Coterra Energy (CTRA) Update - May 29

[dan_s]

At the time of this post CTRA was trading at $24.80. My current valuation is $36.00.

Wells Fargo Equity Research dated May 16

Our Call (Price Target lowered to $33)
CTRA's strong operational momentum was interrupted by a misstep in Harkey shale development, introducing some near-term execution risk. Still, its uniquely diversified commodity mix positions the company well to navigate a volatile macro environment.

Modeling Adjustments. Our Q2'25 and FY'25 adjustments reflect updated guidance and tweaks to production/realizations/opex assumptions. We lower our Q2'25 estimates on lower production volumes and commodity price realizations and higher opex. We reduce our FY25 oil/total production estimates to 159.1 mbbl/d / 745.4 mboe/d. At recent strip, we forecast FCF generation of $2,248MM/$2,405MM for FY25/26. We maintain our OW rating and reduce our NAV-based PT to $33 from $36.

Production Trajectory & Activity Cadence. While Q2'25 oil vols are expected to dip modestly (~5 mbbl/d below initial expectations), due to a temporary pause in Harkey development, CTRA maintained its FY25 oil production guide, implying strong H2 vols. This reflects a pivot to more prolific Upper Wolfcamp zones. We model Q2-Q4'25 oil vols of 155/170/170 mbbl/d. The company reiterated its ability to flex activity across business units as commodity prices evolve.

In response to weaker oil prices, CTRA cuts its rig count to 7 (from 10). In the Marcellus, the company plans to keep 2 rigs running into H2’25—added in April—adding $50MM to FY25 capex. A decision on maintaining the 2nd rig through YE25 will be made in Q3’25, which could add another $50MM. For 2026, CTRA reaffirmed its 3-yr outlook: annual oil growth of 5%+, boe growth of 0%-5%, and $2.1-2.4bn in annual capex.

Harkey Setback Pauses Ops. CTRA encountered mechanical issues in half of its 22 Harkey wells at Windham Row, due to inadequate cementing, which allowed shallow water to enter the wellbore and reduce oil output. The issue is localized and considered fixable, with remediation efforts under way. The disruption lowered Q2'25 oil guide by ~5 mbbl/d. While CTRA expects to restore vols during Q2'25, they were excluded from the guidance. Activity has shifted to the more productive Upper Wolfcamp zones.

Shareholder Returns. CTRA is prioritizing deleveraging, targeting full repayment of its term loan balance of $750MM by YE25. Share repos will be opportunistic and are expected to be more back-end weighted. The company targets net leverage of <1.0x to provide financial flexibility for debt reduction and share buybacks, committing to returning at least 50% of annual FCF. At WFS price deck, we model debt reduction of $850MM and total cash return of ~$1.0bn in 2025, including ~$325MM of share repos.