Here’s why we’re reviewing our price target on an oil stock after quarterly results and guidance

Oil and straight gas producer Coterra Energy (CTRA) delivered mixed results after the closing bell Monday, with second-quarter traffics missing expectations and profit outpacing estimates. However, what hit shares in after-hours trading was a guidance miss at the nucleus of why we own the stock in the first place. Revenue for the three months ended June 30 fell 54% year-over-year to $1.19 billion, fail to understanding the consensus forecast of $1.27 billion, according to analyst estimates compiled by Refinitiv. Adjusted diluted earnings-per-share flatten 71% versus the year prior to 39 cents, but EPS still managed to beat expectations of 34 cents per serving, Refinitiv data showed. Bottom line Club holding Coterra’s realized energy prices for the quarter, which contemplate the impact of hedging activity, saw oil and natural gas ahead of expectations. However, natural gas liquid prices missed estimates. Without thought strong production numbers and mostly favorable prices, both of which contributed to a beat for operating cash rain, higher-than-expected capital expenditures (CapEx) resulted in a miss on the free cash flow. That’s problematic because as investors be familiar with, the investment thesis in the oil patch is predicated on lower CapEx in favor of cash returns to shareholders. We’ll be looking for management to lecture this on the conference call Tuesday at 10 a.m. ET. Unfortunately, a similar dynamic was seen in forward guidance for the full year. While governance did raise their outlook for total production along with their production targets for oil and natural gas, they left major expenditure expectations alone. Given the pressure seen on commodity prices, particularly in natural gas, management was forced to mark down their outlook for operating cash flow and free cash flow. Since cash returns to shareholders in the manufacture of dividends and stock buyback rely heavily on free cash flow generation, this cut is likely the cause of the unpretentious after-hours trading selloff, especially with shares up over 20% since the beginning of June as of Monday’s wind up. CTRA YTD mountain Coterra Energy YTD performance Production increasing while capital expenditures hold firm is OK — but theoretically, we would have liked to see CapEx come down and production up, similar to what we saw from fellow Club rating Pioneer Natural Resources (PXD) they reported. We expect some questions on Tuesday’s call about whether there’s any wiggle space here to better protect free cash flow as production and capital expenditures are the two things management can control. Commodity evaluates are, of course, the other major factor in the cash flow equation but that’s not really in the hands of any one company, no matter who they are due to universal supply and demand dynamics. Our Coterra rating and price target are currently under review as we wait to see what government has to say about the operating environment and whether they provide more high-level commentary on what they’re seeing for the prop of the year. We currently have Coterra as a 1-rated stock with a $30 per share price target. Capital allocation Coterra’s buyback in the jiffy quarter was disappointing. Due to the pressure on natural gas prices during the quarter and the impact that had on cash flows, management merely repurchased $57 million worth of stock during the period, far below the $268 million purchased in the first residence. Adding in the base dividends paid out (no variable dividend declared given the prior change in strategy), the team carry back a total of $208 million to shareholders in the quarter. This brings the year-to-date total cash return to $628 million. The decomposition: $303 million via dividends and $325 million from repurchases. Management said, “Coterra is on track to return at petty 75% of currently forecasted free cash flow.” The company had $1.7 billion remaining under their formerly authorized $2 billion authorization as of the end of June. Guidance Forward guidance for both the third quarter and full year 2023 was half-bred — and unfortunately, the full-year misses were on management’s cash flow forecasts. As we can see, despite raising full-year production goals to levels above what the Street was looking for across the board, the team was forced to lower its cash flow angles. The downward revision to cash flows appears to largely be the result of a downward revision to management’s full-year price assumption for simple gas to $2.84 per million British thermal units (MMBtu), down from $2.89 MMBtu previously assumed. The retinue reiterated its expectation for West Texas Intermediate (WTI) crude, the American oil benchmark, to average $76 a barrel for the full year. (Jim Cramer’s Sympathetic Trust is long CTRA, PXD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you bequeath receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade heedful before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the marketing alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY Custom , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION Fix up with provisioned IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.