Raymond James' note on Cimarex Energy (XEC) on Apr 23
Posted: Sun Apr 25, 2021 12:04 pm
In my April 24 podcast I made some comments on Cimarex. Here are notes from Raymond James upgrade and new price target of $102/share that they sent out on April 23
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Cimarex Energy (XEC)
Eventful 1Q due to weather, but production in line with expectations: Despite the tumultuous 1Q driven by the winter storm, XEC had a good
grasp of the impact by the time it reported 4Q earnings. Consequently, we're not anticipating any negative surprises, and are modeling 1Q oil
volumes of 68 Mbo/d and total production of 220 Mboe/d, both in line with consensus. Regarding capex, we believe the Street may be overlooking
the impact of XEC's modest activity (6 POPs) in 1Q and thus our capex estimate of $147M is 8% below consensus ($159M). Looking out to the
remainder of the year, we anticipate 1Q is the low point of production and are modeling 2021 oil production of ~78 Mbo/d (consensus: 77 Mbo/
d) and capex of $700M (consensus: $714M).
Strong realized gas/NGL pricing likely to drive big EBITDA beat: In an 8-K published earlier this week, XEC provided an update on its expected
1Q21 realized pricing of $55.85/bbl for oil (consensus: $47.52/bbl), $22.43/bbl for NGLs (consensus: $18.19/bbl) and $4.14/Mcf for gas (consensus:
$1.71/Mcf). After factoring in impressive pricing and an estimated $162M loss on derivatives (includes $62M in net cash payments), our model
suggests 1Q21 EBITDA of $437M, 35% above consensus ($325M).
Early indications are positive regarding wider spaced developments: Recall that XEC has redesigned its typical completion design with a focus
on higher per-well productivity and per section NPV, which incorporates wider horizontal and vertical spacing with wells per section being reduced
modestly. The Dixie Land and Big Sky developments were POP'd in early 2021 with results thus far above expectations.
Recommendation: Cimarex continues to make progress in capital efficiency, along with the shift to the Permian. We're encouraged by the
declining well costs in the Delaware (Permian go forward costs of $800-$850/ft over 20% lower than 2019) and meaningful productivity
improvements (our most recent analysis shows XEC's 2020 wells outperforming 2019 wells by over 15% on a per ft. basis). XEC trades at ~12%
2021E FCF/EV, well above the SMID-cap average of 8%, while maintaining one of the healthier balance sheets among its peers (net-debt/2021E
EBITDA: 1.1x). The improving productivity/capital efficiency, clean balance sheet, and just 15% of 2022 oil volumes hedged positions the company
as the top SMID-cap E&P to take advantage of the recovering strip and our bullish oil call. At the current strip, XEC trades at 15% 2022E FCF/EV
(SMID-cap average: 11%) which expands to 17% under the RJ deck. As such, we're upgrading XEC to a Strong Buy rating and increasing our target
price to $102/share (from $96) after updating estimates.
Valuation: Our price target of $102 is based on ~6.5x 2021E EV/EBITDA - within the E&P 10-year historical average range of 5-7x. Our bull case
assumes ~7.5x 2021E EV/EBITDA - implying a price of $120. Our bear case assumes ~4x 2021E EV/EBITDA - implying a price of $50.
-----------------------------------------
Cimarex Energy (XEC)
Eventful 1Q due to weather, but production in line with expectations: Despite the tumultuous 1Q driven by the winter storm, XEC had a good
grasp of the impact by the time it reported 4Q earnings. Consequently, we're not anticipating any negative surprises, and are modeling 1Q oil
volumes of 68 Mbo/d and total production of 220 Mboe/d, both in line with consensus. Regarding capex, we believe the Street may be overlooking
the impact of XEC's modest activity (6 POPs) in 1Q and thus our capex estimate of $147M is 8% below consensus ($159M). Looking out to the
remainder of the year, we anticipate 1Q is the low point of production and are modeling 2021 oil production of ~78 Mbo/d (consensus: 77 Mbo/
d) and capex of $700M (consensus: $714M).
Strong realized gas/NGL pricing likely to drive big EBITDA beat: In an 8-K published earlier this week, XEC provided an update on its expected
1Q21 realized pricing of $55.85/bbl for oil (consensus: $47.52/bbl), $22.43/bbl for NGLs (consensus: $18.19/bbl) and $4.14/Mcf for gas (consensus:
$1.71/Mcf). After factoring in impressive pricing and an estimated $162M loss on derivatives (includes $62M in net cash payments), our model
suggests 1Q21 EBITDA of $437M, 35% above consensus ($325M).
Early indications are positive regarding wider spaced developments: Recall that XEC has redesigned its typical completion design with a focus
on higher per-well productivity and per section NPV, which incorporates wider horizontal and vertical spacing with wells per section being reduced
modestly. The Dixie Land and Big Sky developments were POP'd in early 2021 with results thus far above expectations.
Recommendation: Cimarex continues to make progress in capital efficiency, along with the shift to the Permian. We're encouraged by the
declining well costs in the Delaware (Permian go forward costs of $800-$850/ft over 20% lower than 2019) and meaningful productivity
improvements (our most recent analysis shows XEC's 2020 wells outperforming 2019 wells by over 15% on a per ft. basis). XEC trades at ~12%
2021E FCF/EV, well above the SMID-cap average of 8%, while maintaining one of the healthier balance sheets among its peers (net-debt/2021E
EBITDA: 1.1x). The improving productivity/capital efficiency, clean balance sheet, and just 15% of 2022 oil volumes hedged positions the company
as the top SMID-cap E&P to take advantage of the recovering strip and our bullish oil call. At the current strip, XEC trades at 15% 2022E FCF/EV
(SMID-cap average: 11%) which expands to 17% under the RJ deck. As such, we're upgrading XEC to a Strong Buy rating and increasing our target
price to $102/share (from $96) after updating estimates.
Valuation: Our price target of $102 is based on ~6.5x 2021E EV/EBITDA - within the E&P 10-year historical average range of 5-7x. Our bull case
assumes ~7.5x 2021E EV/EBITDA - implying a price of $120. Our bear case assumes ~4x 2021E EV/EBITDA - implying a price of $50.