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Executives

Mark Burford – IR

Mick Merelli – Chairman, CEO

Tom Jorden – EVP Exploration

Joe Albi – EVP Operations

Paul Korus – VP, CFO

Analysts

Larry Busnardo – Tristone Capital

Kevin [Wank] – [Polinus] Capital Management

Gregg Brody – J.P. Morgan

Tim Curro – Value Holdings

Cimarex Energy Co. (XEC) Q4 2007 Earnings Call February 20, 2008 1:00 PM ET

Operator

Good afternoon my name is Sheryl and I’ll be your conference operator today. At this time I would like to welcome everyone to the Cimarex Energy fourth quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. If you would like to pose a question during this time, please press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. If you have previously pressed star one to pose a question, we request that you press the pound sign and then press star one again. Thank you it is now my pleasure to turn the call over to your host Mark Burford. Sir, you may begin your conference.

Mark Burford

Thank you Sheryl and thank you for everyone joining us today for our fourth quarter conference call. We issued our press release our press release last night and a copy of which can be found on our website and we will be making forward looking statements in this conference call so I will direct you to the end of that press release for a disclaimer regarding forward looking statements. On today’s call we have Mick Merelli, Chairman and CEO, Tom Jorden, Executive Vice President of Exploratoin, Joe Albi, Executive Vice President of Operations and Paul Korus, our Vice President and CFO and Jim Shonsey our Vice President of Accounting and the Controller, Chief Accounting Officer. We’ll go ahead and get started and jump right into it today and I’ll turn the call over to Mick Merelli.

Mick Merelli

Thanks Mark, thank you all for tuning in. I’m just going to recap a little bit of the fourth quarter highlights and talk a little bit about what we’re seeing for next year very briefly then the guys will fill in on the details. We had a good fourth quarter. Our earnings totaled $130 million and our cash flow hit almost $300 million, $299. Capital investment, we invested in the quarter, $266 million. Our full year 2007 earnings were $346 million and cash flow reached $986 million.

Exploration and development capital investment came in at about $983 million. We closed during the quarter, we closed our Sprayberry and Gulf of Mexico, our Sprayberry assets, we closed the sale of those assets and our Gulf of Mexico main pass operated properties, we sold and that brought in proceeds of about $144 million. That in combination with the production and nice lift from realizations we exited 2007 with no bank debt and $123 million of cash in our books. We have an active 2008 drilling program underway and we plan to invest somewhere between $1.1-$1.3 billion which we expect to fund from our cash flow or on a cash on hand. Obviously that depends on if we keep getting some decent commodity prices.

Production, our fourth quarter production averaged 471 million cubic feet a day equivalent and that’s an increase of 23 million cubic feet a day equivalent over the third quarter of this year. Our that increased production, it reflects the our drilling program. We’ve had a pretty good drilling program this year. We’re seeing good results from our horizontal oil drilling programs in the Permian Basin and corporately our oil production grew 3,100 barrels a day over last year and reached an all time high in our fourth quarter of almost 21,000 barrels a day.

Gas volumes increased 16 million cubic feet a day from the third quarter to the fourth quarter and this is a largely a result of our Texas Panhandle program. And the team that’s working this area is just doing an outstanding job for us. They drilled over 100 wells in 2007 and we’re expecting to drill somewhere between 125 and 150 in 08. Permian and Mid-Continent production in the fourth quarter grew 43 million cubic feet a day equivalent or 13% over the fourth quarter of last year. Later in the call Joe Albi will cover production in more detail.

Our drilling program, again we expect that in 08 to be around 1.1-1.3 and over 80% of that is going towards our Mid-Continent and Permian Basin moderate risk programs. Returns on our 07 program, we turned the crank on that and we looked at it and as we do every year and we had a good program this year. Moderate risk drilling program returns benefited from low service costs, higher oil prices and slightly higher gas prices and our Yegua Cook Mountain program and the Gulf Coast onshore had another, had a good year this year.

