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

Next up, we have Coterra Energy Chief Executive Officer and President, Tom Jorden. Tom, thank you for being here. Most of you probably know Coterra by now is the merger between Cabot and Cimarex, creating an upstream company with assets in the Marcellus and the Permian and Anadarko Basins.

So maybe, Tom, we'll start with the integration. Tell us how it's going, challenges. Any new color that you can provide on just the synergies and the merger and how it's all developing.

Yes. Thank you for that. The integration, it's actually a lot of fun. It's a lot of work, but fortunately, I'm surrounded by people that like to work. Obviously, there's system integration, accounting integration, IT integration, and that's -- that -- I'd love to snap my fingers and have that happen immediately, but we are merging 2 different accounting systems. There are some new concerns around cybersecurity that certainly make this a more measured process than it may have been otherwise. But I still walk the hall snapping my fingers. My nature is to be impatient, and I'm going to stay impatient, and it's proceeding on pace. The part that's the most enjoyable is the technical collaboration. I've said before and I'll say again, I am just delighted and wholly impressed with our team in Pittsburgh. The Susquehanna field operations, I was in Pittsburgh, Monday, for employee meetings, and I'll be in Susquehanna next week for employee meetings and conversations. And it's just an amazing group of professionals, dedicated. Our field operation is remarkable, and it's just really humbling to be a part of it. But it's also a lot of fun to bring our 2 teams together and share ideas, and we've had some really good collaboration. We're trying some different things in the Marcellus. I look forward to bringing some ideas to the Permian, Anadarko, but we're really seeing a lot of the technical turbocharge that motivated the combination in the first place. So it's -- my alarm goes off every day. I can't wait to get to work.

Great. Yes. Maybe we'll talk a little bit high level just on the energy markets today. You've seen a number of commodity cycles. And over your career, what's maybe been the most exciting time in energy?

Well, I had a young CEO ask me recently what's my favorite time of my career? And he's been asking a number of execs. And my answer was immediate: "Right now." I think this is as fun as I've ever seen in the business. And there's every reason to be optimistic. Of course, in E&P, we're born optimists, so we have jumped out of windows. At least those -- there's a survivorship bias on that, right? But I'm very optimistic about oil, and I'm very optimistic about gas for 2 different and independent reasons. I think over recent years, optimism on oil has been underpinned by our expectations of OPEC and OPEC+. And we listen carefully to what happens in the ballroom in Vienna, and that drives our outlook on oil. And I think what we're seeing right now with oil is a consequence of many, many years of underinvestment in the sector. And the optimism is underpinned by structural foundation and data. And it's been a lot of time before I could have said that. On natural gas, it's a different issue. And natural gas, I think, is a conversation around domestic and worldwide energy security. I think that what's going on in Eastern Europe is a tragedy on several fold. It's certainly a human tragedy, and our hearts go out to the brave people in Ukraine, but it's also just a consequence. The energy situation in Europe was a consequence of 20 years of political malpractice, quite frankly. It was 20 years in the making. If you look at European gas production, it started to decline around 20 years ago. And so I say, "Okay, if it takes a decade to fix that, let's get going today." And I think people are realizing that natural gas is an essential element for the world energy mix. It's also a great climate solution. Natural gas does not compete with solar panels and windmills. It competes with coal. And it is the best climate solution we have in front of us. I have a lot of respect and admiration for Toby at EQT, and Toby has been a very effective presenter of that concept. He's absolutely right. And so I'm very constructive about energy right now. It's a good time to be in the business.

And does that mean that you or your team are spending more time in Washington or in front of the political folks to push the agenda?

Well, we're certainly -- I'm on a plane to Washington this afternoon, and we are trying to find inroads. Now you kind of have to wedge your foot in the door, still. We're not by invitation. But we're -- look, I'm an American first and foremost, and it is good for America. It's good for the world, and we're going to be relentless in a fact-based discussion.

Yes. Good to hear. Maybe let's move to some of the operational items ahead. I guess maybe start with the Permian. You got a lot of improvements going on, operational, right now. This 8-well pad, you've -- over 8-well pad that you've talked about. What are some of the most, maybe, exciting things going on operationally right now in the Permian?

