Thank you, everyone. Pleasure to be here. You know, this morning, just as from a macro standpoint, I'm sure today we're going to talk a lot about macro during the day. We're back to worrying about oil again, you know, and God bless our industry for that. I, you know, I've had the privilege in my career to have a front row seat in the shale revolution, and I recently looked at some data on U.S. oil production. Had there not been a shale revolution, and we had been on the decline that we were as a nation starting in 1970, we'd be producing 2.5 million barrels today instead of the 13+ million barrels that we are producing. We'd be heavily dependent on imports, and with what's happening in the Middle East, Lord knows where oil prices would be.
You know, at an energy conference like this, I think it's important to reflect on the remarkable position our industry has given and put our United States in, that we're no longer held hostage to energy with our foreign policy. We're able to have relationships with the surety of domestic security of energy. To be sitting here in a nation in the great city of New York and be able to say that with the largest economy in the world, we have the most secure energy and one of the lowest cost structures of energy, there's not another nation that can say that. There's not another nation that can touch that. That's what our industry has done.
I just want to reflect on that because, you know, we get up every morning and we think, oh, you know, God, I have not checked the news in an hour, what is going on? We ought to be grateful for a lot of the overprint here. You know, as far as Coterra goes, I appreciate the introduction, everyone. We are really in a great position. Obviously, I am not objective when I say that. You know, when we look at the volatility of oil and gas, we have a remarkable stability of our cash flow. We have a very low cost of supply with a balanced set of assets. That gives us not only the flexibility to allocate capital as we see fit, but it also gives us the ability to have consistency in our program. You know, I will talk about that.
If you want to get your cost structure down and maintain a great degree of capital efficiency, not having your program get jerked around because of price volatility is a real asset in this business. That is really what Coterra is all about.
Tom, on the last print or coming into the year, you took some capital out of your oily assets and allocated a little bit more to gas. How does the events in the Middle East change your thinking about capital allocation this year?
You know, we said at the time that $60 oil for us is not necessarily a rocket flare event. Because of the quality of our assets, we can make a really nice return at $60 or, you know, between $60 and $65. Really, you know, we can run our price down to $50 and get way above our cost of capital. And that's fully burdened. The reason that we, at our last quarterly release, announced that we were throttling back was because we just did not know where it was going to go. You know, I have seen these periods in my career where when oil markets wobble, they do not glide gently down to their low. They kind of wobble for a while and then they suddenly collapse. We were, you know, looking at the possibility of a collapse. We are feeling a little better about that now.
You know, we talked about going down to seven rigs. We're holding firm right now at nine. And we, you know, we have very few under contracts, so we have the flexibility. Most of our fleet company-wide is pad to pad. Right now, we're going to just watch this situation as we move ahead. If we were to hold flat at nine, we'd probably be closer to the high end of that guidance range. You know, we'll update it our next quarter because we retain the option to drop that activity. Right now, we've decided we're just going to steady as she goes.
Okay. What about your thoughts on natural gas? You did allocate a little bit more capital to gas. Maybe talk a little bit about some of your exposure to LNG because you actually sell a market lot of your gas for some of these LNG projects.
Yeah, we, you know, of course, we produce about 3 Bcf a day net. And that's remarkable to be able to say that given our oil assets as well. You know, as we showed in our deck, our first quarter was nicely balanced between oil and gas revenue. And that's really the way we like it. We really like to have that flexibility. It gives us great capital allocation. Both in the Marcellus and in the Anadarko, we have outstanding gas assets. You know, of course, the Marcellus is well known, well discussed. You know, there we've got a very active program. We're back drilling in the Dimock box. If those of you that have followed the long legacy of Gasland, if you saw that film, you know, that's been a long saga.
