Portfolio holding Coterra Energy (CTRA) reported second-quarter results Tuesday that beat Wall Street expectations on the top and bottom lines and raised its quarterly dividend payout by roughly 8%. Total revenues of $2.57 billion topped FactSet estimates of $2.24 billion. Adjusted earnings per share of $1.35 eclipsed forecasts of $1.27.

Cash flow

With our focus on capital return to shareholders, we’re paying close attention to Coterra’s cash flow figures. Here’s how the Houston-based company did:

• Adjusted discretionary cash flow (cash flow from operations excluding changes in assets and liabilities) was $1.49 billion, up nearly 21% sequentially and topping expectations of $1.46 billion.

• Adjusted free cash flow of $1.02 billion was pretty much in line with expectations of $1.03 billion.

Coterra left its full-year free cash flow expectations unchanged at approximately $4.5 billion.

“While inflation has driven 2022 capital costs up 20 to 25 percent year-over-year, we are still projecting all-in returns that markedly exceed our historical results,” CEO Thomas Jorden said in the earnings release. “We remain committed to capital discipline and our updated guidance continues to assume we will invest less than 30 percent of our 2022 projected cash flow from operations.” 

Dividends and buybacks

Coterra’s board announced Tuesday a quarterly fixed-plus-variable dividend of 65 cents per share, up 8.3% from its prior level of 60 cents per share. Based on Coterra’s Tuesday closing price of $29.38, the annualized dividend yield (65 cents times four quarters) is 8.85%.

The other part of the cash return story at Coterra is stock buybacks, which ratcheted up in the second quarter compared to the first three months of 2022. In the second quarter, the company spent $303 million to repurchase 11 million shares at an average price of $27.51. For comparison, in the first quarter, Coterra bought back 7.6 million shares at an average price of $24.21 at a total cost of $184 million. As of June 30, Coterra had $763 million remaining under its original $1.25 billion repurchase program. 

Production and second-quarter outlook

Total production in the quarter was 632 thousand barrels of oil equivalent per day (MBoepd), coming in higher than the company’s guidance and analyst expectations. Coterra had expected to average between 605 and 625 MBoepd, while the Street was looking for 616 MBoepd.

Recall that one key difference between Coterra and the other E&P firms we own — Pioneer Natural Resources (PXD) and Chevron (CVX) — is Coterra’s more sizable natural gas exposure. Here’s the breakdown of the company’s production in Q2:

• Oil: averaged 88.2 MBopd, exceeding prior guidance of 82 MBopd to 84 MBopd and analyst estimates of 83.1 MBopd.

• Natural gas: averaged 2,790 MMcfpd (million cubic feet per day), more than the company’s guided range between 2,725 and 2,775 MMcfpd, and more than estimates of 2,769.1 MMcfpd.

Coterra said it anticipates averaging between 610 and 630 MBoepd in the third quarter of 2022. The FactSet estimate of 622.4 MBoepd is pretty much in the middle of Coterra’s guidance.

• Coterra expects oil volumes to average between 85.5 and 88.5 MBopd in the third quarter, exceeding consensus estimates of 84.2 MBopd.

• Nat gas volumes in the third quarter are expected to average between 2,725 and 2,775 MMcfpd, which is the same guidance the company issued for the second quarter. The top end of the third-quarter range is below the consensus estimate of 2,800.7 MMcfpd, according to FactSet.

For the full year, Coterra raised the low end of its production forecast to 615 MBoepd, up from 600 MBoepd. It left the top end of its guidance unchanged at 635 MBoepd.

Pricing, excluding the impact of derivatives (hedging activity such as selling futures contracts to lock in prices in future periods and therefore operate with increased certainty), the average realized price for oil was $109.23 vs. $106.20 expected, while natural gas was $39.17 vs. $40.40 expected and gas was $5.78 vs. $5.60 expected.

Bottom line

Capital returns are a major reason why we invested in Coterra (and other energy companies) this year, and on this front the company delivered Tuesday night. It increased the percentage of free cash flow it is returning to shareholders to 80% in the second quarter, from 50% in the first quarter. Half of the free cash flow is being used to fund the company’s dividend, while the other 30% went to buying back 11 million shares at an average price of $27.51 per share.