And overall our 07 drilling program was more in line with what we normally expect for our returns in that 20-30% band. Again I mentioned that we had some asset sales during the year, we sold $177 million of properties in 07 and again the two largest pieces of that were our Sprayberry oil properties in the Permian Basin and our Gulf of Mexico main pass operated properties. In 2008 we don’t anticipate very many much activity in our asset sales. We’re still trying to market our Gulf of Mexico non operated position and we’ll, that’ll, when we sell that’ll depend on when we can reach agreement with someone on a reasonable valuation. So that’s really all I had to cover, and with that I’m gonna turn this over to Tom Jorden and he can talk in a little more detail about our drilling program.

Tom Jorden

Thank you Mick. I’d like to talk about our 2007 exploration and development activity. For the year we drilled 452 gross or 281 net wells and we completed 91% of those as producers. As Mick said, our exploration and development capital for 2007 totaled $983 million and it was focused primarily on oil and gas plays in the Mid-Continent, Permian and onshore Gulf Coast areas. Drilling activity currently is active, we have 31 operated rigs running and we’re looking to increase that and as Mick mentioned we still expect our 2008 exploration and development capital to be approximately $1.1-$1.3 billion.

We have plenty of opportunity and we’re always watching our results, steering as we go and adjusting accordingly either high or low depending on our results and conditions of the market. I’d like to walk through each of our regions in an 07 recap, starting with our Mid-Continent. In the Mid-Continent, we drilled 237 gross or 134 net wells during 2007 and we completed 95% of those as producers. Our Mid-Continent investment was $385 million which accounted for 39% of our total exploration and development capital. For 2008, we expect another very aggressive year in the Mid-Continent, we should invest upwards of $520 million or about 43% of our total spending.

The Texas Panhandle granite wash was a very [prior] program for us in 2007 and there we drilled 106 gross or 75 net wells and completed 99% of those as producers. We bring wells on all the time with neck to drilling program but in the fourth quarter we completed some notable wells I’ll mention that included the Earp 60, we had 100% working interest and it came on at 4.3 cubic feet a day, the Hobart Ranch 68-22, again 100% working interest at 3.9 million cubic feet a day and the Webb 194-6 at 35% working interest at 2.4 million a day and the Byrum 4-20 at 75% working interest at 2.2 million a day. So the Anadarko Basin and Southern Oklahoma drilling totaled 95 gross or 29 net wells with 89% being completed as producers.

We had a great year at our Southern Oklahoma area and wells in this area recently commencing production include the Cassell C 3-7, that’s a 100% working interest well at 2.8 million cubic feet equivalent a day, the Picket B 3-18, 80% working interest, 2.2 million cubic feet equivalent a day and the Cook 3-12 100% working interest at 1.8 million cubic feet a day. So it’s just part of our active ongoing program and obviously we prefer to have high working interest wells.

As we’ve discussed in the past when we embarked on a Woodford Anadarko horizontal program, it’s a deeper part of the current Woodford development, we have drilled 2 operated wells with a 50% working interest and 3 outside operated wells with a 50% working interest, so we have a total of 5 wells that have reached TD in that play. These are 13,000 feet wells with 2,500 laterals, so the vertical depth range between really 11 and 14,000 feet and currently our laterals are 2,500 feet long, they’re expensive wells. Based on our current configuration we’re looking at pre drill estimates somewhere in the neighborhood of $7 million total completed wall costs.

We’re evaluating our wells currently and we’re also evaluating the effect of going to longer laterals with additional frac stages. This is early in our evaluation and you know we have to say that the jury is still out but based upon what we do know now, we’re optimistic about the chances of the play, we’re optimistic that it’ll move into an active development program and it could be a significant contributor to our future results. So we have, to recap, we have 14 operated rigs currently in the Mid-Continent region that includes 9 in the Texas Panhandle.