That was one of the first things we did when we formed Coterra, is get that issue settled, get it behind us, and we're back drilling in the Dimock box, which is among the most prolific of the prolific of that lower Marcellus. We have quite a handful of wells to drill there. We'll bring, we have 11 that we're drilling this year, and we'll have about 17 in the next couple of years. You know, the Anadarko is really standing on its own, I'll say. You know, we've got a couple of projects this year that are just outstanding. One in particular is just the best of the best in the Anadarko that we're flowing back. You know, it's a single pad that's making almost 200 million cu ft a day.
60% of that is natural gas revenue, and 40%, give or take, is natural gas liquids. Those natural gas liquids really turbocharge those economics. You know, when we look across our portfolio, it's never been as close a call as it is right now on three business units that are really, really neck and neck for returns and capital allocation.
Tom, one of the longer-term concerns of investors of U.S. unconventional properties worries around inventory depth, as you know, the melting ice cube kind of question. Can you talk about your inventory depth and your three-core basins and where you stand?
Yeah, you know, a peer CEO said to me a few years back, he said, you know, when everybody was talking about tier one inventory depletion, you know, he looked at me and he said, you know, our tier three inventory today is better than our tier one was prior to the shale era. And that, you know, I think we always have to keep that in mind that, you know, our industry will not run out of inventory. What will happen is our costs will just go up a little bit. You know, our capital efficiency will go down. It will happen to different companies at different paces as we deplete that cream of the crop. Look, we've become spoiled, and I love it. You know, at Coterra, we're able to grow our volumes, generate historically high returns, investing 50% or less of our cash flow.
I mean, if you rewound a decade ago and asked me if that would ever be possible, I'd have said absolutely not. I mean, a decade ago, we were outspending our cash flow, much less, you know, spending half our cash flow. Coterra is going to be among the last to run out of tier one inventory. You know, we really have a very deep inventory. It's spread across three business units. You know, we talk about it in a number of years. You can talk about it in a number of locations. I think it's widely recognized that, you know, pound for pound, Coterra's got one of the deepest, highest quality inventories in our sector. The luxury of that is how long can you wake up every morning and only allocate capital based on returns.
You don't have to worry about running out. You don't have to worry about investor perception of that. You just wake up every morning and make the best financial decision. That's our core DNA, and that's the value of that inventory.
Tom, you talked about the relatively low reinvestment rates and that Coterra go 50-60%. Could you talk about your updated kind of three-year outlook that you've provided and what that can achieve in terms of oil production growth as an output of that capital allocation process?
Yeah, and I love the way you phrased that question, everyone, because we really do view production as an output. We do not manage a company by production goals. We manage a company by how much, what do we think our cash flow is, how much do we think we should invest, and then and only then do we calculate the production as an output. You know, it would be, in our estimation, foolish to do it otherwise, where, you know, managing your company with production goals can be throwing good money after bad. You know, the production is a consequence of good investment decisions, not a primary driver. Our three-year outlook has us investing roughly 50%, give or take, depending on the year of our cash flow. We can, you know, grow our volumes. We talk about growing our oil mid-single digits, and we think that is fully achievable.
That's certainly consistent with our history. You know, we'll grow our, you know, on a BOE equivalent single-digit growth. We think we can sustain that for a long, long time.
Okay. Tom, why don't we dig a little bit deeper on your three kind of core assets? Perhaps we could start with the elephant in the room. On the 1Q print, Coterra announced a mechanical issue with recent Harkey Shale wells in the Windham Row project in Reeves County. We think that, unfortunately, this erased maybe $2 billion of market cap out of the equity value. Maybe you could start for investors here. Talk a little bit about the Windham Row at a higher level and maybe shed light on this mechanical issue.
Yeah, look, that was, I do not know if we had to do over, if we do anything differently, quite frankly, everyone. I mean, you know, our style is to be transparent, talk about the business. If people look at us and think we are the only outfit that has anything ever go wrong, good luck if that is your viewpoint, you know. We are just going to talk to you about the business. Things do not always go right. We have problems, we have issues, and we have a lot of strengths. You just, in this business, your strengths have to outweigh your weaknesses and you move the ball forward. You know, this is the Harkey issue, was 11 wells, 11 wells total, where we had a water flow behind pipe. We talked about that in some detail. It surprised us.
