Cabot Oil & Gas (NYSE: COG) no longer exists. COG merged with Cimarex Energy in an all-stock merger of equals in autumn 2021. The new entity is Coterra Energy Inc (NYSE: CTRA).
What Is Coterra Energy?
Coterra Energy (NYSE: CTRA) is a recently formed company comprised of Cabot Oil & Gas (NYSE: COG) and Cimarex Energy (NYSE: XEC).
The company was renamed Coterra Energy Inc. on October 1, 2021, in connection with the NYSE: COG merger.
A Powerful Combination.
Cabot (NYSE: COG) and Cimarex have come together as one bringing the best of both companies to a new entity, Coterra Energy. Our name reflects our natural synergy, a spirit of collaboration, and a combination of premier assets that provide a strong foundation for delivering differentiated performance.
Coterra Energy is a premier, diversified energy company well-positioned to deliver superior and sustainable returns. It is based in Houston, Texas, US.
Sustainability
With ESG targets being so crucial to industry nowadays, Coterra strives to responsibly produce oil and natural gas.
Some environmentally conscious methods include using electric horsepower for power generation, recycling water, reducing emissions through reduced flaring activity, and monitoring continuous emissions.
Asset Ownership
The company holds top-tier assets onshore in the US and owns high-quality development projects in key producing basins.
Permian Basin
In the Permian's Delaware basin region, Coterra owns 234,000 net acres with multi-zone development opportunities. Its target zones are Wolfcamp, Bone Spring and Avalon. At the end of 2021, it had 514 MMboe (millions of barrels of oil equivalent) reserves here in the Permian.
Marcellus Shale
In Susquehanna County, Pennsylvania, Coterra holds approximately 177,000 net acres in the dry gas window of the Appalachian basin. Its target zones are the lower and upper Marcellus. At the end of 2021, it held 2,179 MMboe reserves in the Marcellus.
Anadarko Basin
Coterra owns 182,000 net acres in the Anadarko Basin. Here, company activity is currently focused on the Woodford Shale in Western Oklahoma. At the end of 2021, it held 198 MMboe reserves in the Anadarko Basin.
How Does Coterra Energy Make Money?
Coterra makes money from selling crude oil and natural gas. As prices vary in each commodity, the company can hedge and tactically position to benefit.
The Marcellus Shale is widely considered a natural gas source, whereas the Permian is known for its crude oil. The company produces both but is skewed towards a focus on natural gas.
Natural gas contributed $1.1bn to Conterra’s Q1 operating revenues and natural gas liquids (NGLs) contributed $245m. Meanwhile, oil contributed $699m.
While both are currently fetching high prices, natural gas appears to have a longer outlook from a macroeconomic point of view and the green energy transition.
The company strives to maintain adequate liquidity to combat commodity price volatility and risk. Its primary sources of liquidity are cash on hand, net cash provided by operating activities and available borrowing capacity under a revolving credit facility.
Hedging
Hedging is when the company sells a share of its future output at a price decided now. If the oil price falls significantly, the company can be sure it will still bring in revenue at that pre-determined price. However, hedging goes out of fashion when prices are rising because the company wants to capture the bigger gains and use it to pay down debt or boost the balance sheet.
Coterra has its future production hedged at around 35%. It aims to keep it about 25% and at 50% max. Hedging is a key part of its long-term strategy to maintain a strong balance sheet and continue to deliver shareholder returns.
Natural Gas Price
The Henry Hub prices are the benchmark settlement prices for the entire North American natural gas market. The Henry Hub spot price has risen 71.5% in the first six months of 2022 but is now 30% below its May high.
WTI Crude Oil Price
WTI crude is the leading benchmark for oil consumed in the USA. WTI stands for West Texas Intermediate with a delivery point at Midland and sent via pipeline to Cushing, Oklahoma. It is very light and sweet and is ideal for refining gasoline.
The WTI crude oil price rose 40% in the first half of 2022 but endured a high of $8.96, which has come back 48% to $4.58 at the time of writing. WTI has remained above $100 since April.
