XEC Price Target Raised to $145

[dan_s]

Morgan Stanley sent a note to clients this morning raising their price target on Cimarex Energy (XEC) to $145, which is the same as my Fair Value Estimate. It is nice to see a smart guy like Drew agree with my analysis. - Dan

Drew Venker, CFA – Morgan Stanley
March 12, 2014
Despite a potential pullback on weaker oil prices, we see long-term opportunity. XEC’s lowest risk plays deliver 48% IRRs vs. 27% in our last update. We estimate these could improve to 70% if recent tests prove repeatable. Raising PT to $145 and raising estimates for more rapid, sustained growth.

Deep dive indicates faster growth; raising estimates and price target. We are raising our price target 8% to $145 for a more rapid, sustained growth outlook. Our target equates to 32% upside.

Raising estimates on updated production models. We conducted in depth analysis on Cimarex’s growth potential, particularly from the Permian Basin Wolfcamp. For 2015 we now expect 24% oil growth, an increase of 5%, and are raising our 2015 EBITDA estimate by 4%.

Enhanced growth profile is driven by:
1) higher returns from new completion techniques

2) deeper drilling inventory that equates to 19 years of capex potentially expanding to 27 years if it has success with downspacing tests.

This 19 years of drilling includes XEC’s lowest risk inventory (Culberson County Wolfcamp C&D and Cana) which equates to 11 years of capex and generates IRRs of 48%. We estimate upside to 17 years of inventory at 70% IRRs if XEC has success with downspacing tests and long laterals continue delivering enhanced returns (inventory details on p. 3-4).

Catalysts:
1) Permian Wolfcamp downspacing pilots: XEC has 4 pilots in Culberson and Reeves Counties (Texas) to test density down to 80-acre spacing: $40/share potential upside to our price target or 27% upside.
2) Delaware Permian: testing long laterals in Culberson County Wolfcamp C&D and in Reeves County Wolfcamp A that could boost returns from 30-60% to 45-90%.