Coterra Energy: A Little Too Gassy For My Liking (NYSE:CTRA)

Introduction

Houston-based Coterra Energy (CTRA) released its second quarter 2023 results on May 4, 2023.

Note: I have followed CTRA quarterly since October 2017 (Cabot Oil). This new article updates my article published on June 12, 2023.

Coterra Energy is struggling with a bearish trend in natural gas prices, even if they are now up slightly from their low in May. On the other hand, oil prices have risen significantly from their lows in July.

1 – Presentation

The company’s production is primarily natural gas, representing 72.9% of the total output, leaving only 15.4% for oil.

Thus, the company is highly sensitive to the price of natural gas, which is a weakness that should be considered seriously before investing in the stock long-term. On the other hand, CTRA is a US oil & gas producer.

The company exclusively produces Oil, NGL, and natural gas from three US basins (Marcellus, Permian, and Anadarko).

2 – Stock performance

I cover Coterra Energy and Chesapeake Energy (CHK) in this segment. Both companies dropped significantly from their high in 2022. CTRA outperformed CHK on a one-year basis and is now up nearly 1% YoY.

3 – Investment Thesis

Coterra Energy reported a weak second-quarter revenue due to lower commodity prices. The company’s top-tier assets and solid balance sheet are a plus, but the stock is prone to wild swings due to its high gas production, reaching 72.9% of the total input in Q2’23, increasing the risk of hiccups along the way.

The issue with gas-oriented E&P like Coterra Energy is their revenues’ unpredictability and high volatility, which strongly affect free cash flow and dividends.

A look at history shows that the Natural Gas segment is periodically rocked by periods of busts and limited successes, which makes an investment in this segment quite risky.

CEO Tom Jorden said in the conference call:

With top-tier assets, a pristine balance sheet and few contractual service commitments, we have tremendous flexibility for 2024 and beyond. Now as ever, our mission is to generate consistent profitable growth. Having outstanding oil and natural gas assets with a low cost of supply

Thus, I recommend a long-term CTRA position combined with active short-term trading that I increase to 60% to take advantage of the sector’s weakness and increase overall risks as natural gas prices are still below $3.

Coterra Energy CEO Tom Jorden said in the conference call:

We had an excellent quarter driven by production beats on oil, natural gas and natural gas liquids. Volumes on all 3 commodities exceeded the high end of our guidance. Our production beat was primarily driven by well productivity that exceeded our expectations. This was true in the Marcellus, Anadarko and the Permian.

Coterra Energy – Balance Sheet History ending Q2’23: The Raw Numbers

COG	Q2’22	Q3’22	Q4’22	Q1’23	Q2’23
Total Revenues in $ Million	2,572	2,520	2,280	1,777	1,185
Net Income in $ Million	1,229	1,196	1,632	677	209
EBITDA $ Million	2,023	1,965	1,754	1,255	684
EPS diluted in $/share	1.52	1.50	1.32	0.88	0.27
Cash from operations in $ Million	879	1,771	1,484	1,494	646
Capital Expenditure in $ Million	474	460	505	484	597
Free Cash Flow in $ Million	405	1,311	979	1,010	49
Cash and cash equivalent $ Million	1,059	778	673	973	841
Total Debt (incl. current) In $ Million	3,105	2,282	2,181	2,176	2,171
Dividend per share in $ per share	0.65 ($0.15 + $0.50)	0.68 ($0.15 + $0.53)	0.57 ($0.37 + $0.20)	0.20	0.20
The share outstanding diluted in Million	808	797	781	768	760
Gas Production	Q2’22	Q3’22	Q4’22	Q1’23	Q2’23
Gas Equivalent Production in K Boepd	631.7	641.2	631.7	634.9	664.8
NG price per Mcf	5.78	6.37	4.87	3.31	1.65

Click to enlarge

Source: Company filings.

Trends, Charts, and Commentary: Revenues, Free Cash Flow, and Gas Production

1 – Total Revenues were $1,185 million in Q2’23

Coterra Energy recorded quarterly revenues of $1,185 million for the second quarter of 2023, down from $2,572 million in Q2’22 and down 33.3% sequentially.

The net income was $209 million in Q2’23, or $0.27 per diluted share, down 30.9% sequentially. Cash Flow From Operating Activities totaled $646 million in Q2’23 compared to $1,494 million the prior quarter.

2 – Free cash flow was $49 million in Q2’23

Note: The generic free cash flow is the cash from operations minus CapEx. The company has a different way of calculating the free cash flow. CTRA indicates $113 million in Q2’23 (non-GAAP).

CTRA’s free cash flow was $49 million in Q2’23. The trailing 12-month free cash flow TTM was $3,349 million.

Coterra’s Board of Directors approved a quarterly dividend of $0.20 per share this quarter, a big slide from the preceding quarter.

During the quarter, the Company repurchased 2.4 million shares for $57 million at an average price of $23.55 per share, leaving $1.7 billion remaining on the $2.0 billion share repurchase authorization as of June 30, 2023.

3 – Quarterly Oil Equivalent production

Coterra Energy operates in three different basins in the USA. Production was higher YoY, as shown in the chart below.

Coterra Energy produced 664.9K Boepd in Q2’23, up from 631.7K Boepd in Q2’22. Unit operating cost totaled $8.27 per BOE in Q2’23, within the company’s annual guidance range of $7.30-$9.40 per BOE.

The average realized natural gas price increased to $1.65/Mcf from the year-ago quarter’s $5.78. The oil price was $71.88 per barrel, and NGL was $16.67 per barrel equivalent. Those prices exclude the effect of commodity derivatives

We can easily see how commodity prices have affected revenues and free cash flow.

4 – Net Debt is $1,330 million as of Q2’23

On June 30, 2023, Coterra Energy indicated a total debt of $2,171 million (including current) and cash on hand of $841 million. CTRA has No debt outstanding under its $1.5 billion five-year revolving credit facility and no near-term debt maturities.

Liquidity is $2.341 billion. The company also indicates its 2023 Hedge with about 15% NG hedged and 17% Oil hedged in Q3’23.

Coterra’s net debt to trailing twelve months Adjusted EBITDAX ratio at June 30, 2023 was 0.2x.

5 – 2023 Outlook raised

For 2023, Coterra Energy forecasts a 630-655K Boepd production, up from 610-650K Boepd indicated in the prior quarter.

CapEx is expected to be between $2 billion and $2.2 billion, unchanged from the preceding quarter.

The company also indicated a Q3’23 outlook with oil and NG prices estimated at $76 per barrel and $2.84 per Mcf.

Third-quarter 2023 production and CapEx:

• Total production volumes of 625-655K Boepd, down 3.8% sequentially.
• Oil production of 88.0-91.0K Bopd
• Natural gas production of 2,775-2,875 MMcfpd
• Expect capital expenditures (accrual basis) of $540 – $610 million

Technical Analysis Short Term and Commentary

Note: The chart is adjusted for the dividend.

CTRA forms an ascending channel pattern with resistance at $28.20, support at $25.85, and mid-resistance/support at $27.25 (50MA). RSI is 23, a strong buy signal that suggests we have now reached a possible solid support.

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

The trading strategy is to sell about 60% of your position between $28.25 and $28, with a potential higher resistance of $28.75. Conversely, I recommend buying and accumulating CTRA between $26 and $25.7, with possible lower support at around $25.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.