Comprehensive evaluation of Coterra Energy Inc (CTRA) (CTRA) | Research Report

🧠 Investing Legends Stock Evaluation: Coterra Energy Inc. (NYSE: CTRA)

1. 🧩 Understandable Business – (Buffett, Lynch, Graham)

What does the company do? Coterra Energy Inc. is an independent oil and gas exploration and production company headquartered in Houston, Texas. It operates primarily in the Permian Basin, Marcellus Shale, and Anadarko Basin, focusing on extracting petroleum, natural gas, and natural gas liquids.

Is the business model simple and predictable? Yes. Coterra's business model revolves around the exploration, development, and production of hydrocarbons, a straightforward and well-understood process within the energy sector.

Are products/services essential or discretionary? Essential. Energy products like oil and natural gas are fundamental to global economies, powering industries, transportation, and homes.

Does it fall within your circle of competence? For investors familiar with the energy sector, especially upstream oil and gas operations, Coterra's business is within the circle of competence.

Can this business be clearly explained in a few sentences? Absolutely. Coterra explores and produces oil and gas from key U.S. basins, selling these commodities to generate revenue.

✅ Legend Fit: ✔️

2. 🛡️ Durable Competitive Advantage – (Buffett, Munger, Lynch)

Evaluate Moat Types:

Cost Advantage: Coterra's operations in prolific basins like the Permian provide cost efficiencies due to established infrastructure and economies of scale.
Asset Quality: The company's diversified asset base across multiple basins reduces reliance on a single region and commodity.

Key Metrics:

ROE: In 2024, Coterra reported a net income of $1.12 billion on equity of $13.1 billion, yielding an ROE of approximately 8.5%.
Stable Margins: Operating income stood at $1.39 billion in 2024, indicating healthy margins.
Free Cash Flow: Generated $1.21 billion in free cash flow in 2024, showcasing strong cash-generating capabilities.
Market Position: The planned acquisition of assets in the Permian Basin for $3.95 billion is set to enhance Coterra's production by 60,000 to 70,000 barrels of oil equivalent per day, strengthening its market position.

✅ Legend Fit: ✔️

3. 🧾 Quantitative Value & Financial Health – (Greenblatt, Graham, Klarman)

Key Metrics:

Return on Capital Employed (ROCE): With an operating income of $1.39 billion and total assets of $21.6 billion, ROCE is approximately 6.4%.
Valuation Ratios: As of May 30, 2025, the stock trades at $24.61. With an EPS of $1.51 in 2024, the P/E ratio is around 16.3.
Debt Metrics: Coterra ended 2024 with a net debt to trailing twelve-month EBITDAX ratio of 0.4x, indicating a strong balance sheet.

✅ Legend Fit: ✔️

4. 📊 Growth & GARP – (Lynch, Buffett)

Key Metrics:

Earnings Growth: While net income decreased from $1.21 billion in 2023 to $1.12 billion in 2024, the company anticipates increased production and revenue from the upcoming Permian Basin acquisitions.
Scalability: The acquisition of new assets is expected to boost production significantly, indicating scalability.
Industry Tailwinds: Global energy demand continues to rise, and Coterra's diversified portfolio positions it to capitalize on this trend.

✅ Legend Fit: ✔️

5. 🌍 Macro & Cyclical Positioning – (Dalio, Marks)

Questions:

How is the business affected by macro trends? Coterra is sensitive to commodity price fluctuations, interest rates, and global economic conditions.
Is the industry cyclical or secular? The oil and gas industry is cyclical, with periods of boom and bust tied to global supply and demand dynamics.
What phase of the credit/debt cycle is it in? With a strong balance sheet and low debt levels, Coterra is well-positioned to navigate various phases of the credit cycle.
Is the stock sensitive to economic shocks? Yes, as an energy producer, Coterra's revenues and profits can be significantly impacted by global economic downturns.

✅ Legend Fit: ✔️

6. 📉 Risk Aversion & Margin of Safety – (Klarman, Graham, Marks)

Evaluate:

Downside Risk: Commodity price volatility poses a significant risk to earnings.
Valuation Cushion: Trading at a P/E of 16.3, the stock appears reasonably valued, though not deeply discounted.
Capital Preservation: The company's commitment to returning capital to shareholders through dividends and buybacks indicates a focus on capital preservation.

✅ Legend Fit: ✔️

7. 🧠 Management Quality & Capital Allocation – (Buffett, Munger, Lynch)

Evaluate:

Shareholder Communication: Management provides clear guidance and updates, fostering transparency.
Capital Allocation: The decision to acquire assets in the Permian Basin demonstrates strategic capital deployment aimed at long-term growth.
Avoidance of Empire-Building: The company's acquisitions are strategic and focused, avoiding unnecessary diversification.

✅ Legend Fit: ✔️

8. ⚖️ Final Valuation & Investment Decision

Valuation Methods:

Discounted Cash Flow (DCF): Given the strong free cash flow generation, a DCF analysis would likely support the current valuation.
Relative Multiples: With a P/E of 16.3 and a strong balance sheet, Coterra is competitively valued among peers.

Decision Criteria:

Is the current price offering a compelling risk-adjusted return? Yes, considering the company's solid financials and growth prospects.
What is the 5–10 year expected IRR? Assuming continued operational efficiency and successful integration of new assets, a mid-to-high single-digit IRR is plausible.
How asymmetric is the risk/reward? The downside is mitigated by a strong balance sheet and diversified operations, while the upside includes increased production and potential commodity price appreciation.

✅ Legend Fit: ✔️

📌 Summary Table: Investing Legends Scorecard

Pillar	Legend(s)	Key Criteria	Pass/Fail
Understandable Business	Buffett, Lynch, Graham	Simple, explainable, predictable	✅
Competitive Advantage (Moat)	Buffett, Munger, Lynch	Moats, high ROE, brand/scale edge	✅
Quantitative Value	Greenblatt, Graham, Klarman	ROCE, EV/EBIT, P/B, margin of safety	✅
Growth at Reasonable Price	Lynch, Buffett	PEG < 1.5, earnings momentum, reinvestment opportunities	✅
Macro & Cyclical Awareness	Dalio, Marks	Debt cycles, recession-resilience, risk parity	✅
Risk & Downside Protection	Klarman, Graham, Marks	Deep value, low downside, margin of safety	✅
Quality of Management	Buffett, Munger, Lynch	Capital discipline, transparency, track record	✅
Valuation & Final Judgement	All	Intrinsic value vs. price, 5–10 year return profile	✅

🧾 Final Investor Questions:

What business am I actually buying into? An established oil and gas producer with diversified operations across key U.S. basins.
How does it make money, and can it sustain that advantage long-term? By extracting and selling hydrocarbons; sustainability depends on operational efficiency and commodity prices.
What economic/competitive moat does it have? Cost advantages from operating in prolific basins and a diversified asset portfolio.
Is it undervalued on a fundamental and relative basis? The stock appears reasonably valued with potential upside from recent acquisitions.
Can it withstand macroeconomic cycles or downturns? A strong balance sheet and diversified operations enhance resilience.
Is the risk/reward profile asymmetric? Yes; limited downside due to financial strength and significant upside from growth initiatives.
Is this company run by smart, rational stewards of capital? Management demonstrates strategic decision-making and a commitment to shareholder returns.

Conclusion: Coterra Energy Inc. presents a compelling investment opportunity, aligning well with the principles of legendary investors. Its solid financials, strategic growth initiatives, and shareholder-friendly policies position it favorably for long-term value creation.