Cimarex Energy (XEC) Q3 - Nov 5

[dan_s]

Cimarex Energy Co. (XEC, $25.78, Buy; Target $54.00)
FCF Tops Expectations as 3Q Beats Across-the-Board - Michael S. Scialla at Stifel

- We view the release as positive. The positives include: i) 3Q CFPS and pre-dividend FCF were 21% and 40% above consensus while capex was slightly below; ii) well costs continued to trend lower; iii) XEC reiterated its plan to retire $750MM of 2024 notes with FCF based on $35 WTI. The negatives include: i) 4Q20 oil production guidance was 4% below consensus. In summary, 3Q production declined modestly despite almost no new wells coming online while FCF exceeded expectations. The company's 4-year plan to generate modest growth, improve the balance sheet, and retire its only debt maturity with post-dividend FCF, remains intact.

My valuation will be going up. - Dan

[dan_s]

CIMAREX REPORTS THIRD QUARTER 2020 RESULTS November 04, 2020

Generated Net Cash Provided by Operating Activities of $259 million < Compares to my forecast of $202.4 million operating cash flow for Q3.
Generated $139 million of free cash flow after dividend (Non-GAAP)
Invested $83 million in the quarter
Oil production averaged 71,600 barrels per day < Compares to my forecast of 70,000 BOPD for Q3.

Cimarex Energy Co. (NYSE: XEC) today reported a third quarter 2020 net loss of $292.7 million, or $2.94 per share, compared to net income of $123.8 million, or $1.21 per share, in the same period a year ago. Third quarter results were negatively impacted by non-cash charges related to the impairment of oil and gas properties. Third quarter adjusted net income (non-GAAP) was $52.4 million, or $0.51 per share, compared to third quarter 2019 adjusted net income (non-GAAP) of $96.0 million, or $0.94 per share. < Adjusted Net Income compares to my forecast of $23.0 million, $0.23 per share.

Net cash provided by operating activities was $259.2 million in the third quarter of 2020 compared to $320.1 million in the same period a year ago. Adjusted cash flow from operations (non-GAAP) was $236.7 million in the third quarter of 2020 compared to $360.7 million in the third quarter a year ago.

Oil production averaged 71.6 thousand barrels (MBbls) per day. Total company production volumes for the quarter averaged 249.4 thousand barrels of oil equivalent (MBOE) per day.

Realized oil prices averaged $37.94 per barrel, up 94 percent from $19.57 in the previous quarter but down 28 percent from the $52.71 per barrel received in the third quarter of 2019. Realized natural gas prices averaged $1.14 per thousand cubic feet (Mcf), up 25 percent sequentially from $0.91 per Mcf and up 30 percent from the third quarter 2019 average of $0.88 per Mcf. NGL prices averaged $10.89 per barrel, up 45 percent from $7.52 per barrel in the second quarter of 2020 and up one percent from the $10.80 barrel received in the third quarter of 2019.

Cimarex's realized oil price was a negative differential to WTI of $2.99 per barrel in the quarter down from $8.28 per barrel in the previous quarter, with a negative oil price differential in the Permian of $2.71 per barrel in the third quarter, down sequentially from $8.12 per barrel. The company realized a negative differential to Henry Hub on its Permian natural gas production of $1.15 per Mcf in the third quarter of 2020 compared to $1.83 per Mcf in the third quarter of 2019 and $1.09 in the second quarter of 2020. In the Mid-Continent region, the company's average negative differential to Henry Hub was $0.31 per Mcf versus $0.66 per Mcf in the third quarter of 2019 and $0.31 per Mcf in the second quarter of 2020. < The differentials for natural gas should come way down in West Texas this winter.

Cimarex invested a total of $83 million during the quarter, of which $52 million was attributable to drilling and completion activities and $3 million to saltwater disposal assets. Third quarter investments were funded with cash flow from operating activities. Total debt at September 30, 2020 consisted of $2.0 billion of long-term notes, with no debt maturities until 2024. Cimarex had no borrowings under its revolving credit facility and a cash balance of $273 million at quarter end.

The company has reduced staff by 20 percent year to date through a combination of an Early Retirement Program (ERIP), further staff reductions completed in the third quarter, and attrition. Cimarex has incurred $31 million in severance expenses year to date, of which $15 million was expensed in the third quarter. Cost savings are expected to total $40-50 million annually, beginning in 2021.

Outlook

Improved oil prices in the third quarter allowed Cimarex to resume activity. We are currently running four drilling rigs in the Permian basin and have had two completion crews working since September 1. Cimarex continues to expect capital investment for the year to total approximately $600 million, as stated in guidance given in August.

Fourth quarter 2020 production volumes are expected to average 215 - 235 MBOE per day, with oil volumes estimated to average 62.5 - 68.5 MBbls per day. Total 2020 daily production volumes are expected to average 250 - 255 MBOE per day, with annual oil volumes estimated to average 75.5 - 77.5 MBbls per day.

[dan_s]

I have updated my forecast/valuation model for Cimarex and I've raised my valuation by $2 to $45.
XEC closed at $26.93 on November 6
Dividend yield is ~3.27% with dividends likely to increase in 2021.

Here is what I like:
> Cimarex is generating more than enough free cash flow to pay dividends and lower debt.
> Commodity price differentials in West Texas are coming down, which should give the company a nice revenue boost in 2021.
> I am using conservative natural gas ($2.50/mcf) and NGL ($14/bbl) prices for 2021, so there is significant revenue upside for next year.
> I really like the Company's production mix: approximately 30.0% crude oil, 41.5% natural gas and 28.5% NGLs. Gas and NGL should go a lot higher in 2021.
> Plenty of liquidity and no near-term debt retirements.