Cimarex Energy Co. (NYSE: XEC) production was down slightly in the 2nd quarter and will be up just slightly in the 3rd quarter, primarily due to their high decline rate gas wells in SE Texas. Production growth should accelerate into year-end and I’m expecting more than 7% production growth from Q2 to Q4.
As we all know, the market turned bearish after S&P downgraded the U.S. debt. August was not a good time to report a decline in production. In my opinion, investors have over-reacted to XEC’s slight decline in production, giving us an opportunity to build a position in this rock solid company at a bargain price.
Although production growth this year on a barrel of oil equivalent (“boe”) basis is modest, the production mix is shifting rapidly to more liquids. My current forecast is based on a year-over-year decline in natural gas production of approximately 16%, offset by a year-over-year increase in liquids production (oil, condensate and NGLs) of approximately 20%. Since Cimarex sells their liquids at better than 3X the price of their gas on a boe basis, revenues are accelerating.
There are two primary reasons Cimarex was selected for the Sweet 16.
• A rock solid Balance Sheet. As of June 30, the Company has only $350 million in long-term debt – very low debt for a company with almost $5.5 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. Natural gas production should flatten out in 2012 but liquids production should accelerate.
Cimarex reported 2nd quarter net income of $166.7 million, or $1.94 per diluted share. Cash flow per share came in at $4.34/share, beating my forecast. Based on my forecast, XEC is on-track to generate approximately $15/share in operating cash flow this year and $18/share in 2012.
My Fair Value estimate for Cimarex is $130/share (compared to the current First Call 12-month target price of $115/share).
The Company is funding growth almost entirely from operational cash flows and non-core asset sales. Based on their 23% year-over-year increase in proven reserves for 2010 and the continuing increase in liquids production, an even higher multiple than 8X CFPS is justified, but I will stay “conservative” for now.
XEC - Buy the dips
XEC - Buy the dips
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: XEC - Buy the dips
August 31: "Dahlman Rose believes Q2 will be the low point for Cimarex Energy (XEC) and that its growth profile will begin to improve while negative sentiment shifts. The firm views valuation as attractive and reiterates its Buy rating and $90 price target."
My Fair Value estimate for XEC is $130, so I strongly agree with the statement above. It is the change in their production mix that investors should focus on. - Dan
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Cimarex Energy Co. (NYSE: XEC) production was down slightly in the 2nd quarter and will be up just slightly in the 3rd quarter, primarily due to their high decline rate gas wells in SE Texas. Production growth should accelerate into year-end and I’m expecting more than 7% production growth from Q2 to Q4.
As we all know, the market turned bearish after S&P downgraded the U.S. debt. August was not a good time to report a decline in production. In my opinion, investors have over-reacted to XEC’s slight decline in production, giving us an opportunity to build a position in this rock solid company at a bargain price.
Although production growth this year on a barrel of oil equivalent (“boe”) basis is modest, the production mix is shifting rapidly to more liquids. My current forecast is based on a year-over-year decline in natural gas production of approximately 16%, offset by a year-over-year increase in liquids production (oil, condensate and NGLs) of approximately 20%. Since Cimarex sells their liquids at better than 3X the price of their gas on a boe basis, revenues are accelerating.
There are two primary reasons Cimarex was selected for the Sweet 16.
• A rock solid Balance Sheet. As of June 30, the Company has only $350 million in long-term debt – very low debt for a company with almost $5.5 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. Natural gas production should flatten out in 2012 but liquids production should accelerate.
Cimarex reported 2nd quarter net income of $166.7 million, or $1.94 per diluted share. Cash flow per share came in at $4.34/share, beating my forecast. Based on my forecast, XEC is on-track to generate approximately $15/share in operating cash flow this year and $18/share in 2012.
My Fair Value estimate for Cimarex is $130/share (compared to the current First Call 12-month target price of $115/share).
The Company is funding growth almost entirely from operational cash flows and non-core asset sales. Based on their 23% year-over-year increase in proven reserves for 2010 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 eleven 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 half of this year, they drilled and completed 56 net wells and had another 8 more 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 14 operated rigs in the basin with plans to add another rig for the 4th quarter.
• 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 two rigs drilling in this area but may take it up to three rigs this summer.
Cimarex 3rd quarter production should be up slightly from the 2nd quarter due to catching up on their well completions, primarily in the Permian Basin. With lower realized commodity prices, XEC should report 3rd quarter earnings per share slightly below the current First Call estimate. Beyond Q3, 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.
My Fair Value estimate for XEC is $130, so I strongly agree with the statement above. It is the change in their production mix that investors should focus on. - Dan
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Cimarex Energy Co. (NYSE: XEC) production was down slightly in the 2nd quarter and will be up just slightly in the 3rd quarter, primarily due to their high decline rate gas wells in SE Texas. Production growth should accelerate into year-end and I’m expecting more than 7% production growth from Q2 to Q4.
As we all know, the market turned bearish after S&P downgraded the U.S. debt. August was not a good time to report a decline in production. In my opinion, investors have over-reacted to XEC’s slight decline in production, giving us an opportunity to build a position in this rock solid company at a bargain price.
Although production growth this year on a barrel of oil equivalent (“boe”) basis is modest, the production mix is shifting rapidly to more liquids. My current forecast is based on a year-over-year decline in natural gas production of approximately 16%, offset by a year-over-year increase in liquids production (oil, condensate and NGLs) of approximately 20%. Since Cimarex sells their liquids at better than 3X the price of their gas on a boe basis, revenues are accelerating.
There are two primary reasons Cimarex was selected for the Sweet 16.
• A rock solid Balance Sheet. As of June 30, the Company has only $350 million in long-term debt – very low debt for a company with almost $5.5 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. Natural gas production should flatten out in 2012 but liquids production should accelerate.
Cimarex reported 2nd quarter net income of $166.7 million, or $1.94 per diluted share. Cash flow per share came in at $4.34/share, beating my forecast. Based on my forecast, XEC is on-track to generate approximately $15/share in operating cash flow this year and $18/share in 2012.
My Fair Value estimate for Cimarex is $130/share (compared to the current First Call 12-month target price of $115/share).
The Company is funding growth almost entirely from operational cash flows and non-core asset sales. Based on their 23% year-over-year increase in proven reserves for 2010 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 eleven 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 half of this year, they drilled and completed 56 net wells and had another 8 more 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 14 operated rigs in the basin with plans to add another rig for the 4th quarter.
• 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 two rigs drilling in this area but may take it up to three rigs this summer.
Cimarex 3rd quarter production should be up slightly from the 2nd quarter due to catching up on their well completions, primarily in the Permian Basin. With lower realized commodity prices, XEC should report 3rd quarter earnings per share slightly below the current First Call estimate. Beyond Q3, 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.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group