I want to welcome everyone to day three of our 39th Barclays Energy and Power Conference. It's my pleasure to introduce Tom Jorden, CEO of Coterra Energy. Tom, thank you for being here and flying out last night.
Yeah, happy to be here.
Great. Well, I want to start off the conversation with Coterra's strategy. It's about a balance of oil and gas portfolio that demonstrate resilience through the cycles, and I do think that the portfolio execution has demonstrated the resilience of that. So, but some investors are still questioning if that's the best strategy. So what are some of the things that Coterra look at to assess the execution of that balance strategy?
Mm-hmm. No, thank you for that question. You know, our model, I think, can be simplified in that what we're really looking to do is generate consistent, profitable growth. And you know, there's a lot of metrics for that, but certainly free cash flow is an outcome of that behavior, and so we'd like to see growing free cash flow over time and really demonstrate to the market that we have great durability in that. I think that we have a very deep inventory of low cost of supply and the optionality between oil and gas. What we're really pleased with the performance of our portfolio. And you know, in our latest deck, if you look at that, you'll see some sensitivity of our free cash flow under various commodity price iterations, and that's not just theoretical.
You know, we're finding that now as oil and gas oscillates, sometimes correlated and sometimes uncorrelated, we're really seeing a stability of cash flow, which allows us to have a consistent level of activity. And our own experience tells us that's the best way to play a cyclic commodity business is to maintain some level of consistency. So free cash flow and duration, and that's the Coterra story.
So talking about the flexibility of capital allocation, we have seen quite a bit of volatility in gas prices. It's almost roundabout in price in the last six months or so. Coterra is actually adding capital-
Mm-hmm.
to Marcellus in the second half of the year. So does the near-term price action change how you think about that allocation of capital to the Marcellus?
No, we don't fluctuate based on quarterly sentiment. And, you know, in some respects, we're still in the weather business with natural gas. And so, you know, it's remarkable when you look at the growth in production over the last 50 years and how decoupled it is from the growth in storage. So I think as we look, we're going to see a fair amount of volatility in natural gas. It's also something to be aware of as LNG becomes a bigger part of the story. One or two maintenance cycles may introduce tremendous volatility. So I think it's important to realize that and have some patience through these oscillations. We're very constructive on natural gas for a whole host of reasons.
I mean, not only LNG exports, but the talk about power demand, although I think many of us probably think it's exaggerated, even if it's tempered significantly, it's still significant to our industry, and then you have growing export, you know, Mexican exports. I think there's every reason to be constructive about natural gas, and so we're steady as she goes there.
And so talking about the volatility that we see in that, in the near term, is there a flexibility to manage production and, like whether that's active production management or differing activity without really changing the broad direction of the program?
There is. You know, last year, we shut in some volumes, and we've talked about that this year as well. We haven't done that this year, but that's not to say we wouldn't. I mean, I think typically in the Marcellus, if our netbacks get significantly below $1, we have-
Right
... that conversation, and we're close to that now, but we haven't shut in anything.
Got it. You mentioned power-
Yeah
... and it's such a big theme throughout this conference so far, and if anything, feels like there's more confidence in these really big power demand numbers. So in your view, how's do you see Marcellus as a potential growth engine or more as a cash flow generating machine, as in, is there an opportunity to capture that growing power demand from Appalachia?
We need. I hesitate to use the word infrastructure, but because infrastructure doesn't necessarily mean pipes out of the basin. It could mean a pathway to an additional demand in basin, but a pathway for your molecules. You know, you've seen a couple of deals that are at index pricing, and you know, that's interesting to us because at first we ask: Well, why would you do a long-term contract to index pricing? And I think the answer to that is because for those that did that, it allows them to grow in basin without necessarily disturbing the basin gestalt, if you will, because it's a particular contract around a particular supply. You know, Coterra, we're probably less interested in that because of our optionality in a multi-basin, multi-commodity.
So I mean, to answer your question, I think when we look at the Marcellus, we're probably looking at it more in maintenance mode. I think we would seek out of basin egress before we'd probably look to grow it. That said, you know, one or two opportunities changes this conversation, and we're very opportunistic. We're always looking for deals that make sense, and, you know, we our power deal in the Permian, we think, is. Well, what it was fascinating the amount of attention that got. That, you know, to us, said a lot about the marketplace.
Right. I mean, if anything, even just holding a flat, it's a super capital efficient-
Mm-hmm.
