Coterra Energy Inc. (NYSE:CTRA) Q4 2023 Earnings Call Transcript
Coterra Energy Inc. (NYSE:CTRA) Q4 2023 Earnings Call Transcript February 23, 2024
Coterra Energy Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Coterra Energy Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Dan Guffey, Vice President, Finance, Planning and Investor Relations. Please go ahead.
Dan Guffey: Thank you, Operator. Good morning. And thank you for joining Coterra Energy’s fourth quarter and full year 2023 earnings and 2024 outlook conference call. Today’s prepared remarks will include an overview from Tom Jorden, Chairman, CEO and President; Shane Young, Executive Vice President and CFO; and 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 reconciliation for 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 are joining us on the call. Coterra had an excellent fourth quarter, as shown by the results that we released last night. Shane will walk you through the specifics here, which include coming in above the high end of our guidance on oil, natural gas and Boe or barrels of oil equivalent, and below our capital guide. For full year 2023, we finished the year with 5% year-over-year growth in Boe and 10% year-over-year growth in oil volumes, while hitting the midpoint of our capital guide. More importantly, we generated excellent returns. We also made great progress on emissions reduction and continue to push the envelope on our environmental initiatives. As we look ahead to 2024, total capital is projected to be between $1.75 billion and $1.95 billion.
Given the outlook for commodity prices and commensurate revenue, we think that this is a prudent level of investment, as it invests approximately 60% of our projected cash flow. We will grow our investments in the Permian and the Anadarko Basins and retrench in the Marcellus. We are reducing our Marcellus investments by over $400 million in 2024 compared to 2023. Mark Twain said that, a man learns something by carrying a cat by the tail that he can learn in no other way. Through the commodity cycles, we have learned that although downswings typically do not last long, they also do not come pre-labeled with how long they will last. We have learned to be disciplined and patient. Experience tells us that our focus should always be on returns and never on production or activity.
In this case, that means throttling back on our Marcellus program. We remain highly optimistic on the 12-month to 18-month outlook for the gas macro. The impact of new LNG export capacity coming online at the end of 2024 and early 2025 coupled with the possibility of cold weather provides reasonable hope for significant price recovery in natural gas. However, experience tells us that although we will underwrite our hopes with the future strip price, we should never underwrite our capital program with it. We will be patient and watch for recovery in the gas macro. Missing a few months of the recovery is much better than fully participating in the downside. We project that this slowdown in the Marcellus will result in our natural gas volume shrinking 6% in the Marcellus in 2024.
If we see signs of recovery in natural gas, our 2024 capital range includes a contingency plan to accelerate our Marcellus program in the latter half of the year, which would reposition us for significant growth in our gas volumes in 2025 and 2026. We will watch and be ready to act. In the meantime, we will pivot to our deep inventory in the Anadarko and Permian where our returns are excellent. We have a tremendous program ahead of us in 2024 and we are excited to be increasing activity in both the Permian and Anadarko. All three business units, however, are poised and ready for out-year acceleration should conditions warrant. This ability to redirect and reposition activity around premier assets is one of the differentiating strengths of Coterra.
We also provided an update on our three-year outlook. Our new 2024 to 2026 outlook has Coterra with an average annual CapEx of $1.75 billion to $1.95 billion, which is expected to generate annual growth in the low-single digits for Boe and 5% plus for oil growth. This plan leverages our deep, high-quality inventory, demonstrates improving capital efficiency and clearly displays the confidence we have in our ability to continue a cadence of operational excellence. This is an achievable outlook under current conditions. As always, we continuously adjust our plans with changing conditions. As we have previously said, planning at Coterra is a guided missile, not a rocket. In closing, I want to acknowledge our remarkable field organization. They set the pace for operational excellence.
They work in hostile environments with dedication, perseverance and an unwavering commitment to safety. They serve as an example to all of us. The Coterra brand stands for operational excellence, leading-edge technology and innovation, best-in-class development of outstanding assets, and the ability to adapt nimbly to changing market conditions. We want to be known for a pristine balance sheet, investment discipline and rigorous economic decision analysis. We are not perfect. However, having a great organization, great assets and a great balance sheet allows us to learn from our mistakes, make continuous progress and always push ourselves farther and harder. With that, I will turn the call over to Shane.
