#USA #New York #Kimmeridge #Coterra Energy #Cabot Oil

Kimmeridge Calls for Governance Changes at Coterra Energy

In a recent open letter aimed at Coterra Energy's Board of Directors, Kimmeridge, a private investment firm with a vested interest in the energy sector, has made a strong case for immediate governance reforms to restore shareholder value. The letter follows a series of governance failures and highlights the detriments faced by the company post its merger with Cabot Oil & Gas and Cimarex Energy.

Background on Coterra’s Governance Challenges

The merger, touted as a means to create a robust and versatile energy company, has largely been deemed unsuccessful four years later. Mark Viviano, the Managing Partner at Kimmeridge, remarked that Coterra currently trades at a low valuation compared to its peers due to the failure to create a coherent strategic direction following the merger. This unfortunate trajectory illustrates a board that has overlooked its critical missteps, leading to significant shareholder dissatisfaction.

Coterra is now left with incongruent assets that complicate its operations: dry gas reserves in the Marcellus and oil-oriented production in the Permian. This lack of strategic clarity has resulted in inefficiencies and an overall decrease in asset value when compared to its competition in the sector.

Governance Issues – A Critical Analysis

One of the critical issues Kimmeridge pointed out is Coterra’s failure to adopt standard governance practices common among its peers. In particular, about 65% of S&P 500 Energy companies maintain a separation between the roles of CEO and Chair. However, Coterra has combined these roles, consolidating authority in a way that diminishes accountability. The concentration of power makes it difficult to uphold governance principles and has led to long-standing underperformance and a widening valuation gap versus industry benchmarks.

The company recently faced a staggering write-down of 32% in its Marcellus reserves, exposing serious flaws in board oversight, capital allocation, and risk management strategies. Kimmeridge's call for appointing an independent, non-executive Chair is seen as essential for injecting objectivity and credibility back into the boardroom.

The Path Forward: A Focused Strategy

Kimmeridge strongly advocates for Coterra to refocus on its most promising assets, notably in the Delaware Basin. Data from Enverus indicates that within the Delaware region, Coterra has maintained the lowest cost of supply wells among operators with at least one hundred completions since 2022.

The firm believes that by divesting from low-performing assets in the Marcellus and Anadarko regions, Coterra can reposition itself as a dedicated Permian-focused company. A streamlined approach would not only simplify operations but also enhance returns on invested capital, thereby positively influencing the company’s valuation in the market.

A Call to Action for Coterra’s Board

Kimmeridge cautions that shareholders deserve a board genuinely engaged in driving the company forward, rather than merely acting as passive observers. The firm expresses its willingness to engage with the board constructively, but emphasizes that time is of the essence and continued inaction is not an option.

The implications of Coterra's past actions provide a crucial lesson in governance and accountability within the energy sector. As the company faces ongoing scrutiny, significant changes are necessary to restore both trust and shareholder value in the years to come. Kimmeridge’s open letter serves as a vital reminder that effective governance and strategy are integral to a successful future in the ever-evolving energy landscape.