-and powerful, productive asset, so it gives you a lot of optionality. Talking about optionality, Coterra has 15 years of inventory runway. Forty percent of that or economic CapEx, delivers the 2x PV-10-
Mm-hmm.
-that you guys talk about at $75 oil and $3.75 gas. How would you say is your this year's development program compared to that overall benchmark of your overall inventory?
Yeah, I would say it's top tier. I mean, it's representative of that upper, uppermost, you know, the way we look at capital allocation, we don't have placeholders for any particular business unit. You know, we've got the Permian, we have the Anadarko, we have the Marcellus, and we have very few commitments. We really avoid long-term vendor commitments, and we generally avoid long-term market commitments. At least, we don't want to make commitments that require us to invest into them. We'll make long-term market commitments on our base production because that, you know, that's not at risk. But we don't like to make commitments that involve us being forced to invest capital because we may not want to invest in that particular place to satisfy that commitment.
You know, our flexibility is huge, and this year, in answer to your question, we're seeing returns that are at the upper end of that creaming curve.
Got it. And then, what are the opportunities to high grade the thing that's in that 1x-2x range, in that 1x-2x PV-10 inventory range? And I want to tie in here with the AI integration-
Mm-hmm.
Perhaps that, it's actually being a big topic throughout the conference so far, that it's really having a big impact on how companies are being run, the productivity and cost. So maybe just speak to the overall ability to enhance the inventory you have.
Well, yeah, technology, technology, technology
Yeah
... are the three ways we can enhance it. And that, you know, not only is that drilling completion technology, but you're absolutely right to call out artificial intelligence or machine learning. You know, we left fairly early on that. We've had a very serious internal machine learning project for going on seven or eight years, and we stumbled along the way. We... But we got some things right, and one of the things we got right is that we didn't take our machine learning effort and put it in an ivory tower. You know, we do a lot of networking in the industry, and there are some peers of ours that I would have to say have more sophisticated algorithmic development than ours, but they're confined to ivory towers.
At Coterra, what we did right is we marbled it into our organization by taking some operations people, bringing them into our machine learning effort, and then repopulating them in our business units. So at Coterra, you will not go to a serious operation meeting without our operations engineers, you know, people that come in from the field, insisting that the machine learning team be at the table. It's truly adopted broadly through our company. Now, we started with very high-level tasks. So we started with asking, "All right, what are the needle movers?" And well, forecasting, project design in terms of completion spacing, those are the projects that we started on first, and we've made tremendous progress on that. Oddly enough, some of the low-hanging fruit that other companies went to first are still available to us.
Production optimization, you know, accounting and how you can faster pay invoices. Some of the just simple process, tactical, things that machine learning is almost designed to optimize, we've got a lot of low-hanging fruit in the organization there. And so the potential for Coterra to get better with machine learning is really tremendous.
How impactful do you think that could be? Is it just more smaller, incremental changes or potential that, big, big needle movers?
In our viewpoint, the geoscience are the big needle movers. You know, I always ask questions when we have projects is, you know, is this gonna make us a great company or not? Is this gonna really move us forward in big leaps? And I think a lot of the implementations on, you know, paying a bill faster with 1/3 less people, that's a great thing for efficiency, but we're not gonna distinguish ourselves by paying our invoices faster. We're not gonna distinguish ourselves by processing expense accounts faster. We need to do that, but we're more focused on what are the big needle movers?
Mm.
How can machine learning help us with re-architecting our own capital program, where we spend billions of dollars? How can it make us more competitive in acquiring assets? How can it make us faster in evaluating opportunities? Those are the needle movers. You have to do all of it, but it's just my guess. I'm gonna focus on those big steps.
Got it. That makes sense. Speaking to the three-year outlook, I'll say Coterra has been consistently outperforming the mid-single-digit oil growth that's been laid out in the last few years. As the company continue to scale up, do you think that's still the right type of growth rate for a company of Coterra's size now?
I don't know what the right growth rate is. You know, we don't manage by growth rate. We really manage by. We assess our capital, and we decide how much of it we want to invest, and then we try to find the most profitable investments we can find. And growth is an outcome. We're not afraid of growth as long as that growth comes with a lot of windage between what's reasonable commodity price forecast and where you'd scrape against your cost of capital. So we look at that. We run our price file durations down to $40 oil, $2 gas. We wanna make sure we've got a lot of head space between the market we're investing into and the market we might be producing into.
