Cimarex Energy (XEC) Update - Sept 14

[dan_s]

From the Tudor Pickering Holt "Morning Note". Their price target of $148 compares to my valuation of $150.

XEC Stock Thoughts

Looking for near-term oil execution to drive Permian re-rate thesis

Sector: Nam E&P | Ticker: XEC | Recommendation: BUY | Target: $148 | Close: $89.37

Near-term, we see Q3'18 production slightly ahead of expectations at 215mboepd (64mbpd oil) vs. Street 213 (63 oil) / guidance of 206-215 (61.5-64.5) and are watchful for results in the southern portion of the N. Delaware Basin to drive a meaningful shift in the corporate oil mix over time. A H2'18 heavy TIL schedule (~70% of FY'18) is expected to drive a strong exit rate (TPHe Q4'18 78mbpd oil vs. Street 76), while FY'18 capex is likely at the low-end of the $1.68-1.79B budget (TPHe $1.67B/Street $1.64B). However, Permian oil differentials and Waha (ngas price) weakness could be near-term headwinds and we'd be looking for execution on oil before seeing a greater shift in sentiment on the name behind our Permian re-rate thesis. Longer-term, valuation remains attractive at current levels (66% upside to NAV, 3.3x 2020 EV/EBITDA at strip) with the ability to generate a 5-year 13% CAGR and a 9% FCF yield, on average, in '21-'25 and inventory through ~2030 on our accelerated activity ramp.

TIL = Turn in Line (i.e. complete the well to sales)

XEC is very profitable and it is trading at less than 6X operating cash flow per share.