Cimarex Energy (XEC) - Update

[dan_s]

I have been holding off on updating the profile for Cimarex until I saw what Wall Street analysts thought of their Q4 results. More important was the company's guidance of slower growth because they were committing to "living within cash flow", something that I thought Wall Street wanted these companies to do.

XEC is down ~20% YTD and I think this is the time to add this stock as one of your Core Holding.

Cimarex has been in the Sweet 16 for over five years. They have a track record of under-promising and over-delivering when it comes to production guidance. In 2017, production was up 18.5% year-over-year. At this point a year ago, their guidance for 2017 was production growth of 12% YOY, so they beat their own guidance by more than 50%. Their production guidance for 2018 is 11% to 16% and I am using the midpoint in my forecast model. I think it is a good bet that actual production comes in at the high end of their guidance.

Since the Q4 earning release 11 ranked analysts (not exactly sure what "ranked" means) have updated their forecast/valuation models and submitted them to Reuters / First Call. Their valuations range from $98 to $185 per share, which is quite a wide gap for a company of this size and quality. The average of the eleven analysts is $132. I do believe that the lowest valuation is based on much lower commodity prices than we have today. Seven of them rate it a BUY and four of them rate it a HOLD. The "HOLDs" are obviously because they believe oil prices are going to pull back. Remember that Wall Street analysts must use the commodity price decks of their firms to base their valuations on. That is why we have such wide gaps in the valuations for most of the upstream companies.

XEC is trading at $94.70 today. First quarter results are going to be very good and they have steady production growth locked in.

Cimarex is a super conservative company with a strong balance sheet and lots of running room in the Permian Basin and in SCOOP/STACK, the two hottest oil plays on Earth.

My updated forecast/valuation model has been posted to the EPG website. My valuation is $160/share (based on $60/bbl WTI and $2.75/MMBtu HH gas).

[dan_s]

I just finished reviewing the updated profile on Cimarex Energy that was prepared by one of our SMU MBA Graduates. Scott graduated two years ago and he has a "real job", but he still helps me with profile updates each month. We agree that XEC is trading at a deep discount to its true value.

We will send out the updated profile Saturday morning and it should be posted to the EPG website tonight (3/23).

Cimarex has two core areas ~2/3 Permian Basin and ~1/3 Mid-Continent (Oklahoma STACK). It is trading at less than 6X operating cash flow per share, pays a small quarterly dividend and has a super strong balance sheet & proven reserve base. Mid-teens % annual production growth is locked in for years and growth s/b funded entirely with cash flows and cash on hand today.