Well, there are a lot of things to be excited about across our portfolio. But certainly, in the Permian, we are seeing a significant uplift in capital efficiency based on some changes we made a year or so ago, widening, spacing and increasing our completion energy. And that's paying off nicely. The opportunity to drill longer laterals, we talked about our Culberson project, where we have a 14-well pad of 3-mile laterals, and that's remarkable. The all-in cost of that project will -- is projected to be under $700 a foot. Another one that we haven't spent a lot of time talking about, but we're really excited about, is the benefits of electrification. We put a lot of energy into electrification. From an emission standpoint, it's a home run to electrify our drilling rigs, our frac fleet but also our compression because we own and operate our own midstream for most of our Permian assets. And we've made a tactical and strategic decision to electrify. And we're seeing -- we'll have our first all-electric crew show up in late second quarter. We did test a bank of 4 electric pumps off -- we're -- what am I excited about? We are powering our electrical equipment off our grid. We own and operate our own electrical distribution grid. So we don't have portable power supplies for electricity, which is the standard in our industry. And so our drilling rigs are powered off our grid. We tested a bank of 4 electric pumps on grid power and found a remarkable uplift in delivered horsepower above and beyond what these portable electrical generators deliver because they are still themselves backstopped by mechanical machines that generate electricity. Grid power has a much more robust way to respond to changing peak demand. And if you have a frac crew, frac pumps, you have a tremendous fluctuation in demand, and grid power is a better power sourcing and led to much greater efficiency of that pump fleet to the point where we're curious to see if we can accomplish the same job with less equipment if we're running off the grid. We also are seeing, with our drilling rigs that are grid-powered, a remarkable savings over diesel. And that's one that is a benefit that we didn't quite model. It's certainly going to help us push back against inflation.

Is this something you can transfer to the Marcellus or the Anadarko Basin?

Well, not readily. The Marcellus is a challenge because there isn't the regional electrical high-voltage lines that you'd like. So I mean, in any reasonable time frame, I think on Marcellus, it's no. Now in the Marcellus, we do have compressor stations. They're -- I call them compressor stations. Compared to my background, they look like small cities. I mean these individual compressor stations can -- are nameplated for almost 600 million cubic feet a day. And many of those are not fully but partially electrified, but it's difficult because there's not the regional grid into the area.

Okay. I mean that might be a great cost savings over time, particularly in the Permian. Maybe just on the Marcellus, as you think about the longevity, right, the portfolio, how do you think about the production trends over time? You're incorporating some Upper Marcellus into the program this year. Can you just talk about the plans and, maybe, how you see that not just over '22 but, maybe, over sort of a 5-year period?

Well, when we look at capital allocation, we have an embarrassment of riches in that when I look at the Permian, and I'm going to throw the Anadarko in that mix as well and the Marcellus, we have tremendous productivity of our assets and just amazing returns. We quote a 15-year inventory of a PVI 10 of 1.5 or better. And now that's the highest cutoff I've ever seen in my career on inventory. And we have 15 years that are that or better. So depending on conditions, as conditions change, I fully expect that inventory to be significantly longer than that 15 years, but that's -- we wanted to use a high bar for cutoff, and I think that's appropriate in this day and age. So we have 5 to 7 years left of Lower Marcellus, and the 5 to 7 is depending on whether we go to 800- or 1,000-foot well spacing. And right now, we're going to try to go to 1,000 foot where we can. Now in the lower, the geometry is kind of closing in on us in that 5- to 7-year period. So for example, this year, about 1/3 of our program will be at 1,000-foot well spacing. As we look ahead into next year, it will probably be a little more than that. But by the time we go to the Upper Marcellus, we'll be able to take full advantage of best practices without any land constraint. And that means longer laterals, whatever well spacing we think is optimal. And that's a really important thing to be able to say. Now in the -- what we're testing this year, and this was an outcome of Coterra collaboration. So this is -- we couldn't necessarily have a big impact at Coterra on the -- what pads we're drilling, but we've had a little bit of impact as we brought our teams together. So we're testing wider spacing and a little upsized completion. And we have a lot of indication that, that will be a positive move. But as I look -- and a direct to answer your question, we said publicly, the Upper Marcellus, as we model it, and we're going to try to do a better job of communicating this, it's fantastic. It's just fantastic. And that's not an uncalibrated opinion. There are a lot of wells sprinkled that run our asset, that are highly productive. As we map the trend, there are some offset operators that have some fantastic Upper Marcellus wells. And the geology actually gets thicker and better onto our asset. So now, that said, it is not as good as the Lower Marcellus, and that's just the nature of the rock. But it's a question of how bad is an A- compared to an A+. I mean, it is still -- as we look at the Upper Marcellus, it is the cream of the crop of our asset portfolio, hands down.