Moving on to the Permian Basin, in the Permian Basin in 2007 we drilled a total of 172 gross or 118 net wells and we had a success rate 91% of those were completed as producers. Our drilling investment in the Permian totaled $368 million or about 37% of our total 2007 exploration and development capital. For 2008 we expect the Permian investment to increase to $450 million and again that’s about 38% of our total spending. Southeast New Mexico in 2007 totaled 67 gross or 48 net wells with 84% of them being completed as producers. Our important emerging oil play for us in this area is a horizontal Wolf Camp oil play that we’ve talked about in the past and we have about 30 wells planned for this program in 2008.

You know as an aside I have to say we’re very, very pleased with the way our Permian program is developing. It’s really come together in 2007, we have several very active emerging plays and we really, really have been very pleased not only with our results to date but the opportunity we see in the Permian Basin. Recent wells we’ve brought on production in Southeast New Mexico include the Pyramid 1H, it’s an 80% working interest horizontal well at 180 barrels of oil per day, the Glenwood 28 Federal 1 is a vertical well, 55% working interest and 1.2 million cubic feet a day and the Mescalero 30 Fed number 6 50% working interest at 1.5 million cubic feet a day. We drilled a total of 71 gross, 58 net wells in West Texas which includes 43Westbrook exploitation infill wells.

Our Third Bone Spring program has continued to realize great results and Ward and Reeves Counties we, were drilled a total of 16 gross or 9.5 net horizontal wells, these are oil wells, we’ve continued to add to our position in this area and we’re working to add more. We currently have two rigs drilling vertical wells and three rigs drilling horizontal wells. Those two rigs are drilling pilot wells and then we reenter with a smaller well to go horizontal so we have five rigs active in the area and we expect an active and increasing 2008 program.

Overall we’re very active in the Permian with 15 operated rigs including nine in Southeast in New Mexico and six in West Texas and we’re aggressively looking to increase that rig count. In the Gulf Coast, we drilled 42 gross or 29 net wells in 2007 and completed 71% as producers. As Mick said, our Gulf Coast group had another banner year this year and we’re very, very pleased with our prospects for 2008. In 2007 they invested a total of $175 million which accounted for 18% of our exploration and development capital.

For 2008 we expect the investment to be $190 million or about 16% of our total spending. We’re currently in a number of emerging plays in the Gulf Coast, we’re attempting to increase that activity level. The Gulf Coast is all 3D seismic driven, in large part it’s subtle hydrocarbon indicators and so it’s a little bit of needlepoint compared to some of our other drilling programs but we’ve got a great team working it and we’re aggressively adding to our staff, adding to our database and developing some new programs.

The majority of our activity in 2007 occurred in our Yegua Cook Mountain program in Liberty and Hardin Counties, we drilled a total of 19 gross, 16 net wells with a 79% overall success rate. Wells recently commenced production include the Sharon Crissey number 1 with a 70% working interest at 10.4 million cubic feet equivalent per day, the Willis Estate number 5 where we have a 47% working interest at 8.2 million cubic feet equivalent a day and the Blackstone Rock Creek number 2, 100% working interest at 5.1 million cubic feet equivalent a day.

We have two rigs currently operating at Texas Gulf Coast and are looking to as I said increase that. As an aside, a point I wanted to make, you know our program is composed in aggregate between moderate risk drilling and some higher risk opportunities and we still are planning on continuing with a component of high risk drilling. In 2007 we had a very good year overall and yet in that capital there were $30 million of dry holes in our high risk program. We like to have exposure to that, we have our teams working on some very, very good ideas so going forward you’ll see our program as a blend of moderate risk repeatable programs with some higher risk shots.

