Energy Prospectus

DENVER, Feb. 16, 2016 /PRNewswire/ -- Cimarex Energy Co. (XEC) today reported a fourth quarter 2015 net loss of $630.5 million, or $6.78 per share. The adjusted fourth quarter net loss was $23.0 million, or $0.25 per share, compared to fourth-quarter 2014 adjusted net income of $76.4 million, or $0.87 per diluted share(1). For the year, Cimarex recorded a net loss of $2.4 billion, or $25.92 per share. The adjusted net loss for the full year was $0.60 per share(1). Adjusted cash flow from operations totaled $744 million in 2015, a 54 percent drop from 2014 levels(1). Revenues in 2015 totaled $1.5 billion, a 40 percent decrease from 2014. The decrease in revenues, earnings and cash flow was the result of substantially lower product prices received.

The Adjusted Net Loss of $0.25 compares to my forecast of $0.22.

Production during the quarter was slightly lower than my forecast due to weather related issues.

XEC is dropping more rigs to align their capital program this year to cash flow from operations.

Total debt at December 31, 2015 consisted of $1.5 billion of long-term notes, with $750 million maturing in 2022 and $750 million maturing in 2024. Cimarex had no borrowings under its revolving credit facility and had a cash balance of $779 million. Debt was 35 percent of total capitalization.

XEC released its initial 2016 capital budget which calls for exploration and development capital of $600-$650 million, down 29% y/y, and FY16 production to average 890-930 MMcfe/d, down 8% y/y. Management stated that following the completion of multi-well projects currently underway, XEC will reduce activity to a level corresponding to its acreage obligations. The company is currently running 11operated rigs and plans to drop to 4 rigs in 2Q16. The '16 capital budget will be Permian weighted (65%) with a portion of previously anticipated Mid-Continent spending being deferred into 2017. Originally expected to begin in mid-'16, XEC's Cana-Woodford infill program in its southeastern core is now being delayed until late 4Q16/early 1Q17.

Although this is prudent, it will lower my valuation about $10/share. Keep in mind that XEC has a very strong balance sheet and plenty of liquidity to ramp up drilling activity if oil prices do rebound in the 2nd half of 2016.

I am updating my forecast model now and will get it posted to the EPG website later today.

Stifel: "Well performance across XEC's portfolio continues to outperform the type curves underpinning our NAV. Examples include: 13 Culberson Lower Wolfcamp wells (10,000' laterals) are tracking 25% above our 12-month type curve and 2 Culberson Upper Wolfcamp wells (7,500' laterals) are 26% above our 4-month type curve; 11 New Mexico Bone Spring wells are 24% above our 6-month type curve; 17 Meramec wells (5,000' laterals) are 7% above our type curve. XEC's Cana-Woodford performance continues to trend in line with expectations."

Stifel rates XEC a BUY with a $110 price target.

I have updated my forecast model for XEC and it will be posted to the EPG website later today.

My valuation adjusts to $99.00/share as a result of their lower production guidance for 2016. First Call's price target is $109.38, but I expect that to come down as analysts adjust their 2016 forecasts.

Even though XEC's production will decline 8% to 10% in 2016, it will remain in the Sweet 16 because it has a strong balance sheet and strong leasehold positions in several of the best oil & gas plays in the U.S. If commodity prices rebound, this company can ramp up drilling activity quickly. Their decision to pull back to a four rig program is prudent. A lot of their leasehold is HBP and the four rigs can meet all of their drilling obligations.

We will continue to see a sharp decline in the U.S. active rig count, which should support higher oil prices. I follow a lot of companies and most of them are slashing their drilling programs.

Morgan Stanley:
Despite mgmt taking prudent steps, investors will likely be disappointed. Cimarex's 2016 capital plan is a prudent approach in the weak macro environment, despite being likely to disappoint most investors, with meaningfully lower production (12% below consensus), but without sharply lower capex (35% below consensus). Importantly, we note that this lower production is primarily gas and that our oil production estimate, the biggest driver of revenue, is essentially unchanged. Nevertheless, production guidance was below our estimate, but capex was in line.

Aggressively cutting activity levels consistent with the current environment. Cimarex plans to cut its rig count from 11 to 4 during 2Q16 in response to much lower prices than when it unveiled its preliminary plan for 2016 to operate 16 rigs. Activity will focus on the Permian at 65% of the budget with the balance to be spent on the Cana Woodford and Meramec.
Production and capex guidance below consensus. The lower production guidance is partly related to the deferral of Cana completions to late 2016/early 2017. This delay is due to its partner's preference to delay completions until around YE-2016.

Meramec results. Cimarex reported continued delineation success. Headline 30-day rates were lower than prior results, but oil rates, which drive economics, were slightly higher than the prior average. The company has drilled 17 - 5,000' lateral wells to date with average 30-day IP rates of 8.4 MMcfe/d (33% oil) with 30-day oil rates of 462 B/d. Its first 2 - 10,000' laterals have delivered a 69% production uplift vs. its 5,000' laterals. In its first density pilot consisting of 2 wells, 660' apart horizontally, 270' apart vertically, delivered average 30-day IPs of 7.6 MMcfe/d (35%).