Cimarex Energy: Ready to Drill for More Natural Gas

Buy-recommended Cimarex (XEC) offers unlevered appreciation potential of 62% to a McDep Ratio of 1.0 and levered appreciation potential of 122% to Net Present Value (NPV) of $55 a share. During the first quarter, according to results released today, the company generated cash from oil and gas production of about $15 a barrel of oil equivalent as the difference between price of about $27 and cash operating costs of about $12.

Unlevered cash flow (Ebitda) met our expectations from three months ago. We project gradual increases in Ebitda in the second half of 2009. Our valuation capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) for natural gas and oil.

Pointing to expected oil price recovery, futures prices for the next six years averaged near $71 a barrel recently. Low-debt, well managed Cimarex has weathered the storm and is ready to drill for more natural gas in its new Cana shale play in Western Oklahoma when the supply is needed.

Originally published on May 5, 2009.

Comments

[Shale Gas:]

The company also has some good properties in the Woodford Shale that it is developing.

Jun 08 09:08 AM

[Mad Hedge F...:]

Better think again. Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60. Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain’t talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader... ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 09 12:37 AM