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Analyzing Coterra Energy’s Risk Factors After Merger

Texas-based Coterra Energy (CTRA) is an oil and gas company operating in Permian Basin, Anadarko Basin, and Marcellus Shale. It was formed through the merger of Cabot and Cimarex in an all-stock transaction valued at $17 billion. 

The merger of equals, announced in May 2021, was completed in October 2021 and resulted in the combined company taking the Coterra name.

With this in mind, we used TipRanks to take a look at the latest financial performance and understand the risk factors for Coterra. (See Analysts’ Top Stocks on TipRanks)

Q3 Financial Results

Coterra reported revenue of $440.4 million for Q3 2021, falling short of the consensus estimate of $633.7 million. Revenue was $291 million in the same quarter last year. The company posted adjusted EPS of $0.52, compared to $0.09 in the same quarter last year but missed the consensus estimate of $0.79. Coterra ended Q3 with $1.1 billion in cash and $2.9 billion in debt. (See Coterra Energy stock charts on TipRanks).

Risk Factors

According to the new TipRanks Risk Factors tool, Coterra’s main risk category is Finance and Corporate, representing 49% of the total 39 risks identified for the stock. Coterra recently updated its profile with nine new risk factors.

In connection with the merger, 408 million shares were issued to Cimarex shareholders. Coterra cautions that legacy Cimarex shareholders may decide to dump those shares now that the merger has been completed as they are not subject to selling restrictions. Likewise, legacy Cabot shareholders may decide to sell their shares due to the change in the company’s investment profile following the merger. Therefore, Coterra has warned investors of potential volatility in its stock price following the merger.

Historically, Cabot and Cimarex paid cash dividends to their shareholders, however, following the merger, Coterra may decide to stop the dividends or reduce the dividend amounts. It mentions that the board will need to weigh a dividend decision against the company’s financial condition and capital spending plans. Therefore, Coterra cautions that its future dividend program may be uncertain after the merger.

Coterra informs investors that its ability to use Cimarex’s loss carryforwards to reduce its future tax liability may be limited. It says that Cimarex has $2 billion in net operating loss carryforwards. Of that amount, $1.8 billion needs to be used before it expires between 2032 and 2037. The problem is that the merger has triggered an annual limitation on the amount of loss carryforwards that Coterra can apply to offset its tax bill. As a result, Coterra may be unable to fully utilize Cimarex’s loss carryforwards before they expire.

Coterra tells investors that its debt increased as a result of the merger. It warns that the debt burden could adversely affect its business and cause cash shortage challenges due to interest payment requirements. As a result, Coterra may not have sufficient funds to operate or grow its business. Furthermore, the company cautions that it may not achieve the anticipated benefits of the merger, such as cost savings. For example, unexpected liabilities that may be discovered in the future could reduce the merger benefits.

The Finance and Corporate risk factor’s sector average is 37% compared to Coterra’s 49%. Coterra’s stock has gained about 25% year-to-date.

Analysts’ Take

Mizuho Securities analyst Silvio Micheloto recently reiterated a Buy rating on Coterra stock and raised the price target to $33 from $31. Micheloto’s new price target suggests 67.17% upside potential. The analyst remains bullish on Coterra after increasing his U.S. crude oil price forecast to $61 from $56 a barrel.

Consensus among analysts is a Moderate Buy based on 12 Buys and 5 Holds. The average Coterra Energy price target of $27.94 implies 41.54% upside potential to current levels.

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Neha Gupta
Neha Gupta has worked in the financial industry for over six years. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) designation. She has successfully completed Level II of her CFA.