Coterra Energy Inc. (CTRA) Earnings Call Transcript & Summary

Welcome, everybody. Thank you for the next session in our 2021 energy conference. A staple of this conference in his old firm is Tom Jorden, Chairman and CEO now of Coterra having recently completed one of the -- a handful of mergers that have gone into the sector and continue to redefine all the investment cases for the E&P. So Dan Guffey for setting this up, thanks very much indeed. And Tom, welcome. Thank you for being here. I'm joined by my colleagues, Dan Lungo from their credit team and Kalei Akamine who works with me on the large-cap E&Ps.

So Tom, I'm going to kick off with a simple one here. How did you come up with the name Coterra? What does it mean?

Well, of course, we had some help. We engaged a consulting firm that did a great job and put a set of suggestions in front of us. But we were resonated to the name because we're bringing some disparate lands together and forming a new company and Coterra had a nice ring to it. I'll say this, over time, we were able to make a brand out of Cimarex, and we'll be able to make a brand out of Coterra. It's -- the name is less important to me than what it comes to symbolize, and we'll make it work.

But the audience, it wasn't this thing to our preamble. Tom promises to get multiple tattoos, so we're looking to see that somewhere down the future. But joking aside, to get a little bit more serious. What did you learn out of the merger process, Tom? Because obviously, there was -- there were varying opinions as to the logic of putting the 2 companies together, both on the investment side and from other commentators. But what's the feedback been? What do you see the strengths and weaknesses of the company? And I guess what did you just learn out of the merger process now that it's over?

Well, there's -- that's a big question, Doug, and it encompasses a lot of different issues. But one of the things that I learned personally is the absolute fundamental importance of engaging with your ownership base over time, developing relationships and developing credibility with your owners. So conversations can evolve over time. I mean, it's no secret that we surprised the marketplace with the transaction, and there was a lot of -- whenever people are surprised, I think as humans, our muscle reaction can be negative. That's certainly true for all of us personally, at least most of us. And we had some really, really good discussions with our ownership base where concerns were brought forth, and we were able to go back and do some additional work and come back. And it was just a remarkable process for us as a team and for me personally to see investor sentiment evolve over the months when we had those conversations from initial surprise to being deeply supportive. And of course, we passed with a 90% shareholder vote. It's something I learned years ago, but it just underscored the importance of constant and continuous communication with your ownership base. Another thing that was a learning is that you can carry it just so far before closing that because of certain antitrust considerations, you really cannot just completely M&A boundaries prior to closing. So as you listen to the thread of quarterly conference calls with some of our peers that have gone through this, you realize that an integration process is probably a year long post closing. And you know that, you talk about that, but living through it, we'll still be integrating in many respects for quite some time. Another thing that was a learning as I've had the opportunity to wonder the halls and get to know our organization broadly, get to know them personally, I just -- as energized as ever about the quality of our people, the energy, the enthusiasm about creating something new. And we have a lot of work to do. It's a lot of work, but I've got a real advantage of surrounding myself with people that like to work. And so we're going to get it done.

And it's not -- as someone who's moved around the world -- thankful I've been in Texas for 12 years, but you've made a big personal commitment to move down here as well. So I hope -- I wish you the very best luck with the go-forward efforts in putting the company together. I just want to ask you, however, that energy as a whole has somewhat been out of favor, I guess, the last year, has seen a bit of a recovery. But you are now a $17 billion company in a market which is less than 3% energy. So when you think about -- the reason you go to work every day is to presumably present an attractive investment case. How do you differentiate the go-forward company in a market that, for a while, hasn't been as focused on energy as it used to be?