Shane Young: Thank you, Tom, and thank you everyone for joining us on today’s call. This morning, I’ll focus on four areas. First, I’ll discuss highlights from our fourth quarter and full year 2023 results. Then, I’ll provide production and capital guidance for the first quarter and full year 2024. Next, I will provide a new and updated three-year production and capital outlook for 2024 through 2026. Finally, I’ll discuss our shareholder return program and our debt maturity later this year. Turning to our strong performance during the fourth quarter. Fourth quarter total production averaged 697 MBoe per day, with oil averaging 104.7 MBoe per day and natural gas averaging 2.97 Bcf per day. All production streams came in above the high end of guidance driven by well performance and acceleration of till timing during the quarter.
Specifically, turn-in lines during the quarter totaled 40 net wells, including 28 in the Permian, near the high end of guidance, and 12 in the Marcellus, slightly above the midpoint of guidance. During the fourth quarter, pre-hedge revenues were approximately $1.5 billion, of which 61% were generated by oil and NGL sales. In the quarter, we reported net income of $416 million or $0.55 per share and adjusted net income of $387 million or $0.52 per share. Total cash costs during the quarter, including LOE, workover, transportation, production taxes and G&A totaled $8.41 per Boe, near the midpoint of our annual guidance range of $7.30 per Boe to $9.40 per Boe. Cash hedge gains during the quarter totaled $46 million. Incurred capital expenditures in the fourth quarter totaled $457 million, just below the low end of our guidance range.
Discretionary cash flow was $881 million and free cash flow was $413 million, after cash capital expenditures of $468 million. For the full year 2023, Coterra produced outstanding results. Total equivalent production exceeded the high end of our initial February guidance, coming in at 667 MBoe per day. This outperformance was driven by a combination of better-than-expected well timing and beats unexpected well productivity. Oil production for the year was 96.2 MBoe per day, exceeding the high end of initial guidance by over 4%. Capital costs were right at the midpoint of our guidance range, coming in at $2.1 billion as a result of relentless focus on capital by our teams in each of our business units. Cash operating costs per unit totaled $8.37 per Boe for the year, slightly below our initial guidance midpoint.
Looking ahead to 2024. During the first quarter of 2024, we expect total production to average between 660 MBoe per day and 690 MBoe per day. Oil to be between 95 MBoe per day and 99 MBoe per day, and natural gas to be between 2.85 Bcf per day and 2.95 Bcf per day. We anticipate first quarter oil production to have the lowest average for any quarter during 2024, primarily as a result of tilt timing that pulled some volume forward and into the fourth quarter of 2023. Regarding investment, we expect incurred capital in the first quarter to be between $460 million and $540 million. For the full year 2024, we expect incurred capital to be between $1.75 billion and $1.95 billion, or 12% lower at the midpoint than our 2023 capital spend. Our 2024 program will modestly increase capital allocation to the liquids-rich Permian and Anadarko Basins, and significantly decrease capital by more than 50% in the Marcellus.
We expect total production for the year to average between 635 MBoe per day and 675 MBoe per day, and oil to be between 99 MBoe per day and 105 MBoe per day or 6% higher at the midpoint than oil was in 2023. Natural gas is expected to be between 2.65 Bcf per day and 2.8 Bcf per day, approximately 5.5% lower at the midpoint than gas production was in 2023. It is important to note that we have incorporated efficiency gains achieved in 2023 into our 2024 guidance. Reflecting on our new three-year outlook. As we did this time last year, yesterday we announced our new three-year outlook for 2024 through 2026. We believe this is a robust, capital-efficient plan that delivers consistent, profitable growth for our shareholders. We anticipate that our project inventory can deliver 5%-plus oil volume growth over this period, with zero percent to 5% Boe growth by investing between $1.75 billion and $1.95 billion of capital per year.
This reflects increased capital efficiency and is designed to afford Coterra the flexibility to reallocate capital between our business units as market conditions change. This outlook incorporates an appropriate level of reinvestment and delivers meaningful free cash flow to underpin shareholder returns. Moving on to shareholder returns. Last night, we announced a $0.21 per share base dividend for the fourth quarter, increasing our annual base dividend by 5% to $0.84 per share. This remains one of the highest yielding base dividends in the industry at well over 3%. Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. During 2023, despite relatively lower commodity prices and cash flow, Coterra continued to execute on its shareholder return program by repurchasing 17 million shares for $418 million at an average price of approximately $25 per share.
