Coterra Energy's Q3 2025: Contradictions Emerge on Marcellus Production, Harkey Shale Remediation, and Capital Expenditure Plans

Date of Call: None provided

Financials Results

• Revenue: $1.7B pre-hedge oil & gas revenues in Q3 (57% from oil, up from 52% in prior quarter)

Guidance:

• Q4: oil production ~175 MBoe/d at midpoint (up >8,000 bpd, ~5% q/q); total production 770–810 MBoe/d; gas 2.78–2.93 Bcf/d.
• Q4 CapEx ~ $530M; FY2025 CapEx ~ $2.3B.
• FY2025: production midpoint 777 MBoe/d (midpoint +5% vs initial guidance); gas midpoint 2.95 Bcf/d (up >6% vs initial guidance).
• Soft 2026 outlook: capital expected modestly down year‑over‑year while maintaining 3‑year production ranges; comprehensive 2026 guidance to be provided in February.

Business Commentary:

• Strong Financial Performance:
• Coterra Energy delivered a 2.5% above the midpoint for oil, natural gas, and BOE production in Q3, with natural gas production reaching an all-time high of approximately 136 MBO per day.
• The company's cash operating costs were $9.81 per BOE, which increased 5% quarter-over-quarter due to production mix and higher workover activity.
• Despite these costs, Coterra generated $1.15 billion in discretionary cash flow and $533 million in free cash flow.
• Growth was driven by consistent operational execution and strong capital efficiency, as well as favorable market conditions such as increased oil volumes and higher natural gas realizations.

• Capital Efficiency and Operational Integrations:
• Coterra maintained a 9-rig 3 crew program in the Permian, 1 rig and 1 crew in the Marcellus, and 1 rig in the Anadarko throughout Q3 and Q4.
• The integration of the Franklin Mountain and Avant acquisitions led to a significant 10% reduction in total well costs and a 5% reduction in lease operating expenses, with expectations for further cost savings and productivity enhancements.
• The integration and realization of operational synergies improved Coterra's full cycle returns and capital efficiency across its production basins.

• Production Growth and Strategic Acquisitions:
• The company achieved an 8% increase in oil production quarter-over-quarter, with substantial growth in Permian oil volumes, representing 57% of revenues.
• Coterra's legacy assets showed high single-digit percentage growth in oil volumes year-over-year, indicating consistent performance and strategic positioning.

• The successful integration of the Lea County assets demonstrated significant uplift in asset performance, cost reductions, and future inventory potential.

• Shareholder Returns and Balance Sheet Strategy:

• Coterra announced a $0.22 per share dividend and repurchased $250 million in outstanding term loan facilities, with a total term loan pay down of $600 million year-to-date.
• The strategy to prioritize shareholder returns reflects confidence in cash flow projections and the company's commitment to deleverage, maintaining a strong balance sheet.
• Shareholder returns are expected to be robust in upcoming years, supported by strong cash flow and free cash flow generation.

  Sentiment Analysis:

  Overall Tone: Positive

  • Management stated "Coterra had a strong third quarter" and that they are "on track to deliver on the ambitious annual goals." They reiterated an expectation to generate "around $2 billion" of free cash flow in 2025 ("~60% increase over 2024"), reinitiated buybacks and continued term‑loan paydowns.

Q&A:

• Question from Douglas George Blyth Leggate (Wolfe Research): The Kimmeridge letter suggests Coterra would be better as a stand‑alone Delaware pure play — how do you respond?
  Response: Management defended the multi‑basin, multi‑commodity strategy as value‑accretive and declined to pursue a detailed public debate; they view diversification and cross‑basin synergies as strategic advantages.

• Question from Douglas George Blyth Leggate (Wolfe Research): LOE was elevated this quarter but you beat oil guidance — is this tied to workovers and should LOE come down?
  Response: LOE was up due to Harkey remediation and higher workover activity; management expects workover costs and LOE to decline entering Q4.

• Question from Wei Jiang (Barclays): How will excess free cash flow be allocated between debt reduction and buybacks going forward? Can you return to ~100% return levels?
  Response: Prioritized term‑loan paydown earlier in the year, reinitiated opportunistic buybacks, and will balance continued deleveraging with buybacks—aiming to return a large share of FCF consistent with prior years.