Well, I'll say, we were in conversations, really going back 2 or 3 years, with many thoughtful players both from the buy side and the sell side on the evolving business model. And you were one of those players, Doug. And certainly, we had a clearing call for a changed business model. But in those conversations, it was also apparent that it will take some time of consistency before the investor and particularly the long investor comes back into the space. They've been hurt by the volatility of our own actions in chasing a varying commodity price file. And I think the investor base wants to see discipline in action, not discipline in words. And that we -- embrace that. I love it when people want to see results and not pretty investor slides because that's a playing field that we do very well on. The power of Coterra is going to be in our ability to allocate capital. And that's how we're going to distinguish ourselves. Not only do we have the ability to allocate capital amongst 3 very premier basins, we also have extremely high margins in each one. And we can get into this in a little more detail, Doug, but this is a great time in our business. And so I always worry about single measures of performance. And right now, we've got this single measure of free cash flow. And it's a good one, but it's not perfect. And so when you have companies that are under investing and generating free cash flow, that will play itself out over time differently in different companies. What I love about Coterra is we have absolutely top-tier returns in each of our 3 arenas, very high margins. And so we will be able to consistently create value through the cycles. And that's what we're here to do. And if we do that and we establish and maintain credibility and behave with integrity, our investors will return.

I appreciate the list of those comments about taking counsel for a number of different folks. I respect the fact that guys like you have built businesses and you've got a business to run. But at the end of the day, you're right, the definition of value has really, I think, been cemented by the experiences we've all had in the last 5 years. And that free cash flow metric is one output. It's a very transparent output. But another required output is the duration of that free cash flow. So when you look at the portfolio -- you just talked about the 3 operational areas. One of the questions that's come up a lot is what's the inventory debt? And more importantly, how dynamic is our inventory debt with different decisions on growth and different commodity backdrop? So when you think about Marcellus, Mid-Continent, Permian, how do you think about the interplay between capital allocation to optimize that inventory debt, the duration of the business model, if you like?

Well, Doug, that's priority one right now in our integration process. One of the first priorities we have is understanding all 3 of our assets and making sure that we have a lens that normalizes and that we truly can make capital allocation decisions on a level playing field. Our goal is to generate additional free cash flow over time. And the best way we can do that is to invest in the highest returns we can find. Returns that not only look good today, but have the robustness to withstand cycles in that commodity price strip. So we not only look at a modeled return based on current outlook, but then we look at, all right, what happens if oil falls to $40. What happens if oil falls to $30? What happens if gas falls to $1.50 and so on. And we want to make sure that we look at all the dimensions of that problem in allocating capital. Inventory is not a top concern. I know there are some voices that feel differently, and we will prove that over time. I -- whether it's the Marcellus, the Lower and the Upper, Anadarko has come forward with a very deep inventory of fantastic projects. And then the Permian just continues to perform with new landing zones and a rich, deep inventory. I -- there's lots of things I worry about, and that's not on my top 5 list.

Obviously, I'm being a little selfish with the things I want to ask you, but there's also questions coming in on the Veracast. So given that this dovetails with what we just asked the question has come in is, if you look at the current strip, can you rank the returns, whether by IRR or however you want to define it, across the 3 areas?

Well, I would say that as I look at it today, there's really a selection of opportunities that are tied for first. Certainly, the Marcellus competes with the Permian heads up. So that's absolutely Tier 1. And we do have some in the Anadarko that competes at a Tier 1 level. And then as we work our way down, there are some Permian opportunities that are lower tier. And there are some Anadarko opportunities that are lower tier. And then as far as the Marcellus goes, the big question there is the degree to which we can manage parent-child interference as the field gets further developed. And we have some of our very brightest minds working on that, both in Pittsburgh and in our other offices. And so I'm pretty optimistic as to what we're going to come up with. We've faced these problems before in other areas, and we've got some really bright people across our platform, working together on this.

I want to kind of round out the capital allocation question, but one, this is my favorite. It was my favorite at Cimarex. And goodness knows that the folks at Cabot knew this was a top question for them as well. Sustaining capital. When we talk about ex growth -- now you haven't committed to a budget yet for the new company. I guess we're going to get that early next year. But you also haven't indicated what your thinking is on whether we should have a top line growth currently and what that rate should be for Coterra going forward? So can you walk us through sustainable capital intensity? What that looks like maybe on a breakeven basis, if you can get that granular? And then what do you think the right model is for Coterra forward as it relates to future growth and cash returns?

