Dear Shareholders,
Shareholder returns play a key role in Coterra’s financial strategy. Coterra is committed to returning 50% plus of Free Cash Flow to shareholders via dividends and share repurchases.
Dear Fellow Shareholders,
After completing our first full year as Coterra, I am pleased to report that we have hit our stride. We had an outstanding 2022, surpassing all expectations for cash flow, free cash flow, and production.
Our teams are fully integrated, engaged in idea sharing, and focused on value creation. Our results demonstrated the power of our assets and revenue diversity, resiliency, and the technical advantages that come from blending problem solvers from different operating arenas. Coterra is the first of a new breed, as we are demonstrating each and every day.
Coterra benefits from having assets with a low cost of supply, broad commodity and geographic diversity, and an organization focused on operational excellence with a commitment to be the very best. We operate in a cyclic commodity price environment in which cycles can be unpredictable and severe. Flexibility is the coin of the realm. With our fortress balance sheet, asset quality, and organizational capability, we can quickly adapt to changing conditions. Although we are not insulated from the effects of market swings, we have the intrinsic ability to adapt in a manner that few can replicate.
As we look ahead, we have strategic priorities that guide us. First, we are committed to consistent, profitable growth. We will invest through the cycles in a manner that positions us to consistently earn well above our cost of capital. This can be challenging in a cyclic commodity business, but our experience and solid track record differentiate Coterra. Second, we will be on the lookout for opportunities to high-grade our asset portfolio, either through new exploration and development or through accretive acquisitions and divestitures. Third, we will remain fiscally conservative. We stress test all of our investments at downside commodity prices, and we will maintain low debt leverage. Finally, our highly technical organization will continue to evolve, driven by our culture of value creation, economic decision analysis, scientific rigor, and open and healthy debate. Our experience tells us that if we get these four things right (consistent profitable growth, opportunistic expansions, fortress balance sheet, culture of value and innovation), then our shareholders will prosper through the cycles.
In our most recent earnings release, we announced a 33% increase in our base dividend and a $2 Billion share repurchase authorization. Together, these are outcomes of our decision to pivot our capital return priorities from variable dividends to share buybacks. Our commitment to growing our base dividend is foundational, and the significant increase signals long-term confidence in our business. Our decision to prioritize buybacks over a variable dividend is consistent with our strategic goal of growing per-share metrics over time. We will seek to repurchase our shares when we see accretive opportunities for our shareholders. We remain committed to returning value to our owners.
Coterra management has always maintained a long-term vision when it comes to managing the business. This includes decisions to drill new wells, lease new land, acquire and divest assets, take on debt, and hire new talent. One of the many benefits of a solid balance sheet, low cost of supply, and an adaptive organization is that we are able to manage the business while focusing on long-term value creation.
2022 heralded some remarkable changes in the macro economic environment. Commodity prices increased dramatically, and then fell back. Inflation in the oil and gas exploration and production (E&P) sector ran rampant. The world was reminded that oil and natural gas are essential elements of the world’s economies and will not be supplanted anytime soon. Finally, environmental, social, and governance (ESG) investing came under challenge from multiple fronts. I would like to address each of these changes separately.
Commodity price swings and service cost swings are a part of our business. Coterra worked hard to preserve our flexibility by negotiating a mix of annual service commitments and ongoing quarterly service commitments, which was possible due in part to the strong long-term relationships we have with our vendor partners. We enter 2023 with flexibility in our capital plan where we can select off-ramps, release equipment, and reduce capital spending if the need should arise. Alternatively, we have the flexibility to reallocate capital between our oil and natural gas assets.
Reviewing the trajectory of global hydrocarbon supply and demand quickly leads to the conclusion that the world will need oil and natural gas for a very long time. The United States oil and natural gas industry has provided our country with tremendous advantages in low-cost energy, geopolitical energy security, and the ability to produce oil and gas with one of the lowest carbon footprints in the world. Political pressure to abandon hydrocarbons within the next 10 or 15 years is both unwise and contrary to U.S. interests. Policies that discourage supply will inevitably lead to increased prices and harm those least able to afford it. From a global energy perspective, the United States is in the energy catbird seat. We should not squander this global advantage.
We understand the challenge of global climate change. We, as scientists, are confident that the solution will be found in emerging technologies and through free market forces. We are excited by many of the rapid developments in carbon capture, nuclear technology, and geothermal energy, among others. Energy and climate solutions will come from the power of free markets unleashed. Coterra is ready to do our part for the long-term solution to our energy needs.
The ESG movement has helped E&P companies to adopt a laser focus on our respective environmental footprints and safety practices. Coterra has made remarkable progress in reducing emissions. We are top tier and getting better. At Coterra, reducing our environmental footprint is a top engineering challenge. Coterra’s commitment to environmental excellence and safety will not waver.
In closing, I want to thank our amazing employees for their energy, creativity, hard work, and dedication to our mission. I would also like to thank our talented and demanding Board of Directors for their stewardship, oversight, and wisdom. Also, Dan Dinges retired at the end of the year as Executive Chairman of Coterra after almost 22 years with the company. Dan’s success in creating value at the helm of Cabot is without parallel in the shale era, and his fingerprints will be all over the future success of Coterra. On behalf of our Board of Directors and the entire Coterra organization, I want to express our gratitude to Dan for the legacy he leaves.
We have a long future road ahead of us that is paved with unforeseen obstacles, successes, and challenges. We appreciate you, our owners, for joining us on this journey. We promise to be good stewards of your precious capital and to grow it over time. We never forget that we work for you.
Thomas E. Jorden
Chief Executive Officer & President
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