CTRA - Coterra Energy: Free Cash Flow Projected To Increase To $1.7 Billion In 2024

2023-08-21 09:35:17 ET

Summary

• Coterra Energy is projected to generate $574 million in free cash flow in 2H 2023.
• It may be able to generate $1.7 billion in free cash flow in 2024 at current strip prices.
• At my long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas, I'd estimate Coterra's value at around $30 per share.
• It should be able to generate an 8% free cash flow yield at those commodity prices and a share price of $30.

Coterra Energy ( CTRA ) recently increased its full-year production guidance by 2% to 3% while keeping its capex budget unchanged. It is projected to generate $574 million in free cash flow during the second half of 2023 (and approximately $1.24 billion in free cash flow for the full year). This should increase in 2024 due to improved natural gas prices. Although Coterra's oil production has been growing faster than its natural gas production, natural gas still accounts for 73% of its total production.

I believe that Coterra can generate $1.7 billion in free cash flow at current strip prices for 2024. It is expected to put much of that free cash flow towards share repurchases.

I currently value Coterra at approximately $30 based on long-term commodity prices of $75 WTI oil and $3.75 NYMEX gas.

Potential 2023 Outlook

Coterra increased its full-year production guidance for 2023 to a range of 630,000 to 655,000 BOEPD. This was a 2% increase from its prior guidance. It also increased its oil production guidance to a range of 91,000 to 94,000 barrels per day, which was a 3% increase from its prior guidance.

Based on that full-year guidance and Coterra's production to date, Coterra's 2H 2023 production may average around 642,500 BOEPD, including 91,100 barrels per day in oil production.

At current strip prices, Coterra can generate $2.739 billion in 2H 2023 revenues, while its hedges have around $81 million in positive value.

Coterra's 2H 2023 capex budget may end up around $1 billion, which would allow it to generate approximately $574 million in free cash flow during that period. That would result in Coterra generating approximately $1.24 billion in free cash flow for the full year.

Dividends And Repurchases

Coterra currently has a quarterly base dividend of $0.20 per share. This may result in another $302 million in dividend payments (with its current share count) during the second half of the year. Coterra is prioritizing share repurchases over variable dividends, so it has not declared a variable dividend during the last two quarters.

It also spent $325 million in share repurchases over the last two quarters, repurchasing approximately 13.4 million shares.

Coterra had $841 million in cash on hand at the end of Q2 2023, so it could easily put the remainder of its 2H 2023 free cash flow towards share repurchases. This could allow it to spend $272 million on share repurchases in 2H 2023, allowing it to repurchase 9.8 million shares at its current share price. That would also reduce its quarterly dividend payments by approximately $2 million.

Coterra also has $575 million in debt maturing in 2024. This debt has a low average interest rate of 3.7%, and Coterra should be able to repay it with cash on hand.

Future Outlook

Coterra is aiming for 5+% compound annual oil production growth from 2023 to 2025 and 0% to 5% compound annual natural gas production growth during the same period. It aims to deliver this growth with a similar (or slightly lower) capex budget than its roughly $2.1 billion capex budget for 2023.

This may result in Coterra being able to generate around $1.7 billion in free cash flow in 2024 at current strip prices, giving it $1.1 billion for share repurchases, variable dividends and debt reduction after paying out around $600 million in base dividends.

Notes On Valuation

I have updated my long-term commodity prices to $75 WTI oil and $3.75 NYMEX gas. Based on Coterra's projected 2024 production levels and an EV to EBITDAX multiple of 5.5x, Coterra would be worth approximately $30 per share at those commodity prices.

Another way to look at it would be that Coterra's free cash flow yield (post-tax) would be approximately 8.0% at a share price of $30 and those other inputs mentioned above.

For comparison, Coterra's 4.375% unsecured notes due 2029 have been trading at around 93 cents on the dollar and yielding 5.9% to maturity. I often value the equity based on a free cash flow yield that is a couple percentage points higher than the bond yields.

Conclusion

Due to relative weak natural gas prices in 2023, Coterra is projected to generate approximately $1.24 billion in free cash flow, down from $3.942 billion in free cash flow in 2022.

This should improve in 2024, and I currently estimate that Coterra can generate $1.7 billion in free cash flow next year at current strip. Coterra is likely to use much of this free cash flow (after its roughly $600 million in base dividend payments) on share repurchases.

I estimate Coterra's value at approximately $30 per share at long-term prices of $75 WTI oil and $3.75 NYMEX gas. Coterra should be able to generate an 8% free cash flow yield (after cash income taxes) at those commodity prices.

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