Cimarex Energy Should Recover from Dry Spell

Buy-recommended Cimarex (XEC) had more dry holes than normal in its higher risk Gulf Coast
drilling in 2006, limiting its real return for the year to 4% as measured by increase in reserves.

Considering that the company reinvested all of its cash flow, growth of 7% real would have been more normal. One year does not a trend make and XEC appears to have the financial strength
and management ability to do what is necessary to get back on course. Improved Gulf Coast operations and continued success in predictable, low risk Mid-continent and Permian drilling should help XEC beat the volumes in our base projection for 2007, updated to take account of latest quarterly results reported on February 15.

Exceeding stock price by a wide margin, estimated Net Present Value [NPV] of $68 a share matches that from a correlation with reserve life and cash flow for some thirty natural gas and oil producers. XEC is a concentrated play on natural gas whose price appears to be in a renewed uptrend from a low value relative to oil. Below the 200-day average price signifying an out-of-favor stock, Cimarex has a full weighting in our illustrative energy portfolio, concentrated on real assets that promise a high return providing clean fuel for global growth.

XEC 1-yr chart

Originally published on February 16, 2007