Coterra plans to reduce natural gas production in 2022 in favor of oil, NGLs

Coterra – formerly Cabot Oil & Gas and Cimarex – will scale back natural gas production slightly in 2022 compared to 2021 levels in favor of oil and NGLs as part of the company's efforts to maximize free cash flow, executives said in its fourth-quarter earnings call Feb. 24.

CFO Scott Schroeder outlined expectations that Coterra's gas production would fall 5% in 2022, with presentation materials showing a full year guidance of 2.68-2.85 Bcf/d.

In the fourth quarter, gas production totaled 3.12 Bcf/d and accounted for 60% of total revenue, which was projected to decrease to 53% in 2022.

Balancing toward oil, NGLs

"We are strategically interested in balancing liquids upward as a percentage of our overall revenue and cash flow," CEO Thomas Jorden told analysts. "In 2022, we expect liquids to account for 47% of our revenue mix, up from 40% in 2021."

"We plan to accomplish this by weighting more capital to our oil and liquids-rich areas with 49% in the Permian, 7% in the Anadarko and 44% in the Marcellus," Jorden said.

While natural gas pricing saw its strongest year on record since 2014 in 2021, oil and NGLs have also seen bumper prices.

S&P Global Platts assessed prompt-month West Texas Intermediate at $92.95/b Feb. 23, up from averaging $68/b in 2021. Similarly, Platts assessed the prompt Mt. Belvieu propane price at 144.50 cents/gal Feb. 24, up from a 2021 average of 104.85 cents/gal.

The company expects to increase oil production by 4%-10% in 2022 from prior-year levels, with growth driven primarily by increasing operational efficiency in the Permian. Coterra plans to boost the number of wells per pad in the Permian to 8.3 in 2022, up from 5.5 in 2021, and bring on a full electric completion spread by the middle of the year to save on diesel costs.

In contrast to the cost savings from Permian efficiency gains, Coterra projected that the costs of drilling, completion, managing flow back, and facilities in the Marcellus will increase 7%-17% in 2022 from prior-year levels, cutting into the margins for more pure-play gas production.

"The tilt towards our liquids-rich areas was a multifactor decision driven by the current commodity environment, service and inflation headwinds, and the goal to maximize free cash flow," Jorden said.

The lesser focus on natural gas production may not be a long-term plan for the company, however, with Jorden saying in analyst Q&A that the company's gas production in the Marcellus might see a return to growth in 2023.

Hedging and financials

As of Feb. 24, Coterra had hedged 21% of total expected remainder of 2022 gas volumes, with an average floor of $3.80 and average ceiling of $5.50 with NYMEX costless collars. With producers eager to take advantage of buoyant pricing environments while protecting against downside risk, collars have become increasingly in vogue as a hedging instrument.

For the quarter ended Dec. 31, Coterra had a net income of $939 million, or $1.16 per share, up from a net income of $131 million, or 33 cents/share, for the corresponding quarter a year prior.