2023-03-30 05:18:00 ET
Summary
- Coterra generated a good amount of free cash flow of $979 million in 4Q 2022, which is well higher than $682 million at the end of 2021.
- Also, CTRA declined its net debt level to $1.9 billion in 4Q 2022 versus $2.4 billion in 4Q 2021.
- However, oil and natural gas prices dropped, and the company’s free cash flow in 2023 is expected to be significantly lower than in 2022.
- Despite the increased dividend base, CTRA’s potential to pay variable cash dividends and share repurchases is expected to impair.
- The company’s increasing capital expenditures in the Permian Basin may fuel its revenue in 2024.
As a result of hiked oil and natural gas prices in 2022, Coterra Energy's ( CTRA ) net cash provided by operating activities increased by 227% YoY to $5.2 billion. The company paid full-year 2022 dividends of $2.0 billion (up 155%) and repurchased $1.25 billion in shares. Also, the company decreased its net debt by 28% and improved its net debt to adjusted EBITDAX from 0.9x in 2021 to 0.2x in 2022. However, in 2023, CTRA’s net cash provided by operating activities is not expected to be as high as in 2022. CTRA’s cash flow from operating activities may decrease by 27-30% in 2023. Thus, the company's dividends and share repurchases in 2023 may be significantly lower than in 2022. It is important to know that CTRA increased its annual base dividend by 33% to 0.80 per share, and announced a new $2.0 billion buyback authorization. However, I expect the company’s potential to pay variable cash dividends to be significantly lower than in 2022. Moreover, as the company’s share repurchase program does not have a fixed expiration, we may not see a considerable part of it (even a small part of it) happen in 2023. Overall, the company is in a financially healthy position and can cover its obligations. Also, its increasing proven reserves, combined with new investments in the Permian Basin (Permian Basin accounts for a large part of CTRA’s production and revenues), can support the company’s cash flow position in the upcoming years. CTRA stock is a hold.
Financial results
In its 4Q 2022 financial results, CTRA reported total operating revenues of $2280 million, compared with $2225 million in 4Q 2021, driven by higher oil revenues and higher gain on derivative instruments, offset by lower natural gas and NGL revenues. Compared with the full-year 2021, as a result of hiked energy prices in 2022, Coterra’s full-year 2022 total operating revenues increased by 162% YoY to $9051 million. CTRA reported a 4Q 2022 net income of $1032, or $1.32 per diluted share, compared with a 4Q 2021 net income of $939, or $1.16 per diluted share. It is worth noting that the company’s operating expenses in 4Q 2022 were as equal as in 4Q 2021. Furthermore, as I expected in my previous article , CTRA’s 4Q 2023 financial results were not as strong as in 3Q 2022. In the third quarter of 2022, CTRA reported a net income of $1196 million, or $1.51 per diluted share. CTRA’s financial results were impaired on a quarter-over-quarter basis as oil and natural gas prices dropped in the fourth quarter of 2022.
Due to hiked net income, Coterra’s net cash provided from operating activities increased from $953 million in 4Q 2021 to $1484 million in 4Q 2022. Moreover, the company’s net cash paid in the settlement of derivative instruments decreased from $370 million in 4Q 2021 to $39 million in 4Q 2022. The company’s full-year 2022 net cash provided by operating activities increased 227% to $5456 million. In 2022, CTRA paid dividends of 1992 million, compared with $780 million in 2021. CTRA complemented $1.25 billion of share repurchases in 2022, compared with zero share repurchases in 2021.
“Coterra delivered a strong 2022. Outstanding execution led to value creation, outsized shareholder returns and further improvement of our industry-leading balance sheet,” the CEO commented. “Combining our track record of execution with our deep inventory of high-quality assets, Coterra is positioned to succeed through commodity cycles,” he continued.