Well, as you know, Doug, our margins are quite high, so our breakeven costs are quite low. And so I -- that's not really a primary concern. We're -- this is a remarkable time in our business, remarkable on 2 opposing fronts: one is it's probably the best business climate I've ever lived through in terms of the productivity of our assets, the cost structure and commodity prices. We are able -- as we look forward, whether we're looking into 2022 or beyond, I've never seen an environment where we can have maintenance capital that is such a small percentage of our total cash flow. And that won't last, but it's pretty good right now. And then the other thing that makes our environment so remarkable are the external pressures on us, whether it's energy policy, investor pressure and so on. So it's the old proverb, may you live in interesting times, and these are really interesting times. But as we look forward in allocating capital, we're going to seek to find the assets that build the most sustainable future. Coterra is built around a core thesis that says because of our differing revenue mix and the quality of our assets, we can manage volatility in a way that I think will be a standout amongst our peers. And that's what we're going to do. You asked about growth. I think you're going to see certainly at a BOE level, top line, I would say, little or no growth. Now we may disproportionately grow our oil volumes a little bit, but just a little bit. We're playing with that now. And again, what we're trying to accomplish is more robust, increasing cash flow over time. But I don't think you're going to see us cause any concern over growth.

Well, the way I'm going with this is this idea of sustaining capital, obviously, then provides an idea of free cash flow and free cash flow yield. So I wonder, if I may, I'm going to pass this to Dan in a minute to talk about balance sheet, but I want to talk about the method of cash return. And if I may, I'm -- if you see me looking over here it's because I'm looking at your presentation up on my screen. But the question I want to put to you is this, think of this as a debate, and I'm putting my this house belief on. This house believes that if you have a limited inventory in a depleting industry, variable dividends do not get capitalized by the market in the share price. Think about it as you move forward in time, your balance sheet builds the cash. You then take that cash and pay it out, your point forward equity value declines by definition because your debt is going up. Why a variable dividend? Why not a buyback or a higher base dividend, given the lower volatility of the business?

Well, we committed to a variable dividend, and we certainly -- under that commitment this last quarter and intend to going ahead. But all of those options are on the table. I mean, we continue, as we model it, to have plenty of options to look at buybacks, debt retirement, increasing our ordinary dividend. I mean all of these are active points of discussion and debate at Coterra. And it's not -- what our commitment, our core principle is to return value to our owners in real time. I think we've heard that message loud and clear that the days of being valued on net asset value and increasing the size of your asset base, those days are over and people want real returns in some fashion. And you've described many of those fashions. They're all on the table. We're in the process of debating this. And I wouldn't argue against any one of those options.

I think the -- I won't dwell on this, but the variable distribution issue is really a question of what does it do to your shareholder base and the permanence of the value recognition as opposed to a buyback or something else that can be capitalized like a sustainable base dividend. But we can take it forward as part of the debate, but I would urge you to think about what are variable distribution signals to your [indiscernible]?

Doug, as -- we've had some owner feedback on that, some good long-term owners that have told us that very same thing that certainly in comparing the variable to the ordinary, they're -- or common dividend, they're encouraging us to increase the ladder and expense the former. But we're in the process of analyzing all of our options. And you mentioned buybacks. And we'll analyze buybacks as well. It's hard for me over time, over the cycles to see too many examples of buybacks I want to emulate. And so that's probably the one that we'll struggle with the most. But that said, it's a ground level analysis, and we know how to do that analysis. And if as sure Coterra competes on a yield basis or competes with our other options, we're going to put that on a table and discuss it as a management team and discuss it with our Board.

It's a great business skill study, I think, but that -- I think there was a transition, Tom, I guess, just my two cents for what it's worth in this conversation. There's a transition between a buyback being seen as a full cyclical problem as opposed to a net of managing dividend burden because at some point, your dividend gets to a scale where you can manage that burden through buybacks. So it becomes a slightly different discussion. But I do want to ask you about one last thing before I turn it to Dan on the balance sheet, which you're one of the best in the industry. [indiscernible] I'm not sure where it's going to go on that. But during the conference call announcing the merger, you made the point that Coterra would be over scale, won't put words in your mouth, where it could be a consolidator? How serious should we take that comment? What is your vision for additional M&A and the scaling up of your business model? Because let's face it, not everyone followed your lead with capital discipline, but applying that to someone else's assets. Do you think Coterra could still be a consolidator going forward [indiscernible]

