Coterra Energy is cutting oil drilling in response to spending more on slack price slack and natural gas production, but that move, announced along with the results of the first quarter, is hidden by several operational concerns, leading to the sale of its shares on Tuesday. First quarter revenues rose 33% year-on-year to $1.9 billion, according to LSEG. Adjusted earnings per share of 80 cents for the three months ended March 31st coincided with expectations, LSEG data showed. Each year, adjusted EPS increased by 56.9%. According to Factset, free cash flow of $663 million has surpassed an estimate of $596 million. In conclusion, we have long been craving Coterra’s mix of oil and natural gas assets. This is because it gives the company the flexibility to accommodate inherently unstable product prices. The biggest point from Coterra’s late Monday release and Tuesday morning conference call: its flexibility is being used seriously in the current disadvantaged oil market. However, even in principle support of the move, operational issues in certain parts of the company’s Texas area have attracted a lot of attention and could be one of the biggest drivers of a sudden 8.5% stock decline. CTRA YTD MOUNTANE COTERRA YTD executives did a good job explaining their plans to fix the issue in Tuesday’s revenue call, but make it clear they don’t believe it is a structural issue of inventory quality. Coterra is worth owning as our only oil and gas play, providing solid dividend payments, serving as a geopolitical hedge, providing some exposure to long-term trends that could drive an increase in natural gas demand, such as increased artificial intelligence computing and the US exports of liquefied natural gas. However, in recent years, stock prices may struggle to gain traction. We repeat our rating of 2 equivalent to Hold, but lower our price target to $28. Commentary There are three main themes from the Coterra revenue report, but they have nothing to do with actual first quarter results. It’s not that bad, but it’s not exceptional either. 1. Macro Landscape The area of the first discussion is around the decision to reduce the amount of spending on macro Landscape and Kotera oil. Coterra and its American oil producer brothers are facing difficult setups thanks to the sharp drop in crude prices over the past month, bringing the US oil benchmark, the middle-level crude in West Texas to its four-year low of under $58. At the beginning of April, WTI traded over $71 per barrel. There are two main reasons for pullbacks. President Donald Trump’s intense trade war has fueled concerns about a global economic slowdown. At the same time, a group of eight oil producers known as OPEC+ has announced a series of surprisingly aggressive moves to provide markets with more supply in the coming months. The latest in these decisions was announced over the weekend. While Saudi-led OPEC+ may normally be expected to reduce power in the face of potential demand disruption, opposition is on the rise. Analysts say various factors may motivate OPEC+’s conflicting behavior, including internal politics within the oil cartel. But for our purposes here, most importantly, the fear of trade-related recession, what effectively undermines the prospects of crude oil, whether OPEC+ or both, makes the useful drilling work for Kotera oil more difficult. Not impossible, but if the WTI is $75 per barrel than $55, the company and its peers will make more money. So the new set of facts requires that you rethink the best use of money and adjust accordingly if something else is better for the investor. Kotera’s new plan to reduce oil-focused spending is a wise plan for the near future, made possible by its oil-rich Permian basin in western Texas and southeastern New Mexico, as well as its presence in the natural gas-rich Marcellus Shale and other parts of the Appalachian region of Pennsylvania. Kotella also has wells in the Anadarko Basin, which extends to the Texas Panhandle and the West Oklahoma, but plans for this year have not changed. However, in the Permian, Kotera is currently planning to average seven rigs from the 10-wave plan announced in late February in the second half of 2025. A rig is a machine used to drill wells. As a result, the planned Permian capital investment this year has dropped by $150 million. Meanwhile, Coterra resumed activity with Marcellus in April using two rigs. However, the company said it hopes to continue running both rigs later this year, increasing capital expenditures in the region another $50 million. The executive says decisions will be made in the third quarter, but if Cotella decides to run the second rig until the end of the year, he could add another $50 million to those plans. In a