Coterra Earnings: Coterra Returns 184% of Its Free Cash to Shareholders

Coterra CTRA delivered production of 665 mboe/d in the second quarter, which was 4.7% higher sequentially and 5.3% higher year over year. This compares with the previously guided range of 620-650 mboe/d. Quarter over quarter, daily production increased by 8.8% in the Marcellus and 1.5% in the Permian, while Anadarko output decreased by 8.2%. Management attributed the positive surprise exclusively to better-than-expected well performance across the portfolio, noting that the number of wells coming online in the period was within guidance. Like other E&P firms, Coterra continued to refine its completion design and optimize the spacing of its development program to squeeze out the best results, and the improvement shows this effort is yielding results. Consequently, management increased its full-year volume guidance by 2%, with no change to the 2023 budget or activity plan. Looking further ahead, the firm sees some sign that well costs are moderating, especially in the rig, steel, frac crew, and sand categories. Early indications suggest a 5% dip in well costs going into 2024, which is what we are already modeling.

Also in the period, the firm opted to lean on its balance sheet to return 184% of its $113 million free cash flow to shareholders. While the majority of this was the base dividend, management also repurchased $57 million stock at an average price of $23.55. We think that price is fair, given our $25 fair value estimate, but the slight discount is not really consistent with management’s view that the repurchases were counter-cyclical (implying a strong valuation dislocation that would theoretically justify deploying its cash reserves to accelerate buybacks). Notably, the dividend portion of the capital return ($151 million) by itself exceeded free cash flows.

We plan to incorporate these operating and financial results in our model shortly, but after this first look our fair value estimate and narrow moat rating remain unchanged.