Coterra Energy Inc. (NYSE:CTRA) Q1 2023 Earnings Call Transcript

Coterra Energy Inc. (NYSE:CTRA) Q1 2023 Earnings Call Transcript May 5, 2023

Coterra Energy Inc. beats earnings expectations. Reported EPS is $0.87, expectations were $0.7.

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coterra Energy First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Thank you. Dan Guffey, Vice President, Finance Planning Analysis and Investor Relations, you may begin your conference.

Dan Guffey: Thank you. Good morning, and thank you for joining Coterra Energy’s First Quarter 2023 Earnings Conference Call. Today’s prepared remarks will include an overview from Tom Jorden, Chairman, CEO and President; and Scott Schroeder, Executive Vice President and CFO. Also on the call is Blake Sirgo, Senior Vice President of Operations. Following our prepared remarks, we will take your questions during our Q&A session. As a reminder, on today’s call, we will make forward-looking statements based on our current expectations. Additionally, some of our comments will reference non-GAAP financial measures. Forward-looking statements and other disclaimers as well as reconciliations to the most directly comparable GAAP financial measures were provided in our earnings release and updated investor presentation, both of which can be found on our website. With that, I’ll turn the call over to Tom.

Tom Jorden: Thank you, Dan, and welcome to all of you who have joined us for our first quarter conference call. Coterra had an excellent first quarter. We delivered on all fronts, Production at the high end of our guidance, capital within our targeted front-loaded cadence and significant progress on our buyback. These results were driven by outstanding asset performance, a recurring trend you should expect from Coterra. Oil production exceeded the high end of our guidance, driven by strong performance in our Permian, Wolfcamp and Harkey developments. Our Anadarko projects also continued to deliver above our expectations and set the stage for future activity increases. In particular, part of our production beat was driven by continued outperformance of the Anadarko Miller Trust project, which was brought online last year.

The Anadarko is an underappreciated gem within a strong portfolio. Finally, our Marcellus program outperformed in Q1 as we continue to develop a mix of lower and upper Marcellus targets. As we look ahead, we see continuing volatility in our underlying commodities. As of the close of business yesterday, 12-month NYMEX gas strip had fallen to $2.90 per Mcf. The 12-month WTI oil stood at $67 per barrel. Two quarters ago, we were looking at a 2023 oil strip of $83 and natural gas strip of $5.30. There are growing fears of a significant recession, which have been exacerbated by the ongoing banking challenges. Fortunately, we at Coterra have some experience with living through volatility and uncertainty. Our formula is simple, keep our debt low, strive for assets with a low cost of supply, stress test our investments with downside commodity price scenarios and make capital allocation decisions that optimize returns and preserve flexibility.

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Service costs appear to have crested and are trending modestly downward. Although we welcome service cost moderation, it does not substitute for our mandate to push forward with operational efficiencies, project architectures that maximize investment returns and the application of best-in-class technology to leverage our efforts for value creation. We focus on things that are within our control. We are on track with the three-year plan outlined in our Q1 release. In line with our initial plan, we will reduce activity in the Marcellus in the coming weeks and expect to remain at two rigs and one frac crew during the second half of the year. If we were to hold this level of activity flat through 2025, future Marcellus CapEx would decrease significantly and yet hold our Northeast production flat, allowing us the option to redirect activity to the Permian and Anadarko.

Both of these basins have opportunities at the ready that provide great returns. Furthermore, our Marcellus assets retained the flexibility to grow in the future should macro conditions and prices warrant increased investment. Looking forward, we retain maximum optionality to employ capital to its best use. We also look forward to publishing our 2023 sustainability report later this year. We’re making great progress in understanding methane monitoring, including the discrepancies between the various technologies available to the industry. Coterra is working with our vendors to improve the available technology, understand the limitations and choose the best solution for the problem in hand. With the varying environmental conditions between the Permian, Anadarko and Marcellus, we have learned that there is no single scalable solution that can be successfully deployed across our portfolio.

Instead, we will rely on multiple technologies to detect, measure and reduce our methane emissions. Coterra will remain a leading company in innovative design and facility modification to reduce emissions. We also appreciate the collaboration with an outstanding set of competitor companies as we work together to solve this problem. This is an industry-wide challenge, and industry collaboration will be key to finding workable solutions our nation and the world depend upon. With that, I will turn the call over to Scott to walk us through the particulars of a great Q1.