Well, Doug, my comments on our call initially were really about optionality and not about strategic intent. We've got a very deep inventory of absolute phenomenal returns. So we're not pressured to do anything. And we don't have a goal to get out there and buy something. We're -- we formed Coterra around quality, not necessarily empire building. That's not what we're here to do. We're here to build a better company that is fit for our time. Now what is the ideal bolt-on or ideal acquisition? I think the ideal is one that has, first and foremost, returns that compete with what's in your existing portfolio. It makes no sense to acquire something that goes to the back of the line; two, I think you look for assets that you honestly believe are better off in your hands than they are in the sellers. And although those opportunities are rare, they do exist. I have tremendous confidence in Coterra's operating capability. I have tremendous confidence in our analytical and scientific approach. And I think that there are assets that, quite frankly, we would extract additional value over the current holder. But -- three, it has to be at a price that the entry point is attractive. And that's -- those 3 are extremely rare. We look at a lot of things and very few of them make a state velocity to even be seriously discussed. But we will have the potential and the option that if something were to come our way, that really made sense on all of those fronts, and we were fully convinced that the owner of Coterra is better off if we grab it then we'll seriously consider it. But we're not going to make this a strategic priority. It will be an opportunity if it presents us. So we look at a couple of things now. I would -- right now, if you help my feet [ from ] fire, I'd say I don't think any of them are going to rise the point of view in being discussed seriously by the executive team. But you know what, you're a better organization to look, and that's going to be our ongoing approach.

Yes. I think we hear from some of the larger companies, the ConocoPhillips and so on that in a low to no growth market, meaning global oil demand, there's too many companies still pursuing growth. You could argue that privates are in that category right now. It really gets to my last kind of high level question about the industry. You've led the market on capital discipline with Cimarex and now presumably at Coterra in that go-forward model. Do you trust the capital discipline of the industry generally in the U.S. in the industry? And particularly, what's your thoughts/concerns on the behavior of the private companies currently?

Well, I'm going to work that backwards. Look, the privates are having a heyday. I said earlier, it's one of the best times I've ever seen in our business, and privates are taking full advantage of that. Now I probably worry about the private activity in terms of inflation of services more than I do [indiscernible] the supply/demand curve. But they're behaving differently than the publics, and we all know that. And what do I think about that? I think that they're probably behaving very rationally, but they're not under the investor pressure that we are, and we are under tremendous investor pressure. And that leads me into the first part of your question. We got here from investor pressure, Doug. I don't think any of us woke up 5 years ago and said, well, we ought to adopt a different E&P model where we moderate our growth, we generate free cash flow. We abandon the growth model and return cash more aggressively to our owners. I don't think any of us got there on our own power. We responded to investor pressure and some very thoughtful analysis and around the history of public E&Ps. And we will get forward with investor pressure. Yes, you asked me what do I think about capital discipline. I think it's real. I think it's genuine, and I think we're all committed to it. But I'm not 100% convinced on investor pressure won't swing. I'm not 100% convinced that the White House won't come out and criticize our sector for a low growth model and that all of a sudden we'll be criticized for restraining supply because we're all moderating our growth. So none of us live in a vacuum. And we wake up every day and respond to the world that we live in. The world I live in today says, you know what, we need to moderate our growth, we need to return cash to our owners and we need to listen carefully to our investors, and we'll continue to do that. But our investors may give us different signals over time, and we're going to listen to that as well. So I think the power is flexibility. We have tremendous flexibility with the balance sheet we have and the assets we have. We're ready for whatever comes at us.

Great segue. I'm going to pass it down in 1 second, but I just want to offer a comment. When we started out 4 or 5 years ago, talking about the DCF of 0 to 0, it was because we didn't know how to value the growth model. I didn't know how to establish the multiple or the NAV or whatever the number was because for 10 years some of your larger peers, it grew like crazy and didn't generate $1 of free cash flow. And that was kind of our thinking on why that model -- we couldn't get there. I'm an old conventional oil and gas guy. So the unconventional model to me was a perpetual spending machine that never got to the end game. So I credit you and guys like Tim Leach and others basically led the shift in that business model. And I think -- I agree with you. I think it is permanent because the share prices are showing you that. Dan?