Mm-hmm.
And so, because of our low cost of supply, generally, we have a lot of degrees of freedom there. But we also have one of the lowest reinvestment rates in our sector. You know, as we look ahead, we're at or below 50%, depending on, you know, what price file that you wanna cite. But a reinvestment rate of 50% is, you know, certainly competitive in our sector, and that's kind of what we look at, and then growth is an outcome, not necessarily an input. It's all about return on capital and
Mm-hmm
... future profitability.
As we think about that continued efficiency gains, whether that's from AI or just operations, is there a tendency to want to save more on the CapEx side than letting the program continue to sort of run at the most efficient pace?
We don't. You know, we always love save on the CapEx side.
Yeah.
I mean, we, you know, we seek to optimize, become as capital efficient as we can. But, you know, we are also in the business to invest. I mean, we're not in the business to be dead in the water. I mean, we like to invest, and, you know, we have long-duration assets, but we also like to invest in our own assets. So, you know, we're out there on the ground game, leasing in various places where we're active. And, you know, it's about the future and making sure that that future is available to our investors.
No, that makes sense. So speaking to that 50% reinvestment rate, I think the strong cash flow generative ability of the business is not quite fully appreciated by the market. You still create. The valuation is very attractive in our view. Are there ways, in your view, to really highlight the resilience of the business? And are there ways to maybe narrow that valuation gap? And I'm speaking to, like, how do you guys think about cash return and really buying back stock-
Mm-hmm
... if you think it's attractive?
Yeah. You know, right now, I think the fault line for us in conversations with our owners is between retiring our debt or buying our stock. You know, we took out a $1 billion term loan when we bought these North Lea County assets, and our state of intent is to retire those term loans. That's still where we are. You know, I think as you look ahead six months, we'll be at a point where we will retire those term loans, and we would pivot to a buyback. Now, you know, we may feather that decision in. You know, we may start buying back before the term loans are paid off. We're having that discussion now. We haven't made any decisions.
But that's, you know, on a long-term trajectory. We wanna get that debt retired and then get back to a fairly aggressive buyback. We see real value in our shares, and we'd like to be in the market using that free cash flow.
Would love to see that. Even that, the balance sheet is quite good right now. Maybe speaking operationally, I'm just gonna touch very quickly on Harkey, just because-
Mm-hmm
... it's still something that comes up every once in a while, just where the remediation efforts are now for these wells. And I'm also interested in the water issue. Like, do you think the, the Harkey wells is isolated in that area because of the saltwater disposal wells in proximity, or is it because of the depth of the Harkey interval themselves?
There are a lot of reasons why it's happening in Culberson County. I will say it's generally a basin-wide phenomenon, in that saltwater disposal in the Delaware Basin, and really the larger Permian Basin, is an emerging and serious issue. You know, we started out injecting in the deep section, and that had tremendous potential, but we ran into an induced seismicity issue. So in Texas, we've, I believe, Coterra, in particular, we pivoted. We got completely out of the deep injection, and we've gone into shallow injection, as most operators inject shallow. That pore space is limited. There'll be a point where that pore space fills up. Now, in Culberson County, we're a part of the basin that's slightly less pressure than the deep basin.
And that means that when we inject shallow, we're pressuring up a shallow formation and introducing a pressure differential between that and surrounding formations. And so that's introduced the issue. It's not unique to Coterra. In fact, you know, I've said that after our second quarter call, we had some inbounds from offset operators wanting to discuss it because they're facing the same issue. And there's some public litigation going on over this issue that others are tied up in. You know, we understand the phenomena. We think it's well addressed. We don't see it as material in any way to our future inventory, and we're very pleased with new wells we brought online that are responding very well with a subtle tweak in how we complete the well.
So we're very optimistic that we can manage this and get it behind us.
Great. Do you think the industry is adequately prepared to handle that growing water issue in Delaware?
Well, you know, industry is a broad term.
Yeah.
There are a few leading companies that are getting in front of this issue, and I'm proud to say Coterra is one of them, and I think that, dealing with our regulators, dealing with our peers, I think that the industry will find productive ways to solve this problem.
Great. I also want to ask about the Franklin Avant asset in the Northern Delaware Basin. It's almost a new sandbox for the technical team. What are some areas are they most excited about as they integrate the asset?
