Coterra Energy beats expectations on its most important line item: free cash flow

Oil and natural gas producer Coterra Energy (CTRA) delivered strong results Monday after closing bell, including beating expectations where it matters most: free cash flow.

• Revenue for the three months ended June 30 fell 46% year over year to $1.356 billion, just shy of the consensus forecast of $1.361 billion, according to analyst estimates compiled by LSEG.
• Adjusted diluted earnings-per-share fell 65% versus the year prior to 50 cents, but outpaced expectations of 44 cents per share.

All line items are important, but it’s free cash flow that supports cash returns to shareholders. It’s also the main reason we — and many other investors — own Coterra in the first place. The investment thesis for so-called upstream companies (exploration and production) is predicated on returns to shareholders via buybacks and/or dividend.

The slight miss on sales was partly due to lower-than-expected realized prices on gas and natural gas (NGL) was more than made up for in strong cash flow generation on the back of better-than-expected production. In addition, management raised its production forecast for the year while keeping capital expenditure guidance unchanged. That means improved capital efficiency, and we love that.

You will see in the chart below that management’s cash flow outlook is lower than expected. But it’s important to remember that cash flow is a function of energy prices, and is therefore largely out of management’s control. No company, regardless of how big, is going to singlehandedly determine the price of a global commodity like oil or gas. As a result, it’s the production and capital expenditures forecasts that carry the most weight. And in that respect, Coterra delivered a favorable outlook for the year, which is helping to lift shares 3% higher in the after-hours trading.

Coterra management holds its post-earnings conference call the morning after its release, so we’ll tune in tomorrow, Tuesday, at 10 a.m. ET. We reiterate our 1 rating and $30 price target.

During the quarter, Coterra returned a total of $211 million to shareholders with $60 million coming via share repurchases and another $151 million declared dividends. This represents 84% of third-quarter free cash flow.

This brings the year-to-date total cash return to $839 million. The breakdown: $454 million via dividends and $385 million from repurchases. In total, this amounts to 91% of free cash flow generated this year. Management said Coterra is on track to return at least 80% of currently forecasted free cash flow. The company had $1.6 billion remaining under their previously authorized $2 billion authorization as of the end of September.

Operating and free cash flow guidance missed expectations, but the numbers are purely a function of oil prices and out of management’s control.

Production and capex for the full year — which is really what matters when we’re looking into the fourth quarter — are firmly within management’s control so the guidance beat here firmly outweighs cash flow miss. Versus prior guidance, this new outlook represents an increase to full year production targets and a reiteration of the capital expenditure target.

(Jim Cramer’s Charitable Trust is long CTRA. See here for a full list of the stocks.)

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