Cimarex Energy (XEC) Update - July 24
Posted: Tue Jul 24, 2018 8:29 am
Comments below are from the Tudor Pickering Hold (TPH) Morning Note
XEC Q2'18 Thoughts: See higher Q2 capex on timing though FY biased lower; TPHe oil beats begin H2'18
Sector: NAm E&P | Ticker: XEC | Recommendation: BUY | Target: $175 | Close: $96.76 < Compares to my valuation of $160/share. - Dan
TPHe Q2 production of 205mboepd (67mbpd oil) ~in-line vs. guidance of 200-209mboepd with flat q/q oil (Q1 65mbpd) and the Street's 206.5 (66), as light TIL activity lessens upside potential. Despite the lack of new wells, spending in Q2 should come in relatively heavy (TPHe $460MM) as D&C will be TPHe ~similarly weighted in Q2/Q3, when the bulk of infill project spend is set to occur per mgmt. commentary, with Street's $422MM estimate pushing more capex into Q3. While a high Q2 print could incite concerns of FY overspend, we expect management commentary to signal the opposite as lower inflation and in-basin sand usage should bias capex towards the low end of the $1.68-1.79B guide (incl. midstream). Recent conversations on the quarter also revolved around (i) Q3 guide / execution risk given outsized TIL schedule (40% of FY wells) and (ii) timing of TPHe oil growth outperformance as the drill bit shifts towards oilier targets. On the former, we think recent guidance of a heavily Q4-weighted growth profile bakes in appropriate risking and on the latter, we model Q3'18 / Q4'18 oil production of 72 / 84mbpd, +3% / +7% vs. the Street and at the high-end of FY / Q4 oil guidance as oily NM activity continues to take share away from gassier targets.
XEC Stock Thoughts: Near-term pricing headwinds remain, but name offers torque to the Permian re-rate thesis
Sector: NAm E&P | Ticker: XEC | Recommendation: BUY | Target: $175 | Close: $96.76
Over the medium-term, uncertainty around the ultimate impact of Permian oil/gas differentials on XEC's cash flow / activity could drive continued equity volatility. However, for investors able to withstand H2'18-H1'19 turbulence, XEC provides torque to the coming Permian re-rate as investor attention turns to a much rosier 2020 on a combination of (i) an overall sea change in Permian realizations from worst to top-tier and (ii) TPHe outsized XEC oil growth vs. consensus over the next few years on greater New Mexico capital allocation (TPHe 27% CAGR ‘18-20 vs. Street 20%). Strategically, as XEC's firms sales contracts provide flow assurance through 2019 but not pricing protection, we don't expect to see an outsized capital outlay in 2019 if weak in-basin pricing persists. Interestingly, this could free up cash for buybacks (TPHe ~$800MM post Ward sale -- almost 10% of mkt cap), though re-investment is likely a higher priority. Near-term we see a dramatic 1.5x y/y compression in multiples in 2020 to 3.5x at strip as the Permian debottlenecks. Longer-term, we model the company generating FCF post-2021 with an average yield of 12% through 2025 on a solid ~15% oil CAGR (13% boe).
XEC Q2'18 Thoughts: See higher Q2 capex on timing though FY biased lower; TPHe oil beats begin H2'18
Sector: NAm E&P | Ticker: XEC | Recommendation: BUY | Target: $175 | Close: $96.76 < Compares to my valuation of $160/share. - Dan
TPHe Q2 production of 205mboepd (67mbpd oil) ~in-line vs. guidance of 200-209mboepd with flat q/q oil (Q1 65mbpd) and the Street's 206.5 (66), as light TIL activity lessens upside potential. Despite the lack of new wells, spending in Q2 should come in relatively heavy (TPHe $460MM) as D&C will be TPHe ~similarly weighted in Q2/Q3, when the bulk of infill project spend is set to occur per mgmt. commentary, with Street's $422MM estimate pushing more capex into Q3. While a high Q2 print could incite concerns of FY overspend, we expect management commentary to signal the opposite as lower inflation and in-basin sand usage should bias capex towards the low end of the $1.68-1.79B guide (incl. midstream). Recent conversations on the quarter also revolved around (i) Q3 guide / execution risk given outsized TIL schedule (40% of FY wells) and (ii) timing of TPHe oil growth outperformance as the drill bit shifts towards oilier targets. On the former, we think recent guidance of a heavily Q4-weighted growth profile bakes in appropriate risking and on the latter, we model Q3'18 / Q4'18 oil production of 72 / 84mbpd, +3% / +7% vs. the Street and at the high-end of FY / Q4 oil guidance as oily NM activity continues to take share away from gassier targets.
XEC Stock Thoughts: Near-term pricing headwinds remain, but name offers torque to the Permian re-rate thesis
Sector: NAm E&P | Ticker: XEC | Recommendation: BUY | Target: $175 | Close: $96.76
Over the medium-term, uncertainty around the ultimate impact of Permian oil/gas differentials on XEC's cash flow / activity could drive continued equity volatility. However, for investors able to withstand H2'18-H1'19 turbulence, XEC provides torque to the coming Permian re-rate as investor attention turns to a much rosier 2020 on a combination of (i) an overall sea change in Permian realizations from worst to top-tier and (ii) TPHe outsized XEC oil growth vs. consensus over the next few years on greater New Mexico capital allocation (TPHe 27% CAGR ‘18-20 vs. Street 20%). Strategically, as XEC's firms sales contracts provide flow assurance through 2019 but not pricing protection, we don't expect to see an outsized capital outlay in 2019 if weak in-basin pricing persists. Interestingly, this could free up cash for buybacks (TPHe ~$800MM post Ward sale -- almost 10% of mkt cap), though re-investment is likely a higher priority. Near-term we see a dramatic 1.5x y/y compression in multiples in 2020 to 3.5x at strip as the Permian debottlenecks. Longer-term, we model the company generating FCF post-2021 with an average yield of 12% through 2025 on a solid ~15% oil CAGR (13% boe).