Yeah, we were talking about that in a meeting this morning. It's an area where geology counts. You know, there's a lot of the basin where it's just repeatable throughout, and you can go 3 mi or 4 mi in any direction, and it's just layer cake. This is an area of the basin where there's rapid variation in geology. It's an extension of productivity that I think has surprised many people, and it really is hand knitting. You can have a section that's highly prospective and one next to it that's less prospective. And so being good at geoscience really counts there, and that's exciting to us. We're very involved in a land ground game, and we're having some success.
I'll say that our viewpoint of the asset and the inventory has increased since we've brought it into our organization. You know, we don't like to talk about stick count. We'll talk about gross perforated interval, the entire lateral feet that the asset will make available to us. It's increased significantly since we bought it, and we really love this area.
Is there any midstream or infrastructure build-out that's needed to really develop that asset?
Yes. You know, it's sour gas, and so the gas needs to be treated, and that's a challenge to our midstream partners. But there are several good companies in the area, and they're coming up to speed, and you know, we're working closely with them.
Great. Great. Maybe take a step back as, maybe, rounding this up, in that, before this conversation, we're just talking about the history of Cimarex and how you were the founding member of Cimarex Energy in 2002 and have been the CEO since 2011 . A lot has changed in the transformation of Cimarex and now Coterra. How would you say has the culture of the company evolved through the transformation?
So I love talking about our culture. You know, I'm a geophysicist, and so my passion is the technology and the science, the energy around ideas. And you know, we've over time, through a very aggressive intern program, built our company from the ground up with young talent, and today we're still a very young company. You know, I find myself, you know, when I started in this job, in this role, I was the youngest person in the room, and now I'm finding I'm being referred to as the older statesman. And it's a lot of fun because I'm surrounded by people that you have to work really hard to keep up with them.
People that don't know what can't be done, people that have grown up in a culture of open ideas, non-political, a culture that's absolutely dedicated on facing our problems head-on and not spinning our way through things, being transparent with our investors, with our regulators, but most importantly, with ourselves throughout the organization. We freely exchange ideas and collaborate, and it's, it's a, it's a culture that's powerful and is the reason for our success, and we move people around. You know, we really expose people to different opportunities. Like, for example, we've just taken two of our executives that many of you know, Blake Sirgo and Michael DeShazer. Michael's been long-term head of our business units, and Blake was our ops guy, and we flipped their roles.
And so now Michael is over operations, and Blake is over the business units, and that's not as big a change at Coterra than one would think because of our open culture, our degree of high collaboration. Everybody's fairly familiar with. You know, there's no silos at Coterra. So we have a lot of visibility into one another's jobs, and we do a lot of collaborating. But it's an exciting opportunity for Coterra because they'll bring fresh eyes, fresh perspectives. You know, I've told both of them that you're not getting each other's jobs, you're getting your new job, and do it differently. And so, you know, Coterra is a very young culture. It shows up in everything we do. I'm surrounded by people that are younger, and it's exciting. The energy is exciting.
And that's, and speaks to your leadership in enabling that type of culture and that open mindset. I hate to ask this, but as we look ahead, you know, Tom, I feel like I've, you know, I grew up in the industry, watching you speak, but how do you think about the succession planning of the company and then the future leadership?
The board is highly engaged, as am I, and talent development is one of our top challenges. You know, we've got some great internal candidates, and you know, I think it's probably apparent to anybody who looks at Coterra that my successor will be a fair amount younger than I was when I took the job. But you know, the thing that I tell our board is, "Don't ever get distracted by somebody's age.
Look at what they've done, what their capabilities are, what their temperament is." You know, there's a lot of very successful young CEOs in the industry generally, and I will tell you, of the things I worry about, the future of Coterra and the future of our leadership is absolutely not one of them, and that's not just because I have confidence in the executive team. From top to bottom, we've hired people out of school and given them big challenges early in their career. So I'll take a 30-year-old at Coterra and put him against anybody in our industry because they've, they've managed multimillion-dollar projects. They've had to stand and make recommendations. They've also been challenged with dealing with failure, and they know how to adapt. They're innovative, they're flexible, and they're also operating in a high-trust environment. So I,
the future of Coterra is, really, really secure.
That's an inspiring message with a really high-quality asset and enduring asset as well. With that, Tom, it's always a treat to have this conversation, and thank you again for being here.
Betty, thank you so much.