Coterra Energy Q3 2023 Earnings Call Transcript

There are 17 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Photera Energy 3Q 'twenty three Earnings Conference Call. 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

If you would like to ask a question during this time, to press star once again. Thank you. I would now like to turn the call over to Dan Guppy, Vice President of Finance Planning in Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning and thank you for joining Coaterra Energy's Q3 2023 earnings conference call. Today's prepared remarks will include an overview from Tom Jordan, Chairman, CEO and President Shane Young, Executive Vice President and CFO and Blake Sergo, Senior Vice President of Operations. Following our prepared remarks, we will take your questions during our Q and A session. As a reminder, on today's call, we will make forward looking statements based on our current expectations.

Speaker 1

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 who are prepared 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.

Speaker 2

Thank you, Dan, and thank you all for joining us this morning. Coterra had an excellent Q3 exceeding expectations across the board. This was the result of several factors, including outstanding performance from our top tier assets and excellent operational performance from our organization. I want to particularly acknowledge our field employees and vendors who are the driving force behind our outstanding results. Although we are pleased to announce these results, quite frankly, it's what you should expect of Cokera and what we expect of ourselves.

Speaker 2

We are not interested in being average. These results are best understood within the framework of the core thesis of Coterra. With top tier oil and natural gas assets, Coterra can flexibly allocate capital to take advantage of changing commodity prices, changing technical innovations and changing field conditions. We work for our shareholders and we believe that they are best served by a disciplined approach that generates consistent profitable growth. We do not manage the company around production targets.

Speaker 2

We manage the company to maximize the financial productivity of our assets. We seek to grow our per share profitability throughout the cycles, which is best achieved through a combination of prudent investments and direct shareholder returns in the form of dividends and buybacks. We are problem solvers. Albert Einstein said, It's not that I'm so smart, it's just that I stay with problems longer. At Coterra, we stay with problems longer.

Speaker 2

Staying with problems longer means that we do not simply adopt workable solutions. We demand perseverance in finding optimum solutions. This is true with our technical challenges as well as our financial challenges. We do not adopt an a priori0growth posture in operational planning, no more or no less than we assume a priori answers to technical problems before engaging in rigorous analysis. A key focus of our organization is iterative operational and financial planning.

Speaker 2

We engage in exhaustive planning iterations in an ongoing effort to maximize our capital efficiency, focusing both on asset productivity and cost optimization, which also allows us to analyze and model multiple options. Dwight Eisenhower said that, In preparing for battle, I have always found that plans are useless, but planning is indispensable. At Coterra, we build annual capital plans that have on ramps and off ramps. By limiting our long term commitments, We retain the option to pivot capital from one area to another as conditions warrant. Our history tells us that flexibility is crucial for we cannot predict the future.

Speaker 2

It is not the plans that are important, it is the planning. This planning process combined with the high energy, innovative and curious organization is the core of Coterra's strength. We do not intend to provide detail on our 2024 plans during this call. However, we are highly confident that our results will continue to be top tier, that our capital efficiency will continue to improve and that the quality and duration of our inventory will continue to be apparent. As we have previously discussed, we expect to enter the year holding our Marcellus gas production relatively flat as we monitor gas macro conditions.

Speaker 2

By doing so, we can reduce Marcellus' capital by at least $200,000,000 versus 2023, while maintaining the optionality to pivot back to the Marcellus when gas markets structurally rebound. In February, we will provide an updated 3 year outlook. We do not expect significant deviations to our current strategy of allocating capital to its most productive use to achieve moderate, disciplined growth. Under a moderate multiyear growth strategy, our corporate breakeven, defined as the ability to generate excess free cash flow after paying Our healthy common dividend will remain below $50 oil $2.50 natural gas. Before I turn the call over to Shane, I want to close with our answer to the question, why Cotera?

Speaker 2

Coatera is a new company and one that is unique in our space. We have top tier assets, a top performing organization in robust revenue diversity. We operate among a field of great competitors and we are here to compete. Coterra is designed to provide excellent financial and operational results through the cycles. Our goal is to make top tier results routine.

Speaker 2

As I said, it is what you should expect of us because it's what we expect of ourselves. With that, I will turn the call over to Shane.

Speaker 3

Thank you, Tom, and thank you, everyone, for joining us on our call today. This morning, I will focus on 3 areas. First, I will discuss highlights from our Q3 2023 results. Then I'll provide production and capital guidance for the Q4 and update our full year 2023 guidance. Finally, I'll review where we are on our shareholder return program year to date.

Speaker 3

3rd quarter total production averaged 670 MBOE per day, oil averaged 91.9 MBO per day and natural gas averaged just over 2.9 Bcf per day. All production streams came in above the high end of our guidance, driven by a combination of continued positive well productivity coupled with faster cycle times that accelerated TILs. Turn end lines during the quarter totaled 46 net wells, 25 in the Permian at the high end of guidance, 14 in the Marcellus at the midpoint of guidance and 7 in the Anadarko as our Evans project came on a few weeks earlier than expected. Turning to our financial performance. During the Q3, to net income of $373,000,000 or $0.50 per share and discretionary cash flow of $796,000,000 Approximately 64% of our revenues for the quarter were generated by oil and NGL sales.