revenue call Tuesday, CEO Tom Jorden said he hopes the tariff situation will be resolved and “the threat of a recession will be lifted,” but he stressed that he “cannot run the program on the basis of hope.” “We’re relaxing a little now [on oil spending] This is because they are concerned that crude oil prices could weaken even further. “But when we think that looking at these events, we are prepared for the worst-case scenario, our experience shows that the net effect of these changes was reduced by $100 million in the new guidance range, with the total capital expenditure forecast for 2025 to be in the mid-level range, which is the total amount of the new guidance range. The total product of less expenditure reflects that Kotera is positive in the short term, but they repeatedly said it remains as is. “We have kept a three-year plan that outlines the changes we discussed in this call, and we really want to be clear with everyone about it,” Jorden said. 2. Big theme by free cash flow: Coterra’s free cash flow outlook reduced by 22% to $2.1 billion this year. And while that low assumption of commodity prices outside of control is a major factor in the revision, investors may be concerned that this will limit stock buybacks this year, especially if crude oil prices will weaken. The company’s commitment was to return at least half of its free cash flow to shareholders via dividend payments and share buybacks. However, in 2025, executives in particular have prioritized repayment of debts related to the two Permian-focused acquisitions that closed earlier this year. “We still have the ability to do everything, so to speak, but in 2025, our priorities will be debt repayments. We are not going to compromise on that,” CFO Shane Young said over the phone. “That doesn’t mean there’s no buyback… but looking at 2024, we returned 90% of our cash flow to shareholders. [In 2023]returned 76% of cash flow to shareholders. Why were we able to do that? Because the leverage was low. And we believe that low leverage is an enabler and focuses on protecting long-term shareholder return targets. And I think the best way to do that is to reduce your debt. “At this point, we are very optimistic that this is a solvent in a combination of revised pipe design and cement programs, as the area called Harkey produced normal water volumes. Jorden said. The 2025 guidance is where many of the Kotera year-round guidance from the aforementioned revised edition stands. According to FactSet, this is below the previous guidance of Wall Street expectations of $4.62 and $5 billion, taking into account the high price of both items. Estimated free cash flow of $2.1 billion based on product price assumptions used in discretionary cash flow guides. That’s down from the previous $2.7 billion. Estimated capital expenditure budgets ranging from $2 billion to $2.3 billion fell by $100 million across both ranges. The result is a new midway point of $2.15 billion compared to the previous guide of $2.25 billion. The seven rigs operating in the Permian later this year are lower than previous plans to operate 10 rigs. Expected 2025 720-770 MBOE/D total equivalent production. The midpoint of the range 745, up from the previous guidance of 740, is slightly below the fact set consensus forecast of 757 MBOE/D, which is equivalent to 1,000 barrels per day. Oil production expected in the 155-165 MBO/D range represents 1,000 barrels of oil per day. The midpoint of the range remains unchanged at 160 MBO/D despite moderately lowering the top edge of the range and slightly increasing the bottom end. The fact set consensus is for 163.6 MBO/d. Expected natural gas production ranges from 2,725 to 2,875 mmcf/d, with a new midpoint of 2,800 rising from 2,775. According to Factset, this is below the consensus of 2,837 MMCF/D. (Jim Cramer’s Charitable Trust is a long CTRA. For a full list of stocks, see here.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade warning before Jim makes a transaction. Jim waits 45 minutes after sending a trade alert before purchasing or selling stocks in the Charitable Trust portfolio. If Jim talks about stocks on CNBC TV, he will wait 72 hours after issuing a trade alert before running the trade. 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Oil pump jacks will appear near the Colon Oil area in Mona Hands, Texas on March 27, 2024.
Brandon Bell | Getty Images News | Getty Images
Kotera Energy It cuts oil drilling in response to slack price sagging and spending more on natural gas production, but that move, released along with the results of the first quarter, is hidden by some operational concerns, leading to the sale of its shares on Tuesday.
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