Business Overview and History: Coterra Energy traces its roots back to the 1989 founding of Cabot Oil & Gas Corporation, a pioneering natural gas exploration and production company. Initially focusing on natural gas exploration and production in the Appalachian Basin, the company gradually expanded its operations over the years, entering the Permian Basin in Texas and the Anadarko Basin in Oklahoma. In 2010, Coterra made a major acquisition of additional Marcellus Shale assets, solidifying its position as a leading natural gas producer in the region. This acquisition, along with continued development of the company's other assets, helped drive strong growth in Coterra's production and financial performance over the ensuing decade.
However, the company faced challenges along the way. In the mid-2010s, Coterra faced litigation related to alleged environmental violations in Pennsylvania, which resulted in a settlement in 2024. Additionally, the company had to navigate volatile commodity price cycles, adjusting its operations and capital allocation accordingly.
Most notably, in 2021, Cabot Oil & Gas merged with Cimarex Energy, a well-respected operator in the Permian and Anadarko basins, to form the combined entity known as Coterra Energy. This transformative merger created a premier exploration and production company with a diverse portfolio of high-quality assets across the Permian, Marcellus, and Anadarko basins. The merger significantly expanded Coterra's geographic footprint and asset portfolio, creating a diversified E&P powerhouse with a premier acreage position across multiple prolific basins.
Coterra's current operations are focused on the Permian Basin, Marcellus Shale, and Anadarko Basin, where the company leverages its technical expertise and operational excellence to drive efficient development and production. This merger positioned Coterra as a leading player in the domestic energy industry, with a strong balance sheet and the operational expertise to thrive in a dynamic market environment.
Financial Performance and Ratios: Coterra's financial results have been consistently strong, with the company displaying robust profitability and cash flow generation. In the fiscal year 2023, the company reported annual revenue of $5.91 billion and net income of $1.62 billion, translating to a net profit margin of 27.4%. Coterra's operating cash flow for the year stood at $3.66 billion, while its free cash flow reached $1.56 billion, showcasing the company's ability to generate substantial cash from its operations.
For the most recent quarter (Q3 2024), Coterra reported revenue of $1.36 billion, net income of $252 million, operating cash flow of $755 million, and free cash flow of $359 million. Compared to Q3 2023, revenue remained flat, while net income decreased by 21.7% from $323 million, operating cash flow decreased slightly by 0.4% from $758 million, and free cash flow decreased by 45.6% from $659 million. These decreases were primarily attributed to lower natural gas prices and production, partially offset by higher oil revenues.
The company's balance sheet remains in excellent shape, with a net debt to EBITDA ratio of just 0.31x as of the end of 2023, indicating a strong financial position and ample liquidity. Coterra's return on equity (ROE) for the year was 12.7%, demonstrating the efficient deployment of capital and the company's commitment to shareholder value creation. As of September 30, 2024, Coterra's debt-to-equity ratio stood at 0.14, with $843 million in cash and a $2.0 billion revolving credit facility with no borrowings outstanding. The company's current ratio and quick ratio both stand at 1.61, further underlining its strong liquidity position.
Operational Excellence and Asset Quality: Coterra's operational prowess is a key competitive advantage, as evidenced by its consistently strong production and cost performance. In 2023, the company's total production averaged 656.9 thousand barrels of oil equivalent per day (MBoE/d), with a liquids (oil and natural gas liquids) contribution of 57%. Coterra's operational efficiency is further highlighted by its low all-in unit costs, which averaged $7.45 to $9.55 per barrel of oil equivalent (Boe) in 2023.
The company's asset portfolio is characterized by high-quality, long-lived reserves with low-cost development, enabling Coterra to generate robust returns across varying commodity price environments. As of the end of 2023, the company's total proved reserves stood at 2.4 billion Boe, with a reserve life index of over 10 years.
Coterra's Permian Basin assets, which account for approximately 60% of the company's total production, are particularly noteworthy. The company has established a strong operational foothold in the Delaware Basin, where it continues to drive efficiency gains and deliver compelling well results. In the Marcellus Shale, Coterra maintains a leading position, while its Anadarko Basin assets provide additional geographic and commodity diversification.
For the first nine months of 2024, Coterra's production mix was approximately 16% oil, 59% natural gas, and 25% natural gas liquids (NGLs), compared to 14% oil, 61% natural gas, and 25% NGLs in the same period of 2023. The company's total equivalent production increased from 179.30 million barrels of oil equivalent (MMBoe), or 656.90 MBoE/d, in the first nine months of 2023 to 184.90 MMBoe, or 674.80 MBoE/d, in the first nine months of 2024.
Product Segments:
1. Oil Segment: Coterra's oil production increased significantly in Q3 2024, reaching 10.30 MMBbl (112.30 MBbl/d) compared to 8.50 MMBbl (91.90 MBbl/d) in Q3 2023. For the first nine months of 2024, oil production rose to 29.40 MMBbl (107.40 MBbl/d) from 25.50 MMBbl (93.30 MBbl/d) in 2023. This increase was primarily driven by higher activity in the Permian Basin. The average realized oil price, including derivatives, was $74.18 per Bbl in Q3 2024, down 8% from $80.74 per Bbl in Q3 2023. For the first nine months of 2024, the average realized oil price was $76.17 per Bbl, slightly higher than $75.64 per Bbl in the same period of 2023.