Speaker 3

Accrued capital expenditures in the 3rd quarter totaled $542,000,000 at the low end of our $540,000,000 to to $610,000,000 guidance and free cash flow was $250,000,000 after capital expenditures of 546,000,000 Total cash costs during the quarter, including LOE, workover, transportation, production taxes and G and A totaled $7.99 per BOE, down from approximately $8.27 in the 2nd quarter. This was below the midpoint of our annual guidance range of $7.30 to $9.40 per BOE. One note on our deferred tax guidance. Beginning in 2022 and with greater impact in 2023, New requirements under the Tax Reform Act of 2017 require Coterra to capitalize Section 174 R and D expenditures and amortize these expenditures over a 5 year period rather than expensing them in the year in which they occurred. Our Q3 2023 deferred income tax ratio was negatively impacted by this new requirement.

Speaker 3

As such, we now expect 95% or more

Speaker 2

of our

Speaker 3

full year 2023 income tax expense to be paid during the current year. This 5% to 10% change in our percent deferred will have a minor impact on 2023 discretionary cash flow, but we felt it was worth clarifying on this call. Looking ahead, we estimate over the next few years, our percentage of income taxes to be current will be greater than 90%. Looking ahead to the Q4 of 2023, we expect total production to average between 6.45 and 6.80 MBOE per day, oil to be between 98 MBOE and 102 MBO per day in natural gas to be between 2.78 Bcf2.9 Bcf per day. We expect accrued capital in the 4th quarter to be between $460,000,000 $530,000,000 which includes the impact of infrastructure and non operated activity shifting into the 4th quarter.

Speaker 3

For the full year 2023, today we are increasing our production guidance. Our oil volumes are now expected to come in at 94.5 to 95.5 MBO per day, up 3% from our August guide. Our BOE and natural gas volumes are now expected to be 6.55 to 6.65 MBOE per day and 2.84 and 2.87 Bcf per day, up 3 and 1% respectively from our August guide. Relative to our initial February guidance, to Coterra's full year 2023 production guide has increased 5% for BOEs, 7% for oil and 3% for natural gas. The incremental volumes were driven by an even split between better than anticipated well productivity and faster cycle times in the field.

Speaker 3

Based on updated guidance and recent strip pricing, we now expect to generate full year discretionary cash flow of approximately $3,500,000,000 with more than 50% of revenue driven by oil and NGL sales. The company expects to invest approximately $2,100,000,000 or roughly 60% of cash flow and generate free cash flow totaling $1,300,000,000 On the shareholder returns. Last night, we announced a $0.20 per share base dividend for the Q3. Our annual base dividend of $0.80 Per share remains one of the highest yielding base dividends in the industry at nearly 3%. Management and the Board remain committed to responsibly increasing the base dividend on an annual cadence.

Speaker 3

During the Q3, despite to relatively lower commodity prices and cash flow, Cotera continued to execute its return program by repurchasing 2,200,000 shares for $60,000,000 at an average price of approximately $27 per share. In total, We returned 84% of free cash flow during the quarter. Year to date, including our base dividend and $385,000,000 of share repurchases, we have returned $839,000,000 or 91% of free cash flow to our shareholders. Taking into account recent strip pricing, buyback activity completed year to date and our expected base dividend for the year, we expect to return greater than 80% of our 2023 free cash flow to shareholders, well in excess of our 50% plus minimum commitment. Moreover, since instituting the buyback program in 2022, doTERRA has repurchased a total of 64,000,000 shares or 7% of our shares outstanding for $1,600,000,000 at an average price of $25.72 per share.

Speaker 3

In summary, doterra's team delivered another quarter of quality high quality results, both operationally and financially. We look forward to a strong final quarter of 2023, which we believe should set a solid foundation for 2024 and beyond. With that, I will hand the call over to Blake to provide more color and detail on our operations. Blake?

Speaker 4

Thanks, Shane. This morning, I will discuss our capital expenditures and provide an operational update. 3rd quarter accrued capital expenditures totaled $542,000,000 coming in at the low end of our guidance of $540,000,000 to 610,000,000 primarily due to delayed infrastructure spend and lower non operated activity, both of which we expect will move into the Q4. As such, we are reiterating our full year 2023 capital of $2,000,000,000 to $2,200,000,000 and continue to trend 1% to 2% above the midpoint. Looking ahead to 2024, we continue to expect a 5% dollar per foot per foot decrease based on leading edge service costs and contract repricing.

Speaker 4

Of note, We continue to see meaningful price decreases in OCTG, rig rates and frac spreads. However, other cost categories, including labor and fuel costs remained resiliently high. As noted in our investor deck in the Q3, our Permian and Marcellus frac crews averaged 17 hours per day, up 18% from a year ago and an all time record for our pumping efficiency. The drivers of this improvement include larger project sizes, increased wells per pad, improved water sourcing and a focus on transition timing. Over the last few years, our company has achieved improved capital efficiency through the execution of longer laterals, co mingling of surface facilities and sign ups.

Speaker 4

Our operations teams in all three bases continue to find creative and impactful ways to improve our capital efficiency. These gains couldn't be achieved without the strong execution of our world class field staff. We recently added a 7th rig in the Permian Basin, a few months ahead of schedule. This was driven by a recent decision to simulfrac and derisk to the timing of our largest 2024 project, the Wyndham Row in Culberson County. Simulfracking has the potential to decrease dollar per foot on this project by an incremental 5%, bringing the project's total estimated cost savings to 5% to 15% versus our current Culberson County average.

