Buy-recommended Cimarex Energy (XEC) offers unlevered appreciation potential of 68% to estimated net present value (NPV) of $70 a share. On October 28, we reset NPV from $100 a share on the basis of a long-term oil price assumption of $75 a barrel, down from $100. Patience may be necessary as XEC stock price remains below the 200-day average of $54.
Released today, third quarter results displayed strength in unlevered cash flow (Ebitda) driven by crude oil and natural gas prices. Futures prices now look lower for the next four quarters. Projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) supports NPV.
As Chairman Mick Merelli declares “the landscape has changed”, Cimarex has reduced the number of drilling rigs under contract from a high of 42 in August to about 30 currently and perhaps to 25 soon. Exercising financial discipline, low-debt XEC will spend no more cash than it gets from current production. In the face of the outlook for reduced outlays, Chief Financial Officer Paul Korus declares that the company has increased its production volume every year. Continued profitable reinvestment preserves and enhances present value that we believe exceeds current stock price.
Originally published on November 4, 2008.