Cimarex Energy (XEC)
Posted: Wed Jul 20, 2011 1:59 pm
Cimarex Energy Co. (NYSE: XEC) is generating strong drill-bit driven growth in production and reserves. I’m now forecasting 5% production growth in 2011 but that may prove to be conservative. Production growth will accelerate into year-end and I’m expecting more than 20% production growth in 2012.
Note that both my 2011 and 2012 earnings per share and cash flow per share forecasts are in-line with the First Call consensus. My 2012 EPS forecast is now 18% below the high end of the First Call forecast range, so I believe there is significant upside to my Fair Value estimate of $135/share.
There are two primary reasons Cimarex was selected for the Sweet 16.
• A rock solid Balance Sheet. As of March 31 the Company has positive working capital, operating cash flow in excess of capital expenditures and only $400 million in long-term debt – very low debt for a company with almost $8 Billion in market cap.
• Cimarex is focused on increasing their oil production. For 2011, I’m now expecting oil and natural gas liquids to be 47% of their production and generate approximately 70% of the Company’s revenues.
Cimarex reported 1st quarter net income of $118.2 million, or $1.37 per diluted share. Cash flow per share came in at $3.08/share, beating my forecast. Based on my forecast, XEC is on-track to generate approximately $15/share in operating cash flow this year and $19/share in 2012.
The Company has an 11% Debt/Capital ratio (as of 3-31-2011) and is funding growth almost entirely from operational cash flows. Based on their 23% year-over-year increase in proven reserves and the continuing increase in liquids production, an even higher multiple than 8X CFPS is justified, but I will stay “conservative” for now.
Cimarex has three Core Areas of operations.
• Mid-Continent (54.6% of proven reserves), where they hold over 120,000 net acres in western Oklahoma’s Cana Woodford Shale Play. Production from this area is high btu natural gas (that sells at a premium to NYMEX) with very high liquids content. Cimarex believes their acreage holds up to 3.0 Tcfe of recoverable reserves (~30% liquids). They now have nine operated rigs drilling in the play.
• Permian Basin (29.8% of proven reserves), where Cimarex holds over 448,000 net acres and growing. This is the primary focus for 2011 where most of their production growth is coming from. During the first quarter of 2011, they drilled and completed 19.7 net wells and had another 18.1 net wells in various stages of completion. Cimarex will be spending $750 million in the Permian this year with a lot of attention on the new Bone Spring play in SE New Mexico. They are currently running 13 operated rigs in the basin with plans to take it up to 15 rigs this summer.
• Gulf Coast (4.4% of proven reserves) (SE Texas): Cimarex is focused on Yegua and Cook Mountain prospects generated from a 3D seismic program. The wells drilled in this area typically come on at high production rates but have steep declines. They generate strong return on investment but don’t add much too long-term reserves. Cimarex has one rig drilling in this area but may take it up to three rigs this summer.
Cimarex 2nd quarter production should be up just slightly from the 1st quarter due to weather related issues, primarily in the Permian Basin. With higher realized commodity prices, XEC should report 2nd quarter earnings per share in-line with the First Call estimate. Beyond Q2, the company’s production will be ramping up sharply as more rigs are deployed and they complete some high rate wells that are now waiting on frac equipment.
Note that both my 2011 and 2012 earnings per share and cash flow per share forecasts are in-line with the First Call consensus. My 2012 EPS forecast is now 18% below the high end of the First Call forecast range, so I believe there is significant upside to my Fair Value estimate of $135/share.
There are two primary reasons Cimarex was selected for the Sweet 16.
• A rock solid Balance Sheet. As of March 31 the Company has positive working capital, operating cash flow in excess of capital expenditures and only $400 million in long-term debt – very low debt for a company with almost $8 Billion in market cap.
• Cimarex is focused on increasing their oil production. For 2011, I’m now expecting oil and natural gas liquids to be 47% of their production and generate approximately 70% of the Company’s revenues.
Cimarex reported 1st quarter net income of $118.2 million, or $1.37 per diluted share. Cash flow per share came in at $3.08/share, beating my forecast. Based on my forecast, XEC is on-track to generate approximately $15/share in operating cash flow this year and $19/share in 2012.
The Company has an 11% Debt/Capital ratio (as of 3-31-2011) and is funding growth almost entirely from operational cash flows. Based on their 23% year-over-year increase in proven reserves and the continuing increase in liquids production, an even higher multiple than 8X CFPS is justified, but I will stay “conservative” for now.
Cimarex has three Core Areas of operations.
• Mid-Continent (54.6% of proven reserves), where they hold over 120,000 net acres in western Oklahoma’s Cana Woodford Shale Play. Production from this area is high btu natural gas (that sells at a premium to NYMEX) with very high liquids content. Cimarex believes their acreage holds up to 3.0 Tcfe of recoverable reserves (~30% liquids). They now have nine operated rigs drilling in the play.
• Permian Basin (29.8% of proven reserves), where Cimarex holds over 448,000 net acres and growing. This is the primary focus for 2011 where most of their production growth is coming from. During the first quarter of 2011, they drilled and completed 19.7 net wells and had another 18.1 net wells in various stages of completion. Cimarex will be spending $750 million in the Permian this year with a lot of attention on the new Bone Spring play in SE New Mexico. They are currently running 13 operated rigs in the basin with plans to take it up to 15 rigs this summer.
• Gulf Coast (4.4% of proven reserves) (SE Texas): Cimarex is focused on Yegua and Cook Mountain prospects generated from a 3D seismic program. The wells drilled in this area typically come on at high production rates but have steep declines. They generate strong return on investment but don’t add much too long-term reserves. Cimarex has one rig drilling in this area but may take it up to three rigs this summer.
Cimarex 2nd quarter production should be up just slightly from the 1st quarter due to weather related issues, primarily in the Permian Basin. With higher realized commodity prices, XEC should report 2nd quarter earnings per share in-line with the First Call estimate. Beyond Q2, the company’s production will be ramping up sharply as more rigs are deployed and they complete some high rate wells that are now waiting on frac equipment.