We’ve also talked in the past about new ventures and new play development, we view our new ventures, new play development as a part of our higher risk program. So even though we’re looking at new ventures, opportunities that will evolve into a moderate risk or repeatable program, often resource type plays, at the outset we viewed as part of our higher risk program. So we have an active program, we’re looking to get more active as I said at the beginning, we have 31 rigs currently operating. Horizontal drilling is becoming an increasingly large part of our program. Of those 31 rigs we have operating, 15 of them are on horizontal targets, 10 of those are in oil plays and 5 of them are in gas plays. So we had a good year in 07 and looking for a more active very good year in 2008. With that I’ll turn the call over to Joe Albi.

Joe Albi

Thanks Tom, as Mick mentioned we made some good strides from a production standpoint during the last half of 2007. Around August we increased our operated rig count from 22 to 24 rigs to a level of about 28-32 rigs, represented about a 30% increase and it was a level that we were able to hold for the remainder of the year. It’s, this increase in rig count, our resulting successes and an aggressive exploitation program, that really allowed us to realize fairly rapid production gains in the last half of the year. During 2007, our production rose from levels of 441 to 442 million a day in Q1 and Q2 to 448 million in Q3 and as we entered the fourth quarter, our goal was simply to [few] off the third quarter growth and end the quarter with a good solid exit rate and we did just that.

We closed Q4 with reported average equivalent daily production of 471 million a day. That exceeded our fourth quarter guidance which was 460-470 million a day and it beat our fourth quarter 06 average of 441 million a day by 7%. Our strong finish in the fourth quarter also helped us to make up the production drop we saw during 2006 and end the year with an average reported daily equivalent production rate of 451 million a day which fell at the top end of the guidance we gave in our last call. But more importantly, it allowed us to surpass our 2006 average of 449 million a day even with the property sales we had during the year.

Over the last year, we’ve seen some nice production gains in each of our core areas of drilling and exploitation activity and I want to hit on a few of them. In the Mid-Continent, our fourth quarter production hit an all time high of 209.2 million a day, that’s an increase of 13% over our fourth quarter 06 volumes and is a direct result of our expanding Texas Panhandle program. As Tom mentioned, we now have nine rigs running in the Texas Panhandle area which has not only resulted in the increased production in the Mid-Continent region but it more importantly has allowed us to achieve drilling efficiencies that can only be gained through an active program and those are drilling cost efficiencies which have a direct bottom line result on our economics.

Production from the Permian also hit an all time high in the fourth quarter. We averaged 151.4 million a day and that’s a 14% increase over fourth quarter 06 volumes. Production growth here has been a byproduct of our expanded Bones Spring, [Abo] and Wolf Camp horizontal oil plays and in fact as a result of these plays our net daily oil volume in the Permian have increased 19% from fourth quarter 06 levels to 10,260 barrels of oil per day which we saw in the fourth quarter of 07. We now have 15 operated rigs working the Permian and ten of them are dedicated to drilling or Bones Spring, [Abo] and Wolf Camp horizontal oil programs.

Despite the sale of our Columbus assets, our new well activity in South Texas as Tom previously mentioned, helped us to increase production in our onshore Gulf Coast program from 68 million a day in Q4 06 to 74 million a day in Q4 07, that’s an increase of nearly 9%. We now have two rigs working South Texas and we have plans to increase our operated rig count in the area during the year.

Looking forward from a guidance perspective, after adjusting for property sales, we’re projecting first quarter 08 volumes to fall in the range of 458-468 million a day with our full year average projected at 465-485 million a day, which after we account for 2007 property sales would equate to about 5-10% production growth. When you all compare our first quarter guidance to our fourth quarter 07 average, do keep in mind that our first quarter guidance does not include about 11 million a day of production associated with our Sprayberry and Main Pass properties which we sold at the tail end of December. A few words on our exploitation program, 2007 was another successful year for our program.

We put over $128 million to work during the year, we drilled 86 operated wells, performed over 325 work over and recompletion projects. Most all of the activity was in the Mid-Continent and Permian areas. For 08, our production group has put together another aggressive plan, it’s calling for a budget of $175 to $200 million with an inventory of over 456 already identified projects. Our 08 plan calls for continued activity in each of our core project areas. In the Permian we’ll again focus on our Southwest Westbrook field in West Texas.

