Cimarex Merger with REN Update - Nov 20

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dan_s
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Cimarex Merger with REN Update - Nov 20

Post by dan_s »

I spent a couple hours this morning looking at Resolute Energy (REN) and how the merger will impact Cimarex.

1. It should be accretive to earnings and cash flow from operations in 2019.
2. My SWAG is that it will increase Cimarex's 2019 production by approximately 36,500 Boepd to 292,000 Boepd.
REN's Q3 production was 34,752 Boepd (60,012 Mcfpd, 15,739 BOPD, 9011 bbls of NGLs per day)
3. After the expense of closing the transaction, Cimarex should be able to reduce REN's G&A by at least 50% and lower the interest expense on their debt.
4. Post-Merger, Cimarex's production mix in 2019 should be approximately 39% natural gas, 34% crude oil and 27% NGLs.
5. Post-Merger, Cimarex should generate over $2 Billion of cash flow from operations in 2019, which compares to their D&C budget of $1.7 Billion in 2018. In other words, soon after the merger, Cimarex should be generating a lot of FREE CASH FLOW FROM OPERATIONS.

REN is a pure play on the Delaware Basin and their acreage appears to be in the Tier One area; an area where Cimarex already has extensive operations. Cimarex has a first class technical staff and I'm sure they did a good job looking at the resource potential of the acreage.

I have posted my updated forecast model for Cimarex to the EPG website.
> Note that there are two columns for 2019; one without the merger and one assuming the merger closes on January 1st. < It probably won't close on Jan 1, but with a merger it really does not matter since the Buyer gets all of the benefit of pre-merger production anyway.
> Note that I have added a significant amount of "padding" to Other Expenses to cover the transaction closing costs.
> Note the commodity prices used in the 2019 forecast. There is considerable upside for XEC if natural gas prices firm up to $3.00.
> The share count used in the post-merger is a bit of a SWAG because the current REN shareholders have an option to take all cash if they wish. IMO they would be wise to take all stock.
Dan Steffens
Energy Prospectus Group
dan_s
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Re: Cimarex Merger with REN Update - Nov 20

Post by dan_s »

You can view any of the forecast/valuation models on the EPG website, but I recommend downloading them to Excel to get a clear view. Then you can go down the forecast line-by-line to see how I calculate revenues and expenses. I have a lot of "padding" built into the "Post Merger Forecast" (Column T).

Plus once you download the forecast to Excel, you can play with the production and commodity price assumptions at the bottom and the spreadsheet will automatically update (it is macro driven). Learning to use the forecast models on the EPG website can be a valuable skill.
Dan Steffens
Energy Prospectus Group
ChuckGeb
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Re: Cimarex Merger with REN Update - Nov 20

Post by ChuckGeb »

Dan,

My understanding of the transaction is that a REN shareholder’s election of cash or stock is subject to proration to maintain a balance of 60/40 stock and cash ratio.

It would assume the shares to be issued should be definitive.
dan_s
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Re: Cimarex Merger with REN Update - Nov 20

Post by dan_s »

You can see the post-merger share count that I am assuming in Column T Row 46. It is probably too high, but I am trying to be very conservative in all of my assumptions and I have a lot of "padding" in the forecast.

Also, note that my valuation of XEC is based on a 9X multiple of operating cash flow. The other large-cap Permian companies are valued at higher multiples.
Dan Steffens
Energy Prospectus Group
bobs
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Re: Cimarex Merger with REN Update - Nov 20

Post by bobs »

XEC didn't participate in the recovery on Wednesday and is that perhaps because the REN shareholders get can have a certain amount of cash for their shares which were a lot higher at the time of the deal so that the XEC recent price drop makes the cash a much better deal than taking shares?
Too complicated for me but might explain why XEC didn't move up like the other E & Ps.
dan_s
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Re: Cimarex Merger with REN Update - Nov 20

Post by dan_s »

Companies that are "in transition" like this tend to have less buying interest because figuring out deals of this size takes some work. Most investors and most analysts are lazy and don't want to do the work. Just trust that Cimarex did a lot of work before they decided to buy REN.

I doubt that the mix of cash or stock that REN shareholders will take will change much, nor will it have much impact on my forecast/valuation model. If the cash portion goes up, the share count (dilution) goes down.
Dan Steffens
Energy Prospectus Group
jb2257
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Re: Cimarex Merger with REN Update - Nov 20

Post by jb2257 »

How do you invest in any of these stocks when the price of oil drops 7% in one day?
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Cimarex Merger with REN Update - Nov 20

Post by dan_s »

Each of you needs to decide where oil & gas prices are heading and how it will impact the companies in this sector.

Keep in mind:
1. This world runs on oil and there is nothing on the horizon that will change that. The oil industry will survive, simply because it must. These companies have survived much lower oil prices.
2. Hedge funds and speculators determine the near-term oil price. Supply / Demand fundamentals do determine the long-term price.
3. Hedge funds went long oil when it was going up and they set stop loss orders tight. When oil start coming down it caused a "cascade" of sell orders.
4. All of the Sweet 16 can and have made money at today's oil, gas and NGL prices.
5. OPEC+ meets on Dec 6 and they will (99% sure) cut production. They have no choice since their economies are highly dependent on revenues from oil sales.
6. Holiday trading is always exaggerated. Today there a few if any buyers, so there is nothing to stop the automated sell orders.
7. Check each company's hedges carefully.
Dan Steffens
Energy Prospectus Group
bobs
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Re: Cimarex Merger with REN Update - Nov 20

Post by bobs »

Of the small caps which are oil hedged alot and which arent if that is easy for you to let us know since we can determine that info easily for the Sweet 16 but not the small caps......thanks
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Cimarex Merger with REN Update - Nov 20

Post by dan_s »

Lonestar (LONE) has over 95% of their Q4 2018 oil hedged at $56.66/bbl and they sell their oil into the LLS market, so they keep the $5/bbl premium on all of their Q4 oil.

Under the Small-Cap tab you can find undated forecast/valuation models for each one of the small-caps. At the bottom of each spreadsheet is a table that shows how much they have hedged.
Dan Steffens
Energy Prospectus Group
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