Coterra Energy Inc. (NYSE:CTRA) Q1 2024 Earnings Call Transcript May 3, 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: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Caterra Energy, Inc.’s First Quarter 2024 Earnings Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. At this time, I would like to turn the conference over to Dan Guffey, Vice President of Finance, Investor Relations and Treasurer. Please go ahead.
Daniel Guffey: Thank you, Audra. Good morning, and thank you for joining Coterra Energy’s first quarter 2024 earnings 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 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.
A – Thomas Jorden: Thank you, Dan, and welcome to all of you who are joining us on the call this morning. We’re pleased to report that Coterra had an excellent first quarter. Our total equivalent production for the quarter was 686,000 barrels of oil equivalent per day, which was near the high end of our guidance. Oil production averaged 102.5 thousand barrels of oil per day, which was 3,500 barrels of oil per day above the high end of our guidance. This beat in oil production was driven by a combination of well performance that exceeded expectations, production optimization and timing. Natural gas production averaged 2.96 billion cubic feet a day, which was slightly above the high end of our guidance. Capital expenditures came in at $450 million, which was below the guidance range.
This was a combination of timing and cost reductions and completions. Blake will provide further detail on this. We have raised our full-year oil guidance, while leaving our natural gas guidance unchanged. Shane will provide commentary here. As we previously said, our capital guidance for 2024 includes room for adding additional Marcellus activity, if our received prices in the Marcellus were to rebound. Of course, any additional activity will be evaluated against other shovel-ready opportunities in our portfolio. Rapid and severe commodity price swings are a feature of our business. As much as we try to anticipate and predict market movements, there is an inherent humbling unpredictability to them. During Q1, we saw upward movement in oil, coupled with downward movement in gas.
Despite these swings, revenue at Coterra for Q1 2024 came in roughly flat with revenue for Q4 2023. This stability in revenue allows us the luxury of maintaining a consistent level of activity, while retaining significant upside exposure to a gas price recovery. We did, however, delay some Marcellus turn-in-lines during Q1. We currently have two pads comprising 12 wells completed and waiting to be brought online. We have ongoing completion activity and are making the go/no-go decision on bringing wells online on a monthly basis. Blake will provide further detail on this. In spite of near-term headwinds, we remain wholly optimistic on natural gas. With coming LNG export capacity, near-term power demand and the evolving discussion about the long-term power demands of AI-driven data center needs, it is hard not to be constructive on the future of natural gas.
We watch this conversation closely and have heard forecast for incremental natural gas demand driven by growing data center consumption that range from 3 Bcf per day to 30-plus Bcf per day, by the year 2030. We will welcome increased demand anywhere within that range. Finally, we are pleased to once again be reporting results that exceed expectations. Our organization is highly focused on operational excellence, costs, safety, emission reduction and on being responsible members of our communities. I want to acknowledge the tremendous work and dedication of our entire organization from the field on up. This includes, in addition to field office staff, contractors, and service partners. At Coterra, we continually choose progress over comfort.
And our strong culture of optimization, innovation, and financial discipline continues to be an important competitive advantage. With that, I’ll 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 three areas. First, I will summarize financial highlights from the first quarter results, then I will provide production and capital guidance for the second quarter, as well as update our full-year 2024 guide. Finally, I’ll provide highlights for our recent bond offering and the progress we’re making on our shareholder return program. Turning to our strong performance during the first quarter. First quarter total production averaged 686 MBoe per day, with oil averaging 102.5 MBO per day and natural gas averaging 2.96 Bcf per day. Oil and natural gas production came in above the high end of guidance, driven by strong well performance and a modest acceleration of Permian TIL timing.
