Estimated Net Present Value (NPV) of $55 a share, down from $70, is about 120% higher than stock price for low-debt, buy-recommended Cimarex Energy (NYSE:XEC). Released today, fourth quarter results displayed rapid cost reduction in the face of lower unlevered cash flow (Ebitda) driven by crude oil and natural gas prices.
Customarily disclosing in advance on February 9, management reported higher production in the latest quarter along with greater decline in natural gas price than in the industry benchmark. Already fortified by a strong balance sheet, the company further protected its financial position by reducing contracted drilling rigs from a peak of 42 last August to five by the end of next month. The advance disclosure of a reduction in proven reserves along with lower estimated production in 2009 contributes to lower NPV. Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil. Latest calculations result in NPV concentrated 66% on natural gas and 34% on oil.
Pointing to expected oil price recovery, futures prices for the next six years averaged US$62 a barrel recently. We justify our optimistic view on the stock in fearful times on the basis of the company’s conservative financial position and trustworthy management all in the context of a diversified portfolio fortified against negative surprise.
Originally published on February 18, 2009.