Cimarex: Tough Times Can Be Times of Opportunity

Buy-recommended Cimarex Energy (XEC) is taking advantage of its operating and financial strength to acquire promising shale gas acreage in western Oklahoma from Chesapeake Energy (CHK) for $180 million. The acquired leases cover most of the same land where XEC has already participated in 18 of the 23 industry wells drilled to tap natural gas in the Woodford Shale formation.

The low-debt, cash-rich buyer will use internal funds to acquire an asset from a cash-strapped seller at an opportune time. Cimarex may ultimately spend $2 billion in the Woodford area to develop more than a trillion cubic feet of reserves over the next decade. Meanwhile XEC is reducing the number of drilling rigs it employs currently in order to keep spending within cash flow generation. Some well projects in the Texas Panhandle and in West Texas would be marginal at $6 a million btu, should natural gas price drop to that level.

While we keep estimated net present value (NPV) at $100 a share, investors can readily make an approximation that the McDep Ratio of 0.44 implies that XEC stock is priced for oil at $44 a barrel and natural gas at little more than $6 a million btu. Current futures prices for the next six years are more than $80 a barrel and almost $8 a million btu. XEC Chairman Mick Merelli has shown in the past that tough times can be times of opportunity for the well-run company.

Originally published on October 22, 2008.