We’ve inventoried 50 potential drilling locations and [assumed] a number of recompletion projects. Our goal here is simply to work off our past success, a success which has increased our total field gross production at current levels of about 1,500 barrels a day which is a level the field hasn’t seen since the early 1970’s. In addition to Westbrook, we have numerous other drilling and recompletion projects identified throughout New Mexico and West Texas. We also plan to continue exploitation activity in our Walnut Bend field, located just North of Dallas, with large inventory wells and projects, we see activity in the field continuing well beyond 2008.

That said, our 08 plan calls for 36 work overs, six deepenings, four new drills, 33 injection projects and just like Westbrook this mature field has also seen new life as a result of our exploitation activity. Our current gross production here is 1,450 barrels a day which represents more than a two-fold increase in total field production since we started the project just 22 months ago. In our other areas, we have numerous other additional exploitation leads. In the Kansas [unintelligible] area, we have inventories 131 projects, 20 new drills and 111 work overs and recompletions. In Southern Oklahoma we’ve identified 40 projects which are focused on continued recompletion and re-frac activity.

In Western Oklahoma and the Texas Panhandle, in addition to more than a couple dozen recompletion projects, we’ve identified over 80 candidates for artificial lift and will complete the final stages of three large scale salt water disposal projects which are aimed at lower inter [LOB]. One thing that has not changed over the last two years with our exploitation program is we continue to be encouraged as we continue to dig deeper and deeper into the potential of our assets. We still have a healthy inventory of ideas and projects and they continue to, excuse me, fuel on new ideas for the future. Bottom line is we still have a lot to do. With that I think I’ll turn the call over to Paul.

Paul Korus

Thank you Joe, I’ll just try to make a couple quick comments about fourth quarter earnings. We reported $1.54 per diluted share, that’s up 90% from last year’s $0.70 per share, not a surprise given that production was up 7%, oil prices were up 57% and gas prices were up 24% and of course established several new records for the company in the fourth quarter in terms of revenues, volumes, things like that. As our fourth quarter earnings may compare to what some of the analysts were modeling and expecting, obviously our $1.54 blew their estimates away.

The largest variance comes from the fact that we had a substantially higher gas price realization than what was expected. We did beat guidance on production, that helped a little bit but like I said the biggest thing being gas prices. [Pretty] hedging our average gas price for the quarter was $7.46 per MCF and then with hedging it increased to $7.71but if we ignore the effect of hedging, we were $0.49 per MCF higher in the fourth quarter than the average that we calculate for [Henry Huber] NYMEX of $6.97. So that’s a positive differential. Last year in the fourth quarter we averaged a price that was $0.35 below [Henry Hub], which is you know normally what we kind of see in the winter.

But being [fit] almost $0.50 higher this quarter, $0.35 below it last year, that’s about an $0.85 swing which I think accounted for most of the variance in actual earnings versus estimates. By our calculation that swings about $27 million of revenues and you tax effect it and all that stuff and it probably impacted our earnings by about $0.20. And so the difference between our $1.54 and estimates largely accounted for that but we had a number of other good things happen to us in the quarter, in addition to production being up, our costs also came down on a per unit basis which as much as anything reflects higher costs, or higher production so the unit costs came down.

So then the next question around the gas price is, why, what happened? Well the reason that the gas price appears or is so high is because we have some liquids rich gas, mostly in the Texas Panhandle where we’re rapidly increasing volumes as well as in Southern Oklahoma. We operate those wells but we do not operate the plants that the gas is sold into and the way it works is that we are paid for the value of the processed gas, the residue gas and the natural gas liquids that come back from that, but we don’t own those natural gas liquids. Instead its translates to use as high BTU gas.

