These are the 3 things driving Coterra's sell-off — and how we're viewing the stock now

CNBC

06-05-2025

Coterra Energy is cutting back on its oil drilling in response to sagging crude prices and spending more on natural gas production — but that move, announced alongside first-quarter results, is being overshadowed by some operational concerns and leading to a stock sell-off Tuesday. Revenue in the first quarter increased 33% year over year to $1.9 billion, short of the $1.97 billion consensus estimate, according to LSEG. Adjusted earnings per share of 80 cents in the three months ended March 31 matched expectations, LSEG data showed. On an annual basis, adjusted EPS increased 56.9%. Free cash flow of $663 million topped estimates of $596 million, according to FactSet. Bottom line We have long coveted Coterra's mix of oil and natural gas assets because it gives the company flexibility to respond to inherently volatile commodity prices. Our biggest takeaway from Coterra's late Monday release and Tuesday morning conference call: That flexibility is being put to serious use in the current unfavorable oil market. But even if we support that move in principle, some operational issues in a certain part of the company's Texas acreage are getting a lot of attention and are likely among the biggest drivers of the steep 8.5% stock decline. CTRA YTD mountain Coterra YTD While executives did a good job explaining their plan to fix the issue on Tuesday's earnings call — and making it clear that they do not believe it is a structural problem with the quality of inventory — we're not in a hurry to step in and take advantage of this sell-off. Coterra is still worth owning as our only oil-and-gas play, providing a solid dividend payout, acting as a geopolitical hedge and offering some exposure to long-term trends that could drive increased natural gas demand such as artificial intelligence computing and growing U.S. exports of liquified natural gas. But in the near term, the stock may struggle to gain traction. We're reiterating our hold-equivalent 2 rating , but lowering our price target to $28. Commentary There are three main themes from Coterra's earnings report — and none of them really have to do with the actual first-quarter results, which, as the chart above shows, were mixed. Not that bad, but also not exceptional. 1. Macro landscape The first area of discussion is around the macro landscape and Coterra's decision to spend less on oil. Coterra and its American oil-producing brethren are confronting a difficult setup, thanks to a steep decline in crude prices over the past month that has brought West Texas Intermediate crude , the U.S. oil benchmark, to four-year lows below $58 a barrel . At the start of April, WTI traded above $71 a barrel. There are two main reasons for the pullback: President Donald Trump 's intensified trade war has fueled concerns about a global economic slowdown — a bad thing for oil demand if it comes to fruition. At the same time, the group of eight oil-producing nations known as OPEC+ has announced a series of surprisingly aggressive moves to bring more supply to the market in the coming months. The most recent of those decisions was announced over the weekend. While Saudi Arabia-led OPEC+ might typically be expected to curtail output in the face of potential demand destruction, the opposite is happening. A variety of factors could be motivating OPEC+'s counterinitiative actions, including internal politics within the oil cartel, analysts say. But for our purposes here, what matters most is that anything that materially weakens the outlook for crude prices — whether it's trade-related recession fears, OPEC+ or both — makes Coterra's job of profitably drilling for oil harder to do. Not impossible, but the company and its peers make a whole lot more money when WTI is $75 a barrel than they do at $55. And so, the new set of facts requires them to reconsider what the best use of money is and adjust accordingly if something else is better for their investors. Coterra's new plan to reduce oil-focused spending is a sensible one in the near term, and it is made possible by its presence in both the oil-rich Permian Basin in western Texas and Southeastern New Mexico and the natural gas-heavy Marcellus Shale in Pennsylvania and other parts of the Appalachian region. Coterra also has wells in the Anadarko Basin that spans the Texas Panhandle and western Oklahoma, but its planned activity there this year is not changing. In the Permian, though, Coterra now plans to average just seven rigs in the second half of 2025, down from the 10-rig plan announced in late February. Rigs are the machinery used to drill a well. As such, its planned Permian capital investments this year are coming down by $150 million. Meanwhile, Coterra restarted activity in the Marcellus in April with two rigs, as previously projected. But the company said it now expects to keep both rigs running into the second half of the year, lifting its capital spending in the region by an additional $50 million. Another $50 million could be added to those plans if Coterra decides to keep its second rig running through year-end, though executives said that decision will be made in the third quarter. On Tuesday's earnings call, CEO Tom Jorden said he's hopeful that the tariff situation is resolved and the "threat of recession is lifted," but he stressed that "we can't run our program on hope." "Right now, we're relaxing slightly [on oil spending] because we're