On Wednesday, Wolfe Research adjusted its price target on Coterra Energy (NYSE: NYSE:CTRA), increasing it to $32 from the previous $31, while retaining an Outperform rating on the stock. The firm noted that Coterra Energy has lagged behind the Russell 3000 Energy Index by about 10% year-to-date. This performance dip was attributed in part to market rumors that the company might be considering an acquisition, potentially in the Anadarko Basin.
Wolfe Research believes that Coterra's recent acquisitions in the Permian Basin have addressed these speculations and bolstered the company's drilling backlog in New Mexico. The analyst suggested that Coterra's performance could see improvement as it integrates these assets and begins to realize potential efficiencies that have not yet been quantified.
The firm also pointed to the possibility that Coterra's forthcoming three-year outlook, expected with its year-end results, could serve as a turning point, potentially resetting expectations for the company's medium-term free cash flow (FcF) growth. Management has offered several benchmarks for valuation, all predicated on a $70 West Texas Intermediate (WTI) crude oil price, $3.00 Henry Hub (HH) natural gas price, and a 10% discount rate.
According to Wolfe Research, the present value of the proved developed producing (PdP) assets is estimated at $2.6 billion. Moreover, the free cash yield on the acquisition cost of $3.95 billion is calculated at 13%, and the acquisition multiple is approximately 3.8 times the fourth-quarter 2024 annualized EBITDAx, implying an EBITDAx of around $1.04 billion. These figures are part of a calibrated model based on Coterra's own assumptions.
Wolfe Research's base case scenario, which assumes a long-term $65 WTI price, $4.00 long-term HH gas price, and a market-based cost of capital of 8%, underpins the adjusted valuation and price target for Coterra Energy.
In other recent news, Coterra Energy Inc. announced a $3.95 billion acquisition of assets from Franklin Mountain Energy and Avant Natural Resources, set to strengthen its presence in the Permian Basin. The firm also reported robust Q3 performance, with a net income of $252 million and total production averaging 669 thousand barrels of oil equivalent per day, exceeding their guidance. Analyst firms Piper Sandler and JPMorgan (NYSE:JPM) have adjusted their share targets for Coterra, citing the company's strong financial discipline and operational efficiency. Piper Sandler raised its target to $32, while JPMorgan lowered its target to $24, both maintaining an overweight rating.
Despite operational challenges, Coterra demonstrated increased drilling efficiency and frac pumping hours, highlighting their commitment to high-quality projects and disciplined capital allocation. The company also emphasized its dedication to shareholders, returning 96% of free cash flow via dividends and share repurchases, and diversifying its revenue through new LNG sales agreements.
InvestingPro Insights
Complementing Wolfe Research's analysis, InvestingPro data provides additional context for Coterra Energy's financial position. The company's P/E ratio of 15.49 suggests a relatively modest valuation compared to some peers in the energy sector. This aligns with Wolfe Research's view that CTRA may be undervalued, especially considering its recent acquisitions and potential for improved performance.
An InvestingPro Tip highlights that Coterra Energy has maintained dividend payments for 35 consecutive years, demonstrating a commitment to shareholder returns even in volatile energy markets. This consistency could be attractive to investors seeking stable income, particularly with the current dividend yield of 3.33%.
Another relevant InvestingPro Tip indicates that the company operates with a moderate level of debt, which is crucial for financial flexibility in the capital-intensive energy sector. This conservative financial approach may support Coterra's ability to integrate new assets and potentially fund future growth initiatives.
For investors seeking a deeper understanding of Coterra Energy's prospects, InvestingPro offers 5 additional tips that could provide further insights into the company's financial health and market position.
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