We’re buying 100 shares of Coterra Energy (CTRA) at roughly $28 each. Following Friday’s trade, the Jim Cramer’s Charitable Trust will own 1,400 shares of CTRA, increasing its weighting in the portfolio to 1.44% from 1.34%. Shares of Coterra Energy dropped more than 8.5% on Friday, following the after-the-bell release of third-quarter results by oil and natural gas exploration and production (E & P) company. Earnings and revenue beat expectations, but free cash flow, while robust, was a little bit below analyst estimates. The capital return story, a major reason we own the stock, remained fully intact, with Coterra increasing its quarterly fixed-plus-variable dividend payment by 8 cents to 68 cents from Q2. When annualized, the company’s dividend yield increases to a very healthy 9.75% based on the current stock price. Management also remains committed to share repurchases and is on track to finish the $510 million remaining on its authorization by the first quarter of 2023. So why were shares getting hit? It has to do with market concerns over a slightly disappointing update on its proved reserves, which are continually evaluated in connection with the 2021 merger between Cimarex and Cabot Oil that formed Coterra Energy. On Thursday evening’s Q3 release, management said it anticipates the total company’s proved reserves (estimated quantities of energy resources) will decrease by approximately 15% to 20% year over year come December 31, 2022. That reflects a 32% to 36% downward revision to the company’s natural gas-rich Marcellus Share properties, which was partially offset by an upward revision of approximately 8% to 12% at its Permian and Anadarko Properties. About a quarter of the total Marcellus revision is related to the Securities and Exchange Commission (SEC) 5-year rule for proved undeveloped reserves. For background on this SEC rule, E & P companies are permitted to classify undeveloped reserves as “proved” if there are plans to develop those reserves for drilling within five years of being booked. If the reserves are undeveloped for more than five years, only specific circumstances and certain factors can defend the extended timeline. The news is raising some questions about some of the long-term value of Coterra’s assets, but management believes the financial impact will be “little to modest” with no changes in the immediate term. On the conference call Friday morning, CEO Thomas Jordan said, “There’s certainly no impairment involved with it, and the DD & A [depreciation, depletion, and amortization] is extremely modest. We also don’t see it really impacting our cash flow significantly over the next 3 to 5 years.” Additionally, the expected revisions will have no material impact on Coterra’s capital allocation plans or ability to deliver on the return of capital promises management has made. With no real change in cash flow expectations over the next several years, we see no reason why Coterra would stop generating strong levels of free cash flow in this favorable oil and natural gas pricing environment and stop returning the bulk of that free cash back to shareholders through dividends and buybacks as it did in Q3. Jordan broke that down on the release: “We will return 74 percent of our third-quarter 2022 free cash flow to shareholders, which includes 50 percent in the form of cash dividends and 24 percent in the form of share repurchases.” We see Friday’s decline in Coterra’s stock as overdone to the downside, which is why we are upgrading our rating back to a 1 , and we’re repurchasing 100 of the 300 shares we trimmed in August at around $30. (Jim Cramer’s Charitable Trust is long CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert 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 trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
We think a decline in one of our oil stocks is overdone so we’re buying more shares
Traders work on the floor of the New York Stock Exchange during morning trading on November 02, 2022 in New York City.
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