The market outlook
In 2022, CTRA’s natural gas production and oil production increased by 12.4% YoY and 294% YoY, to 1024.3 Bcf and 31.9 MMBbl, respectively. Excluding hedges, its natural gas average sales price increased from $3.07/Mcf in 2021 to $5.34/Mcf in 2022, and its oil average sales prices increased from $75.61/Bbl in 2021 to $94.47/Bbl in 2022. Including hedges, CTRA’s natural gas average sales price increased from $2.73/Mcf in 2021 to $4.91/Mcf in 2022, and its oil average sales prices increased from $60.35/Bbl in 2021 to $84.33/Bbl in 2022. Due to the energy prices and energy demand in 2023 and the company’s plan to invest 50% of its cash flow (based on strip prices on February 2022), Coterra expects its 2023 oil and natural gas production to be relatively flat year-over-year, before increasing in 2024 and 2025. According to EIA’s short-term energy outlook , the average WTI crude oil price is expected to decrease from $94.91 per barrel in 2022 to $77.10 per barrel in 2023. On one hand, the reopening of China, Russia’s lower production, and higher demand for refineries can support oil prices from decreasing further. On the other hand, higher oil production and higher global inventories may not allow oil prices to increase. Henry Hub's natural gas price is expected to decrease from $6.67 per thousand cubic feet in 2022 to $3.14 per thousand cubic feet in 2023, with lower prices in the first half and higher prices in the second half. It is worth noting that due to lower consumption (as a result of very mild temperatures) and higher natural gas storage EIA’s estimation of Henry Hub's natural gas price in 2023 (published on 7 March) is 11% lower than its previous forecast (published on 7 February).
Based on strip prices on February 2022, CTRA estimated its cash flow from operating activities in 2023 to be $4.0 billion, down 27% YoY. CTRA expects its 2023 capital investment to be between $2.0 billion to $2.2 billion, with $1.8 billion to $2.0 billion allocated to drilling and completion activities. It is important to know that 49% of CTRA’s drilling and completion capital is expected to be invested in the Permian Basin, 44$ in the Marcellus Shale, and 7% in the Anadarko Basin. According to new data, natural gas prices in 2023 may be lower than they were expected a month ago. Thus, CTRA’s cash flow from operating activities in 2023 can be lower than the company expects. It is important to know that as Coterra’s oil and natural gas production is not expected to be higher than in 2022, we cannot expect the company’s lower realized prices to be offset by higher volumes.
However, CTRA may benefit from its derivatives in 2023 and does not pay in cash settlement as much as it did in 2022. According to Figure 2, which shows CTRA’s derivatives information in 2023 as of 31 December 2022, I expect the company’s loss on derivative activities to turn into a gain, and its net cash paid in settlement of derivative instruments to drop.
Figure 1 – Energy prices
Figure 2 – CTRA’s derivative instruments
CTRA performance outlook
Coterra Energy's cash and equivalents decreased since the second quarter of 2022, reaching $673 million in 4Q 2022, down 13% from $778 million in 3Q 2022. However, the company's debt level decreased by 24% year over year to $2.6 billion compared to $3.5 billion in 4Q 2021. This resulted in a significant drop of 20% in the company's net debt level to $1.9 billion from $2.4 billion in the same period last year. Despite lower cash generation due to lower oil and gas prices, CTRA's total equity slightly improved and reached $12.6 billion at the end of 2022 compared to $11.7 billion at the end of 2021. Fortunately, CTRA's net debt is well below its total equity level, providing ample capacity for shareholder benefits and risk management. Overall, Coterra Energy's capital structure is healthy and positioned well for future growth opportunities (see Figure 3).
Figure 3 – CTRA’s capital structure (in millions)
Upon analyzing Coterra Energy's cash structure, it appears that the company is poised to generate a substantial amount of operating cash flow in 2022. Specifically, the company's cash operation experienced a significant boost of over 56% in the fourth quarter of 2022, reaching approximately $1.5 billion compared to $951 million during the same period in 2021. Additionally, capital expenditure accrued during this time was $505 million, which is significantly higher than the $269 million recorded at the end of 2021. As a result, Coterra Energy generated $979 million in free cash flow during 4Q 2022 – a marked increase from the $682 million generated during 4Q 2021. Looking ahead, Coterra Energy plans to invest roughly half of its cash flow while maintaining a flat production profile in 2023. However, relative growth is expected in 2024 and 2025. Given these factors and Coterra Energy's solid balance sheet and cash structure, it is anticipated that the company will experience long-term growth (see Figure 4).
Figure 4 – CTRA’s cash structure (in millions)
Summary
Oil and natural gas prices are not as high as they were in 2022, and despite the reopening of China and geopolitical tensions, the lower demand and high inventory levels stop energy prices from rising. CTRA improved its cash and debt structure in 2022 and with current energy prices and its estimated production volume, Coterra can reward its shareholders, remain healthy, and expand its operations to increase its production volumes in 2024. The stock is a hold, and I don’t expect its price to increase significantly in the next few months.
For further details see:
Coterra Energy: Cash Generation Potential, Permian Developments, And Debt Position