I'll say, you know, people thought we stood alone on this. As soon as our call finished, our phone rang with other operators having the same problem, wanting to talk about it. You know, it's rather a simple issue. What's happening is we're injecting saltwater disposal into shallow formation in the Delaware Mountain Group, and it's pressured up that formation, and it's causing crossflow behind pipe. You know, we had not encountered it to that degree, but we think we've properly diagnosed it, and we think we have a fix that appears to be working. You know, it's not a reservoir issue. It's not a spacing issue. It's not an overfill versus co-development issue. It's a simple mechanical issue. We've addressed it. You know, we have several different ways to address it, from simple to complex.
The end members, their simple is a different cement type called thixotropic cement that sets up much faster and does not allow that behind pipe channeling to occur. The more elaborate solution is a different casing design. Thus far, the thixotropic appears to be working very handily. In fact, once we diagnosed this problem, we had some wells underway. Since our last update, we have actually brought a couple of pads on that with this new cement, just north of where we are having the problem on these 11 wells. They are behaving just very, very well. You know, we think we have got the problem understood. Now, we are not out of the woods yet. You know, we have these 11 wells where we have got, at one point, we had 13 workover rigs on doing squeeze jobs, sealing off the flow. We think we are sealing off the flow effectively.
That work will be underway until mid-August. You know, they're all will be flowing back. You know, this is just part of our business.
Just to summarize, it's 11 wells. I believe your Delaware-based program is like 150-165 wells. Is that right?
Yes.
You've identified a solution that appears to be working.
Yes.
You've implemented this at the Barbara Row. Is that the next?
The Barbara Row is north of it. That's where we had the new wells we brought on that are flowing back normally and naturally.
With the solution. Okay.
That, you know, look, we have to get these 11 wells fixed and back online. I mean, you know, I do not want to minimize this issue, but the rocket flares that were sent up were a bit exaggerated.
Yeah, we felt so too, but I want to detail a little bit on this situation. Okay. Again, just to go back to those 11 wells, you think you have a solution. You're working with some of the workover rigs that maybe some of this production could come online later this year?
It could. Now, we're, you know, we're very conservative in how we're projecting that. Again, you know, we're in the middle of this solution. We don't want to get ahead of ourselves. You know, one of the things you need to do first is make sure that you're effectively sealing off this behind pipe water flow. There are a number of downhole tools that diagnose that. We think we are effectively sealing off. The next thing to do, of course, is to bring the wells back online. They're going to produce a lot more water initially because you've flooded the horizon. Thus far, we're seeing really good behavior of wells we're bringing online, and we're very optimistic.
Okay. Perhaps one of the reasons why the stock overcorrected in this situation is we heard some investor concerns that you obviously temporarily suspended the Harkey program, that if you were going to permanently suspend the Harkey program, that this could have a negative impact on your inventory depth.
Yeah.
Again, this is a what-if kind of question. Any sense of how much of your inventory the Harkey Shale represents? Again, your confidence on the fact that you will be able to develop this resource over time?
Yeah, you know, this question, it's a natural question for people that think that we're BS-ing them. You know, I mean, we're really telling you exactly the situation. If all of the Harkey were to go badly on Culberson County, that's about 3%-4% of our total company inventory. It is 11 wells. It is an insignificant portion of our total inventory. I think that, and you know, the wells we brought on in the second quarter, I mean, right north of this issue, we have new wells that we brought on that are behaving perfectly normally with the oil, water, production, and pressure drawdown. You know, there's, as Mark Twain said, rumors of our death are greatly exaggerated.
I'm going to add that to our note. I like that quote. Just maybe final question on this kind of topic is how have you, the IR team, your ops team, how have you risked the Harkey in terms of your forward outlook for 2Q, the balance of the year?