Yes. Yes. So as you think about sort of that capital allocation, then over the whole portfolio over, maybe, a 3- to 5-year window, do you see it similar to how you're allocating capital today? Or how do you think that trends?

Well, what I've said for a lot of years, flexibility is coin of the realm.

High-class problem.

Yes. I love having the flexibility of having 3 basins that we could allocate capital to without degradation of returns. And that's a remarkable thing to be able to sit here and say. And so we're very constructive on the Marcellus. We're very constructive on the Permian, but we're -- don't forget about the Anadarko. And one of the things I love about that Anadarko is not only our -- we have a couple of billion dollars of identified opportunity that we control, we operate and its long laterals. And we've cored that up over the last couple of years, and that team is kind of ready to step forward. Now I love having it in our portfolio because it's a great safety valve. From time to time, the Marcellus has seen constraints. And there's some discussion about the Permian seeing constraints in the late '23, early '24. You're probably asking about that. I think those concerns are overblown. But nonetheless, in terms of risk management, I love having that Anadarko in our portfolio. So we're going to allocate capital nimbly. We have only one bias, and that's return on our invested capital, period. And we're going to find the best returns we can and be able to navigate the conditions in front of us. And like, right now, there are some supply chain issues in Permian. There are some supply chain issues in Marcellus. And depending on where that conversation goes or which commodity we tend to want to lean into in a given year, like this year, we decided we want to lean into oil. And that was a tactical decision based on what we saw over a 12-month window. So we're going to allocate capital with all those considerations in mind. And as you say, it's a real high-class problem to have.

So incremental dollar today and no judgment on putting more capital into the drill bit. And I know everyone doesn't want to see high volumes. But incremental dollar today, where do you think that dollar would go in those 3 portfolios?

Well, I mean, 2022, we've already made that decision. We had the choice of putting incremental money in the Marcellus, our incremental money in the other basins. We went to the Permian and our explanation is as simple as the words. It had a greater impact on '22. Now I think as we look into '23 and beyond, don't be surprised if that incremental dollar goes to the Marcellus or split evenly. We're really high on the Marcellus. We do have some capacity there. Our marketing team has done a great job of giving us great netbacks out of that. And we're quite high on it.

Okay. You talked -- you mentioned the constraints, whether it's the Marcellus or the Permian. Maybe your view on just how you see the Permian unfolding over. And the rig count is going up, I think, a few years ago when flaring was, maybe, a little bit more acceptable in the Permian. So just some thoughts on how you see those constraints sort of unfolding?

Well, I'll answer that twofold. One is Coterra, and one is the basin at large. At Coterra, we have, through 2023, certainty of flow. So we have marketing arrangements that our molecules will move. Now we have Waha exposure for a little more than half our gas. It's split roughly 60-40. We have about, currently, 40% of our gas flows to a Gulf Coast index, and 60% is generally sold at something at or near Waha. So we have exposure, but the greater concern is assuredness of flow because the oil revenue is your real contribution there. So for Coterra, we feel fairly confident that we're going to be able to flow our products. Now, for the basin at large, I think the concerns are overblown. And I say that from experience that I believe it was summer of '18, I lose track of the years, when the big story out of the Permian was, "Oh my God, oil pipelines are going to fill, and oil will be constrained. It will not leave the Permian Basin." And at the time, a lot of our competitors were signing up for firm transport that I think they would come to regret. And we, at the time, said that -- I mean, I said personally, there were 3 things that gave me confidence that it would work itself out, 3 words: God bless Texas. I mean this is all within the state of Texas, where you have a regulatory environment that can facilitate quick action. You have free markets that function effectively. And so what happened in '18 is there were some NGL pipelines that were repurposed to oil. You add augmentation of pump capacity, and the free marketplace responded in a rapid fashion. And I think that's what we're going to see in between now and 2023. You've already seen a major midstream company come out with a plan that's significant to add capacity. And I expect to see much more of that. So not to downplay it, faith is a bad strategy, but I just -- I have faith in free markets, and fears are always formed with a snapshot, but solutions are motion pictures. And I suspect the free markets will respond.

