Grade: B — Generally Healthy, Minor Concerns
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-27, FY ended December 31, 2025) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Unqualified opinion
One-line verdict: Coterra passes 16 of 17 screening checks. Cash of $114 million against $4.0 billion in debt is the only flag, but Debt/EBITDA of 0.8x and $4.0 billion operating cash flow confirm this is a capital allocation choice, not distress. Revenue surged 40% on strong natural gas prices and the $4.0 billion FME/Avant acquisitions in the Permian Basin. The pending all-stock merger with Devon Energy -- announced February 1, 2026 -- introduces significant near-term uncertainty around deal execution, antitrust approval, and operational integration.
| Metric | Result |
|---|---|
| Red Flags | **0** |
| Watch Items | **0** |
| Checks Completed | **17/18** (1 N/A: impairment data) |
| Beneish M-Score | **-2.80** (clean; threshold is -2.22) |
| Piotroski F-Score | **0.40** (low fraud probability) |
| Altman Z-Score | **3.35** (safe zone) |
| Auditor | PricewaterhouseCoopers LLP — Unqualified opinion |
Three-Basin Operator With a Pending Mega-Merger
Coterra Energy operates across three core areas: the Permian Basin in west Texas and southeast New Mexico (46% of production), the Marcellus Shale in northeast Pennsylvania (44%), and the Anadarko Basin in Oklahoma (10%).
Per the 10-K: "On February 1, 2026, we entered into an Agreement and Plan of Merger with Devon to combine via an all-stock merger transaction. Under terms of the Merger Agreement, at closing Coterra stockholders will receive a fixed exchange ratio of 0.70 shares of Devon common stock for each share of Coterra common stock." Devon shareholders will own approximately 54%, Coterra shareholders 46%.
In January 2025, Coterra completed two Delaware Basin acquisitions: Franklin Mountain Energy (FME) for "$1.7 billion of cash and the issuance of 28,190,682 shares" and Avant for "$1.5 billion" in cash. Combined, these added approximately 49,000 net acres and 290.7 producing net wells.
Profitability: Headline Numbers
| Metric | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|
| Revenue | $5.9B | $5.5B | $7.6B | +40.1% (acquisitions + gas prices) |
| Net Income | $1.6B | $1.1B | $1.7B | +53% rebound |
| Gross Margin | 46.3% | 36.6% | 41.5% | Recovering with gas prices |
| Operating Cash Flow | $3.7B | $2.8B | $4.0B | +43.9% |
| Free Cash Flow | $1.6B | $1.0B | $1.6B | Stable |
Per the filing, Permian Basin net production averaged 357 MBoe/day (95% of total oil production), Marcellus delivered 2,053 MMcf/day of natural gas (69% of total gas), and the Anadarko Basin contributed 82 MBoe/day.
Total proved reserves increased to 2,565 MMBoe as of year-end 2025, up from 2,271 MMBoe, driven by acquisitions and development activity. The Dimock field in the Marcellus accounts for approximately 49% of total proved reserves.
Cash Flow: Acquisitions Funded, Still Generating FCF
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $3.7B | $2.8B | $4.0B |
| Net Income | $1.6B | $1.1B | $1.7B |
| **CFFO / Net Income** | **2.25** | **2.49** | **2.34** |
| CapEx | $2.1B | $1.8B | $2.4B |
| Free Cash Flow | $1.6B | $1.0B | $1.6B |
CFFO/NI consistently above 2.0x reflects strong cash conversion typical of E&P companies with large DD&A charges. The company turned in line 199.7 net wells in 2025 and plans 174-208 net wells in 2026, with "approximately 68 percent of capital expenditures invested in the Permian Basin, 16 percent in the Marcellus Shale, eight percent in the Anadarko Basin."