In the Permian, we brought on 22 wells versus 21 wells at the midpoint of our guidance. In contrast, in the Marcellus, we tilled 11 wells below our guidance of 23 wells. I will discuss this further later in my remarks. During the first quarter, pre-hedge revenues were approximately $1.4 billion, of which 62% were generated by oil and NGL sales. In the quarter, we reported net income of $352 million or $0.47 per share and adjusted net income of $383 million or $0.51 per share. Total unit costs during the quarter, including LOE, transportation, production taxes and G&A totaled $8.68 per BOE, near the midpoint of our annual guidance range of $7.45 to $9.55 per BOE. Cash hedge gains during the quarter totaled $26 million. And current capital expenditures in the first quarter totaled $450 million, just below the low end of our guidance range.
Lower-than-expected capital was driven primarily by timing and we are maintaining our full-year capital guide. Discretionary cash flow was $797 million, and free cash flow was $340 million after cash capital expenditures of $457 million. Looking ahead to the remainder of 2024. During the second quarter of 2024, we expect total production to average between 625 and 655 MBoe per day, oil to be between 103 and 107 MBO per day and natural gas to be between 2.6 and 2.7 Bcf per day. In other words, we expect oil to be up approximately 2.5% quarter-over-quarter on continued strong execution. Regarding investment, we would expect total incurred capital during the second quarter to be between $470 million and $550 million. As a result of low natural gas prices, we have chosen to defer the turn in line of two separate Marcellus projects totaling 12 wells.
Based on current in-basin pricing, we don’t anticipate bringing any projects online in the Marcellus during the second quarter, resulting in lower gas volumes quarter-over-quarter before flattening in the second half of the year. Yesterday, we increased our full-year 2024 oil production guidance range by 2.5 MBO per day to between 102 and 107 MBO per day for the year or up approximately 2.5% from our initial guide in February. There is no change to our full-year 2024 BOE and natural gas production guidance. Similarly, there are no changes to our unit cost guidance or turn in well — turn-in-line well counts for the year. For the full-year 2024, we are reiterating our incurred capital guidance to between $1.75 billion and $1.95 billion, which is 12% lower at the midpoint than our 2023 capital spend.
As previously discussed, our 2024 program will modestly increase capital allocation to the liquids-rich Permian and Anadarko Basins, while decreasing capital by more than 50% in the Marcellus year-over-year. Moving on to shareholder returns. As previously announced, during the first quarter, we successfully issued Coterra’s inaugural bond offering of $500 million of senior notes carrying a coupon of 5.6% and a maturity of 2034. We were pleased with the timing of the transaction and the reception of the Coterra story in the market. We intend to use the proceeds of this offering along with cash on hand to retire our $575 million 2024 notes at maturity during the third quarter. Until the maturity, we have invested the proceeds and time deposits at a similar interest rate to the coupon of the notes.
Coterra continues to maintain its low leverage profile with a ratio of 0.3x at the end of the first quarter. Our target leverage ratio remains below 1x even at lower price scenarios. This refinancing allowed us to extend our maturity profile, maintain a high liquidity position and affords us modest deleveraging, while maintaining a robust shareholder return program in 2024. During the first quarter, Coterra continued to execute on its shareholder return program by repurchasing 5.6 million shares for a $150 million at an average price of $26.94 per share. In total, we returned $308 million to shareholders during the quarter or over 90% of free cash flow. We remain committed to our strategy of returning 50% or more of annual free cash flow to shareholders through a combination of our healthy base dividend and our share repurchase program.
Last night, we also announced a $0.21 per share base dividend for the first quarter, maintaining our annual base dividend at $0.84 per share. This remains one of the highest yielding base dividends of our peers at approximately 3%. Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence. In summary, the team delivered another quarter of high-quality results in the field, which resulted in another successful quarter financially. Our business has significant operating momentum and we are poised for a strong 2024 and are on track to meet or exceed the differentiated three year outlook we provided in February. With that, I will hand the call over to Blake to provide details on our operations. Blake?
Blake Sirgo: Thanks, Shane. This morning, I will discuss our capital expenditures and provide an operational update. First quarter our crude capital expenditures totaled $450 million, coming in just below the low end of our guidance. Our strong execution in the field continued in Q1 with our oil production coming in at 102.5 thousand barrels of oil per day above the high end of our guidance. We are seeing continued completion gains in the Permian, led by reduced transition times on our diesel crew as well as strong initial performance from our electric simul frac crew in Culberson County. During the first quarter, our two Permian crews and one Anadarko crew hit all-time highs in efficiency with record pumping hours per month.