Thanks, Doug. So like I mentioned, there's really not too much to ask on the balance sheet. So I'm actually going to follow up his M&A line of questioning and then get [indiscernible] balance sheet. So you guys mentioned how you look at everything. But at this point in time, there's nothing that you think is even going to make it to the executive level for review. Does that mean it's a better time to be selling assets than buying assets in today's market? And then how -- just how is Coterra thinking about potential asset divestments?

We have divested some assets. This year, we put a Mid-Continent package out that was -- it had become noncore. What I always look for is that -- just that, what's noncore? And how do I define noncore? A core asset is one where the entire organization is focused on making it successful. When I look around the room, I see our tax people, I see our marketing people, I see our financial planning people, I see our engineers. I see a robust set of company talent focused on making it successful. And then there are some assets where I look around the room and there's a production engineer and me and everybody else is either out of the room, checking their e-mail or sleeping. Those are noncore, and we can't get rid of those fast enough. We have very little of that in our portfolio right now, but not to say we have none of it. I don't think we have enough of it to make a material difference on a sale. But we've got a group that's always kind of nipping at the heels and saying, look, this is stuff we ought to divest, and we'll take those opportunities where we can.

What would it take to get you interested in potentially divesting something sizable such as the Anadarko?

Well, it would take a fundamental shift in our marketplace. When I look at the Anadarko -- and this is something that we will show you over the next couple of years. We intentionally started the Anadarko of capital because we wanted them to be a little desperate, quite frankly. And we said we need you to build a deeper inventory and come up with things that compete, and they have done a remarkable job. And as I look today, the Anadarko, it doesn't quite have an inventory that will compete with the Marcellus or the Permian. But I'll say this, they have some top-tier opportunities. We are really excited about, and it is a tremendous safety valve for Coterra. When I look at the challenges that can occur in northeastern part of the U.S. and the challenges that can occur in the Permian and have occurred with takeaway and other issues in the Permian, having that Anadarko in our portfolio just reinforces the core flexibility of Coterra. And so we will demonstrate to the marketplace. I said I like to play in an arena where results are what you talk about and not promise. And we're going to have some remarkable results in the Anadarko that we'll be talking about.

That's a really helpful way of framing it. So now back to the balance sheet. You said on your last earnings call that you feel that $2 billion of debt is likely the correct level of debt for the combined entity. But one of your peers has highlighted that they would like to drive net debt down to 0. You mentioned that 0 net debt is probably not the right number for you. But would Coterra ever consider going down the step? Again, what is the shift that would send you down that path to 0 net debt?

Well, the -- again, I said we're living in interesting times, and there are lots of other factors at play. In a level playing field, that is important part of our balance sheet. I would say debt is very useful and is good for ownership base as a source of capital. But I'm concerned and watching carefully is what the SEC is going to do in terms of our reporting, what the marketplace is going to do in terms of our ability to continually borrow and to make sure that -- to the extent that we want debt to be a permanent part of our capital structure, that we -- when that debt terms out, that we'll be able to replace it. So with that in mind, I'm probably at a point where we're going to live at a lower debt level than we would have if we had this conversation a couple of years ago. Is that 0 net debt? No, probably not. But it's -- certainly, if you'd asked me 2 years ago, what's the right debt level? My answer was 1.5x debt to EBITDA. And today, I'm probably going to tell you that it's going to be below 1 and maybe significantly below 1. But we're still waiting for policy we're waiting -- we're watching the evolving conversation on the role of fossil fuels in the energy transition, and we're going to be flexible.

Sorry, just one follow-up. You mentioned that you do have concerns about what's going to be available in the marketplace. Does that mean Coterra would potentially look to shift from traditional bullet bonds that you issue in the high-grade market to green bonds or sustainability-like bonds as a way of ensuring that you continue to have access to capital? Do you see those being the only way for energy firms to access capital in the future? Or just how are you thinking about that?