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 46 days, -9 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR +18.0% vs revenue +40.1% |
| A3 | Revenue vs CFFO | PASS | Revenue +40.1%, CFFO +43.9% |
Revenue grew 40% while AR grew only 18% -- a clean signal. CFFO growth (+44%) actually exceeded revenue growth, confirming cash quality of the new revenue. DSO compression from 55 to 46 days further validates improved collections.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +4.3% vs COGS +29.0% |
| B2 | CapEx vs Revenue | PASS | CapEx +34.8% vs revenue +40.1% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 10.2% |
| B4 | Gross Margin | PASS | 41.5%, +5.0pp YoY |
Gross margin improvement from 36.6% to 41.5% reflects natural gas price recovery (Henry Hub averaged $3.43/MMBtu vs $2.27 in 2024) and the addition of higher-margin Permian oil production from FME/Avant.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 2.34 |
| C2 | Free Cash Flow | PASS | FCF $1.6B, FCF/NI = 0.95 |
| C3 | Accruals Ratio | PASS | -9.5%, clean |
| C4 | Cash vs Debt | FAIL* | Cash $114M covers only 3% of $4.0B debt |
C4 context: Cash dropped from $2.0B to $114M because Coterra spent $3.2B in cash on the FME and Avant acquisitions in January 2025. However, Debt/EBITDA is only 0.8x, interest coverage is 11.1x, and the company has substantial undrawn revolving credit capacity. Per the filing, the company also refinanced its senior notes: "lower proceeds from the issuance of debt due to the funding of our term loan."
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | Zero goodwill |
| D2 | Leverage | PASS | Debt/EBITDA = 0.8x |
| D3 | Soft Asset Growth | PASS | Other assets -11.8% vs revenue +40.1% |
| D4 | Asset Impairment | N/A | No write-off data |
Zero goodwill despite $4B in 2025 acquisitions. Total equity increased from $13.1B to $14.8B. The balance sheet is clean.
Acquisition & Manipulation
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | No goodwill |
| F1 | Beneish M-Score | PASS | -2.80 (below -2.22) |
SGI (Sales Growth Index) of 1.401 is elevated due to the 40% revenue surge from acquisitions and gas prices, but the M-Score at -2.80 remains comfortably below the manipulation threshold.
Key Risks from the 10-K
1. Devon Merger Uncertainty
The February 2026 merger with Devon introduces execution risk. Per the filing: "The Merger is expected to close in the second quarter of 2026, subject to stockholder approvals and other customary closing conditions." The filing warns: "the determination, payment and amounts of dividends, if any, distributed to our stockholders following completion of the Merger will be uncertain."
Pre-closing covenants require Coterra to "conduct their respective businesses in the ordinary course consistent with past practice and to refrain from taking certain specified actions without the consent of the other party." This limits operational flexibility during the pendency period.
2. Marcellus Concentration -- 49% of Reserves in One Field
Per the filing: "our interests in the Dimock field, which is primarily located in Susquehanna County, Pennsylvania in the Marcellus Shale account for approximately 49 percent of our total proved reserves." This extreme geographic and formation concentration creates vulnerability to regional price basis differentials, regulatory changes specific to Pennsylvania, and infrastructure constraints.
3. Natural Gas Price Volatility
Marcellus-sourced natural gas (69% of total gas production) is highly sensitive to basis differentials and regional oversupply. The filing notes firm sales commitments of 644 Bcf in 2026 declining to 457 Bcf in 2030. While these provide revenue stability, they also limit upside from price spikes.
4. Regulatory and Permitting Risk
The filing discloses derivative financial instruments used "to manage price risk associated with our production." However, permitting delays in the Permian Basin (particularly New Mexico) and potential federal land drilling restrictions could impact development plans.
Summary
Grade: B. Coterra passes all substantive screening checks with strong cash flow quality and a clean balance sheet.
The sole fail is the cash-to-debt ratio, driven by $3.2B in acquisition spending that depleted cash from $2.0B to $114M. With Debt/EBITDA at 0.8x, interest coverage at 11.1x, and FCF of $1.6B, this is temporary. CFFO/NI consistently above 2.0x, zero goodwill, and an M-Score of -2.80 confirm clean financial statements.
The dominant risk is the pending Devon merger. If completed, Coterra shareholders receive 0.70 Devon shares per CTRA share, creating a combined company with dominant Permian and Appalachian positions. If the merger fails, Coterra remains a well-capitalized standalone E&P with strong cash generation.
**Disclaimer**: This report is based on Coterra Energy's FY2025 10-K filed with SEC EDGAR on February 27, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (Unqualified opinion)
Fiscal year ended: December 31, 2025