Cimarex Energy (XEC) Update - Jan 5

[dan_s]

I have updated my forecast/valuation model for Cimarex and it will be posted to the EPG website later today.
XEC is trading at the time of this post at $41.64
During December, 7 energy sector analysts updated their models and price targets for the company. Their price targets range from $40.00 to $54.00.
I am increasing my valuation by $2 to $52, primarily because of higher realized commodity prices for 2021 and 2022.

I am expecting the Company's production to be down from Q3 to Q4, stabilize in 1H 2021 then rise steadily in 2H 2021 and 2022 as they add a few more rigs and complete a lot of their DUC wells.

Cimarex will generate over $300 million of free cash flow from operations in 2020 and they should double FCF in 2021, despite having ~45% of their 2021 oil hedged in the low $40's in 2021. Higher realized natural gas and NGL prices should give their revenues a nice boost. Production mix in 2021 s/b approximately 41% natural gas, 31% NGLs and 28% crude oil.

Cimarex will have over 40 high-rate horizontal DUC wells that can be completed quickly at minimal cost should the Company decide to ramp up production. My guess is that they will do that starting in Q2 2021 when weather improves (lowering completion costs) and oil prices are rising. My 2021 production forecast of 250,000 Boepd is probably too low considering my current outlook for oil & gas prices this year.

Cimarex has high quality leasehold, a strong balance sheet and lots of liquidity. It is a PRIME TAKEOVER TARGET because of its asset base and its people. In their December update, Stifel estimates the fair value takeover price, which they call "4P NAV" at $67.35/share.

The only negative that I see today is their oil hedges for 2021.

[dan_s]

Cimarex Energy (XEC) is now one of Goldman Sachs Top Picks.

Note below from the Goldman Sachs Global Energy Conference, held January 6-7:

XEC: Return of cash beyond debt paydown in the near-term is underappreciated.
We came away from our conference with further conviction in our view that XEC is
uniquely set-up for a combination of high FCF yield and low leverage. Specifically, we
believe XEC is differentiated in its more near-term ability to return cash to shareholders
in forms beyond debt paydown. During its panel, XEC’s commentary supported our
view, noting that it expects to build sufficient cash by 1H22 (assuming current strip
prices, below our more bullish commodity price outlook) to address its $750 mn 2024
debt maturity. After addressing its upcoming maturity, XEC noted it will provide greater
color around use of cash, but that it is considering both variable dividends and share
buybacks (management indicated it is leaning toward dividends over buybacks). We
expect XEC to deliver a 17% FCF yield on average in 2021E/22E at a 0.5x average net
debt/EBITDA and believe execution of its plan can garner greater investor credit to
shares.

Goldman Sachs is now using Brent oil prices of $55/bbl for 2021 and $65/bbl for 2022. This matches up to what I'm now using for WTI in my forecast.