Scott Schroeder: Thanks, Tom. Today, I will discuss our first quarter ’23 results, shareholder returns and updates to guidance. During the first quarter, Coterra reported net income of $677 million, discretionary cash flow of $1.039 billion, accrued capital expenditures of $569 million and free cash flow of $556 million. Despite natural gas and oil prices falling 30% and 19%, respectively, versus 1Q ’22, discretionary cash flow declined only 16% year-over-year. This was driven by an increase of the company’s oil and NGL production, which caused Coterra’s liquids production miss to increase 3% year-over-year to 28%. The company expects greater than 55% of its 2023 revenue to come from oil and NGL sales. Also during the quarter, the company realized a cash hedge gain totaling $100 million versus $172 million loss in Q1 ’22.

First quarter total production volumes averaged 635 MBoe per day, with oil averaging 92.2 Mbo per day and natural gas volumes at 2.76 Bcf per day. Oil and BOE finished 2.5% and 1.6% above the high end of guidance, respectively, and natural gas hit the high end. The strong performance was driven by a combination of positive well productivity trends and improved cycle times. Turn-in lines during the quarter totaled 49 net wells above expectations. The incremental wells came online late in the quarter. First quarter accrued capital expenditures totaled $569 million, as I said before, but the cash capital expenditures only $483 million, consistent with expectations. Turning to return of capital. We announced a $0.20 per share base dividend and remain one of the highest-yielding base dividends in the industry.

Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. During the first quarter, Coterra followed through on its return priorities by repurchasing 11 million shares or $268 million. In total, we returned 76% of free cash flow during the quarter. As we communicated in February, it is our intention to pursue strategic buybacks ahead of variable dividends. We have over $1.7 billion remaining on our $2 billion buyback authorization. We are reiterating our annual commitment to return 50% plus of free cash flow to shareholders. Lastly, I will discuss the refinements to our ’23 guidance and activity outlook. We reiterated the company’s capital estimate of $2.0 billion to $2.2 billion. While we are seeing clear signs of cost softening, we have yet to realize meaningful savings and therefore, have not built any future cost reductions into our forecast.

We are increasing our full year oil guidance 1% to 87 to 93 Mbo per day, driven by efficient operations and strong well performance in both the Permian and Anadarko basins. The total company well turn-in lines are unchanged from our original guidance. In the Marcellus, as Tom has stated in his remarks, we are finishing up a development this month and then plan to drop one of our two frac crews and hold a single crew for the balance of the year. We also plan to drop from three rigs to two rigs this summer as planned earlier this year. In the Anadarko, a late ’23 turn-in line was pushed into ’24. This lowers our Anadarko turning lines to seven wells, down from our prior range of 10 to 15 wells. We now intend to maintain one to two rigs in the basin for the remainder of ’23.

In the Permian, we expect to continue to run six rigs for the remainder of the year and will pivot between 2 and 3 frac crews. Due to improved cycle times, we expect to bring on an additional five wells in the Permian during late ’23, offsetting the lower turn-in lines in Anadarko. Turning to unit cost. The company’s guidance remains unchanged at midpoint but there was some moving pieces primarily driven by reclassification between cost categories, which occurred after completing our integration into a single accounting system earlier this year. We also reiterate our 3-year outlook, which assumes the company achieves a 3-year oil CAGR of 5%, BOE and natural gas CAGR of 0% to 5%, which is achievable with capital and activity that is flat to down relative to ’23.

In summary, despite commodity headwinds, Coterra’s outlook remains strong. Driven by continued strong execution, we are well positioned to meet or exceed our 2023 targets. With that, I will turn it back to the operator for Q&A.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Arun Jayaram from JPMorgan. Your line is open.

Operator: And your next question comes from the line of Umang Choudhary from Goldman Sachs. Your line is open.

Operator: And your next question comes from the line of Doug Leggate from Bank of America. Your line is open.

Operator: Your next question comes from the line of Michael Scialla from Stephens. Your line is open.

Operator: Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open.

Operator: [Operator Instructions] Your next question comes from the line of David Deckelbaum from TD Cowen. Your line is open.

Operator: And there are no further questions at this time. Mr. Tom Jorden. I will now turn the call back over to you for some final closing remarks.

Tom Jorden: Thank you all for joining us. It’s nice to generate and discuss great results. We’ve always been a team that likes to talk about results more than promises, and I look forward to continuing to talk about results as time marches on. Thank you very much.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.