Energy Prospectus

Cimarex Energy Co. (NYSE: XEC) reported second-quarter 2021 financial and operating results.

Net income for second-quarter 2021 totaled $113.4 million, or $1.10 per share. Net income for the quarter was impacted by a mark-to-market loss on the Company's commodity derivative positions of $125.7 million. Excluding the impact of the mark-to-market loss on commodity derivatives, adjusted net income (non-GAAP) for second-quarter 2021 was $215.6 million, or $2.09 per share. < Adjusted Net Income compares to my forecast of $201.5 million, or $1.96 per share. First Call's EPS forecast was $1.68..

Highlights

Generated cash flow from operating activities of $364 million. Adjusted cash flow from operating activities (non-GAAP) totaled $394 million, exceeding capital expenditures and generating $195 million of free cash flow (non-GAAP). < My Adjusted Cash Flow forecast for Q2 was $392.6 million.

Delivered oil volumes of 72.7 MBopd. < Compares to my forecast of 72,000 BOPD.

Provided comprehensive environmental and safety performance data for 2020 on Cimarex's website; data highlights the Company's continued investment and progress in reducing emissions, decreasing water intensity and enhancing safety efforts.

Announced merger with Cabot Oil & Gas, creating a premier energy company that will be well positioned to deliver through-cycle returns on and of capital.

Outlook

Re-affirm Cimarex's full-year 2021 total capital expenditures guidance range of $650 million to $750 million, which is expected to drive fourth-quarter 2021 oil volume growth of more than 30% year-over-year.

Tom Jorden, Chairman and Chief Executive Officer, commented, "Our team delivered solid results, with oil production at the high-end of our expectations and cumulative free cash flow generation of $426 million in the first half of 2021. Additionally, we continued to make important progress on our ESG initiatives and minimizing our environmental footprint, including continuing to reduce our total Scope 1 GHG emissions."

"Looking ahead, the merits of our merger with Cabot are clear and compelling. The combination brings together two world-class portfolios to form a stronger, more resilient company that is well positioned to deliver value for shareholders. The transaction is proceeding on track, and we expect to close in the fourth quarter of this year." < A lot of the "Wall Street Gang" came out and said they didn't like the merger with Cabot. I wonder what they think now that natural gas is firmly over $4/mcf.
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I am working on my updated forecast/valuation model for XEC based on the assumption that the merger with COG will close early in Q4.

Before year-end 2021 Cimarex is going to merge into Cabot and Cimarex shareholders will get 4.0146 shares of COG for each share of XEC.
Today's closing prices:
XEC at $64.91
COG at $16.04 x 4.0146 = $64.39 So, these stocks are now trading in lockstep, which tells us that Wall Street thinks the merger is going to close.

I have updated my forecast models for XEC and COG. When I merge my XEC model into COG I come up with a valuation of $30.95/share for COG.
$30.95 x 4.0146 = $124.25

So, the upside that I see for XEC share holders is ($124.25 - $64.91) / $64.91 = 91.4% from where it closed on August 5.

Looking at XEC as a stand alone company, assuming the merger does not close, my valuation is $123/share. This is reasonable because there aren't a lot of synergies (expense savings other than G&A) coming from this merger because the two companies' assets and operations don't overlap. If you are a Cimarex shareholder I would vote for the merger simply because I don't think that today's outlook for natural gas prices is reflected in COG's share price. The closing of the merger early in Q4 should draw a lot of analysts' attention right when I expect a Bidding War for natural gas to spike.

Post-merger the combined company is going to change its name. In 2022 the production mix will be approximately 74% natural gas, 14% crude oil and 12% NGLs.
If you are bullish on natural gas prices, then XEC should be in your portfolio.

I have posted the standalone forecast for XEC and the COG+XEC forecast to the EPG website. Take a look a the combined forecast model for 2022 and you will see that this post-merger company is going to generate a lot of free cash flow if natural gas prices just average $3.00/mcf going forward. It should be able to pay a very nice dividend.

TipRanks: "In the last 3 months (since the merger with COG was announced), 18 ranked analysts set 12-month price targets for XEC. The average price target among the analysts is $81.38."
The most recent price target is from Gabriele Sorbara at Siebert Williams Shank & Co who rates XEC a Buy on 08/05/21 with a price target of $100.00

Other recent valuations
$88.00 < Susquehanna 7/26/21
$96.00 < Citigroup 7/23/21
$71.00 < Piper Sandler 7/22/21
$80.00 < Truist Financial 7/21/21