NYSE: CTRA Stock Financials
The CTRA stock price climbed more than 36% in the first six months of 2022. Does it have the makings of a good long-term investment?
Coterra boasts a stable balance sheet, strong cash generation, and manageable debt.
The company takes a shareholder-friendly stance in running its finances, including share buybacks and a generous dividend yield.
Indeed, thanks to its recent dividend pledge, the CTRA stock annualized dividend yield exceeds 7.7% at the time of writing.
What do the underlying trends at Coterra Energy Inc tell us about its potential as a long-term investment? Let's take a closer look and see what the numbers tell us.
Why Fundamentals Matter
Analyzing a company's fundamentals gives us key insights into whether it will be a good 'buy and hold' investment.
By 'fundamentals,' we mean a set of key metrics which include price-to-book value (P/BV), price-to-sales ratio (P/S ratio), earnings per share (EPS) and debt. When examined together, fundamentals can tell us whether a company is likely to be a good investment.
For as long as investors have been buying stocks, they've relied on fundamental analysis to assess an organization's financial health and growth prospects.
What do Coterra Energy Inc's fundamentals tell us about the investment opportunity? Let's have a look.
CTRA Stock: The Fundamentals
Earnings Per Share (EPS)
First, let's look at Coterra Energy Inc's EPS. This metric is important to help us understand how profitable the company is on a 'per share' basis. To calculate EPS, you divide net income (after dividends on preferred stock) by the number of outstanding shares.
Coterra Energy Inc's EPS is 1.01 based on figures from its last reported quarter. This is an increase of 165% Y/Y and 21% Q/Q.
Price-To-Sales Ratio (P/S Ratio)
CTRA stock has a P/S of 4.5, down from its 5-year-average of 5.2 and above the industry average of 3.2.
The P/S ratio looks at a company's stock price compared to its sales (revenues). The consensus opinion is that stocks with a lower P/S ratio offer better value, while stocks with a very low P/S ratio are known as 'value stocks.' However, what is considered a 'high' or 'low' P/S ratio is relative and varies across different sectors. The best way to objectively assess this is to compare a company against its industry peers.
In comparison to its peers (Data from FactSet):
Coterra Energy - P/S is 4.5
Continental Resources (NYSE: CLR) P/S is 3.5
Diamondback Energy (NASDAQ: FANG) P/S is 2.7
Devon Energy (NYSE: DVN) P/S is 2.3
Pioneer Natural Resources (NYSE: PXD) P/S is 2.8
As we can see, CTRA's P/S ratio is higher than its peers.
Price-To-Book Value (P/BV)
Another key metric to look at is a company's P/BV, which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value,' meaning the value of all assets which appear 'in its book'). Value investors use P/BV to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
Coterra Energy Inc's P/BV is 1.9 according to its most recent financials, which is more than double the industry benchmark of 0.9. However, it's below its five-year average of 3.8.
Debt
Additionally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
A company with too much debt is at risk of insolvency should its cash flow dry up. In the case of oil and gas companies, this is a situation to watch due to the volatile nature of oil and gas prices.
Net Gearing or Net-Debt-to-Equity
One metric used to gauge a company's debt obligation is its net debt-to-equity ratio, also known as net gearing. This ratio provides a measure of a company's financial leverage.
To calculate net gearing or net debt to equity, divide total debt minus cash by shareholder equity.
This gives us a picture of how the company finances its operations, whether with debt or company funds. Better still, it provides a figure showing how company equity will cover its debt if it were to liquidate or file for bankruptcy.
Coterra Energy has around $3.1bn of long-term debt, $1.4bn in cash and cash equivalents, and $11.71bn in stockholder's equity.
Net Debt = $3.1bn (debt) - $1.4bn (cash) = $1.7bn
$1.7bn (net debt)/ $11.7bn (equity) = 0.14 Net-debt-to-Equity
A net debt-to-equity ratio of 0.14, or 14% is considered prudent.
Net-Debt-to-EBITDA
The net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio measures financial leverage and a company's ability to pay off debt.