Speaker 4

To our knowledge, this project will be the first all electric simulfrac powered directly from the grid. Currently, we are running 10 rigs, 7 in the Permian, 2 in the Marcellus, 1 in the Anadarko and 3 frac crews, 2 in the Permian and 1 in the Marcellus. When looking ahead to 2024, Coterra has fewer than 25% of its rigs and frac fleets under contract. This provides significant optionality. We are in the middle of negotiations on a number of contracts and will provide a detailed update to February.

Speaker 2

Thank you, Shane and Blake. Momentum at Coterra continues to build. We're generating consistent profitable growth. The company remains well positioned to deliver on its stated goals. We appreciate your interest in Cautera and look forward to further discussing our results

Operator

I would like to remind everyone in order to ask a question, Your first question comes from the line of Nitin Kumar. Nitin, your line is open.

Speaker 5

Hey, good morning, Tom and team. Congratulations on a great quarter. Tom, I want to start with cash return, Joe. As much as your oil performance has been impressive, As Shane mentioned, you're on track to return 80% of free cash flow this year. Some of your peers have increased the commitment to the percentage that they promised to give back.

Speaker 5

You're still at 50%. Just if you could share some thoughts on how you're thinking about the cash return framework And could we see it evolve in 2024?

Speaker 2

Well, I'm going to let Shane carry this one over the finish line. But look, I'm just going to say flat out. We're not interested in getting in an arms race of promises on cash return. I think you can look at what we've done. It's nicely laid out in our deck that we have a history of being serious about returning cash to our shareholders.

Speaker 2

But as you know, Nitin, we really value flexibility. And I just don't think it makes any sense to make, quite frankly, glorified promises. We'd rather be measured by our results.

Speaker 3

Yes. Thanks, Tom. I think Tom laid it out really, really well. But I would just emphasize that for the Q3, We returned 84% of our free cash flow for the year to date. We're well above that over 90% of our free cash flow.

Speaker 3

And that 80% figure that I talked about earlier, that's a number that sort of takes into account buybacks to date Plus dividends, including an assumed hold of the dividend in the 4th quarter and doesn't assume any incremental repurchase. So that number could well go up higher by the time we get to the year end. If you look at the track record and the history, if you go back to the Q1 of 2022 to today. You'll see we've been anywhere from 70% to an excess of 100% of our shareholder returns as Percentage of free cash flow really averaging a bit over 80% over that time window. So I go back to what Tom says, look at what we do and judges by those actions, but we are fully committed to returning capital in a good quantum to our shareholders.

Speaker 5

Great. Thanks for the fulsome answer, guys. As my follow-up, obviously, industry consolidation is on everybody's minds recently. Tom, you were very systematic and disciplined at Cimarex when you were creating your Permian position, Then with the combination with Cabot and the formation of Cattera, you took a slightly different approach to building a different company. So just if you could give us your thoughts on the M and A market, where you see Cotera fitting in and what is your strategy around consolidation from here on out.

Speaker 2

Well, Nen, thank you for that question. Our strategy is simple. It's consistent profitable growth. We want to generate financial returns through the cycles. We don't want to be Beholden to a particular commodity nor a particular geography, we believe in operational excellence And thank you being good at the business.

Speaker 2

There's a strong underpinning of any kind of financial runway. We don't have a problem to solve. I think the combination of Cimarex and Cabot built one of the most resilient companies in our space and hopefully we are in the process of proving that to our viewers. But as we look at the landscape, we would view M and A solely as an opportunity, but not a necessity. We don't have a strategic goal around any kind of M and A.

Speaker 2

Quite frankly, we're cautious. We're cautious because when you invest through the drill bit, you can do that incrementally and you can pivot and adjust as conditions change. M and A, Mark. M and A involves large episodic movements that can often catch you countercyclically. So, we're opportunistic.

Speaker 2

We're never going to say never to anything. We look at it all. But, we're going to be disciplined. Shane, you have any thoughts on that?

Speaker 3

No, look, I would just echo that, look, the last month has seen some large scale M and A, but really 2023 has been an active year for M and A throughout of all different shapes and sizes, and we're always curious. And if things are out there, Always trying to figure out if there's an opportunity to for those things to help make us better over time, but Clearly, year to date, we haven't seen anything that sort of checked all the right boxes. And so we're very comfortable with taking the business from where we sit today.

Speaker 2

Yes. Shane said it right. It's about getting better. And I'm particularly proud of the way this organization is performing And very confident in saying we intend to make it routine. We would not put that at risk with something that It wraps our momentum.

Speaker 5

Great. Thanks for the answers guys.

Operator

Your next question comes from the line of Yiming with Goldman Sachs. Yiming, your line is open.

Speaker 6

Hi, good morning and thank you for taking my questions. My first question was on the Wyndham Road development. Can you provide any details on the expectation from that program and any color you can provide on the reg add And your plans to de date us the project heading into 2024?

Speaker 4

Yes, Mohan, this is Blake. I'm happy to take that one. As we've talked about the Wyndham Road is really our largest road project to date. It's just taking all of our operational efficiencies and putting them in one place. So It's several DSUs lined up together.

Speaker 4

It's not what you would consider 1 giant cube development. We're prosecuting the Upper Wolfcamp across 1 big section Invite one big row. And by doing that, we can concentrate our rigs, our frac crews, we can co mingle our facilities and we can drop our to infrastructure costs. So all that adds up to some pretty big cost gains. The decision to add the rig a little bit early Well, frankly, just to get ahead of getting the wells ready, we've decided to simul frac that row.