I think, you know, what we said at our call is that the volumes that we suspended, we took out of our forecast.
Fully out of the forecast.
Yeah, yeah. So now, you know, we're not changing our guidance. You know, our guidance is what we've already announced. But, you know, we do have a little hope of upside there. But, you know, our guidance is our guidance.
Okay, fair enough. One of the implications of this mechanical issue is you've redirected some of your capital to the Wolfcamp program and talked to me about, or talked to us about what that could mean in terms of you're redirecting capital to a more productive zone, so to speak.
It is a little higher capital efficiency. You know, we have talked about the Wolfcamp and the Harkey at length. You know, if you had to pick one of the two and say that is all you had, you would pick the Wolfcamp. You know, it is a little more productive, a little higher return. You know, you are talking about one is an A plus and one may be an A minus. You know, because of the issue and because of the depth of our inventory, we just redirected to the Wolfcamp. You know, I am not sure what else I can say there. You know, we will be back drilling these Harkey wells. I mean, we will balance that out over time.
Okay.
Yeah.
I did, Tom, I know we started off talking about a mechanical issue, but I did want to acknowledge the fact that your team has topped the high end of its oil guide for nine out of ten quarters prior to this. The execution has been really, really good. We did want to address that. I want to talk a little bit about some of the A and D activity that you've done in the Delaware. Talk to us about the industrial logic of the Franklin Mountain and Avant deals and how some of the integration is going. Maybe the addition of Lea County is kind of a core area at Coterra.
Yeah, Lea County is terrific. I mean, it's a terrific area. It's complex, I'll say that. And there's opportunity in that. You know, this Franklin Mountain Avant asset that we bought was really for that Bone Spring section. I mean, you know, the Bone Spring sits above the Wolfcamp. The Bone Spring is a basin margin deposit. And as such, it can be locally more variable than the Wolfcamp. And so, you know, you've got multiple targets in that Bone Spring section. You've got the third, second, and first Bone Spring. And then you've got the Avalon that sits on top of those. I would say since we've closed on the acquisition, we've seen some outstanding well results. We've continued to explore with geologic complexity.
I mean, you know, one of the things is we get well results in with a combination of geophysical data and subsurface data and well results. We have a much more focused understanding of a lot of those reservoirs. I'll say we're just really, really happy we made those acquisitions. We see a lot more upside in those formations than we modeled when we bought it. You know, it's not easy. You can't just throw darts in the map there. You really need to map the formations. You'll have a lot of variability if you don't. We think we've unlocked it, quite frankly, both geophysically and geologically. We're really, really pleased to have these assets in our portfolio.
The integration has been going well?
Yeah, the integration is going well. It's, you know, whenever you bring new assets on, you know, one of the things that we're trying to do is bring these new assets up to our emissions standards. You know, I know that sounds like so too 2024 to be talking about emissions. But, you know, we really care about emissions. We'll continue to care about emissions regardless of the regulatory environment. And so we're in the process of bringing that footprint up to our own standards when it comes to emissions.
Okay. Let's shift gears. Talk a little bit about the Appalachian Basin. You restarted two rig lines now in the Marcellus. You're spending about $250 million of DNC capital this year. You highlighted the potential to allocate $50 million more. Talk to us about where you stand with that decision.
We are proceeding. You know, that was if we kept two rigs continuously running. That is what we have decided to do. Gas prices look very constructive. We really do see the Marcellus as a really meaningful part of our program going forward. You know, the other issue that has been in the news is the Constitution Pipeline. For those of you that, you know, do not follow that in some detail, Constitution Pipeline was an initial Cabot project. It is Coterra. The Constitution Pipeline originates in our field in Susquehanna County and shoots up to the right interconnect outside Albany in New York. It is a 125-mile line. You know, it was killed by Governor Cuomo over really the period 2016 to 2020. It is back as a top priority of the Trump administration.
