Cimarex Energy (XEC)

[dan_s]

From Wells Fargo Equity Research:

Summary. Cimarex Energy offers differentiated exposure to the Permian and
STACK regions and within each, Cimarex’s acreage and operational expertise has
proven to be among the best in class. We forecast 7% and 14% production growth
in 2017E and 2018E, respectively, and view substantial upside to NAV as Cimarex
executes on downspacing tests currently under way. We are initiating coverage
with an Outperform rating and a valuation range of $145-155 per share based on
our net asset value estimate of $150.68 per share. Our EPS estimates for 2016
and 2017 are $0.56 and $3.58, respectively.
 Quality Asset Split…Cimarex offers differentiated exposure to the Delaware
Basin and STACK region, two of the most prolific unconventional shale plays in
the Lower 48. Within each basin, Cimarex’s acreage and operational expertise
have proven to be best in class, with well performance tracking ahead of peers.
 …Provides Inventory of High-Return Projects. Management consistently
reiterates its focus on rate of return when allocating capital and the data bears
this out. Cimarex has consistently delivered above-average returns on capital and
its current inventory of projects show outsized return potential.
 Expecting Continued Growth…We project 7% growth in 2017E and 14%
growth in 2018E (compared to Street estimates of 7% and 8%), driven by
Cimarex’s ability to comfortably add rigs to develop its prolific acreage in the
Delaware and STACK.
 …While Maintaining Solid Balance sheet. With an IG rating, net leverage
of 1.6x, and a cash balance of $642MM, Cimarex’s balance sheet is second to none
of its peers’. Along with a balanced commodity split, XEC provides investors with
significant downside risk protection versus other E&Ps, illustrated by 2-year
down-beta to the 12-month WTI strip of 0.68, the lowest among its peers.
 Valuation. XEC currently trades at an 11% discount to our NAV calculation of
$150.68 per share. In addition, we believe XEC could potentially realize further
NAV upside of $16.13 per share if downspacing tests prove successful. XEC
trades at 12.4x and 9.2x 2017E and 2018E EV/EBITDAX multiples, which is 0.4x
and 0.6x behind the Permian average, respectively. We believe this discount is
not warranted given the quality of the company’s acreage in both of its plays and
view the shares as having upside potential as XEC converges toward the Permian
pure plays. We set our valuation range at $145-155 per share, reflecting our NAV
calculation and initiate coverage with an Outperform rating.

[dan_s]

As in the Permian, Cimarex’s STACK results have shown strong IP rates and, although the company doesn’t
provide updated EURs, cumulative 12-month results have exhibited relatively low declines. The Cana-Woodford
shale (responsible for 84% of XEC’s STACK production in 2Q16) has shown strong consistency, with multiple 8-
well infill tests generating first year cumulative production numbers of 2.1-2.2 Bcfe, or 5.7-6.0MMcfe/d for 5,000’
laterals (50-55% gas). As shown in Exhibit 8, when compared with other operators in the region, XEC again
stacks up nicely, showing 30-, 90-, and 180-day IP rates per lateral foot that are among the best in class. For our
modeling, we have assumed EURs of 10 Bcfe in the Woodford and 6.6 Bcfe in the Meramec.

Cimarex maintains varying levels of working interest in a large portion of Devon’s STACK wells, allowing the
company to benefit from Devon’s results, as well. As an example, in July, Devon released strong results from
its 5-well Alma pilot, targeting a single Meramec interval in southwest Kingfisher County, of which Cimarex
owns a 46% working interest. Initial results were strong, showing average 30-day peak IP rates of 1,400 boe/d
with 60% oil. Though the results are still early, the Alma wells recorded little interference and are a positive
indication for Cimarex-operated downspacing pilots currently being drilled in nearby Meramec and Woodford
intervals, in our view.

In the Meramec, Cimarex is actively engaged in downspacing pilots testing 10 wells per section, which, if
successful, would provide an additional $7/share upside to NAV (we currently model 5 wells per section).
Though variability has been a theme within the Meramec, Cimarex recently released results from 2 wells in the
play that show positive results in very different sections of the acreage. The 10,000’ Peterson well in the
northwest section of the company’s position (see map on page 22) generated an IP rate of 19 Mmcfe/d with
54% oil, while the 10,000’ Sims well toward the southeast IP’ed at 12.8 Mmcfe/d with 29% oil. Though
variability will likely continue to be a theme in the Meramec, as the company continues to develop its
knowledge of the play, we expect strong results to persist.

I am updating my valuation of Cimarex to give it more value for STACK, after seeing how well its leasehold sits in the heart of the play.

[dan_s]

I have updated my forecast model for XEC and I have raised my valuation by $11 to $150/share, compared to First Call's price target of $142.52.

Cimarex has a Super Strong balance sheet and large positions in both the Permian Basin and STACK, which are America's two hottest oil plays. Production will be ramping up into year-end and well results in STACK keep getting better.