Summary
- Coterra Energy is an oil & gas exploration and production company operating in the Appalachian and Permian Basin regions.
- CTRA exceeded its Q4 targets for oil and natural gas volumes, reported a net income of $1,032 million in Q4 2022 and generated $1,484 million in cash flow from operations.
- CTRA's shares are slightly overpriced, with NAV of $23.50 per share.
Coterra Energy Inc. ( CTRA ) is an oil & gas exploration and production company that operates in the Appalachian and Permian Basin regions. It was established following the 2021 merging of Cabot and Cimarex. As of the end of 2021, CTRA verified reserves of 2.9 billion oil equivalent barrels and generated a net output of roughly 431 million barrels per day, with natural gas accounting for 70% of the production.
On February 22, CTRA released its Q4 earnings. In this article, I will review the highlights of earnings results, the new guidance, why I believe Coterra has some exciting assets, and the shares' valuation. While I like the company's assets, I think CTRA stock is trading close to its NAV, so I recommend staying away for now.
Q4 earnings and 2023 guidance
CTRA exceeded its Q4 targets for oil and natural gas volumes but missed NGL volumes sold as gas due to lower-than-expected production. Despite this, the company plans modest growth for 2024-25, with a 2023 budget 20% higher than the previous year, resulting in $4 billion in surplus cash, capex of $2-2.2 billion and at least 50% distributed to shareholders via cash dividends (base and variable). The Board approved a new share repurchase program of $2 billion, representing approximately 11% of CTRA's market capitalization.
CTRA reported a net income of $1,032 million in Q4 2022, generated $1,484 million in cash flow from operations, and spent $483 million in capex, with a free cash flow of $892 million. CTRA's total equivalent production averaged 633.8 MBoepd for the year, with oil production at 87.5 MBbls/d and natural gas production at 2,806 MMcf/d. CTRA's proved reserves were 2,399 MMBoe, with 24% proved undeveloped reserves, and the breakdown of the company's proven reserves by resource type is approximately 78% natural gas, 10% oil, and 12% NGLs. CTRA's long-term debt totalled $2.2 billion as of December 31, 2022, with a principal amount of $2.1 billion and no significant payments due until 2024. The company ended the year with a cash balance of $0.7 billion and did not owe any debt under its revolving credit facility.
Operations and Strategy in Three Key U.S. Regions
CTRA resulted from the merger between Cabot Oil & Gas and Cimarex Energy in 2021, and it now operates in three U.S. regions, producing oil and natural gas. The Marcellus Shale, primarily focused on natural gas, is located in Pennsylvania and is Cabot's primary area of operation. The Permian Basin in Texas and New Mexico and the Anadarko Basin in Oklahoma, both legacy Cimarex assets, are more oil-weighted. CTRA's geographic diversification and overhead synergies from the merger are expected to strengthen the combined business. CTRA's Marcellus assets are located in the northeast part of the fairway and are characterized by high daily production rates due to low levels of condensate or natural gas liquids. However, drilling opportunities in the Lower Marcellus layer are limited, so CTRA plans to drill the overlying Upper Marcellus layer, which yields lower productivity but will allow for longer laterals and lower well costs. CTRA has abundant inventory in the liquids-rich part of its portfolio. CTRA's activities are mainly focused on the Delaware Basin in the Permian. CTRA strives to maximize capital efficiency by using larger pad sizes, longer laterals, and electric completion spreads, reducing fuel consumption and improving well costs.
CTRA's acreage in the Marcellus Shale has low operating and development costs, placing it on the lower end of the U.S. natural gas cost curve. The northeast portion of the Marcellus, where CTRA operates, is unique. It lacks oil condensate or natural gas liquids, resulting in a production stream consisting entirely of dry natural gas, which typically has very high initial production rates and projected recoveries. CTRA's costs are thus spread thinly, driving up its margins and returns.
Valuation
I valued CTRA using the NAV approach. This approach heavily depends on the assumption of oil and gas prices. For the near term, I assumed oil price to be in the mid $70 per barrel and natural gas around $3.50 per thousand cubic feet. The long-term prices are lower at $60 per barrel and $3.20 per mcf. As per volume, I expect growth to be in the low single digits, in line with management's guidance. With these assumptions, the NAV is $23.50 per share, suggesting the shares are slightly overpriced.
Risk
CTRA's profitability could be negatively impacted if the outlook for natural gas prices deteriorates, leading to lower cash flows and increased financial leverage. CTRA's recent merger with Cimarex has slightly increased its exposure, as the combined firm operates in the New Mexico portion of the Delaware Basin, which falls under the direct purview of the executive branch for regulation. President Joe Biden has suggested banning new oil and gas drilling permits on federal land.
Conclusion
CTRA has strategically located real estate in the lowest-cost oil and natural gas basins. This amplifies their returns and boosts both their product and geographic diversification. By focusing on dry natural gas in the Marcellus, CTRA avoids NGL processing fees that would otherwise drive up their production costs.
However, they face some challenges. CTRA has less than ten years of drilling opportunities targeting the prolific Lower Marcellus interval. When they are forced to pivot to the less productive Upper Marcellus, their well performance could deteriorate. Additionally, CTRA's midcontinent assets have significantly higher break-evens, which could dilute their returns if they expand regional development.
Based on my long-term assumptions for oil & gas prices, the shares are trading slightly higher than their NAV, and I would recommend staying away for now.
For further details see:
Coterra Energy: Good Q4 Results But Already Priced In