If that Constitution were to go, we expect to be asked to be a significant, you know, anchor shipper on it. That would be probably a 10-year commitment to that line. I only bring this up because as we look at our capital planning with the Marcellus, if Constitution is a go and if we were to participate, that would be a significant input to our capital allocation decisions. You know, we think we can deliver those volumes with our current plan, but we'd need to just plan on it.
Do you think that the prospects that you're seeing suggest that this could happen?
We think the governor of New York is not going to oppose it. If the governor does not oppose it, at least the regulatory pathway is clean. It is a Williams project. You know, we are a significant shipper on that line. The other, you know, of course, regulatory approval is one thing. There are local ways that opponents block projects. We will see how that evolves. You know, you live here in New York. It does not take a rocket scientist to justify this line. I mean, you know, if you look at the New England states as a block, 50% of their electricity is generated from natural gas, 50%. The Constitution Pipeline was reactivated, we are told, because Secretary Wright and Secretary Bergen were meeting with New England governors.
They were very upset as to why they cannot get more natural gas because they cannot compete for data centers because electricity prices in New England are so high. You just want to get a rubber mallet and start hitting yourself on the head when you hear this. You know, the truth of the matter is, you know, our politicians did not come out of the energy space. They do not know the story. They cycle, so they were not around when this happened. You know, you have to be patient and just educate people. With the new electricity demand, with the competition for data centers, and the critical role that electricity prices play in that arena, we are very hopeful that New England will come to their senses.
Yep. Dovetails nicely to a couple of questions kind of on data centers. In your backyard in Pennsylvania, there are a couple of noteworthy projects that are being discussed. Homer City, which is a 4.5 gigawatt mega gas-powered facility near Pittsburgh. What is your sense of the data center opportunities in Pennsylvania, even in the Permian, and how could Coterra potentially play a part given your large production base?
Yeah, we are deeply engaged in this. You know, we've entered into one power agreement in the Permian Basin that, you know, we're quite pleased with. As far as the data center market goes, we're talking to a number of the tech companies, as I think you'll hear all of our peers say. You know, the question is how fast can you make it happen? You know, it's really fascinating. You will hear others say the same thing. We're used to saying, no, you know, you need to be prudent. You need to make sure it's lined out right. You need to think about long term. A lot of these tech companies are like, you know what, we want it yesterday. We just want it fast. You know, we've got a lot of gas available for electricity generation. We're exploring power pricing.
We'd like to see a little more power pricing in our portfolio. You know, I'm quite hopeful that we'll have participation in that.
Last question for me before turning it to the audience for a question or two. Could you just quickly talk about your cash return, you know, program? You know, how does the acquisition activity you did impact the way you're thinking about cash return this year?
Yeah, you know, investing 50% of our cash flow gives us options on cash return. I mean, you know, our ordinary dividend is top of the list. We really like paying a dividend. We think that reminds us who we work for. That is always going to be a big part of it. We will seek to grow that over time. The other two elements that tend to compete next are buybacks or debt reduction. Although we, you know, we love buybacks, we think Coterra is one of the best M&A opportunities out there. We want to get that debt down. You know, we took on some additional debt when we bought these assets in Lea County. At least for the near term, you know, we took out a $1 billion term loan. We expect to pay that off.
If, you know, we expect to pay it off this year, may bleed into a quarter next year. That is really the way we want to clean up that balance sheet.
We have maybe time for one question up front. Just wait for the mic, sir.
After getting regulatory approval, assuming that happens with Constitution, given the work that was done before, will it be a faster construction process or do they have to start from scratch?
No, it'll be faster. You know, and again, it's a Williams project. What they will tell you is they have the right of way ready to go. It's still active. Pending regulatory approval, it could be in service quite soon, you know, within a year or maybe a little more. That's really a question for them.
Williams is our keynote lunch speaker. They will be presenting in the main hall. Tom, thank you so much for your time. Really appreciate you participating in this panel.
Thank you very much. Yeah.
Thank you, sir.