Natural gas and oil explorer Coterra Energy is building a cup-with-handle base that began in early June. The energy stock, today's selection for IBD 50 Stocks to Watch, has benefited from a merger it completed in October 2021.
Coterra Energy explores and produces oil, natural gas and liquefied natural gas. The Houston-based company operates mainly in Pennsylvania, West Texas, New Mexico and Oklahoma. It owns 234,000 net acres in the Permian Basin, 177,000 acres in the Appalachian Basin and 182,000 acres in the Anadarko Basin. All three are major drilling regions.
Energy Stock In Cup-With-Handle Base
The stock has been basing since its high on June 8. Shares sold off on heavy volume in mid-June, as energy stocks fell with dropping oil prices and worries of an economic slowdown. This sharp decline formed the left side of a 33%-deep cup, which is near the maximum depth sought in the CAN SLIM investing strategy.
Share price is within 9% of the 32.09 buy point on the MarketSmith chart, but is 21% off its 52-week high. Shares tested the 50-day moving average Wednesday and bounced back. Volume has been below the 50-day moving average line for most of the base. That's not a problem, although you want to see a burst of volume on a breakout.
The energy stock has a 94 Relative Strength Rating, meaning it has outperformed 94% of all publicly traded companies in terms of earnings growth, in the past 12 months. With the market uptrend under pressure, CTRA may be a stock to watch and a potential buy if the market strengthens.
Earnings And Sales Growth Soar
Coterra reported a beat on Q2 EPS and sales on Aug. 2, and raised its quarterly dividend. Coterra has shown extraordinary triple-digit quarterly EPS growth for several quarters. Analysts expect full-year EPS of $5.13 in 2022, representing a giant 128% increase from 2021, then a drop to $4.45 per share in 2023.
Sales have also had tremendous triple-digit growth in the last three quarters. Coterra holds impressive 98 scores for both Composite and EPS Ratings.
CTRA is No. 13 out of 57 stocks in the Oil & Gas Exploration industry group. The group is ranked No. 26 out of 197 IBD tracks. The industry group has dropped from No. 4 just three months ago.
The company's 16% return on equity is slightly below the CAN SLIM desired 17% minimum, but is expected to rise to almost 32% for full-year 2022.
Merger Seems To Be A Success
Coterra Energy, formerly known as Cabot Oil & Gas, merged with Cimarex Energy on Oct. 1, 2021, forming the new company. It reported combined results starting in January of 2022. The merger was expected to increase free cash flow and return superior and sustainable returns to shareholders.
"Coterra delivered another strong quarter as we remain focused on capital efficiency, operational execution, and shareholder returns through our base dividend, variable dividend, share repurchase program, and debt reduction," said Thomas E. Jorden, CEO and president, on the earnings announcement. "I am excited by the progress our new organization has made less than a year after the merger, and we are eager to build on our track record of execution."
He added that Coterra will return 80% of second-quarter free cash flow to shareholders. That includes cash dividends and share repurchases. The company's annualized dividend yield tops 7%, according to MarketSmith.
Institutions Adding The Energy Stock
Mutual funds own 59% of the stock and have been adding to it, with 1,589 holding in it June, up from 1,477 in March. Institutional ownership can be a positive for stock price because block purchases can certainly move a stock.
Analysts also like what they see. Barclays raised its price target to 43 from 37, while maintaining an equal weight rating. Goldman Sachs also bumped up the price target to 32 from 30, maintaining its buy rating.