So when you add the value for the [edgy Ls] that were sold together with the residue gas, you have a substantially higher value which gets translated back into not just BTUs but for us the way we report, volumes MCFs and that is the biggest reason for the high gas price that we had. You know we had just a fabulous quarter but there’s always some naysayers out there and some have observed that yes we had record production, record revenues and we did have records earnings but they were only just up slightly for the year compared to last year and in that regard I need to remind people that last year in 2006 we had a few nonrecurring items that boosted our earnings in 2006.

The two biggest were the sale of some limited partnership interests that we had that netted us about over $18 million and then we also back then had some lingering gas hedge contracts that we were having to account for on a mark to market basis which boosted 06 earnings by a pretax $23 million so that’s, pretax those two items are $41 million, after tax about $26 and $0.31 of earnings in 06 that were not recurring. So and this year’s earnings are you know very clean, the only unusual item we had throughout the entire year was the gain on the early extinguish [unintelligible] debt that we had in the second quarter which was $5.1 pretax, $3.2 after tax or only $0.04 per share. So, on a clean recurring basis we did have a nice increase year over year. That’s all I want to comment about on earnings so Sheryl we would be happy to begin to take questions.

Question-and-Answer Session

Operator

Thank you at this time I would like to remind everyone if you would like to pose a question press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first question is coming from Larry Busnardo of Tristone Capital.

Larry Busnardo – Tristone Capital

Good morning everyone, on the capital budget when you look at capital allocation it looks like the Mid-Continent region and the Permian are getting the biggest bumps, with the Mid-Continent being up 35% and the Permian being up looks like right around 22, I’ve got a pretty good sense I think of where the increase in the Permian dollars are going to but could you just go through the Mid-Continent a little bit and talk about where those dollars are going? Is it more the typical program I guess the lower risk program, is there anything new that’s being done or anything differently being done within the Mid-Continent program?

Tom Jorden

Larry this is Tom, of course when we say Mid-Continent we are including Texas Panhandle in that overall umbrella. So the single biggest increase in the Mid-Continent comes from our active drilling program in the Texas Panhandle. Our run rate with nine rigs, we’re going to ten shortly, you know a lot of those are fairly high dollar horizontal wells.

As you know indicated with some of our innovations, we’re drilling them faster so we’ll probably have somewhere between $250-$300 million invested in the Texas Panhandle alone. In the Oklahoma portion of the Mid-Continent, certainly Southern Oklahoma is seeing an increase in activity and you know depending on what happens with our emerging [unintelligible] shale well that could certainly put us at the high side of that estimate or even increase it. So just to recap an answer to your question, the single biggest element is our emerging and aggressive Texas Panhandle program.

Larry Busnardo – Tristone Capital

Okay so it sounds like it’s just more activity taking place rather than you know new areas or anything like that.

Tom Jorden

Yeah now we would consider [unintelligible] to be a new area or a new play in an old area but yes its increased activity, we’re really getting after it in the Texas Panhandle in particular.

Larry Busnardo – Tristone Capital

On the Woodford when you were talking about the $7 million well cost there, what type of EURs do you think you need to make that program economic?

Tom Jorden

You know that’s a raging debate Larry. We’re, you know we’d certainly like to see something between 3-4 BCF per well, that would be a hope and we’re, you know we’ll see if we get there, I mean it’s too early in the program really to say one way or another but we’re out there testing it.

Larry Busnardo – Tristone Capital

Now on the $7 million, is that, do you think that’s where you could get to or is that what it’s costing you right now?

Tom Jorden

That, you know we’ve spent quite a bit more than that on one or two of our wells, I can tell you that that’s our current AFEs are in the $7 million range and you know as we get to longer laterals we experiment with longer laterals those well costs will more than likely increase from that but we would anticipate that would be a good increase because we’d be picking up additional frac stages with a longer lateral.

Larry Busnardo – Tristone Capital

Okay and then just lastly, on the production guidance on the range there from an organic standpoint you’re looking at 5-10%, kind of a wide range there, can you just talk about what might happen or what the risks are that would get you to the 5% and then what do you think would need to happen to get you towards the higher end of that range?

