Capital Efficiency And LNG Deals Signal Positive Future Outlook

Key Takeaways

• Enhanced capital efficiency and strategic asset allocation are projected to improve net margins and ensure consistent free cash flow.
  
• LNG sales agreements and potential growth in natural gas demand could diversify and increase future revenue streams.
  
• Reduced activity in the Marcellus and weak prices could lower natural gas revenue, while shifting investments might impact diversification and future earnings.

Catalysts

An independent oil and gas company, engages in the development, exploration, and production of oil, natural gas, and natural gas liquids in the United States.

• Continued growth in organic oil production is expected, driven by asset quality and capital efficiency improvements, enhancing future revenue and potentially improving net margins.
  
• The introduction of LNG sales agreements linked to international market prices could diversify and boost future natural gas revenue streams, increasing earnings as these contracts become active in 2027 and 2028.
  
• Capital efficiency gains, such as simul-fracking in Culberson County, lead to lower capital expenditures and maintain or increase oil production, positively impacting net margins by reducing costs per barrel.
  
• Potential future growth in natural gas demand from expanding LNG exports and increased electricity generation may create a tighter supply-demand balance, potentially raising future natural gas revenue and earnings.
  
• Focused capital allocation to high-return oil projects in the Permian and reduced investment in less favorable gas projects, such as the Marcellus during low price periods, aligns capital efficiency with a disciplined reinvestment strategy, supporting consistent free cash flow and shareholder returns.

Coterra Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coterra Energy's revenue will grow by 21.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.5% today to 27.1% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $3.8) by about December 2027, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.8 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2027 earnings, down from 14.6x today. This future PE is lower than the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

Coterra Energy Future Earnings Per Share Growth

Risks

• Reduced drilling and completion activity in the Marcellus due to current low natural gas prices could negatively impact future production levels and revenue generation from these assets.
  
• Coterra is curtailing and shutting in natural gas volumes because of weak spot prices in the Northeast, which might lower immediate revenue and cash flow from these assets.
  
• Any potential increase in capital allocation to the Permian and Anadarko could mean a decrease in investment in the Marcellus, potentially impacting geographic diversification of revenue and leading to an over-reliance on oil assets.
  
• The ability to maintain returning 50% or more of annual free cash flow to shareholders could be challenged if market conditions change unfavorably or operational efficiencies decline, impacting available cash flow.
  
• Over-reliance on strategic flexibility and optionality might lead to delays in capital investments or suboptimal allocation decisions if market conditions and pricing do not recover as expected, negatively impacting future earnings potential.

Valuation

• The analysts have a consensus price target of $33.11 for Coterra Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.0, and the most bearish reporting a price target of just $30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.9 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $24.52, the analyst's price target of $33.11 is 25.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.