XEC merger into COG Update - Sept 30
Posted: Thu Sep 30, 2021 9:27 am
Note from Neal Dingmann at Truist Financial
Cimarex Energy Co. (XEC): Now the Fun Begins
Shareholders of Cimarex (>90% of voted shares/~79% of outstanding shares)
and Cabot (COG, Not Rated) (>99% of voted shares/~89% of outstanding shares)
overwhelmingly approved the pending transaction. The deal is expected by the
company to close on October 1 at which time we anticipate numerous previously laid
out accelerated capital returns (increasing annual dividend to $0.50/sh, introducing
quarterly variable dividend, $0.50/sh special dividend). Beyond the shareholder
returns, we look for details over disciplined capital investment, strong FCF, and
potential additional shareholder returns such as stock buybacks. We continue to
believe the pro-forma company will be one of the premiere shareholder returning
companies given its limited spend, high commodity prices, limited hedges, and
strong operations.
Stable Continued Efficient Operations to Drive Upside
The combined company will have 173k net acres in the Marcellus, 234k net acres in the
Permian, and 326k net acres in the Mid-Con along with 600+ mboepd of production. We
anticipate total D&C activity not materially different than the current 5+ rigs/1+ frac spreads
run by Cimarex, which we expect will lead to solid production growth and even better
FCF. We assume the pro forma company will operate much like XEC historically, with <1x
leverage.
Pricing Upside
Strong continued natural gas/NGL prices (HHUB gas and NGL prices are currently 60%+
above their five-year averages) along with relatively equally as strong oil prices and minimal
hedges going forward make for an exciting combination. As we have previously stated, for
the remainder of this year going forward cash flow could surprise to the upside. Further, we
believe FCF could surprise to the upside as little capital is required to maintain production
in areas like the Marcellus.
Valuation and Risks
Our $100 price target is derived from two equally weighted methodologies, with the first being our ’23 EV/EBITDAX
multiple of 4.0x applied to our 2023E EBITDAX estimate of $2,213MM and the second being a FCF/EV Yield assumption of 14.0%.
Risks to Our Rating and Price Target:
• A decline in oil and/or natural gas prices may negatively affect the business, financial condition, or results of
operations. Any significant decline in any of the three commodity streams could substantially impact our estimates.
• Constrained transportation capacity out of one of the company’s areas of focus could lead to shut in production and/
or activity reduction.
• Reserve and production estimates depend on many assumptions such as commodity prices, resource potential,
and drilling success rates that may turn out to be inaccurate. Any change in these figures could materially alter our
estimates. This could be a factor of both well performance and company drilling/completion techniques and could
lead to underperformance of company type curves and cost estimates.
Cimarex Energy Co. (XEC): Now the Fun Begins
Shareholders of Cimarex (>90% of voted shares/~79% of outstanding shares)
and Cabot (COG, Not Rated) (>99% of voted shares/~89% of outstanding shares)
overwhelmingly approved the pending transaction. The deal is expected by the
company to close on October 1 at which time we anticipate numerous previously laid
out accelerated capital returns (increasing annual dividend to $0.50/sh, introducing
quarterly variable dividend, $0.50/sh special dividend). Beyond the shareholder
returns, we look for details over disciplined capital investment, strong FCF, and
potential additional shareholder returns such as stock buybacks. We continue to
believe the pro-forma company will be one of the premiere shareholder returning
companies given its limited spend, high commodity prices, limited hedges, and
strong operations.
Stable Continued Efficient Operations to Drive Upside
The combined company will have 173k net acres in the Marcellus, 234k net acres in the
Permian, and 326k net acres in the Mid-Con along with 600+ mboepd of production. We
anticipate total D&C activity not materially different than the current 5+ rigs/1+ frac spreads
run by Cimarex, which we expect will lead to solid production growth and even better
FCF. We assume the pro forma company will operate much like XEC historically, with <1x
leverage.
Pricing Upside
Strong continued natural gas/NGL prices (HHUB gas and NGL prices are currently 60%+
above their five-year averages) along with relatively equally as strong oil prices and minimal
hedges going forward make for an exciting combination. As we have previously stated, for
the remainder of this year going forward cash flow could surprise to the upside. Further, we
believe FCF could surprise to the upside as little capital is required to maintain production
in areas like the Marcellus.
Valuation and Risks
Our $100 price target is derived from two equally weighted methodologies, with the first being our ’23 EV/EBITDAX
multiple of 4.0x applied to our 2023E EBITDAX estimate of $2,213MM and the second being a FCF/EV Yield assumption of 14.0%.
Risks to Our Rating and Price Target:
• A decline in oil and/or natural gas prices may negatively affect the business, financial condition, or results of
operations. Any significant decline in any of the three commodity streams could substantially impact our estimates.
• Constrained transportation capacity out of one of the company’s areas of focus could lead to shut in production and/
or activity reduction.
• Reserve and production estimates depend on many assumptions such as commodity prices, resource potential,
and drilling success rates that may turn out to be inaccurate. Any change in these figures could materially alter our
estimates. This could be a factor of both well performance and company drilling/completion techniques and could
lead to underperformance of company type curves and cost estimates.