We’re buying 150 shares of Coterra Energy (CTRA) at roughly $23.84. Following Wednesday’s trade, Jim Cramer’s Charitable Trust will own 1,650 shares of CTRA, increasing its weighting to 1.32% from 1.2%. One of the biggest commodity stories this year has been the significant decline in the price of natural gas. After peaking at around $10 per million British thermal units back in August, the price of nat gas has pretty much fallen off a cliff. It’s been down almost every day since December due to many factors including a warmer-than-usual winter in Europe, a prolonged shutdown of the Freeport LNG facility in Texas following an explosion in June — and in general, supply growth outpacing demand. All things considered, the decline in nat gas isn’t a terrible thing as it’s a major input cost in the industrial, commercial, and residential sectors of the economy, and higher prices could eat into the profit margins of companies or discretionary consumer budgets if those higher costs get passed on to the consumer. However, when you own Coterra Energy , lower prices can be a bad thing. Coterra gets about one-half of its revenues from producing natural gas, so lower prices mean less free cash flow generation and smaller cash returns to shareholders. With the price of nat gas down more than 40% year to date even before factoring in Wednesday’s declines, our contrarian nature had us wondering if sentiment has become way too negative. @NG.1 YTD mountain Natural Gas (@ng.1) year to date To help us understand the outlook on nat gas, we checked in with Carley Garner, the resident commodities expert for “Mad Money,” who we often turn to for chart work . She told us Wednesday morning that, “everyone loved it at $10 and they hate it at $2. … That is how gas works. We should be mostly through the margin call selling.” She added, “I think we will see $5 to $6 in the coming months.” Due to how hated natural gas has gotten in the $2s, we now believe the risk-reward on prices has skewed favorably, especially as some of the “technical pressures” that Garner pointed out subside. Of course, nat gas prices could continue to be weak in the months ahead, but sentiment has become extremely negative — and when that happens, you have to take a constructive stance. That’s why we are buying some Coterra Energy on Wednesday. To be clear about Coterra, it would not surprise us to see management lower the company’s variable quarterly dividend payment the next time it reports earnings. You cannot expect the same 53-cent per share variable dividend payment when the underlying commodities have fallen quarter over quarter. U.S. oil prices have also dropped nearly 4% year to date. Oil is the other half of Coterra’s operations. CTRA YTD mountain Coterra Energy (CTRA) year to date However, at $24 per share, we can make the case that Coterra’s stock price has started to adjust to the new dividend. If sentiment turns positive on natural gas after this historic stretch of bearishness, then we anticipate CTRA shares to rebound as well. Our other pure exploration and production stocks — Devon Energy (DVN) and Pioneer Natural Resources (PXD) — are far less tied to nat gas. We also have 1 ratings on those companies on the belief that energy prices will remain elevated. Devon, Pioneer and Coterra all report their quarterly results later this month. (Jim Cramer’s Charitable Trust is long CTRA, DVN, PXD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A drilling rig operates in the Permian Basin oil and natural gas production area in Lea County, New Mexico, February 10, 2019.
Nick Oxford | Reuters
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