Natural gas prices jumped Thursday following a multiweek swoon, providing a lift to shares of Club holding Coterra Energy (CTRA), which lately has relied on the commodity for more than half its operating revenues. U.S. natural gas prices rose nearly 4% Thursday to roughly $3.81 per million British thermal units (MMBtu). Coterra shares climbed nearly 3% to over $25 apiece. Thursday’s natural gas gains — on top of a 0.88% jump on Wednesday — reverse some of its recent losses. But only partially. As recently as Dec. 15, U.S. natural gas prices settled at nearly $7 per million British thermal units. So far in 2023, natural gas remains down around 12%. Unusually warm winter weather across the U.S. and Europe is a major culprit for the falling prices. Demand for natural gas fell in response, with less of it is needed to heat homes. Proof is in the data. The amount of working gas in storage actually rose 11 billion cubic feet in the week ended Jan. 6, the U.S. Energy Information Administration said Thursday. That’s the first weekly inventory build in January on record, according to FactSet. Of course, the price of natural gas matters to consumers and their energy bills. It also matters greatly to investors in Houston-based Coterra, the product of a 2021 merger between Cabot Oil & Gas and Cimarex Energy. Coterra has the most natural gas exposure of the three exploration and production (E & P) firms in the Club portfolio, with the commodity accounting for nearly 58% of its operating revenue through the first three quarters of 2022; fourth-quarter results aren’t out yet. Pioneer Natural Resources (PXD), by contrast, has generated 11% of its operating revenue from natural gas over the same span. That figure is roughly 14% for Devon Energy (DVN). Oil and natural gas liquids are the other major products all three E & P companies sell. In a very basic sense, the higher the price of natural gas, the more money Coterra can make from its operations — which ultimately influences the company’s free cash flow and, by extension, its dividend payment. But the company’s realized price in a quarter can be different than the average market prices over that same timeframe. This is because companies like Coterra will enter into agreements to sell natural gas or oil at a predetermined price at a future date. Sometimes, that agreed-upon price will be higher than the market price on that day. Other times, it will be lower. This is what determines the difference between a company’s realized price and the spot price of the commodity in question. Coterra investors still pay attention to the swings in natural gas prices. The company’s sales are not fully hedged, so what happens to market prices does impact the amount of revenue it generates. In an interview with Jim Cramer earlier this week, Coterra CEO Tom Jorden sought to downplay worries about natural gas price declines. “Prices are constructive on both oil and gas, and our returns are really extraordinary at current conditions,” he said Tuesday night. The Club and other shareholders care a great deal about those returns. Coterra employs a fixed-plus-variable dividend, so the payout changes quarterly based on the company’s free cash flow in the trailing three months. The company has committed to returning at least 50% of its free cash flow each quarter to shareholders. Including dividends and stock buybacks, Coterra returned 74% of free cash flow in the third quarter and 80% in the second quarter. At Wednesday’s closing price of $24.69 per share, Coterra’s dividend yield stood at roughly 11%, based on its most recent payout of 68 cents on Nov. 30 . “We can never predict the price going forward, but we can control being good at the business, being disciplined in our investments and managing a prudent, healthy balance sheet,” Jorden told Jim. No doubt, predicting the price of volatile commodities is a tough task. But agencies and research firms still do so. In its short-term outlook issued Tuesday, the U.S. EIA forecasted natural gas prices to average $4.90 per MMBtu this year, down nearly 10% from its prior projection of $5.43. Through the first nine months of 2022, Coterra’s realized natural gas price was $4.79 per MMBtu. This is notable because even though natural gas soared to over $9 per MMBtu at times in the spring and summer of last year, Coterra’s realized sale price wasn’t nearly as high as market prices. This helps explain why the Club hasn’t run for the hills as natural gas prices fell in recent weeks. Volatility is to be expected, and we know Coterra is able to maintain a very attractive dividend even if commodity prices are a bit lower than where they were in 2022. In a very uncertain market environment, being invested in companies that return significant capital to shareholders is a good place to be. Jim said Wednesday morning he believed Coterra was worth buying at current levels, due in part to reassurances Jorden provided on recent reserve write-downs at the company. Elsewhere in energy, the Club trimmed its position in oilfield services Halliburton (HAL) on Thursday. While we still like the stock overall, we wanted to be disciplined due to its recent strength and book some profits. (Jim Cramer’s Charitable Trust is long CTRA, DVN, PXD and HAL . See here for a full list of the stocks.) 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Pipes at the landfall facilities of the ‘Nord Stream 1’ gas pipeline are pictured in Lubmin, Germany, March 8, 2022.
Hannibal Hanschke | Reuters
Natural gas prices jumped Thursday following a multiweek swoon, providing a lift to shares of Club holding Coterra Energy (CTRA), which lately has relied on the commodity for more than half its operating revenues.
