Coterra’s strong energy production allowed for big cash returns to shareholders

Coterra Energy missed Wall Street expectations for sales and earnings in the second quarter. However, production volumes and more importantly cash generation both came in ahead of expectations. Revenue in the three months ended June 30 increased 7% year over year to $1.27 billion but came up short versus the $1.33 billion consensus forecast, according to analyst estimates compiled by LSEG. Adjusted diluted earnings per share fell 5.1% versus the year-ago period to 37 cents and missed expectations of 37 cents, LSEG data showed. CTRA YTD mountain Coterra Energy YTD The results were released after Thursday’s close. The post-earnings conference call was held Friday morning. In another terrible overall market, the stock on Friday dropped roughly 3.5% to just under $25 per share. Bottom line In addition to the strong production and strict capital expenditures discipline, management raised their production outlook and discretionary cash flow target for the remainder of the year. Given the strong execution and management’s ability to be flexible in allocating resources between oil and natural gas depending on commodity economics, we’re reiterating our buy-equivalent 1 rating on Coterra. But we’re cutting our price target by $2 per share to $28, in acknowledgment that commodity prices have come down as the economy is slowing. Coterra Energy Why we own it: Formed by the merger of Cabot Oil & Gas and Cimarex, Coterra Energy is an exploration-and-production company with a high-quality, diversified asset portfolio. The company practices capital discipline and is a low-cost operator. It’s committed to returning 50% or greater of annual free cash flow to shareholders. Our lone energy stock, Coterra also acts as a hedge on inflation and geopolitical risk. Competitors: EQT Corp ., Devon Energy , Marathon Oil Last buy: May 29, 2024 Initiation: April 14, 2022 Coterra returned a total of $295 million to shareholders in the second quarter – split between $155 million in declared dividends and $140 million coming from share repurchases. That amounts to 120% of free cash flow generated in the quarter, demonstrating management’s seriousness and conviction in keeping the focus more on cash returns to shareholders than production growth at any cost. Under management’s stated commitment to returning 50% or more of annual free cash flow via dividends and buybacks, Coterra has returned this year 103% of free cash flow to shareholders. At the end of June, the Houston-based company had $1.3 billion remaining under its previous $2 billion authorization. The importance of capital returns to Coterra investors, like us, is evident as the annual dividend yield of 3.25% does pay us for patience with a stock that’s severely underperformed the overall market. While leaning into oil production, crude prices rising less than 4% this year have been little help as natural gas has declined more than 20% year to date. On the post-earnings call, CEO Tom Jorden talked about the benefit of this optionality. He said, “Although we saw a 42% drop in realized natural gas prices between Q1 and Q2, 2024, our revenue only declined a modest 12%. This financial resiliency affords us the opportunity to make sustained long-term capital allocation decisions without being buffeted by short-term commodity swings. In a cyclic business, flexibility is the coin of the realm. The combination of our balanced revenue stream as well as our geographic and geologic diversity gives us market flexibility. Additionally, our inventory depth and lack of long-term service contracts affords us the luxury to focus solely on the best capital allocation decisions. We can pivot between the Marcellus, the Anadarko, and the Permian as conditions and opportunities warrant.” Full-year guidance Discretionary cash flow is now expected to be $3.2 billion (up from $3.1 billion, $3.22 expected), however, management is giving themselves some flexibility and opted to reiterate both the capex range ($1.75 to $1.95 billion, $1.86 billion expected) and free cash flow target ($1.3 billion, $1.45 billion expected). As for production, management is now targeting total equivalent production per day of 645 to 675 thousand barrels of oil equivalent per day (MBoepd). That’s an upward revision on the low end from a prior range of 635 to 675 MBoepd. The new target is right in line with expectations, at the midpoint. Oil production of 105.5 to 108.5 MBopd (up from a range of 102 to 107 MBopd), 106 MBopd expected. Natural gas production of 2,675 to 2,775 million cubic feet per day (tightened from a range of 2,650 to 2,800 MMcfd), 2,751 MMcfd expected. Q3 guidance Total equivalent production of 620 to 650 MBoepd, 647 MBoepd expected. Oil production of 107 to 111 MBopd, 108 MBopd expected Natural gas production of 2,500 to 2,630 MMcfd, 2,659 MMcfd expected Capital expenditures of $450 million to $530 million, versus expectations of $450 million. (Jim Cramer’s Charitable Trust is long CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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