No. I don't think about it as a traditional versus green bond issue. There are always going to be people in the marketplace that like to make money. And ideology only goes so far. When people have to pay for their ideology, it tends to erode. And so I'm very constructive about our business going forward. I think that we are in an environment where we're going to -- we're on the threshold of making some really poor public policy decisions, particularly around energy. And I think many of those decisions, although bad for the world and bad for our country, might be really good for our business. So the nice thing about Coterra is we have a lot of flexibility. We have flexibility with our assets, and we have flexibility with our balance sheet. And so on this and so many other issues, we have a luxury of waking up every morning and making the best decision around the world we're living in. I'm wholly optimistic.

I'm just going to pass it to Doug.

Your -- we really respect your experience and your opinion and your peers of this industry. But you just made what I think could be a pretty controversial headline and [indiscernible] statement. You really think that, that comment about bank policy decisions -- can I ask you to elaborate just a little bit?

Well, there was a serious discussion about banning oil exports. There's a discussion going on now that came out the other day about doing something on natural gas. I mean look at energy prices. We had the White House come out and encourage OPEC+ to increase production. And their response was, no, we're not bailing you out. These prices are because of bad policy decisions. Look, Doug, if common sense is a headline, then yes, I'm making headlines. But I hope common sense is not a headline.

Well, I think you and I may be aligned on this to some extent. You're not alone. I know you're feeling that I'm isolating you here, but do you think the industry -- and I mean, when you look at the broader macro picture, I wasn't really going to get into this with you, but I think it's a valid point when you think about your comments about it could be good for your business or the business, I should say. Do you think the industry is already under invested to the point where it's too late to avoid a supply pool? I'm thinking about the big oils, the lack of exploration and now the capital discipline from the E&Ps.

Well, look, I -- to be on a call with Bank of America and ask me that, I would say you've got a lot of economists that would have an opinion that I would value far more than my own. But our industry has under-invested. And look, I'm involved in a number of industry associations. I'm Chair of the American Exploration and Production Council, which is all the U.S. independents essentially. And first and foremost, we're American. And our industry is ready to contribute as we need to. But the government can't block our ability to prosecute our business and then call upon increased production simultaneously. And I think the hypocrisy and foolishness of that has been called out. We are willing to be constructive. Our industry has -- is seriously addressing developing our products in a clean -- I won't say emission free, but we've made tremendous progress, and we'll continue to make tremendous progress. And I don't know what people are reading in the headlines, but I work in an industry of people that are dedicated not only to be good stewards of capital, but to be good citizens of our country and citizens of our world. I have tremendous respect for my peers and tremendous respect from my industry, and we can contribute in a positive way.

Wise words, Tom. I want to take up on some of Dan's questions, then I'm going to pass it to Kalei, who wants to -- I'm afraid he wants to hit some of the tax questions. So just on the balance sheet. You've talked about 50% payout of your cash flow -- or sorry, 30% payout in any condition and 50%, I guess, has come of the run rate today. How can you avoid getting to net debt 0 if you maintain those kind of numbers at strip prices? It seems you're headed to net debt 0.

Well, we are, and that's -- boy, there is such a lovely problem to have. We -- look, we're in the process of running a lot of models. But I'll say this, my experience, Doug, tells me prices are high until they're not. And I think one of the things that we have made a mistake on, and I think going back 3 to 5 years, the criticism of our industry, is we kind of forget history. Nothing solves high prices like high prices. And the same is true of low prices. We're in a cyclic commodity business. So I think to make long-term structural decisions assuming that the party will never end is to not learn the lessons of history.

[indiscernible] actually a little footnote for you. We opened up our conference this morning with a discussion with Alexander Novak's right-hand man. And he threw out a $60 to $80 range, something to think about. And for me -- as you say, it's a pretty optimal time for the industry. Wait [indiscernible] one for me. I'm going to throw it to Kalei. And if we've got time, we'll come back on some of the ESG issues. The last one is the hedging strategy of the business kind of went along with the growth strategy of the business. You've mitigated the volatility of the portfolio with the merger, you're headed to a very, very low balance sheet. Why hedge? What's the justification for hedging? Will you continue to hedge?