Tom Jorden

Okay that’s always a wild card because we’re trying to project forward our the results of our drilling program. What we do just to give you some comfort level if you want to say there is one, we look at each individual program, we look at the explorations plans for the upcoming year, we compare it to previous year, we see incremental production added versus capital dollars spent and we put together a risk plan.

What it really means and in the case of this year I believe is that we maintain the activity levels that we currently have because the models are really keyed off of where we were at the tail end of last year and to the extent that we keep 30-32 rigs running, the Woodford pans out, that would be in my mind a plus, it would help get us over the midpoint of that guidance. So the continuation of our program in general, I feel very comfortable could get us in the midrange of that full year guidance.

Larry Busnardo – Tristone Capital

Okay.

Mick Merelli

The other thing is that you know that Tom mentioned the higher risk portion of our drilling program and you know we don’t include any, that doesn’t include any results from that, we’ll just have to see what happens out of that and when that times in you know we never know when we’re gonna, if I had my way we’d drill all the good wells the first month of the year. But we don’t know when they’re gonna come so it’s hard to say what the impact of the higher risk programs gonna be on our production for the year.

Joe Albi

And on that note the South Texas wells can sure have a positive impact if we start out the year with a couple successes down there.

Larry Busnardo – Tristone Capital

Sure, sure, alright great thanks guys.

Operator

Thank you once again as a reminder if you would like to pose a question please press star then the number one on your telephone keypad. Your next question is coming from Kevin [Wank] of [Polinus] Capital Management.

Kevin [Wank] – [Polinus] Capital Management

Good morning everybody and congratulations on a great quarter. Tom on the Woodford wells, what do you think is a reasonable decline rate assumption?

Tom Jorden

Well you know we just don’t know yet, Kevin, I wouldn’t want to give you a number because we’re having a raging debate on how to model these things, with the type of curve. You know, the only straight answer I can give you is we don’t know yet.

Kevin [Wank] – [Polinus] Capital Management

Okay and then Paul given the positive hedging effect in Q4, what does it look like could be the hedging effects in Q1 at this point?

Paul Korus

It’s going to be substantially less for two reasons. One is we had an average of $80 million a day hedge last year and our hedges are in a good place. The $7.00 floor we have is a $7.00 Mid-Continent floor, actually a location on an A&R pipeline in Custar County. So those hedges were very good to us last year, netted us $27 million, over $0.20 per CFE in price. What’s changes is as of January 1 we went from $80 million a day to $40 million a day hedged. Same floor price, these are callers.

We made money on those hedges in January, a little bit in February. Right now the you know NYMEX contract and futures market for basis differential you know we’re probably not going to make any money on them in March because we’ll be above our $7.00 floor and below our $9.90 ceiling. [Overlay] we’re not going to see much hedging benefit going forward in 08 unless the unforeseen happens which you know can always happen, you know gas prices go down.

But right now you know the forward curve is telling us that you know March is going to be [Henry Hub] price of over $9.00 and the year is going to approximate $9.00 and oil geeze we all know you know, a bit above $90. So you know, you model those types of prices against this production forecast and you can see why we’re not afraid to have a $1.1-$1.3 billion capital budget because we can afford it.

Mick Merelli

[Overlay] yeah but it being an afraid is we don’t have very much debt. The $1.1 and $1.3 capital budget is built around how much we can get done. We have more opportunity than that and you know if, unless we have some serious [prices] you know it’s just how much we can get done. We have a lot of opportunity and we’re low debt, so money is not a big problem. Our opportunity is not a problem, our problem is organizational and the way things go together, just how much we can get done.

Kevin [Wank] – [Polinus] Capital Management

Okay, that was actually going to be the next question. Now you’re spending you know even with how strong the cash flows are you’re spending a bit more than cash flow with the announced capital budget and you know how much of that is a factor of how confident you feel about the projects and how much of that’s a factor of how confident you feel about commodity prices.

