Oil and natural gas producer Coterra Energy (CTRA) delivered mixed results after the closing bell Monday, with second-quarter sales missing expectations and profit outpacing estimates. However, what hit shares in after-hours trading was a guidance miss at the core of why we own the stock in the first place. Revenue for the three months ended June 30 fell 54% year-over-year to $1.19 billion, missing the consensus forecast of $1.27 billion, according to analyst estimates compiled by Refinitiv. Adjusted diluted earnings-per-share fell 71% versus the year prior to 39 cents, but EPS still managed to beat expectations of 34 cents per share, Refinitiv data showed. Bottom line Club holding Coterra’s realized energy prices for the quarter, which reflect the impact of hedging activity, saw oil and natural gas ahead of expectations. However, natural gas liquid prices missed estimates. Despite strong production numbers and mostly favorable prices, both of which contributed to a beat for operating cash flow, higher-than-expected capital expenditures (CapEx) resulted in a miss on the free cash flow. That’s problematic because as investors know, the investment thesis in the oil patch is predicated on lower CapEx in favor of cash returns to shareholders. We’ll be looking for management to address this on the conference call Tuesday at 10 a.m. ET. Unfortunately, a similar dynamic was seen in forward guidance for the full year. While management did raise their outlook for total production along with their production targets for oil and natural gas, they left capital expenditure expectations alone. Given the pressure seen on commodity prices, particularly in natural gas, management was forced to lower their outlook for operating cash flow and free cash flow. Since cash returns to shareholders in the form of dividends and stock buyback rely heavily on free cash flow generation, this cut is likely the cause of the modest after-hours trading selloff, especially with shares up over 20% since the beginning of June as of Monday’s close. CTRA YTD mountain Coterra Energy YTD performance Production increasing while capital expenditures hold firm is OK — but ideally, we would have liked to see CapEx come down and production up, similar to what we saw from fellow Club name Pioneer Natural Resources (PXD) they reported. We expect some questions on Tuesday’s call about whether there’s any wiggle room here to better protect free cash flow as production and capital expenditures are the two things management can control. Commodity prices are, of course, the other major factor in the cash flow equation but that’s not really in the hands of any one company, no matter who they are due to global supply and demand dynamics. Our Coterra rating and price target are currently under review as we wait to see what management has to say about the operating environment and whether they provide more high-level commentary on what they’re seeing for the rest of the year. We currently have Coterra as a 1-rated stock with a $30 per share price target. Capital allocation Coterra’s buyback in the second quarter was disappointing. Due to the pressure on natural gas prices during the quarter and the impact that had on cash flows, management only repurchased $57 million worth of stock during the period, far below the $268 million purchased in the first quarter. Adding in the base dividends paid out (no variable dividend declared given the prior change in strategy), the team returned a total of $208 million to shareholders in the quarter. This brings the year-to-date total cash return to $628 million. The breakdown: $303 million via dividends and $325 million from repurchases. Management said, “Coterra is on track to return at least 75% of currently forecasted free cash flow.” The company had $1.7 billion remaining under their previously authorized $2 billion authorization as of the end of June. Guidance Forward guidance for both the third quarter and full year 2023 was mixed — and unfortunately, the full-year misses were on management’s cash flow forecasts. As we can see, despite raising full-year production targets to levels above what the Street was looking for across the board, the team was forced to lower its cash flow outlooks. The downward revision to cash flows appears to largely be the result of a downward revision to management’s full-year price assumption for natural gas to $2.84 per million British thermal units (MMBtu), down from $2.89 MMBtu previously assumed. The company reiterated its expectation for West Texas Intermediate (WTI) crude, the American oil benchmark, to average $76 a barrel for the full year. 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Oil and natural gas producer Coterra Energy (CTRA) delivered mixed results after the closing bell Monday, with second-quarter sales missing expectations and profit outpacing estimates. However, what hit shares in after-hours trading was a guidance miss at the core of why we own the stock in the first place.