Cimarex Energy: Concentration On Natural Gas Has Special Appeal

Lowest McDep Ratio of all stocks in our coverage, concentration on natural gas, and capable management make buy-recommended Cimarex (XEC) an appealing small cap opportunity in our investment framework.

First quarter 2007 results reported on May 9 provide a base for our projection of a 16% increase in cash flow (Ebitda) in 2007. Estimated Net Present Value [NPV] of $68 a share looks low by a correlation with reserve life and cash flow for some thirty natural gas and oil producers.

In contrast to small cap peers that may also have low stock price compared to NPV, Cimarex has low debt that increases its attractiveness by the unlevered McDep Ratio. Concentration on natural gas of 68% by value has special appeal because the underrated fuel is currently priced at an unusually steep discount to oil.

While we hope Chairman Mick Merelli and his team can grow volume in 2007, simply meeting the challenge of replacing production with new reserves, as Cimarex did in 2006, maintains real value and is likely to be quite profitable as long-term natural gas and oil price appear to be in a new uptrend. Cimarex stock has a full weighting in our illustrative energy portfolio concentrated on real assets that promise a high return providing clean fuel for global growth.

Originally published on May 9, 2007.

XEC 1-yr chart: