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Is Coterra Energy Stock a Buy Post Permian Basin Deal?
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Last month, natural gas operator Coterra Energy (CTRA - Free Report) announced two deals worth $3.95 billion in New Mexico’s Permian Basin, a move aimed at boosting profitability. But can this buyout rejuvenate a stock that has underperformed its sector and subindustry this year? Let’s find out.
Coterra Energy Profile
Coterra Energy is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Headquartered in Houston, TX, the firm is focused on the Permian Basin, Marcellus Shale and Anadarko Basin. The company reached its current form following the October 2021 merger between Cabot Oil & Gas Corporation and Cimarex Energy Co. CTRA’s share of natural gas in its overall production is around 65%.
CTRA Boosts Permian Foothold
Coterra's acquisition of Franklin Mountain Energy and Avant Natural Resources strengthens its position in the lucrative Permian Basin. This consolidation allows for longer, more efficient wells and reduces location costs, increasing overall profitability. With a higher percentage of oil in production, the newly acquired acreage diversifies revenue streams, enabling the company to perform under varying commodity price scenarios.
Image Source: Coterra Energy
While the Permian transaction is a clear positive for Coterra Energy, the stock is also supported by the following factors.
Other Positives in the CTRA Story
Efficiency Gains: Coterra Energy delivered strong results in the third quarter of 2024, with oil production reaching 112.3 thousand oil-equivalent barrels per day and natural gas at 2.68 billion cubic feet per day, both above expectations. In the Permian Basin, better drilling methods have reduced well costs by 12% year over year to $10.50 per foot. Looking ahead, top-tier wells are expected to cost less than $1,000 per foot, which is 5% to 10% lower than 2024.
Strategic LNG Agreements: Coterra’s recent LNG agreements in European and Asian markets beginning 2027 diversify its natural gas portfolio and provide pricing exposure to premium international markets. These deals strengthen revenue stability and leverage the company’s multi-basin portfolio.
Balance Sheet Strength: Unlike some of its peers who are saddled with debt, Coterra has done an excellent job at managing its balance sheet. As of Sept. 30, 2024, the company had approximately $848 million in cash and cash equivalents, zero debt on its $2 billion revolving credit facility, providing a total liquidity of about $2.843 billion. The debt-to-capitalization of CTRA is just 13.7%, compared to more than 40% for another natural gas-focused upstream operator EQT Corporation (EQT - Free Report) .
Image Source: Zacks Investment Research
Attractive Valuation: CTRA looks appealing from a valuation standpoint. When comparing its EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) — a common measure of a company’s worth — it stands out as competitive against its peers. Even if we look at the price/earnings ratio, Coterra’s shares currently trade at around 9X forward earnings multiple. This is lower than the subsector, which trades closer to 11X.
Image Source: Zacks Investment Research
These are reasonably strong catalysts, but are they enough to sway sentiment amid several near-term risks plaguing the company? Unfortunately, there appear to be some serious red flags, which have stubted Coterra Energy’s share price appreciation.
Coterra Energy’s Shares Struggle
It looks like the market has not been impressed with the company this year. In 2024, the energy explorer's stock has lost 2.3% against the S&P 500’s 28% climb. Coterra has also underperformed the Oil/Energy space, its subindustry and peers like Expand Energy (EXE - Free Report) during this period.
CTRA, EXE Year-to-Date Stock Performance
Image Source: Zacks Investment Research
A Look at Major Issues Affecting CTRA
Vulnerability to Natural Gas Weakness: The main risk to the company and the stock is the fluctuating price of natural gas, to which it is highly sensitive. With the commodity currently struggling to stay above $3 on a sustained basis, Coterra Energy's operating margins are likely to come under pressure.
Marcellus Challenges: Coterra Energy's operations in the Marcellus region continue to face challenges due to an oversupplied natural gas market. The low realized prices for Marcellus production remain a concern, with the company heavily relying on hedging to mitigate impacts. As a matter of fact, Coterra has paused all drilling and completion activity in the Marcellus due to severely low realizations, while also curtailing volumes.
Falling EPS & Revenues: The Zacks Consensus Estimate for Coterra Energy’s 2024 sales and EPS implies a year-over-year drop of 7.8% and 29.2%, respectively. Moreover, CTRA is a component of the Zacks Oil & Gas U.S. Exploration and Production industry, which currently ranks in the bottom 27% out of approximately 250 Zacks Ranked Industries. We expect this industry group as a whole to underperform the market over the next few months.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Debt-Funded Acquisition Risk: The recent $3.95 billion acquisition, split between $2.95 billion in cash and $1 billion in stock, raises concerns about Coterra's debt profile. While the acquired Permian acreage offers potential, the premium pricing introduces risk, especially if commodity prices falter.
Conclusion: Hold
Agreed, the Permian asset acquisitions provide Coterra with an oil-focused development area in New Mexico, strategically located next to its current holdings. But given the above-mentioned mixed factors, a prudent approach would be to wait for a more favorable entry point before committing to a position in CTRA. Till then, we think that it's prudent to hang on to this Zacks Rank #3 (Hold) stock.
