Coterra Energy’s (CTRA) solid third-quarter earnings beat on Thursday, along with hefty free cash flow and a raised dividend, solidified the our investment case in the oil-and-gas producer.

• Total revenue soared by nearly 500% year-on-year, to $2.52 billion, exceeding analysts’ estimates of $2.37 billion, according to Refinitiv.

• Adjusted earnings per share more than doubled on an annual basis, to $1.42 a share, beating analysts’ forecasts of $1.37 a share.

Cash flow

Cash flow is king for companies like Coterra. Here’s how the Houston-based company did in the third quarter.

• Cash flow from operations expanded by more than 600% year-over-year, to $1.77 billion, roughly in line with analysts forecasts of 1.76 billion, according to FactSet.

• Adjusted discretionary cash flow (cash flow from operations excluding changes in assets and liabilities) was $1.52 billion, below estimates of $1.62 billion.

• Free cash flow, or money the business generates subtracting capital expenditures, was $1.06 billion, short of analysts’ forecasts of $1.16 billion.

• Capital expenditures of $460 million came in above the $450 million predicted by analysts.

Based on recent commodity strip prices, Coterra management expects free cash flow for the full year to be $3.9 billion, compared with the FactSet estimate of $3.83 billion.

Coterra also said its full-year capital budget is projected to be $1.7 billion, matching the high end of its prior guidance range of $1.6 billion to $1.7 billion.

Dividends and buybacks

Coterra said it would pay out a fixed-plus-variable dividend of 68 cents a share, up from its prior 60 cents a share quarter-on-quarter. Based on Coterra’s Thursday closing price of $30.61, that equates to a roughly 8.9% annualized dividend yield. Half of the company’s third-quarter free cash flow is going toward the dividend, as was the case with second-quarter free cash flow.

The company spent $253 million in the third quarter to repurchase 9.3 million shares at an average price of $27.03 a share. That’s equal to about 24% of free cash flow. In the second quarter, 30% of Coterra’s free cash flow went toward stock buybacks, totaling $303 million. As of Sept. 30, the company has $510 million remaining on its $1.25 billion buyback authorization.

Production and Q4 outlook

Total production in the quarter was 641,000 barrels of oil equivalent per day, above the 610,000 to 630,000 barrel-a-day guidance the company issued in August and above analysts’ forecasts for production of 624,100 barrels a day. Coterra attributed its total production levels to “strong well performance and improving cycle times.”

Here’s the breakdown of Coterra’s production in the third quarter:

• Oil: 87,900 barrels a day, ahead of a consensus forecast of 86,700 barrels a day.

• Natural gas: 2.8 billion cubic feet a day, slightly exceeding analysts’ forecasts of 2.77 billion cubic feet a day.

For the fourth quarter, Coterra expects total production to be between 615,000 and 635,000 barrels of oil equivalent a day, which at the midpoint is lower than the 632,900 barrels a day forecasted by analysts. The company also forecasts oil volumes to average between 86,000- to 89,000 barrels a day, roughly in line with estimates for 87,200 barrels a day. Natural gas volumes should average between 2.72 billion- and 2.78 billion cubic feet a day, below the 2.8 billion cubic feet a day predicted by analysts.

For the full year, Coterra raised its total production guidance by 1% at the midpoint, saying it now should be between 625,000- to 640,000 barrels of oil equivalent a day. At the midpoint that exceeds estimates for 630,000 barrels a day. At the same time, the company raised its forecast for natural gas production for the full year to between 2.76 billion- to 2.85 billion cubic feet a day, also up 1% at the midpoint. That compares with analysts’ forecasts of 2.8 billion cubic feet a day.

Coterra’s realized prices, excluding commodity derivatives, in the third quarter were $93.35 per barrel of oil, better than the $92.7 per barrel analysts expected, and $6.37 per thousand cubic feet of natural gas, below the $6.50 analysts predicted.

Bottom line

While we’ve worked opportunistically to trade around our energy positions in recent months, our two-pronged investment rationale has not changed: 1) Hedge our portfolio against oil and energy inflation and 2) get rewarded with robust dividend payouts and stock buybacks. Coterra continued to return an outsized amount of free cash flow to shareholders: 74% in the third quarter. Coterra hiked its fixed-plus-variable dividend payout on a sequential basis, supporting the second part of our investment thesis. 

However, Coterra’s larger natural gas exposure — a key reason we initiated our position in April — continues to be the reason why we are sticking with the stock. Here are some statistics regarding this type of energy: before the Ukraine war, Russia was providing 45% of Europe's natural gas; that number now is less than 10%. This suggests 2 things: 1) the US can step up and send more natural gas to Europe (meaning more sales for companies) and 2) the price for natural gas will rise as Winter gets closer and the supply-demand imbalance inflates gas prices more.