Each investor has their reasons for investing in select stocks. While some invest based on technicals, fundamental research, or macroeconomic factors, others focus on “shadow investing”. With this strategy, you follow in the footsteps of expert, high-net-worth investors — like Stanley Druckenmiller.
After three decades as a successful hedge fund manager, Druckenmiller began managing money through a family office. His track record is impeccable (he’s never had a down year), so, careful examination of his portfolio is a valuable exercise in smart stock picking.
One stock that stands out is Coterra Energy (CTRA). This Houston-based oil and gas exploration company’s stock has increased 45% year-to-date and represents 2.6% of Druckenmiller’s portfolio, a high conviction position. But is it too late to invest?
Oil and Gas Stocks Have Been Winners This Year
Energy stocks have been leading the way in 2022. The oil and gas sector far outperformed other sectors and Druckenmiller was early to the trend. As fears over inflation and slower economic growth grew, he bought plenty of energy and commodity stocks, including around nearly 1 million shares of Chevron (CVX), worth around $180 million at the time of this writing.
Druckenmiller snapped up shares of Pioneer Natural Resources, Cenovus Energy, Teck Resources, and Coterra Energy, among others. He wasn’t the only one. Warren Buffett also bet on oil and gas. He invested billions in Chevron and Occidental Petroleum (OXY) this year.
There are several reasons energy stocks soared, including Russia’s invasion of Ukraine and supply constraints. Sanctions disrupted global supply chains, which were already affected by the pandemic. Higher energy prices meant higher profits for companies like Coterra, benefiting shareholders.
Coterra Reports Strong Financials
Energy stocks have been roaring higher this year and Coterra has actually been performing well for years. Yet for most investors, it’s a stock that has been largely forgotten. As oil and gas companies re-enter the spotlight this year, their stocks are returning to life — and Coterra is no exception. The company’s stock is up because it is performing well.
In Coterra’s Q3 report, the company reported a net income of nearly 1.2 billion and generated cash flows from operating activities of $1.77 billion. Natural gas production exceeded the high-end of guidance, averaging 2,807 million cubic feet per day, while oil production was above the mid-point of guidance, averaging 87.9 thousand barrels of oil per day.
One key reason Coterra has performed well in recent years is the multi-year highs for natural gas. In May 2022, natural gas hit $8, a price not seen since 2008. Prices then reached over $9.70 in August 2022. Since the company’s production is mainly natural gas, it continues to perform well.
Even though oil and gas aren’t a significantly large part of the company’s portfolio compared to natural gas, the segment is highly profitable. During the first nine months of 2022, natural gas pulled in $4.2 billion in operating revenue, compared to $2.3 billion from oil. So, production by commodity does not necessarily reflect revenue by commodity.
The latest report also announced that 74% of its third-quarter 2022 free cash flow would be returned to shareholders — 50% in cash dividends and 24% in share repurchases.
Speaking of Coterra’s Dividend
In 2021, Coterra completed a merger involving the firms previously known as Cimarex Energy and Cabot Oil. This merger helped boost efficiencies while keeping costs low. As a result, the company is generating a significant amount of cash and has consistently raised its dividend.
In 2012, the annual payback was just $0.04, compared to the most recent full-year payment of $2.72 per share. The growth rate is impressive, and there are no signs of it slowing down.
Coterra remains committed to returning 50 percent plus of free cash flows via dividends. For example, shareholders receive a quarterly dividend as well as a variable dividend. So, Coterra returns a portion of the company’s discretionary cash flow beyond the original dividend.
When combining these dividends, Coterra’s yield jumps to nearly 10%.
Is It Too Late to Buy Shares of Coterra?
After analyzing the firm’s cash flows, Coterra stock appears to be an attractive buy. There is no denying that Coterra has had an excellent year, but it should still be on your radar, especially if you’re a value investor wanting to buy into the oil and gas industry. Our analysis points to significant upside still to the tune of around 38%.
What’s the takeaway? Coterra is a solid company that pays an attractive dividend. Although you may not see as much upside buying shares this late, Coterra is still growing and has the wind at its back. The company beat its earnings, reported a hefty cash flow, and raised its dividend, strengthening the case to invest.