenses from G&A to LOE
• Production tax expense updated to $1.20-$1.50/Boe, with both ends of the range shifting downward by $0.10/
Boe
• Exploration expense updated to $0.05-$0.15/Boe, with the low-end of the range down by $0.05/Boe
Second-quarter 2023 production and capital guidance:
• Production volumes are expected to average between 620 and 650 MBoepd, with oil estimated between 88.5
and 91.5 MBopd and natural gas volumes estimated between 2,750 and 2,850 MMcfpd.
• Expect capital expenditures (accrued) during 2Q23 between $510 – $570 million.

Coterra is currently running six rigs and two completion crews in the Permian Basin, two rigs in the Anadarko Basin,
and three rigs and two completion crew in the Marcellus. The Company plans to drop to 2 rigs and 1 crew in the
Marcellus during 2Q23, as expected in our original plan.


Strong Financial Position
Coterra maintains a strong financial position with an investment-grade credit rating and approximately $2.5 billion of
liquidity. As of March 31, 2023, Coterra had total long-term debt of $2.2 billion with a principal amount of $2.1 billion.
The Company exited the quarter with a cash balance of $973 million, no debt outstanding under its new $1.5 billion
five-year revolving credit facility, and no near-term debt maturities. Coterra's net debt to Adjusted EBITDAX ratio
at March 31, 2023 was 0.2x.
Dan Steffens
Energy Prospectus Group
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