concerned that oil prices could further weaken. I hope we're wrong on that," Jorden said. "But our experience tells us that when you see these events – and you see the possibility – be prepared for the worst-case scenario." The net effect of these changes is Coterra's total capital expenditure projections for 2025 came down by $100 million at the midpoint of its new guidance range — and yet the company's total production guidance was actually nudged higher for the year, driven entirely by more natural gas output. Expecting more total production on less spending is a reflection of Coterra's ability to be a capital-efficient operator. That is a positive in the short run. However, investors might be questioning what these changes mean to Coterra's production levels in 2026 and 2027, analysts at Mizuho Securities wrote before Tuesday's earnings call, considering last quarter the company provided three-year outlook that included annual average oil growth of at least 5%. Executives fielded a number of questions on the three-year plans, but they repeatedly said it remained intact. "We're holding to our three-year plan as outlined with the changes that we've discussed in this call. We want to be really clear with everybody on that," Jorden said. 2. Free cash flow Another big theme: Coterra's free cash flow outlook for this year was cut by 22% to $2.1 billion — and while lower commodity price assumptions outside its control is a big driver of the revision, investors might be worried this will limit the amount of share repurchases this year, particularly if oil prices get even weaker. The company's commitment has been to return at least half of its free cash flow to shareholders via dividend payouts and stock buybacks. But in 2025, in particular, executives have prioritized paying down debt — tied to its two Permian-focused acquisitions that closed earlier this year — over buybacks. "We still have the ability to do it all, so to speak, but to be really clear, in 2025, our priority is going to be debt repayment. We're not going to compromise that," CFO Shane Young said on the call. "That doesn't mean that there's not going to be repurchases. ... But if you look at 2024, we returned 90% of cash flow to shareholders. [In 2023], we returned 76% of cash flow to shareholders. Why were we able to do that? Because we had low leverage. And we believe that having low leverage is an enabler, and we're dead-set focused on protecting our long-term shareholder return objectives, and we think the best way to do that is to reduce debt." 3. Operational issues The final major theme — and likely a major culprit for the stock reaction — is operational issues plaguing some of Coterra's operations in Culberson County, Texas, which is part of the Permian. At the highest level, some of the wells in an area called Harkey were producing higher-than-normal water volumes, so the company paused development there to work through the issue. At this time, Jorden said Coterra is "pretty optimistic that this is a mechanical operation that is solvable with a combination of revised pipe design and cementing program," rather than something strategically wrong with the land that threatens the quality of inventory. "As we currently see it, we think we'll be back to completing and drilling these Harkey wells in months, not years," Jorden said. 2025 guidance Here's where Coterra's full-year guidance stands after the numerous aforementioned revisions: Estimated discretionary cash flow of $4.3 billion based on WTI crude prices of $63 a barrel and natural gas prices of $3.70 per metric million British thermal unit, or mmbtu. That's below Wall Street expectations of $4.62, according to FactSet, and previous guidance of $5 billion, which factored in higher prices for both commodities. Estimated free cash flow of $2.1 billion based on the commodity price assumptions used in the discretionary cash flow guide. That is down from $2.7 billion previously. Estimated capital expenditure budget of $2 billion to $2.3 billion, down by $100 million on both ends of the range. That results in a new midpoint of $2.15 billion compared with the prior guide of $2.25 billion. Seven rigs in operation in the Permian in the second half of the year, lower than the previous plan to operate 10 rigs. Expected 2025 total equivalent production of 720 to 770 Mboe/d. The 745 midpoint of the range — up from 740 in its previous guidance — is slightly below the FactSet consensus forecast of 757 Mboe/d, which stands for total oil equivalent of a thousand barrels per day. Expected oil production in the range of 155 to 165 Mbo/d, which stands for a thousand of barrels of oil per day. The midpoint of the range is unchanged at 160 Mbo/d, despite modestly lowering the top end of the range and slightly increasing the bottom end. The FactSet consensus is for 163.6 Mbo/d. Expected natural gas production in the range of 2,725 to 2,875 MMcf/d, resulting in a new midpoint of 2,800, up from 2,775. That is below the consensus of 2,837 MMcf/d, according to FactSet. (Jim Cramer's Charitable Trust is long CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. An oil pumpjack is shown near the Callon Petroleum vicinity on March 27, 2024 in Monahans, Texas.
Coterra Energy is cutting back on its oil drilling in response to sagging crude prices and spending more on natural gas production — but that move, announced alongside first-quarter results, is being overshadowed by some operational concerns and leading to a stock sell-off Tuesday.