Yes. And I remember something similar in the Marcellus. I don't remember if it was '15 or '16, but there was this, "We're not going to be able to get the gas out." And somehow, like you said, the gas just flowed. Now we took a significant haircut on price with that, but there were still...

I remember it well, and many of you in the audience remember it well. There were -- there was a real fear of takeaway out of the Marcellus, and companies scrambled to lock up firm transport. And then the market fell out, and those companies that didn't have firm transport were then mentioned as acquisition candidates for companies that had this unused firm. I mean it's just -- the irony is deeper than one could imagine. And that's where -- there aren't too many places where I look at it and say, "Well, I'm really glad I have some gray hair." But having lived through these cycles just gives you a perspective that, I think, can, at times, be useful because you don't panic.

Yes. Yes. Yes. No, that's good insight. I know we only have a few more minutes. So I should probably mention the return of capital program. I know you guys are -- you've got the plan in place for variable, regular and the share buyback, share buyback being sort of the newest addition to that return of capital program. Maybe just talk about how you're thinking about the buyback today. I don't know if there are parameters, but how do you think about just the valuation and buying back those shares?

Well, yes, thank you for that. We are really committed to return of capital. I suspect you don't hear anything different from too many of my peers. But we came out, and we announced an ordinary plus variable that was 50% plus of our free cash flow. But we also said, really, what we'd like to do is return 30% of our cash flow from operations. And I think that's a detail that shouldn't be lost on people because cash flow -- a marker on cash flow from operations is before your capital program, so it enforces a capital discipline as does your ordinary dividend. But nonetheless, we're very pleased to have returned the ordinary plus variable. And we had always -- when we formed Coterra, in the conversations we had in putting Coterra together, a buyback was always in our mind. We just kind of want to get our sea legs underneath us. So we announced the buyback. It's $1.25 billion buyback. I will say we didn't announce it because we wanted credit. We weren't virtue signaling here. We didn't announce it because we wanted to put it on the shelf and take it out and polish it and display it occasionally. It's action. We want to take action. We believe in Coterra. We believe in our story. If you follow it, you saw I bought a little bit personally. I believe very much that Coterra is a great value right now. And we intend to execute that buyback as aggressively as we find prudent. Now that leaves me a lot of wiggle room there, but I'm not interested in anything other than communicating to the market what actions we intend to take and be measured over time by the actions and results we generate. So I want people to look at our buybacks through a lens of what did we actually accomplish, not what our intentions were. And we plan on accomplishing that buyback.

Okay. And maybe I'll squeeze in one more that I know has been important to investors is just the hedging strategy as prices have moved up here pretty significantly. Just maybe give the audience some high-level thoughts on how you feel about the hedge book today and where you, maybe, like to see it in the future.

Well, both legacy companies, independently, would have said that we would like to have about half our volumes, going forward, hedged. And both legacy companies had very short duration hedges. At Cimarex, we would typically hedge 4 to 6 quarters out and so that those hedges -- really, they were nothing more than a shock absorber on our cash flow. You really -- in my experience, you really can't hedge your way out of long-term cycles. But you can lessen the pain because you have these projects underway that have 6 to 9 months lead time. You're committed to them, and you certainly don't want to find yourself in a position where the market falls out from under you, and you find yourself borrowing to execute your capital program. At least, that's not a desired state. At Cabot, they would typically hedge looking forward to the winter, and when they found constructive pricing, usually 12 months out, they'd layer in hedges. But still, both companies had about half volumes. At Coterra, given our balance sheet, our cash generation, the fact that as we look ahead, we're currently investing 35% of our cash flow in our capital program to roughly hold our volumes flat. We're growing our oil and gas will shrink a little bit, but our revenue is increasing at 35% of our cash flow. It's actually less than that. That's an amazing thing to be able to sit here and say and with our balance sheet. So our need for that insurance is less. So I would say we're probably in the 25%. I would probably tell you that if we had 1/4 of our volumes hedged, we wouldn't have a lot of angst over that either way. And 50% of our volumes is probably an absolute ceiling, and we'll probably be at the lower end of that band.

Okay. Okay. No, that's helpful. we'll stop there and head to breakout. And anybody has any questions, please come next door. Thank you.

Well, thank you very much.