These efficiencies are coupled with new contracts that ensure when we gain efficiencies, it is realized in our dollar per foot and not just in our cycle times. We are currently running two frac crews and eight drilling rigs in the Permian. We continue to benefit from operational efficiencies, including cost savings on electrification, leveraging existing facilities and infrastructure as well as improved cycle times. Faster cycle times drives more footage in the year, also contributing to lower dollar per foot. As a result, we estimate our Permian cost around $10.75 per foot, roughly 8% below our 2023 per foot. Our Windham Row project is off and running with 34 wells now drilled and our simul-frac operations underway. Our electric simul-frac crew is powered directly off our Coterra-owned grid with no generation in the field required.
We are seeing encouraging initial performance from our simul-frac crew with an increase of 1,000 completed feet per day versus our normal zipper performance with a decreased cost of $25 per foot. When we combine our simul-frac efficiencies with the current cost spread between diesel and grid power, we are realizing a total cost savings of $75 per foot, compared to current diesel-powered zipper operations. One update to the Windham Row project is the addition of three Harkey wells to the western part of the Row, bringing the project total to 54 wells. Recent tests in our Culberson asset have shown a possible benefit to co-developing the Upper Wolfcamp with our Harkey Shale landings. This observation is different than what we’ve seen with our other Harkey projects across the basin.
And these three new codeveloped wells will help us further understand the interaction between these zones. Due to strong execution on the project so far, we were able to fit these three new wells to our existing schedule without incurring additional facility or infrastructure costs. As previously discussed, we expect to execute large Row development for many years to come in Culberson County. Our Permian team continues to build momentum and is off to a strong start in 2024. In the Marcellus, we are currently running one rig and one reduced frac crew. Our focus in the Marcellus continues to be decelerating activity and reducing costs as near-term gas markets remain challenging. Our Marcellus program is buoyed by our long-term sales portfolio, which contains multiple indices and price floors, which come into play at lower NYMEX pricing.
We currently have two pads consisting of 12 wells in total that we are delaying turn-in lines. Each incremental molecule we bring on receives in-basin price compared to the rest of our portfolio. Therefore, we are choosing to delay these TILs until we see stronger local pricing. We have also chosen to delay a portion of our well head compression program into 2025, so as not to accelerate volumes into a weakened market. Our teams are focused on reducing costs in the field and looking for ways to optimize our capital spend. As we have discussed, our Marcellus business unit has several strong projects that are teed up and ready to execute later in the year, should macro conditions warrant. In the Anadarko, we are currently running two rigs and one frac crew.
We are in the middle of a large block of completion activity, with three projects being fracked over the first half of 2024. These projects are focused on liquids-rich portions of our asset, which maintains strong economics in the current gas environment. Our consistent activity in the Anadarko is starting to bear fruit. As we have seen our drilled feet per day increased 15% year-over-year, as well as an increase of 10% in pumping hours per day compared to a year ago. Our Anadarko team continues to compete for capital and the returns across the basin remains strong. Our operating teams at Coterra are firing on all cylinders. We continue to make positive strides across all areas of operations, including new initiatives that are materially reducing well trouble costs, minimizing production downtime, beating our emissions targets, improving our cycle times and gaining new efficiencies.
Our field operations are the heartbeat of our company, and they continue to fuel our momentum. And with that, I’ll turn it back to Tom.
Thomas Jorden: Thank you, Shane and Blake. We’re pleased with our continued execution momentum as we march through 2024. We appreciate your interest in Coterra and look forward to discussing our results and outlook. As always, we like talking about results, more the future promises, and we’re always pleased to deliver them. With that, we’ll turn it over to questions.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We’ll take our first question from Nitin Kumar at Mizuho.
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