bymuratdeniz
Coterra Energy (NYSE:CTRA) appears capable of generating close to $5 billion in positive cash flow in 2H 2022 and 2023 combined at current strip prices. This is despite spending a bit above maintenance capex and potentially paying over $1 billion in cash taxes over that period.
Coterra is paying 50+% of its free cash flow in the form of dividends and also has been active with share repurchases and redeeming debt. At long-term (after 2023) $70 WTI oil and $4 NYMEX gas, I estimate that it is worth around $34 to $35 per share.
2H 2022 Outlook
Coterra may average approximately 620,000 BOEPD in production during the second half of 2022 based on its full-year guidance. This includes approximately 87,000 barrels per day of oil production.
At current strip of roughly $90 WTI oil and high-$6s NYMEX natural gas, Coterra is projected to generate approximately $4.53 billion in oil and gas revenues before hedges. Coterra’s 2H 2022 hedges have an estimated value of negative $216 million, with the bulk of those losses attributed to its Q3 2022 hedges. Coterra primarily uses collars for its hedges, and current strip is below the ceiling of most of its Q4 2022 collars.
| Type | Units | $ Per Barrel/Mcf | $ Million |
| Oil (Barrels) | 16,072,500 | $89.50 | $1,440 |
| NGLs (Barrels) | 13,379,583 | $30.00 | $401 |
| Natural Gas [MCF] | 507,137,500 | $5.30 | $2,688 |
| Hedge Value | -$216 | ||
| Total Revenue | $4,313 |
This leads to a projection that Coterra may be able to generate $1.979 billion in positive cash flow during the second half of 2022.
| Type | $ Million |
| Direct Operations | $228 |
| Transportation, Processing & Gathering | $471 |
| Taxes Other Than Income | $173 |
| Exploration | $11 |
| Cash G&A | $130 |
| Cash Interest | $61 |
| Cash Taxes | $400 |
| Capital Expenditures | $860 |
| Total Expenses | $2,334 |
Dividends And Repurchases
Coterra’s quarterly base dividend (at $0.15 per share) is around $119 million per quarter. It is continuing to target 50+% returns to shareholders in the form of cash dividends. Thus Coterra’s variable dividend (related to 2H 2022 results) may be around $0.47 per quarter, bringing its total dividend to around $0.62 per quarter.
This would also leave $990 million (from 2H 2022) to put towards share repurchases and debt reduction, while it also had $1.059 billion in cash on hand at the end of Q2 2022.
Coterra is redeeming $750 million in 4.375% notes due 2024 and also retired $124 million in various notes on August 1. It had an outstanding share repurchase authorization of $763 million at the beginning of Q3 2022.
Based on projections, Coterra could use its cash on hand and free cash flow (after dividends) from 2H 2022 to redeem its 4.375% notes due 2024 and complete its current share repurchase program and still have several hundred million in cash left over.
Potential 2023 Outlook
Coterra hasn’t finalized its 2023 plans yet, but getting to 650,000 BOEPD in average production may be a reasonable expectation. This would represent 4% production growth compared to the midpoint of its 2022 guidance.
The current strip for 2023 is approximately $80 WTI oil and $5 NYMEX gas. At those commodity prices, Coterra is projected to generate $7.607 billion in oil and gas revenue, while its 2023 hedges have no net value.
| Type | Units | $ Per Barrel/Mcf | $ Million |
| Oil (Barrels) | 33,215,000 | $79.50 | $2,641 |
| NGLs (Barrels) | 27,618,333 | $26.50 | $732 |
| Natural Gas [MCF] | 1,058,500,000 | $4.00 | $4,234 |
| Hedge Value | $0 | ||
| Total Revenue | $7,607 |
I’ve assumed that Coterra ends up with a $1.85 billion capex budget in 2023, about 12% higher than the midpoint of its 2022 guidance. This leads to a projection that Coterra may be able to generate $2.951 billion in positive cash flow in 2023 at current strip.
| Type | $ Million |
| Direct Operations | $475 |
| Transportation, Processing & Gathering | $980 |
| Taxes Other Than Income | $290 |
| Exploration | $20 |
| Cash G&A | $260 |
| Cash Interest | $81 |
| Cash Taxes | $700 |
| Capital Expenditures | $1,850 |
| Total Expenses | $4,656 |
Valuation
The blended EV to EBITDAX multiple that I had previously used to value Cabot and Cimarex was approximately 6.0x. At long-term $70 WTI oil and $4.00 NYMEX gas, along with expected 2023 production levels, this would result in an estimated value of approximately $34 to $35 per share for Coterra. This also incorporates Coterra’s projected 2H 2022 cash flow and the additional cash flow it is projected to deliver in 2023 (due to stronger commodity prices than those long-term prices).
This is a relatively high multiple that reflects Coterra’s strong inventory position. It estimates that it has 15+ years of inventory generating better than 1.5x PVI at $55 WTI oil and $2.75 Henry Hub natural gas. PVI is defined as the PV-10 of net operating cash flows divided by well capex. This is a more stringent measure than the breakeven PV-10 metric (1.0x PVI) that sometimes is used.
At $70 WTI oil and $4.00 NYMEX gas, Coterra may be able to maintain production levels and generate close to $3 per share in free cash flow.
Conclusion
Coterra may be able to generate close to $5 billion in positive cash flow in 2H 2022 and 2023 combined at current strip prices, while also delivering modest production growth.
Coterra has a large amount of high-quality inventory that should support its efforts to cost effectively maintain or modestly grow production for years to come. It also has a strong balance sheet with around $2 billion in current net debt (equivalent to its projected 2H 2022 free cash flow), and I’d estimate its value at around $34 to $35 per share at long-term $70 WTI oil and $4 NYMEX gas.
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