Speaker 4

And so, simul frac moves very quickly. You got to have all the wells ready and we just wanted to make sure we had plenty of buffer there. So that's really the main driver.

Speaker 2

It's also an electric simulfrag and that required additional lead time for our partner.

Speaker 6

I see. That's really helpful color. Thank you. I guess moving to your to your outlook and we will wait for a fulsome update next year. But I wanted to get your high level thoughts.

Speaker 6

I mean this year you have shown strong performance. Oil growth is 9% year over year close to 9% year over year. And then on Slide number 14, you highlighted continued expectation for strong productivity in the Delaware going forward. How should we think about the evolution for the company over the next 3, 4 years? Any high level thoughts you can provide there?

Speaker 2

Well, I think you should think of it in terms of our history of behavior. We don't manage Company by production goals, I think I was clear in my opening remarks on that. We really seek to fund very robust projects that not only deliver outstanding returns, But have remarkable windage if the commodity price were to fall so that we know that we're getting a good return on our capital through the cycles as we can best predict them. So we said so we decided how much capital we want to invest, what projects we want to fund. We do our very best job to come up with an estimate of what the production will be, And then we challenge our organization to overshoot that.

Speaker 2

And when they do, we don't view that as a negative. And so That's the way we're going to view our 3 year plan, and we really hope to be providing better and better guidance. We always like to to hit what we aim for, high or low. We want to hit what we aim for. And although we're proud of our outperformance, It means we need to go back to the drawing board and do better estimation.

Speaker 6

That's great answer. Thank you.

Operator

Your next question comes from the line of Arun Jayaram with JPMorgan. Your line is open.

Speaker 7

Yes, good morning. I was wondering if you could really appreciate the to Slide 17 on the Wyndham row. But I was wondering if you could give us a sense of what you're doing to derisk some of the project timing and development of that large row development. In particular, I wanted to see if you could give us some insights on some of the learnings from the Mint Julep projects that you did this year, which maybe helps to de risk this larger project.

Speaker 4

Yes, Arun, this is Blake. I'm happy to take that We've learned as we've expanded these rows bigger and bigger. And while it's a big pretty slide and a long row, You need to remember, this is kind of what we do day in, day out. We drill DSUs all over the Permian, and we have to stay ahead of them no matter where they are. This is just putting them all in one big row so we can prosecute them as one project.

Speaker 4

There are lots of things we've learned along the way. SignOps is probably the biggest one by far. We build in a lot of timing estimates based on when we drill and then we frac and then we drill out our plugs. There's a lot of timing scenarios we use, including what happens if something gets stuck, what happens if something goes wrong. We call them bailout wells.

Speaker 4

We have another well ready to go that we can shift the operation to while we work on that well. And that's really how we approach it. We build a lot of flexibility into the road development.

Speaker 7

And Blake, just as a quick follow-up. How many wells would you expect if timing It goes as planned to come online next year, because I think you just started drilling the row in the Q3.

Speaker 3

All of them.

Speaker 4

It will be the full row will come online next year, which is 51 wells. Yes, sorry. And it won't be one big slug. It will as we get further down the road, those first wells will start coming Yes.

Speaker 7

Okay. And then my second question, Tom, where do you stand in terms of the 200,000,000 of capital that could be reallocated from the Marcellus to your other two assets and maybe just a quick update on how Dimock Township, how that could Impact or influence that decision?

Speaker 2

Well, I'll take that reverse order. We don't see Dimock being a material influencer one way or another. We're very pleased to be returning there, but it's not really a critical factor in any of our remarks. And then as far as the $200,000,000 Arun, we're still where we've been. We have flexibility there.

Speaker 2

We're analyzing our options. Yes, we've got every option in front of us and look really look forward to discussing 2024 when we're ready to discuss it. I Yes. We're still working on our plans.

Speaker 7

Great. Thanks a lot, Tom.

Operator

Your next question comes from the line of Doug Leggate with Bank of America. Doug, your line is open.

Speaker 8

Thank you. Good morning, everyone. Thanks for having me on. Guys, I wonder if I could ask about the Anadolico, where it sits in your thoughts on relative capital allocation for 2024. And I guess my question is around the guidance suggested no tills in 3Q and yet we obviously saw the activity there.

Speaker 8

So I'm just curious if your thoughts on The competitiveness of the Anadarko has stepped up a bit going into next year.

Speaker 2

Well, thank you for that question, As you know, we love Anadarko. It competes heads up. It offers market flexibility. It also is really coming back to force with some new targets, some new completion styles. The fact that we turned some wells aligned in the Q3 is just an outperformance of our execution.

Speaker 2

But I think you could and expect a healthy Anadarko program next year. And It's not out of love or affection. It's out of competing for capital. And those projects are really competing for capital. And then the one other thing they've done is they've established repeatability.

Speaker 2

Now we've got a few behind us that have been repeatable, executed well, gone like clockwork, and Well, gone like clockwork and that's what we're looking for.

Speaker 8

I guess my follow on is kind of related, Tom. Thanks for that answer. But so if I think about the indications on where Costs are headed, capital costs are headed and all the moving parts in there, not just from yourselves, but from your peers. And then I also Stick with the mantra that your capital program is really driven by efficiency and not by growth. I look to 2024 and I have to consider whether your CapEx guidance either is low end of your current range or maybe has some downside risk.