• Question from Wei Jiang (Barclays): On Permian activity versus initial expectations — how are well production profiles tracking and does upper‑end completions change 2026 shape?
  Response: Productivity is in line or slightly better than expectations; quarter‑to‑quarter timing and working‑interest changes drive swings—management expects to exit at higher levels but will not commit to maintaining that cadence through 2026.

• Question from Arun Jayaram (JPMorgan): Can you provide color on CapEx reduction expectations for 2026 and drivers relative to your soft guide for ~5% oil growth?
  Response: Soft 2026 guide anticipates modestly lower CapEx driven by improved asset performance and capital efficiency; final 2026 plan will be capital‑efficient and provided in February.

• Question from Arun Jayaram (JPMorgan): Post‑acquisition performance of Franklin Mountain/Avant — what are you seeing on acquisition economics and inventory?
  Response: Acquisitions are performing at or above underwriting with ~10% reduction in well $/ft, added net lateral footage (~10% more inventory), and operating synergies improving economics.

• Question from Neil Mehta (Goldman Sachs): What tangible upsides do you get from operating as a multi‑basin company versus a pure play?
  Response: Multi‑basin operations enable transfer of best practices (e.g., winterization), operational synergies, improved uptime and pricing resilience—driving measurable netback and reliability benefits.

• Question from Neil Mehta (Goldman Sachs): Do you have sufficient scale to be first‑quartile in the Northeast (Marcellus)?
  Response: Yes—Coterra has meaningful scale (~2 Bcf/d production in the Northeast) and uses portfolio scale to secure better service economics and equipment, supporting competitiveness.

• Question from Scott Gruber (Citigroup): Thoughts on running room/blocking up positions in Lea County and importance for compressing Northern Delaware costs?
  Response: Blocking up acreage is a focus; recent acquisitions created footprint enabling trades and longer laterals which drive capital and operating efficiencies.

• Question from Scott Gruber (Citigroup): Will well costs in Northern Delaware continue to step down into '26 and be an incremental benefit?
  Response: Management expects to continue driving well‑cost reductions via consistent rigs/frac fleets and larger pads, but provided no specific numeric projection.

• Question from David Deckelbaum (TD Bank): For the sub‑$2.3B 2026 guide, are large projects or basin reallocation the main drivers?
  Response: The soft guide reflects steady, consistent programs across business units (e.g., Marcellus at 1–2 rigs) and operational optimization; management retains flexibility and may adjust based on commodity markets.

• Question from David Deckelbaum (TD Bank): Can you refresh on the cadence of Delaware development into '26 after strong back‑half '25 growth?
  Response: Management declined to provide TIL timing or granular cadence for the Delaware at this time.

• Question from Matthew Portillo (TPH): Timing and size of planned microgrids in the Permian — when will they come into service and how many MW?
  Response: Company is expanding existing microgrids and planning up to three expanded projects across Northern Delaware; specific timing and MW capacity were not provided.

• Question from Matthew Portillo (TPH): Thoughts on Northeast PA power demand growth and long‑haul infrastructure opportunities (e.g., Constitution)?
  Response: Numerous ongoing, long‑lead discussions; Coterra is engaged and optimistic but will be patient—market development and offtaker commitments will dictate timing and participation.

• Question from Kaleinoheaokealaula Akamine (Bank of America): What operating wins have you achieved in the Marcellus since the Cabot deal?
  Response: Implemented best practices—longer laterals, optimized spacing, piped frac water—driving ~24% drilling cost reduction Y/Y and materially improved productivity.

• Question from Kaleinoheaokealaula Akamine (Bank of America): Is the Marcellus inventory math simply wells×multiple (12 years at current activity)?
  Response: No—inventory is assessed versus a 3‑year average drilling pace and capital spend with adjustments for lower go‑forward costs, not a simple wells×multiple calculation.

• Question from Derrick Whitfield (Texas Capital): How do PVIs compare across basins?
  Response: Management stated Marcellus has the highest PVI in 2025 and has materially improved returns via operational enhancements.

• Question from Derrick Whitfield (Texas Capital): How are you managing Waha exposure given new pipeline and power announcements—could incremental egress improve in‑basin pricing?
  Response: Q3 saw low Waha prices; Coterra is active in long‑haul pipeline discussions and pursuing in‑kind options to secure flow assurance and capture higher NYMEX‑linked pricing.

