2023-05-09 06:37:17 ET
Summary
- CTRA has positions in both the premier U.S. oil field (Permian) and the premier U.S. natural gas field (Marcellus).
- This gives the company the ability to direct growth towards which molecule is more attractively priced.
- Right now, CTRA will drive oil production growth, but it has nice optionality if nat gas prices rebound.
With positions in both the Permian and Marcellus, Coterra Energy ( CTRA ) is well positioned to benefit from any oil or gas price rebound.
Company Profile
CTRA is an oil and gas E&P company. It operates in three basins: the Permian, Marcellus Shale, and Anadarko. Overall, about 72% of its production and 51% of its revenue in Q1 came from natural gas. About 15% of its production was oil, which accounted for approximately 38% of its Q1 revenue. NGLs were about 13% of production and 11% of revenue.
The company has approximately 307,000 net acres in the Permian, of which nearly 249,000 net areas are developed. CTRA had 220 mboe/d of production in the Permian in Q1, of which 68% was liquids.
In the Marcellus, CTRA has approximately 183,000 net acres, of which approximately 165,000 net areas are developed. The E&P had 2.1 bcf/d of production in the Marcellus in Q1.
In the Anadarko, it has approximately 182,000 net acres, of which nearly 147,000 net areas are developed. The E&P had 60 mboe/d of production in the basin in Q1, of which 46% was liquids.
Q1 Earnings
For Q1, CTRA reported revenue of $1.78 billion, above analyst expectations of $1.57 billion. It recorded adjusted EPS of 87 cents, which beat the analyst consensus by 17 cents. It generated $556 million in free cash flow.
Production rose nearly 1% to 635,000 boe/d, above CTRA’s guidance calling for production of between 610,000-625,000 boe/d. Oil production rose 11% to 92,2000 bbl/d, while natural gas production declined -3%.
Looking forward, the company raised its full-year production outlook by 1.0 mboe/d to a range of 87-93 mboe/d from 86-92 mboe/d. It is projecting discretionary cash flow of $3.6 billion at recent strip prices and $1.6 billion in free cash flow.
The company is currently running six rigs in the Permian, three in the Marcellus, and two in the Anadarko. It will drop to two rigs in the Marcellus this quarter.
On its Q1 earnings call, CEO Thomas Jordan said:
“In line with our initial plan, we will reduce activity in the Marcellus in the coming weeks and expect to remain at two rigs and one frac crew during the second half of the year. If we were to hold this level of activity flat through 2025, future Marcellus CapEx would decrease significantly and yet hold our Northeast production flat, allowing us the option to redirect activity to the Permian and Anadarko. Both of these basins have opportunities at the ready that provide great returns. Furthermore, our Marcellus assets retained the flexibility to grow in the future should macro conditions and prices warrant increased investment. Looking forward, we retain maximum optionality to employ capital to its best use.”
Opportunities and Risks
Like most E&Ps, energy prices play a large role in the results that CTRA puts up. Although it has a strong position in the oil-rich Permian, nearly two-third of its production and half its revenue in Q1 came from natural gas. The nice thing about CTRA, though, is that with positions in the premier U.S. oil basin as well as the premier U.S. natural gas basin, it can direct production growth a bit more towards one molecule or the other.
In this case, the company is looking to lower CapEx in the Marcellus to keep production flat, while growing production in the Permian. A lot of E&Ps don’t have this type of flexibility, so this is a nice advantage that CTRA has.
Meanwhile, while natural gas prices are down, the Marcellus is still a great asset. The company is benefiting from longer laterals in the basin, and its average lateral length will be 10% higher in 2023. CTRA also says its Marcellus position benefits from having a carbonate layer that divides the Upper and Lower Marcellus on its acreage into two separate reservoirs. As such, it can develop each separately, while at the same time use the existing infrastructure.
As such, CTRA really gives investors some nice natural gas price rebound optionality, as it would be able to ramp up production if prices rebound. In the near term, investors can get access to Permian oil growth, with a nat gas price rebound potential bonus.
The mixed gas and oil basin of the Anadarko also provides optionality and is a play on LNG export demand. I’ve talked about some of the LNG projects coming online in the next few years in write-ups on Cheniere ( LNG ), as well as FLEX LNG ( FLNG ), which can be found here . CTRA said that improved frac designs and wider spacing is really helping drive productivity and higher returns in the basin.
Like many E&Ps, CTRA has also done a nice job with its balance sheet. The company ended Q1 with only $1.2 billion in net debt. That is good for a trailing twelve month net debt to EBITDAX ratio of only 0.2x. Meanwhile, it is projecting $1.6 billion in free cash flow. It will pay out a 20-cent quarterly base dividend and has bought back about $300 million in stock so far this year. It has $700 million that it likely will direct to more buybacks this year, or potentially, but less likely, a variable dividend. It paid out $1.5 billion in variable dividends if 2022 when it had $3.9 billion in FCF.
Valuation
CTRA trades at 4.9x the 2023 EBITDA consensus of $4.26 billion. Based on the 2024 EBITDA consensus of $4.78 billion, it trades at 4.3x.
On a PE basis, it trades at 10.3x EPS estimates of $2.43. Based on the 2024 consensus for EPS of $2.90, it trades at 8.7x.
CTRA trades right in the middle of its peer group.
Conclusion
I continue to like the E&P sector given the discipline that most companies have found, focusing on their balance sheets and free cash flow generation. CTRA fits this bill as well, and it has shown a willingness to buy back stock or pay a variable dividend during better times.
What I particularly like about CTRA, though, is its positions in both the premier U.S. oil field (Permian), as well as the premier natural gas field (Marcellus). This gives it some flexibility of where to drive production growth. At the moment, meanwhile, it can focus on oil growth, but it has as that natural gas optionality in its back pocket.
Given these characteristics, I think CTRA stock is a “Buy.” I put a price target of about $36 on the stock, which is about a 6x multiple on 2024 EBITDA.
For further details see:
Coterra Energy: An Oil Play With Nat Gas Optionality