Speaker 8

And I'm trying to understand, would you rather take those efficiencies and redeploy the capital and keep the capital same? Or are you trending lower in your spending going into 2024? Any early guidance would be appreciated.

Speaker 2

Yes. I'm going to give you very vague guidance here. We'll take efficiencies every day we can find them. And to the extent that efficiencies mean we can do the same thing next year cheaper than we did this year, all else being equal, that's a wonderful outcome. And we seek to find those outcomes everywhere we look.

Speaker 2

But that you can infer what you will with $200,000,000 what that means, but it means we have more opportunities than we thought we'd ever have because of efficiencies. We're not prepared to say whether we'll be flat, up, down, sideways. But I will say this, I think you can look for us to have a very strong 2024 based on the operational momentum, capital efficiency, asset productivity and operational execution that we have going on. It's going to flow right into 24 and we will be able to do more with less.

Speaker 8

Appreciate the answers. Thanks so much.

Operator

Your next question comes from the line of Scott Gruber with Citigroup. Scott, your line is open.

Speaker 9

Yes, thank you and good morning. Good morning. So I want to touch on the strategy with the road developments. It does differ a bit from peers and that you're generally focused on single zone development and not developing multiple benches. Can you just provide some more detail What differs from a geologic perspective on the eastern side of your acreage?

Speaker 9

You mentioned on the eastern side, co development isn't necessary. You just see far less communication on the Eastern side. What is the strategy mainly a call Really being able to leverage prior surface spending when you do develop those Tier 2 zones down the road To offset the lower productivity, just some more color on the strategy.

Speaker 2

Yes. Well, I'm going to just say 1st and foremost, As much as we talk about the Permian Basin, it's highly variable and a lot of things change, depth, pressure, product type. It's really not one single basin, but you have tremendous variation in stratigraphy And Geo Mechanics and how rocks respond. For much, not all, but for much of our assets, we have come to the informed conclusion that co development of vertical benches is not necessary. We can develop a particular bench And come back and develop benches above and below.

Speaker 2

Now that's a function of frac barriers, it's a function of reservoir performance, it's The function of timing, but the fact that others see it differently, they're playing in different areas of the basin. It's like me telling you that Mexico has the wrong word for beer. I mean, you get different answers depending on where you are. And even within the Wyndham Row, you're going to see that the interference changes from East to West. So we're very confident in our approach.

Speaker 2

I'll just leave you with that. That's not to disagree or contradict anybody else's, But we have a lot of data that makes us firm in the statement that we can develop this single bench in the Wolfcamp without leaving behind resource above or below us. It's also highly efficient for our infrastructure, but that's a benefit, not a driver. We got it.

Speaker 4

Yes, I'll just add to that. The road development does lay the groundwork for all future that we might develop the infrastructures in place, the tank batteries are in place. Our team has already modeled all those zones and how they can come on later and It'll just drive down the dollar per foot on future projects. But as Tom said, that's an outcome. That's not the driver of why we're developing it the way we are.

Speaker 9

Yes. Do you have like a rough estimate in terms of savings on the subsequent developments when all the infrastructure and surface spend It's already sunk?

Speaker 4

No, I'd be nervous to quote a percentage on that one because it's not in the immediate drill schedule. But It's significant. It will move the needle.

Speaker 9

Okay. I appreciate it. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of David Deckelbaum with TD Cowen. David, your line is open.

Speaker 10

Thanks, Tom and team. I appreciate you guys taking my questions this morning.

Speaker 3

Good morning, David. Just curious, you all have

Speaker 10

demonstrated some pretty impressive well productivity gains certainly over your base cases. I'm curious as we progress into the back half or the end of 'twenty three into 'twenty four, 'twenty five, how would you contextualize midstream Drains, I know obviously you have large scale developments like Windenborough coming online, but we've heard by and large from many of the peers in the area That midstream is creating a pretty big overhang around near term productivity. Could you contextualize, I guess, what you're seeing and How you feel about the midstream setup going into 2024 and 2025 relative to your productivity?

Speaker 4

Yes, David, this is Blake. I'll take that In relation to the Wyndham Road, but also all of our development in Culberson and Reeves County, we own and operate our own midstream systems. Actually, about 70% of our operated gas and our operated water goes through our Coaterra Midstream assets. So we have tremendous control. These are systems we have developed over years.

Speaker 4

Triple Crown, for example, in Culberson County is tied into over 5 different processors that we can shift gas around to, which gives us a ton of reliability. In addition, We have multiple natural gas residue outlets and that just gives us a ton of flexibility and confidence in being ready for these big projects. In New Mexico, we are a 3rd party on the majority of our assets. That requires a lot of planning for all the reasons you alluded to earlier. We have some pretty good service partners and we have found as long as we stay far ahead of our projects, they'll be ready for us.

Speaker 10

Appreciate that. And then maybe just so I better understand the comments around the Marcellus spends next year. It seems like it's being phrased as though it's an option to spend $200,000,000 less. But I guess is that the correct way to think about it? Or is there really $100,000,000 plus of efficiency gains in there or just program changes just from designing better plans into next year?