In total, we returned 77% of free cash flow during the year or just over $1 billion. We remain committed to our strategy of returning 50% or more of our annual free cash flow to shareholders through a combination of a healthy base dividend and our share repurchase program. On to our 2024 notes. We have continued to monitor and analyze opportunities regarding our $575 million maturity coming this September. With low leverage at 0.3 times, we believe we have strong access to the active refinancing markets. At the same time, we had approximately $2.5 billion of liquidity between cash and our undrawn credit facility at year-end, affording us many options with regard to our 2024 maturity. In summary, Coterra’s team delivered another quarter of high-quality results, both operationally and financially.
We are poised for a strong first quarter of 2024, which we believe will set a solid foundation for the full year 2024 and beyond. With that, I will hand the call over to Blake to provide additional color and detail on our operations. Blake?
Blake Sirgo: Thanks, Shane. This morning, I will discuss our capital expenditures and provide an operational update. Fourth quarter accrued capital expenditures totaled $457 million, coming in just below the low end of our guidance. The lower CapEx was driven by efficiency and cost gains, reduced infrastructure spend, lower-than-expected non-operated capital and shuffling of the timing on a few projects. As noted, strong execution in the field pulled a few Q1 tills into Q4, which contributed to the Q4 2023 production beat. Coterra finished the year at $2.104 billion of total CapEx, at our midpoint of our annual guide. This quarter marks the 10th quarter in Coterra’s existence and 10 straight quarters of delivering on our oil guidance.
This was accomplished thanks to our operations teams across our businesses, who strive for operational excellence. At Coterra, operational excellence means operating safely and with integrity, while always looking for ways to accomplish more or less. We do not tolerate sacred cows and we are always on the hunt for new ideas, even if they are not our own. As we enter 2024, we are delivering a plan that continues to do more for less. In the Permian, we are planning to turn in line 75 to 90 wells in 2024, which is down 13% over 2023. These wells will have a $1 per foot of $1,075, down approximately 10% year-over-year. In the Permian, we are currently running two frac crews and eight drilling rigs, which are performing at or near all-time efficiency records.
Our frac efficiencies are coupled with new contracts that offer increased cost savings to Coterra as we gain in efficiency. Across our Permian footprint, we are taking advantage of our large, continuous assets to bring economies of scale to bear. This is highlighted by our Windham Row project in Culberson County, where we are prosecuting a 51-well row development across six drill spacing unit, with each well targeting the Upper Wolfcamp. By concentrating activity at this scale, we are able to minimize rig and frac modes, co-mingle facilities and maximize simul. Combine this with our first grid-powered electric simul-frac, we expect to deliver these wells at 5% to 15% lower cost than our historical program. Our Permian asset is an engine of capital efficiency and that engine continues to find a new gear.
In the Marcellus, we are currently running two rigs and one frac crew, with plans to go to one rig and lower our frac activities. Our Marcellus ops teams worked diligently in 2023 to lower our cost structure through increased frac efficiencies, improved water handling and lower facility costs. We are also pushing new limits on lateral linkage, with 3-mile and 4-mile laterals now part of our program. These cost gains help us to minimize our D&C spend as we go into 2024 and throttle down our activities. Our 2024 Marcellus program remains flexible and includes multiple on-ramps and off-ramps, which will allow us to adjust to changing macro conditions if warranted. In the Anadarko, we are currently running two rigs and one frac crew. Our Anadarko team had a great year executing with improved drilling times and frac efficiency.
Our 2024 program includes 20 to 25 turn-in lines across five projects focused on our liquids-rich assets, which we expect will continue to yield strong returns. Consistency of execution paired with strong well results have made our Anadarko assets a stout competitor for capital allocation at Coterra. Our unrelenting focus on operational excellence continued to bear fruit in 2023 and we expect the team to seek out and execute incremental efficiencies in 2024. And with that, I’ll turn it back to Tom.
Tom Jorden: Thank you, Shane and Blake. We are pleased with our continued execution in 2023 and expect to deliver on our goals outlined in our 2024 plans. We appreciate your interest in Coterra and look forward to discussing our results and outlook. We’ll now be open for questions.
See also 15 Tips and Tricks To Build Wealth Without Buying Real Estate and 25 Safest Cities in Asia to Visit In 2024.
To continue reading the Q&A session, please click here.