Image: Bigstock
Is Coterra Energy Stock a Buy Post Permian Basin Deal?
Last month, natural gas operator Coterra Energy (CTRA - Free Report) announced two deals worth $3.95 billion in New Mexico’s Permian Basin, a move aimed at boosting profitability. But can this buyout rejuvenate a stock that has underperformed its sector and subindustry this year? Let’s find out.
Coterra Energy Profile
Coterra Energy is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Headquartered in Houston, TX, the firm is focused on the Permian Basin, Marcellus Shale and Anadarko Basin. The company reached its current form following the October 2021 merger between Cabot Oil & Gas Corporation and Cimarex Energy Co. CTRA’s share of natural gas in its overall production is around 65%.
CTRA Boosts Permian Foothold
Coterra's acquisition of Franklin Mountain Energy and Avant Natural Resources strengthens its position in the lucrative Permian Basin. This consolidation allows for longer, more efficient wells and reduces location costs, increasing overall profitability. With a higher percentage of oil in production, the newly acquired acreage diversifies revenue streams, enabling the company to perform under varying commodity price scenarios.
While the Permian transaction is a clear positive for Coterra Energy, the stock is also supported by the following factors.
Other Positives in the CTRA Story
Efficiency Gains: Coterra Energy delivered strong results in the third quarter of 2024, with oil production reaching 112.3 thousand oil-equivalent barrels per day and natural gas at 2.68 billion cubic feet per day, both above expectations. In the Permian Basin, better drilling methods have reduced well costs by 12% year over year to $10.50 per foot. Looking ahead, top-tier wells are expected to cost less than $1,000 per foot, which is 5% to 10% lower than 2024.
Strategic LNG Agreements: Coterra’s recent LNG agreements in European and Asian markets beginning 2027 diversify its natural gas portfolio and provide pricing exposure to premium international markets. These deals strengthen revenue stability and leverage the company’s multi-basin portfolio.
Balance Sheet Strength: Unlike some of its peers who are saddled with debt, Coterra has done an excellent job at managing its balance sheet. As of Sept. 30, 2024, the company had approximately $848 million in cash and cash equivalents, zero debt on its $2 billion revolving credit facility, providing a total liquidity of about $2.843 billion. The debt-to-capitalization of CTRA is just 13.7%, compared to more than 40% for another natural gas-focused upstream operator EQT Corporation (EQT - Free Report) .
Attractive Valuation: CTRA looks appealing from a valuation standpoint. When comparing its EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) — a common measure of a company’s worth — it stands out as competitive against its peers. Even if we look at the price/earnings ratio, Coterra’s shares currently trade at around 9X forward earnings multiple. This is lower than the subsector, which trades closer to 11X.
Image Source: Zacks Investment Research
These are reasonably strong catalysts, but are they enough to sway sentiment amid several near-term risks plaguing the company? Unfortunately, there appear to be some serious red flags, which have stubted Coterra Energy’s share price appreciation.
Coterra Energy’s Shares Struggle
It looks like the market has not been impressed with the company this year. In 2024, the energy explorer's stock has lost 2.3% against the S&P 500’s 28% climb. Coterra has also underperformed the Oil/Energy space, its subindustry and peers like Expand Energy (EXE - Free Report) during this period.
CTRA, EXE Year-to-Date Stock Performance
A Look at Major Issues Affecting CTRA
Vulnerability to Natural Gas Weakness: The main risk to the company and the stock is the fluctuating price of natural gas, to which it is highly sensitive. With the commodity currently struggling to stay above $3 on a sustained basis, Coterra Energy's operating margins are likely to come under pressure.
Marcellus Challenges: Coterra Energy's operations in the Marcellus region continue to face challenges due to an oversupplied natural gas market. The low realized prices for Marcellus production remain a concern, with the company heavily relying on hedging to mitigate impacts. As a matter of fact, Coterra has paused all drilling and completion activity in the Marcellus due to severely low realizations, while also curtailing volumes.
Falling EPS & Revenues: The Zacks Consensus Estimate for Coterra Energy’s 2024 sales and EPS implies a year-over-year drop of 7.8% and 29.2%, respectively. Moreover, CTRA is a component of the Zacks Oil & Gas U.S. Exploration and Production industry, which currently ranks in the bottom 27% out of approximately 250 Zacks Ranked Industries. We expect this industry group as a whole to underperform the market over the next few months.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Debt-Funded Acquisition Risk: The recent $3.95 billion acquisition, split between $2.95 billion in cash and $1 billion in stock, raises concerns about Coterra's debt profile. While the acquired Permian acreage offers potential, the premium pricing introduces risk, especially if commodity prices falter.
Conclusion: Hold
Agreed, the Permian asset acquisitions provide Coterra with an oil-focused development area in New Mexico, strategically located next to its current holdings. But given the above-mentioned mixed factors, a prudent approach would be to wait for a more favorable entry point before committing to a position in CTRA. Till then, we think that it's prudent to hang on to this Zacks Rank #3 (Hold) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.