Speaker 2

Well, David, what I said in my opening remarks is as we throttle into the year, we're currently in a cadence where we would If we didn't change, we would hold production flat and be able to realize those savings. But we also have on ramps and off ramps. I talked about planning, and one of the things that I'm most pleased about with our current program Whether we're talking about the Permian, the Anadarko or the Marcellus, each one of those plans has places where we can accelerate or decelerate If conditions change, we've thought ahead, we've preplanned and we can react. And so, right now, As we enter into 2024, we're going to be on a flattish Marcellus cadence. And I would say you would probably See us increase rather than decrease from that, if conditions warranted.

Speaker 10

Thank you, Tom.

Operator

Your next question comes from the line of Josh Silverstein with UBS. Your line is open, Josh.

Speaker 4

Thanks. Good morning, guys. Just sticking with the Marcellus, the realizations have been pretty strong this year and even better than the corporate realizations. I know some of this is from the NYMEX and fixed price contracts that you guys have. You outlined what you have for the rest

Speaker 7

of the year. Can you just provide us

Speaker 4

a little bit of insight as to what you guys have next year and any thoughts on kind of what you can do for locking in strong basis relative to 23 to 24 in our portfolio. We're expecting to realize about 85% of NYMEX this year. That is driven by a big portfolio that's anchored to a lot of out of basin indexes that give us exposure to strong pricing in the winter and also a lot of NYMEX pricing built in there. So we don't see a big change from 23 to 24 in how that portfolio is managed. Great.

Speaker 4

And I

Speaker 3

would just say, even though the 2nd and third quarter, that realization is a little lower. If you look year to date, that's right about where we're tracking year to date.

Speaker 4

All right. Yes. Thanks for that. And then Just on managing the cash balance, I think, Tom, you said you wanted to have about $1,000,000,000 of cash on hand.

Speaker 1

Can you

Speaker 4

just talk about the flexibility in this? I think you still plan on paying down the 3rd quarter maturity next year with cash. But Could this cash also be used to support shareholder returns potentially above 100% of free cash flow if crude oil and natural gas prices move lower? Thanks.

Speaker 3

Yes. I'll jump in there, Josh, for a second here. So look, on the cash balance, again, if you look back over the last, just call it, year and a half or 7 quarters, we've sort of been between, call it, maybe a little over $600,000,000 a little below $1,500,000,000 So we sort of gravitated around that $1,000,000,000 balance. I think we do want to be able to be countercyclical with regards to shareholder returns. So if we're in a period like the Q2 where free cash flow is a little bit tighter.

Speaker 3

We can certainly go beyond with that, in some cases well beyond that in order to continue to We think there's intrinsic value in doing that with the share repurchase program. So we certainly have that ability going forward. The other thing I would just touch on quickly is next fall's maturity, the 2024. And just to highlight, no decisions have been made on that. And so I think you sort of indicated that we'd likely repurchase that or pay that off for cash.

Speaker 3

And that's certainly one of the options and we think we have a lot of different options. But I'll just sort of temper that a bit and say no final decision has been made on that

Operator

Your next question comes from the line of Derrick Whitfield with Stifel. Derek, your line is open.

Speaker 11

Good morning and congrats on the strong quarter and update. Perhaps for Tom or Blake, one of the majors on the back of a recent acquisition talked about the potential double or recovery with Newtek. As a technical forward leaning organization that's been in the basin for quite some time, are there any developments that you're aware of that could drive that

Speaker 2

Yes, I'll start that and Blake may want to comment. We followed that topic carefully. There are a couple of companies kind of talking about that. And I wish I could tell you that we had some to the PAC Laboratory where we have our own version of it, but we don't. We're watching very carefully.

Speaker 2

We certainly hope it's true. But we don't see evidence that it's been field tested yet in any meaningful way. So, Blake, do you want to comment?

Speaker 4

Yes. I'd just Echo what Tom says, we're highly curious. We ask about it all the time. But to date, we haven't seen anything show up in the data that would show some technologies being widely used. So we'll continue to pay attention.

Speaker 11

Great. And as my follow-up, Referencing Slide 17, I want to take it with really a different angle with my question. As you think about the gono go decision on co development of Harkie in the Western Space and Units of the Wyndham Row. What's the downside of co development from an upstream perspective if low level returns are largely consistent?

Speaker 2

Yes. I don't know that I see a downside other than to midstream activity and we do have a certain amount of capital that we want to deploy. So if we were to co develop, it would be increased capital. We've looked at this pretty hard. Certainly, within our assets, there are areas where there's more interference between the Wolfcamp and the Harkie, and there's areas Where there's a little observable interference, even where we see interference, those Harkie wells are landmark wells.

Speaker 2

I mean, anyhow, Even if you say, you know what, you're going to drill the Wolfcamp, come back sometime later and catch the Harkie, the Returns on that Harkie layer even with depletion effects are outstanding.

Speaker 11

Great color. Thanks for your time.

Operator

Your next question comes from the line of Neal Dingmann with Truist Securities. Your line is open, Neal.

Speaker 12

Good morning, Al. Thanks for the time. Tom, my question, I think, I asked on the capital allocation a little differently. You all previously had well above what I'd call in prior, Called a year or 2 ago, what I always would deem is definitely well above average production growth and what I would probably call then probably average shareholder return. And then obviously here in the recent quarters, you've kind of reversed that where you now have well above shareholder return with what I would Probably the average production growth.

Speaker 12

I'm just wondering, Tom, for you, the gang, is there a scenario where you would revert more back to that prior scenario?

Speaker 2

And the prior scenario being above average production growth, is that what you're saying?

