We invested in Coterra for capital returns and it more than delivered last quarter

Published Tue, Aug 2 20227:37 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Coterra Energy (CTRA) reported second-quarter results Tuesday that beat Wall Street expectations on the top and bottom lines — and, notably, raised its quarterly dividend payout by roughly 8%. Total revenues of $2.57 billion topped FactSet estimates of $2.24 billion. Adjusted earnings per share of $1.35 eclipsed forecasts of $1.27. Important note: Coterra management will host their earnings call Wednesday at 10 a.m. ET. We will follow up after the call with any additional information that Club members should know. If you want to listen in Wednesday, a live audio webcast is available on Coterra's investors website under the "Events & Presentation" section. You can find that here . Bottom line As we wrote Monday in our earnings preview, capital returns are a major reason why we invested in Coterra this year, and on this front the company delivered Tuesday night. It increased the percentage of free cash flow it is returning to shareholders to 80% in the second quarter, from 50% in the first quarter. Half of the free cash flow is being used to fund the company's dividend, while the other 30% went to buying back 11 million shares at an average price of $27.51 per share. Coterra did raise its full-year capital investment guidance to between $1.6 billion and $1.7 billion, up from $1.4 billion to $1.5 billion, citing "inflation and a modest increase in activity." While we want Coterra to be disciplined with expenses unlike many exploration and production (E & P) companies of yesteryear, this upside guidance revision did not necessarily catch us by surprise. That's because in recent weeks many analysts on Wall Street indicated they expected firms like Coterra, which held their capital budget guidance steady in the first quarter, to adjust them higher due to inflationary pressures in the oil patch. In the end, it's all about cash flow and a commitment to cash returns of production growth. On this front, Coterra delivered. Cash flow With our focus on capital return to shareholders, we're paying close attention to Coterra's cash flow figures. Here's how the Houston-based company did: Adjusted discretionary cash flow (cash flow from operations excluding changes in assets and liabilities) was $1.49 billion, up nearly 21% sequentially and topping expectations of $1.46 billion. Adjusted free cash flow of $1.02 billion was pretty much in line with expectations of $1.03 billion. Coterra left its full-year free cash flow expectations unchanged at approximately $4.5 billion. "While inflation has driven 2022 capital costs up 20 to 25 percent year-over-year, we are still projecting all-in returns that markedly exceed our historical results," CEO Thomas Jorden said in the earnings release. "We remain committed to capital discipline and our updated guidance continues to assume we will invest less than 30 percent of our 2022 projected cash flow from operations." As noted in the bottom line, Coterra did increase its 2022 capital investment guidance. In the release, the company offered details on what else is behind that decision. "The incremental activity capital is being driven by our intention to keep a third rig in the Marcellus during the second half of 2022, increases relating to facilities capital, and a modest uptick in non-operated activity." Dividends and buybacks Coterra's board announced Tuesday a quarterly fixed-plus-variable dividend of 65 cents per share, up 8.3% from its prior level of 60 cents per share. Based on Coterra's Tuesday closing price of $29.38, the annualized dividend yield (65 cents times four quarters) is 8.85%. The other part of the cash return story at Coterra is stock buybacks, which ratcheted up in the second quarter compared to the first three months of 2022. In the second quarter, the company spent $303 million to repurchase 11 million shares at an average price of $27.51. For comparison, in the first quarter, Coterra bought back 7.6 million shares at an average price of $24.21 at a total cost of $184 million. As of June 30, Coterra had $763 million remaining under its original $1.25 billion repurchase program. That's just over 3% of Coterra's $23.675 billion market cap as of Tuesday's close. Production and second-quarter outlook Total production in the quarter was 632 thousand barrels of oil equivalent per day (MBoepd), coming in higher than the company's guidance and analyst expectations. Coterra had expected to average between 605 and 625 MBoepd, while the Street was looking for 616 MBoepd. Recall that one key difference between Coterra and the other E & P firms we own — Pioneer Natural Resources (PXD) and Devon Energy (DVN) — is Coterra's more sizable natural gas exposure. Here's the breakdown of the company's production in Q2: Oil: averaged 88.2 MBopd, exceeding prior guidance of 82 MBopd to 84 MBopd and analyst estimates of 83.1 MBopd. Natural gas: averaged 2,790 MMcfpd (million cubic feet per day), more than the company's guided range between 2,725 and 2,775 MMcfpd, and more than estimates of 2,769.1 MMcfpd. Coterra said it anticipates averaging between 610 and 630 MBoepd in the third quarter of 2022. The FactSet estimate of 622.4 MBoepd is pretty much in the middle of Coterra's guidance. Coterra expects oil volumes to average between 85.5 and 88.5 MBopd in the third quarter, exceeding consensus estimates of 84.2 MBopd. Nat gas volumes in the third quarter are expected to average between 2,725 and 2,775 MMcfpd, which is the same guidance the company issued for the second quarter. The top end of the third-quarter range is below the consensus estimate of 2,800.7 MMcfpd, according to FactSet. For the full year, Coterra raised the low end of its production forecast to 615 MBoepd, up from 600 MBoepd. It left the top end of its guidance unchanged at 635 MBoepd. Pricing, excluding the impact of derivatives (hedging activity such as selling futures contracts to lock in prices in future periods and therefore operate with increased certainty), the average realized price for oil was $109.23 vs. $106.20 expected, while natural gas was $39.17 vs. $40.40 expected and gas was $5.78 vs. $5.60 expected. (Jim Cramer's Charitable Trust is long CTRA, DVN and PXD. 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. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

In this photo illustration, a Coterra Energy Inc. logo is seen on a smartphone screen.

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