Coterra uses its flexibility to deliver what matters most to investors in energy

Published Thu, Feb 22 20248:06 PM EST

Coterra Energy slightly missed earnings expectations on Thursday, but the oil and natural gas producer delivered where it matters most: free cash flow. Revenue for the three months ended Dec. 31 fell 30% year over year to $1.596 billion, outpacing the consensus forecast of $1.528 billion, according to analyst estimates compiled by LSEG. Adjusted diluted earnings-per-share fell 55% versus last year to 52 cents, a tad shy of expectations of 55 cents per share. Bottom line The investment thesis in the energy complex is all about cash returns to shareholders. Gone are the days when producers sought to grow production at all costs. This new era rewards the energy players that focus on dividends and buybacks, both of which depend on strong, consistent cash flow production. And Coterra delivered, with beats on discretionary and free cash flow. Even more important is how Coterra is doing it. Cash flows are a function of commodity prices, which are not in management's control. However, management can control production and capital expenditures (CapEx). The lower-than-expected CapEx combined with higher-than-expected production allows us to better appreciate the free cash flow beat because it means that management truly is operating more efficiently than was expected by analysts. Moreover, we value Coterra for its flexibility. Natural gas prices have rapidly declined over the past month, but fortunately for investors, Coterra can reallocate assets and shift production to oil from gas. "As we look ahead, our 2024 capital plan underscores Coterra's ability to pivot capital as fundamentals in the commodity markets dictate," CEO Tom Jorden said in the release, noting that the approach reduced total capital investment by roughly 12% year over year. "The company maintains optionality to further pivot capital in the future, should macro conditions warrant." Coterra will hold its post-earnings conference call on Friday at 10 a.m. ET. We reiterate our 1 rating on CTRA shares and a price target of $30. Capital allocation Coterra returned a total of $187 million to shareholders during the fourth quarter, with $29 million coming via share repurchases and another $158 million in declared dividends. This represents 45% of fourth-quarter free cash flow. For the full year 2023, management returned a total of $1.026 billion — $612 million via dividends and $414 million via buybacks, or 77% of free cash flow — to shareholders. The company had $1.6 billion remaining under its previous $2 billion authorization as of the end of December. Management reaffirmed its commitment to returning at least 50% of annual free cash flow to shareholders via dividends and buybacks — exactly what we like to hear. Guidance The current quarter looks good and we're not overly concerned about the misses in the full-year guide. Though production came up well short of expectations, the weakness is a result of management pulling back on its natural gas production. Though the discretionary cash flow guide is disappointing, the ultimate impact is mitigated by this flexibility because it allows for the most efficient use of cash. That results in CapEx which is well below expectations and free cash flow which is closer to what we were looking for, even if it is a bit below expectations. We are more pleased with the lower-than-expected CapEx and better-than-expected oil production than we are disappointed with the weaker cash flow guidance. The CapEx reduction is largely attributable to lower activity in the Marcellus basin due to falling natural gas prices (again, the flexibility we care about) along with some cost reductions and deflation, partially offset by increased activity in the Permian and Anadarko basins as management leans into liquids-rich assets. (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. 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.

A flare burns excess natural gas in the Permian Basin in Loving County, Texas, U.S. November 23, 2019.

Angus Mordant | Reuters

Coterra Energy slightly missed earnings expectations on Thursday, but the oil and natural gas producer delivered where it matters most: free cash flow.

Revenue for the three months ended Dec. 31 fell 30% year over year to $1.596 billion, outpacing the consensus forecast of $1.528 billion, according to analyst estimates compiled by LSEG.
Adjusted diluted earnings-per-share fell 55% versus last year to 52 cents, a tad shy of expectations of 55 cents per share.