Speaker 12

Yes, sir. And more back to the instead of a 90% payout on the shareholder return maybe back to, I don't even know, 50%, 60% or something.

Speaker 2

No, I think we like our current approach. Under current conditions, I always want to say that look, if the world changes, the last thing you should want me to say is, no, we're going to just keep doing what we're doing even though the world has changed all around Yes, we have built Coterra to be flexible. But under current conditions, we are pretty solid in our current approach. Shane, anything you want to say to that?

Speaker 3

No, I would agree with it. I mean, I'd only say, Neil, again, we have a lot of peers today that are probably more focused on just maintaining and keeping things So I think in that regard, Cotera is differentiated and that we can still generate consistent to profitable growth in the current price environment that we set in.

Speaker 12

Yes, great add on, Shane. I agree with that. And then second question, Just on the cost reductions, very noticeable on prepared remarks, we talked about the sub fracs having potential for the 5% decrease and Taking the Culberson costs all the way down up to 15%. Can you remind me prior to this or quarter or 2 ago into deflation next year, were you all just thinking kind of maybe a 5% deflation? I'm just wondering kind of how you're looking at sort of total, I don't know if you want to call it deflation, Tom, but sort of all in lower cost next year versus maybe what expectations were a quarter or 2 ago?

Speaker 4

Yes. For the total program, we're still estimating about 5% deflation going into 2024. That's based on what we know today. The simulfrac savings would be in addition to that, but that's just for this one project and we have a big portfolio, so it's not an across the board savings. We're in the middle of negotiating our Reagan frac contracts for 2024 right now and look forward to Updating that when we put our plan out in February.

Speaker 12

Thanks, guys. Great update.

Operator

Your next question comes from the line of Matt Portillo with TPH. Your line is open, Matt.

Speaker 13

Good morning, all. Tom, maybe a question on the Anadarko Basin to follow-up on Doug's question. It sounds like next year, you'll have a relatively a healthy level of activity. But I was curious maybe looking into the medium term, it is an asset where you still have about 2 40 locations that compete for capital. It's also based and it seems to be well situated to meet some of the to pull demand from an LNG perspective.

Speaker 13

Just curious what you need to see either from a cost perspective or wealth productivity Maybe a macro change to see a healthier level of rig activity in the basin moving into the second half of the decade.

Speaker 2

Well, look, what I'd love to see is long term LNG contract that guarantees us an uplift in price and then we'd be willing to get after it. So I'm looking at Blake, getting him working on that. We do have an amazing asset in the Andarco Basin. It's ready to go. I mean, When we look at the Permian, the Marcellus, the Anadarko, Coterra is very well positioned for exactly what was designed when we formed it.

Speaker 2

We can react to liquids prices or natural gas prices with a healthy inventory. And when I say healthy, I mean a deep and robust inventory and I really I hope people are seeing that in our asset base. But we wouldn't have that option. I mean that's Blake, you want to comment on that?

Speaker 4

Yes. Just the Anadarko is very well positioned for LNG. It's gotten straight shot to the coast. There's lots of new Facilities coming online there, all of them intrigue us. As Tom said, we'd love to find one that guarantees us some great tailwinds to our cash flow.

Speaker 4

We haven't found that yet, but we're focused on how do we do an LNG deal that minimizes our total cost, But also gives us some flexibility because we do like to move capital around and we take for the tail to end up wagging the dog on that.

Speaker 14

Perfect. And then maybe just

Speaker 13

a follow-up on gas specifically, Tom and team, just curious how you all are about the hedge book heading into 2024. It still seems like it might be a bit of a transition year with some challenges on the inventory carryout from Tore carryout from 2023. And so just wanted to see how you all are thinking about your hedge profile for next year and then maybe longer term philosophy around hedging for natural gas.

Speaker 2

Yes. Shane, why don't you take that?

Speaker 3

Yes, sure. So over the course of the last quarter, we did add some hedges to the book. And again, I think historically, we've been pretty consistent in messaging. We want to be somewhere between 20%, 25% to upwards of 50% hedged in any sort of forward 12 months, 18 month window. And so we try to get back into that posture.

Speaker 3

And I think As you look today, we are positioned that way, plus or minus, around 25% to 30% on the gas side. If you include the physical hedges and the financial hedges in concert and we think that's to a good place to be, but we'll continue to monitor it as we go. You'll also find that if you just look at the shape of that hedge book, It is probably a little bit front half of the year weighted, a little less second half, not to the extreme, but there is a little bit of a slope to that to the profile. Thank you.

Operator

Your next question comes from the line of Roger Read with Wells Fargo. Mr. Read, your line is open.

Speaker 14

Yes, thanks. Good morning. Just come back to some of the productivity questions. There's obviously a portion of it you've talked about that's above ground driven and there's a portion that's below ground driven. I think the above ground is not too hard to understand from a logistic standpoint, e frac switchover.

Speaker 14

But the below ground, what have you been able to do there that's led to better performance Per lateral foot.

Speaker 2

Well, one of the things we've done, Roger, over the last few years is really spent a tremendous amount of time studying the optimum development scheme for our drilling spacing unit. We have a little different spacing assumption than others. And I think we're as we apply that throughout our portfolio, we're seeing ongoing benefits from it. We think that with fewer wells, we can extract the same amount of resource. Our machine learning team has been instrumental to Cotera in that understanding.