• Question from Phillip Jungwirth (BMO Capital Markets): Updates on Culberson projects (Barba‑Row, Phase 1) and early performance/costs?
  Response: Projects are performing as expected, contributing significantly to the Q3 oil beat and demonstrating top‑tier capital efficiency in Culberson County.

• Question from Phillip Jungwirth (BMO Capital Markets): Any work on lightweight proppant adoption?
  Response: A trial of lightweight proppant is underway; no results available to share yet.

Contradiction Point 1

Marcellus Production and Gas Market Strategy

It involves the company's strategy and expectations regarding Marcellus production and the gas market, which are crucial for financial planning and investor expectations.

How does the production profile for Permian activity compare to initial expectations, and does this impact your 2026 outlook? - Wei Jiang (Barclays)

20251104-2025 Q3: We expect to exit 2025 slightly higher than the current level but with a likelihood of a slight decline in Q1 2026, followed by a build-up. - Shannon Young(CFO)

How will you achieve the oil growth in the second half of the year? - Arun Jayaram (JPMorgan Chase & Co, Research Division)

2025Q2: The fourth quarter will be driven by high working interest projects, resulting in a strong performance. Coterra's confidence is high due to understanding of the projects and operational consistency. - Thomas E. Jorden(CEO)

Contradiction Point 2

Harkey Shale Remediation and Production Impact

It involves the company's response to production issues in the Harkey shale, which directly impacts operational efficiency and production expectations.

How do you respond to Kimmeridge’s suggestion that Coterra would be better as a standalone Delaware Basin pure play? - Douglas George Blyth Leggate (Wolfe Research)

20251104-2025 Q3: LOE increased due to transitioning from the Harkey remediation program to more workover activities in Lea County. - Michael Deshazer(CFO)

Can you explain the Harkey shale issue and its impact on inventory and future plans? - Doug Leggate (Wolfe Research)

2025Q1: The Harkey issue is a local mechanical issue, solvable with revised mechanical processes. It doesn't impact long-term inventory or development plans. - Tom Jorden(CEO)

Contradiction Point 3

Capital Expenditure Plans for 2026

It involves the company's capital expenditure plans, which directly impact financial forecasts and operational strategies.

What are your plans to reduce CapEx in 2026? - Arun Jayaram (JPMorgan)

20251104-2025 Q3: Good asset performance allows for lower capital spending. We are watching market conditions for potential volume growth, focusing on cash flow and profitability rather than volume. - Thomas Jorden(CEO)

How confident are you that you've resolved the Harkey issues, and when will production reach optimal levels? - Neil Singhvi Mehta (Goldman Sachs, Research Division)

2025Q2: We do expect capital expenditures to decline from the full year '24 to '25 levels. It will decline, but it's really what the market conditions are. - Thomas E. Jorden(CEO)

Contradiction Point 4

Multi-Basin Strategy and Benefits

It highlights a shift in the company's strategic stance on the benefits of a multi-basin portfolio, which could have implications for investment decisions and future growth plans.

How do you respond to the suggestion that Coterra would be better as a standalone Delaware Basin pure play? - Douglas George Blyth Leggate (Wolfe Research)

20251104-2025 Q3: We believe Coterra is a premier outfit and prefer to trade at a premier multiple. We have benefited from being a multi-basin, multi-commodity company, which allows us to see benefits across the stack of oil companies and below the level of gas companies. - Thomas Jorden(CEO)

What are the expected cash tax impacts from recent acquisitions? When might costs per foot rise in the Permian? - John Abbott (Wolfe Research)

2024Q4: We are not serious about splitting up. We like the position we have across the globe. Multi-basin does matter to us. It is not our objective to say we are just a Delaware outfit. - Tom Jorden(CEO)

Contradiction Point 5

Prioritization of Debt Reduction and Share Buybacks

It involves the company's strategy for managing capital allocation between debt reduction and share buybacks, which are critical for financial health and shareholder returns.

How is excess free cash flow being allocated between debt reduction and buybacks? - Wei Jiang (Barclays)

20251104-2025 Q3: We are prioritizing debt reduction while also reinitiating the share buyback program opportunistically due to current trading levels. - Shannon Young(CFO)

How do you prioritize buybacks and debt reduction with weak commodity prices? - Nithin Kumar (Mizuho)

2025Q1: The priority is to reduce debt, which is seen as an enabler for long-term shareholder returns. Opportunistic repurchases will be made, but they will be back-end weighted in the second half of the year. - Shane Young(CFO)