Post earnings, Coterra remains a powerful dividend and buyback play in a shaky market

Published Mon, May 2 20226:32 PM EDTUpdated Mon, May 2 20228:36 PM EDT

Coterra Energy (CTRA) reported a better-than-expected first quarter Monday after the bell. Total revenues of $1.679 billion missed the consensus estimate on FactSet of $1.796 billion, but adjusted earnings per share of $1.01 came in well ahead of the estimate of $0.83. Note that management will host their earnings call on Tuesday, May 3, at 10:00 a.m. EST. We will follow up tomorrow with any important information from the conference call. A live audio webcast can be accessed on the "Event & Presentation" page under the "Investors" section of Coterra's website. Bottom line Coterra Energy delivered a strong first-quarter result with cash flow outperforming expectations, thanks to higher-than-expected production, and of course, a favorable commodity pricing environment. Based on our view that natural gas and oil prices will remain higher for longer due to tight supply, we think Coterra screens as an attractive and powerful dividend and buyback investment vehicle in an uncertain market. We give the stock a 1 rating, meaning we would buy it right here. Cash flow When analyzing an independent oil and gas company in this "capital discipline" day and age, one of the most important items we look at inside an earnings release is the company's cash flow performance. Coterra Energy outperformed across the board: Cash flow from operations was $1.322 billion (up 39% from the fourth quarter 2021) and beat estimates of $1.155 billion. Adjusted discretionary cash flow (cash flow from operations excluding changes in assets and liabilities) was $1.232 billion (a gain of 20% from the fourth quarter 2021), higher than estimates of $1.183 billion. Adjusted free cash flow of $961 million (up 27% from the fourth quarter 2021) exceeded estimates of $800 million. Based on the recent commodity strip prices, management now expects 2022 free cash flow will be $4.5 billion, up from its previous view of $3.0 billion. This new outlook is higher than the current consensus estimate on FactSet of $3.37 billion. No changes were made to management's 2022 capital budget and full year operating expense guidance. This means the company will remain disciplined despite the recent surge in oil and natural gas prices. Dividends and buybacks With free cash flow growth comes more dividends and buybacks. Coterra's board announced today a quarterly base-plus-variable dividend of $0.60 per share. The combined base-plus-variable dividend represents 50% of free cash flow in the quarter and is an increase of $0.04 per share (or 7%) from the fourth quarter payout. Based on Coterra's closing price Monday of $28.92, the annualized dividend yield ($0.60 times four quarters) is roughly 8.3%. In addition to dividends, share repurchases have become an increasingly important part of the cash return story at Coterra. During the quarter, the company did well with its buyback, repurchasing 7.6 million shares at a total cost of $184 million, for an average price of $24.21. Coterra has $1.066 billion remaining under its current authorization. This balance represents approximately 5% of the company's current market cap. Production and second-quarter outlook Total production in the quarter was 630 thousand barrels of oil equivalent per day (MBoepd), representing the high end of guidance and more than estimates of 623.6. The make-up of this production was as follows: Oil: averaged 83.1 MBopd, exceeding the high end of guidance and higher than the 81.2 expected. Natural gas: averaged 2,850 MMcfpd, representing the high end of guidance and slightly more than estimates of 2,829.4 For the second quarter 2022, Coterra expects to average between 605 and 625 MBoepd, about in line with estimates of 616 MBoepd. Oil volumes are estimated to average between 82 and 84 thousand barrels per day (MBopd), in line with estimates of 82.9 MBopd. Natural gas volumes in the second quarter are projected to average between 2,725 and 2,775 million cubic feet per day (MMcfpd), slightly below estimates of 2,769.4 MMcfpd. We are willing to look past the slightly lower-than-expected natural gas volume guide given that management just reported production results that were either at the high end or exceeded initial guidance. In other words, we would not be surprised to see Coterra outperform its initial expectation. (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. 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The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas.

Angus Mordant | Reuters