Speaker 2

And they continue to drive a lot of our thinking. It's been a remarkable piece of technology to adopt internally and it's had direct benefits in our capital efficiency.

Speaker 14

As we think about wider spacing, how does that factor in with the total inventory line? Do you estimate Do you have to make adjustments there or are we talking about enough of a runway that you're not concerned over the next several years?

Speaker 2

Yes, you were breaking up there, but I believe your question is with wider spacing, how does that impact the duration of our resource? We model that into everything you see in our deck that's modeled in. And we don't count number 6 on the map quite frankly. Although everybody loves a high number there, we look at I mean, if we can drill fewer wells and get better financial returns And not leave stranded resource. That is the Holy Grail.

Speaker 2

And we think we're never there, Well, we're moving in that direction in a very positive way and that's part of what's underwritten our results this quarter.

Speaker 14

All right. Thank you. Apologies for the breakup.

Operator

Your next question comes from the line of Leo Mariani with ROTH. Leo, your line is open.

Speaker 15

Yes. Hi. Just wanted to ask on the 7th Permian rig here. It sounds like that was kind of always part of the plan and perhaps you guys just accelerated it. So I just wanted to confirm that was something that was going to be in place kind of all year in 2024.

Speaker 15

So I mean, it sounds like you're probably going to have a little bit more, all in Permian activity next year.

Speaker 2

Well, I'll tell you, if that was pre baked, there are a lot of people down the hallway that have scars from us fighting over that. But I'll let Blake answer the question.

Speaker 4

Yes. I'd say the real impetus was the Wyndham Road like we've talked about. That's a big project. We want to be well ahead of it to give us lots of timing. The drilling cadence associated with that project only had us picking up the rig early in 2024 And we just decided to buy ourselves a little time and pick it up early.

Speaker 4

We're able to contract a great rig with 1 of our strong service providers And it was hot and ready to go, so we jumped on.

Speaker 15

Okay. So just wanted to get a sense, I mean, is that going to give you guys Little bit more Permian activity then, just on average, sounds like they'll be running a little bit more equipment next year.

Speaker 2

No, it really just accelerates the project. It wasn't a big material shift. We had plans to bring that rig in next year anyway.

Speaker 15

Okay, understood. And then I guess, Tommy,

Speaker 13

you talked about this a couple

Speaker 15

of times, but you got the multi year guide, you're going to update that early next year and it just sounds like clearly You've outpaced expectations in 2023. It just seems like if we continue to see Strong well results out of CoTerra, you've got this guide of oil of kind of 5% plus. If trends continue, it seems like it could be a little bit more of the plus as opposed to the 5 as we roll into next year.

Speaker 2

Well, we're currently at 5 plus and we'll look forward discussing our plans when we roll them out. We're still having some iterations. But we are seeing great asset productivity. And we expect any surprise to be the upside. Now that said, we also operate in a world where things go wrong.

Speaker 2

I mean, Yes, there's we're not immune from train wrecks operationally. We avoid them as best we can. But I think if you look at our sector, Any kind of operational interruptions are always part of our business. So we like to promise what we think we can deliver.

Speaker 5

Okay. Thanks.

Operator

Your next question comes from the line of Charles Meade with Johnson Rice. Charles, your line is open.

Speaker 16

Good morning, Tom, to you and your team there, and thanks for going over the hour mark here. This perhaps dovetails with that last question on your outlook for 2024, but I want to start specifically with your 4Q oil guide, which was Stronger than many of us from the outside looking in were expecting. So the press also fits with your other comments about Volumes or volume growth is really an output, not a driver. We look at your sequential Over the course of 2020, we can see that and that the oil rate has ticked up and has ticked back down and you're going to have a big tick up for Q4. So my question to bring it to a point is, How would you encourage us to look at this 4Q, your 4Q volumes?

Speaker 16

Is this one of the big uptick that's likely to mean revert? Or is this more along the lines of a new baseline that you guys are looking at that you're going to build on?

Speaker 2

Well, we haven't, as you know, have specific plans for 2024, But we carry a lot of operational momentum in the 2024. Now that doesn't mean that you take the extra rate and just keep it going up to the right. When we talk about Growth, we're talking about annual numbers. So, but what we're seeing with a lot of these projects that we've Such as Wyndham Row, as we're seeing less seesaw in that production profile and we'll be working hard to maintain that in 2024 had less seesaw. We'd like to have smooth operational cadence and kind of dampen the volatility in that production profile.

Speaker 16

And I guess maybe just for my follow-up, can you elaborate on what Seesaw is?

Speaker 2

Well, seesaw is up and down significantly quarter over quarter. But again, we're not prepared to Discuss anything specific about 24 on this call. I think our 3 year guide of 5 years plus excuse me, 5% plus on oil is a reasonable expectation and that's kind of where we're Setting kind of a starting point on the planning process.

Operator

Ladies and gentlemen, there will be no more further questions at this time. I would like to turn the call back over to Tom Jordan for closing remarks.

Speaker 2

Well, I want to thank everybody for joining us this morning. Again, we're very pleased at Coterra to be delivering excellent results for the 3rd quarter, Well, I'll finish where I started. We expect this out of ourselves and we think you should expect these from us. So look forward to delivering consistent performance over time. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's call. You may now disconnect. Have a great day.

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Earnings Conference Call
Coterra Energy Q3 2023
00:00 / 00:00
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