2. Natural Gas Segment: Natural gas production decreased to 246.70 Bcf (2.68 MMcf/d) in Q3 2024 from 267.10 Bcf (2.90 MMcf/d) in Q3 2023. For the first nine months of 2024, production slightly decreased to 769.10 Bcf (2.81 MMcf/d) from 779.50 Bcf (2.86 MMcf/d) in 2023. This decrease was mainly due to strategic curtailments in the Marcellus Shale in response to weaker natural gas prices. The average realized natural gas price, including derivatives, was $1.41 per Mcf in Q3 2024, down 30% from $2.01 per Mcf in Q3 2023. For the first nine months of 2024, the average realized price was $1.65 per Mcf, 35% lower than $2.53 per Mcf in the same period of 2023.
3. Natural Gas Liquids (NGLs) Segment: NGL production increased to 10.10 MMBbl (109.70 MBbl/d) in Q3 2024 from 8.70 MMBbl (94.50 MBbl/d) in Q3 2023. For the first nine months of 2024, NGL production rose to 27.30 MMBbl (99.60 MBbl/d) from 23.90 MMBbl (87.70 MBbl/d) in 2023. This increase was primarily driven by higher activity in the Permian Basin. The average realized NGL price was $18.42 per Bbl in Q3 2024, 6% lower than $19.52 per Bbl in Q3 2023. For the first nine months of 2024, the average realized price was $19.59 per Bbl, slightly lower than $19.90 per Bbl in the same period of 2023.
Shareholder Returns and Capital Allocation: Coterra's commitment to shareholder value creation is evident in its balanced approach to capital allocation and return of capital. The company's capital expenditure program is disciplined, with a focus on maintaining production and generating robust returns on invested capital. In 2023, Coterra's capital expenditures totaled $2.1 billion, a level the company believes can be funded from its operating cash flow.
Alongside its capital investment, Coterra has established a shareholder-friendly return of capital program. In 2023, the company paid out $890 million in dividends and repurchased $406 million of its common stock, returning over 70% of its free cash flow to shareholders. Coterra's quarterly base dividend of $0.20 per share, which was increased to $0.21 per share in 2024, represents one of the highest yielding dividends in the E&P peer group.
Outlook and Guidance: Coterra's operational and financial results have been outstanding, allowing the company to raise production guidance and lower capital guidance for 2024. For Q4 2024, Coterra expects total production to average between 630 - 660 MBoepd, with oil production between 106 - 110 MBo/d and natural gas between 2.53 - 2.66 Bcf/d. Capital expenditures for Q4 2024 are expected to be between $410 - $500 million.
For the full-year 2024, Coterra has increased its oil production guidance to 107 - 108 MBoepd, up approximately 0.5% from the previous guidance. The company has also tightened its BOE and natural gas production guidance, both up 1% at the midpoint from the previous guidance. Notably, Coterra has lowered its capital guidance to $1.75 - $1.85 billion, representing a 14% decrease at the midpoint compared to the 2023 capital spend.
Coterra's strong operational performance, financial flexibility, and shareholder-friendly initiatives position the company well to navigate the evolving energy landscape. The company's diversified asset base, coupled with its technical expertise and relentless focus on value creation, make Coterra a compelling investment opportunity in the E&P sector.
Risks and Challenges: While Coterra's outlook remains positive, the company is not without its risks and challenges. Like other E&P operators, Coterra is exposed to commodity price volatility, which can impact its financial performance and cash flow generation. This is evident in the recent decrease in natural gas prices, which led to strategic curtailments in the Marcellus Shale during 2024. Additionally, the company faces regulatory and environmental compliance risks, particularly in its areas of operation, which could result in increased costs or operational disruptions.
Furthermore, Coterra's growth and execution are dependent on its ability to successfully integrate and optimize its assets, as well as its capacity to effectively manage its workforce and operational logistics. Any unforeseen challenges in these areas could potentially affect the company's overall performance.
The U.S. oil and gas industry has seen a gradual recovery from the pandemic-related downturn, with oil prices stabilizing in 2023 and 2024. However, natural gas prices have remained volatile, impacting Coterra's production decisions. The industry is also facing increasing regulatory scrutiny around emissions and environmental compliance, which Coterra must navigate carefully.
Conclusion: Coterra Energy's exceptional asset quality, operational prowess, and disciplined capital allocation have positioned the company as a premier player in the E&P industry. The company's diversified portfolio, strong financial position, and shareholder-friendly initiatives make it an attractive investment opportunity for those seeking exposure to the upstream energy sector. As Coterra navigates the dynamic energy landscape, its commitment to value creation and operational excellence will be critical to its continued success. With a robust production outlook, improving capital efficiency, and a strong balance sheet, Coterra is well-positioned to capitalize on opportunities in the evolving energy market while managing potential risks and challenges.