Well, if I could go back to April 2020 me and tell that person that we're having a discussion about not hedging, I hope that April 2020 would dope slap me. Hedging has always been to us a shock absorber to manage fluctuation. And we've never viewed it as a way to profit. We think over the long haul it's a zero-sum game. There's too many smart people in the marketplace. And so we've always modestly hedged with the idea that it will just provide a capital off ramp if prices fall so that we have these long-term projects underway give us a chance to kind of taper down if prices fall. That's always been our hedging philosophy. And now that we're investing a smaller percentage of our cash flow, we'll probably look to hedge a smaller percentage than we would historically. But we haven't -- we're relatively lightly hedged throttling into '22. We're still formulating what we want to be as far as hedged. But it will be, I think, quite a bit less than what we would have said 2 years ago.

Would it be appropriate to think about it as more cyclical hedging to protect the payout as opposed to a capital plan? [indiscernible]

Is an interesting way to look at it. And that's one of the things that I'm currently doing is we look at returns on many metrics, but one of the things I'm also asking is what's the payout of our program? Returns are interesting, but boy, if you've got your money back, you can kind of breathe a side of relief on worrying about terms.

Kalei's got one on tax, and I'd like to come back and ask you a kind of final closeout question. Kalei?

Definitely. Thanks, Doug. So as Doug said, this is a cash tax question, but I want to frame it around the oil breakeven. Wondering if you can bridge for us the oil breakeven from Cimarex to Coterra and highlight where you see the pluses from the Cabot merger? Namely Cabot's very profitable gas business and also the application of your NOL to their cash tax position? Remember, they were transitioning to a cash stack player in pretty short order. So there's a benefit there. So just walk me through the breakeven and I've got a couple of follow-ups.

Yes. I'm going to let Dan Guffey answer that. If -- those of you who don't know Dan, he's our Vice President of Financial Planning and Analysis and [indiscernible] Investor Relations. And Dan is best equipped to give a detailed answer on this.

Sure. Thanks, Tom. So from the Cimarex side, we were quickly becoming and on our way to a cash taxpayer as well, in 2022, specifically with where the high prices were. So what we've talked about, and you heard us on the call, we had 1.3 -- we being legacy Cimarex had $1.3 billion of NOLs at [ 930 ]. So how those NOLs will be used will be -- have a ceiling based on the [ 382 ] limitations and also built in gains. So directionally, you can think about that $1.3 billion of NOLs being at constant prices being fully utilized over the next 3 to 5 quarters. How those will be utilized is somewhat ratable over that period. So you can kind of see that. So the NOL usage will be there, and then clearly you'll still get shielding from IDC. So we -- the percentage of what the deferred will be [indiscernible], is we guided to 30% to 40% in the fourth quarter. We haven't guided to 2022 yet. But I think if you model it out, the percentage may fluctuate, but I think you'll be somewhere in that range that we guided to fourth quarter. And then go forward, you'll be at or below the low end of that range, clearly when you then are a full cash taxpayer, which Coterra will be based on strip prices in the latter halfs of '22 and entering into 2023.

That's perfect's. We've got a minute left, so I'll pass it back to Doug.

Tom, you knew this question was coming. So I'm just going to ask you to frame this for us. Coterra, what does it look like in 5 years? What are you doing in 5 years?

Well, I'm rooting for Coterra, whether that's from the sidelines or within the company, we'll -- time will tell. The Coterra, like Cimarex before, has never been about me personally. I'm honored and humbled to lead such a fantastic organization at Coterra. But one of the nice things about building Coterra is it opened up opportunity for many of our emerging leaders. And I think one of the things you're going to see at Coterra here over the next year or 2 is you're going to have some visibility into some of those leaders. And you're going to realize that, wow the strength of Coterra is in a management group and not any individual. So I don't know what I'll be doing in 5 years. I've got lots of interests in my life and lots of things I want to do. But right now, top of the list of what I want to do is build the best E&P company in our industry.

And now we've got you in Houston, Tom, it means you can come to our spring and fall busters without any difficulty. So we're looking forward to seeing you a few times.

Well I look forward to that.

Thanks very much for your time, guys. Dan. I appreciate you making the time for the guys. And Tom, thanks so much. Enjoyed your conversation.

All right, thank you.

Take care. Bye-bye.

Thank you, everyone.