$1.7bn (net debt) / $3.3bn (EBITDA) = 0.5 Net-debt-to-EBITDA
A Net-debt-to-EBITDA ratio of 0.5, is considered conservative and shows that Coterra Energy is not heavily indebted.
Based on these figures, Coterra Energy Inc's current net debt levels don't worry us. The company generates enough revenue to service its debt and is not using debt to fund its operations, which is good to see.
Free cash flow
Finally, free cash flow is another metric worth a glance. In Q1 2022, CTRA reported a positive free cash flow of $954m, up 25.8% Q/Q.
For the full year 2022, Coterra Energy currently projects discretionary cash flow of $5.9bn, with its total 2022 capital program coming in at less than 30% of cash flow, leaving almost $4.5bn in free cash flow.
Dividends
The company declared an ordinary dividend of $0.15 per share and a variable dividend of $0.45 per share for a total cash dividend of $0.60 per share in Q1.
NYSE: CTRA Growth Potential
Coterra is not yet looking to ramp up production. With the oil demand outlook still uncertain, the company is taking a conservative approach. Ramping up production quickly incurs steep costs and can be risky.
Natural gas is the cleanest burning and fastest-growing fossil fuel, accounting for about a quarter of global electricity generation. But its longer-term use is uncertain in a transition to net-zero energy systems.
Russia's war in Ukraine caused uncertainty and volatility for European and Asian gas markets and triggered a global energy crisis. If the war ends, oil and gas prices should fall, but if the war escalates, prices could go higher.
There are also concerns that oil reserves are lower than desired for keeping a cap on prices.
High oil and gas prices could lead to a recession, so governments want to keep them stable.
Where possible, Coterra is powering its Permian drilling rigs with grid electrical power, saving around $50k per well in costs.
The company outlook for 2022 pegs its capital expenditure program between $1.4bn and $1.5bn. This includes between $1.2bn and $1.3bn for drilling and completion activities.
Coterra will continue to assess the oil and natural gas price environment and may adjust its capital expenditures accordingly.
NYSE: CTRA Stock Risks
Navigating Change
Merging two businesses to create a strong upstream company is a big undertaking. The integration includes system, IT, and accounting integration which takes time. Cyber security is of utmost importance given the level of geopolitical uncertainty in the world and the ongoing energy crisis. Therefore the company continues to invest in this area.
Price Fluctuation
Volatility in oil and gas prices is inevitable. Lower commodity prices may reduce the amount of oil, natural gas and natural gas liquids (NGLs) that Coterra Energy can produce economically.
Inflation
Inflation is the number one risk to the CTRA share price today as the oilfield is affected by inflation from several directions.
The costs for drilling rigs, completion crews, fuel, sand, labor, oilfield services, and trucking are increasing.
Supply chain disruption continues to impact the lead time on critical equipment such as tubulars, compressors, electrical equipment, production equipment, and line pipe. When demand is high, and supply is low, prices predictably rise.
Furthermore, hiring crews is problematic as they're in short supply, so wage increases are inevitable.
Coterra is seeing inflation moving towards 15% to 20% when comparing FY2022 to 2021.
Should You Invest in Coterra Energy?
Coterra Energy is navigating change to become a leading upstream oil and gas player. It now boasts a deep inventory of high-quality development projects covering oil and natural gas.
The company's hedging strategy and strong asset base mean it can compete competitively. Meanwhile, diversification helps the company mitigate cash flow volatility and enable investment and returns, to support long-term value creation for shareholders.
The Coterra Energy share price is sensitive to changes in the oil price. For instance, in March, CTRA stock spiked on news that the US planned to supply more natural gas to Europe. Therefore, your decision to invest in Coterra Energy shares will depend on your appetite for risk.
Its debt position is favorable but its financial metrics are higher than peers indicating it may be overvalued.
With a Buy rating, Wells Fargo Securities analyst Nitin Kumar recently upgraded his share price target on CTRA stock to $42.
Meanwhile, analysts at BMO Capital Markets and Peters & Co Ltd rate the stock a Hold with share price targets of $33 and $36, respectively.
Stanley Druckenmiller's Duquesne Family Office LLC retains a 0.22% ownership stake in Coterra Energy.