Paul Korus

Well as Mick mentioned you know the $1.1-$1.3 or call it for just make things simpler, $1.2, take the midpoint, you know that’s the summation of what we think we can get done during the year. That was not put together you know to fit within some sort of cash flow stream because you know if cash flow is close to that, you know we did end the year with over $100 million of cash and we have nothing drawn on our bank credit facility. So we’re very well positioned to fund it. You mentioned though that you know that that type of spending is below cash flow. Well that’s below a cash flow estimate that some would make if you used current futures prices, you get a different answer.

Kevin [Wank] – [Polinus] Capital Management

Okay, with the large capital spending program, if something interesting comes along to possibly acquire, what are your thoughts about that?

Mick Merelli

Well I, obviously we’d acquire it if we could but what usually happens is somebody else likes it better than we do you know. But if we could, you know if we find something that we really like we would do that. It’s still a competitive, very, very competitive arena. You know our problem that we it has to bring us more than just production and reserves. You know the way that we look at the world, our drilling program gets us in a drilling and capital programs you know just for the way that we look at it gets us in the 20-30% rate of return and so you know to we have to have some kind of upside in anything that we look at because when the PDP that you buy is going to be at a heck of a lot lower rate of return than that. The market won’t let you do [overlay] have it.

Kevin [Wank] – [Polinus] Capital Management

One minor question, Paul the gas gathering revenues bumped up a bit in Q4, I mean are they now higher permanently due to other factors or is that just a onetime thing?

Paul Korus

Well that’s a similar story to our gas price realization because the margin that you see there is really gas gathering and processing. We do also own some gas processing plants, five of them that matter and so we are receiving higher liquids prices on that processed gas too. If we owned the plant, that value is coming back through this margin as opposed to showing up in our gas price.

Kevin [Wank] – [Polinus] Capital Management

Okay, great, thanks, congratulations on the quarter.

Operator

Thank you, your next question is coming from Gregg Brody of J.P. Morgan.

Gregg Brody – J.P. Morgan

Good afternoon guys. Hey just a couple questions, the first one being do you have any more [spall] of extra targets for this year in terms of like Gulf Assets, et cetera. And then maybe if I know the convert isn’t due till December 08 but any update on your thoughts there as to what you might do or not do if you may call it.

Paul Korus

Sure Greg its Paul, I’ll answer those. The only assets that we’re contemplating selling in the near future are non operated Gulf of Mexico assets. And you know clearly we’re not in fire sale mode there. The production from those blocks you know is declining, not as rapidly as the decline that we had experienced the prior two years especially after we get rid of the main pass but we will see declines out there which we’re going to be fighting all year, could be as much as 10 million a day from beginning of year till the end of the year. But as I mentioned, not a fire sale, it doesn’t, we don’t operate ‘em so we don’t have a lot of overhead tied up in continuing to own them. If we get the right price and we will have marketing efforts underway, if we get a good price we’ll sell ‘em, if not we’ll keep ‘em.

Gregg Brody – J.P. Morgan

Out of that, of the non operated units, how much of that is, what’s the year end reserve number associated with those numbers?

Paul Korus

Our reserves in the Gulf of Mexico are probably around 30 BCFE, don’t hold me to that number. Guys are looking it up.

Tom Jorden

Greg it was 25 Bs at year end, 25.

Paul Korus

So that’s not a big package. On the converts, they’re callable and our option in December you know we’ll just wait to see what market conditions are then. They are converts so you know it’ll, they’ll be a challenge to deal with because convert holders usually want another convert. So we’ll see, but we have no firm plans to do anything.

Gregg Brody – J.P. Morgan

Okay, thank you.

Operator

Thank you once again that is star one to pose a question. Your next question is coming from Tim Curro of Value Holdings.

Tim Curro – Value Holdings

Hi gentlemen, I might have been not paying attention but what accounts for the 62 BCF increase in Western and other gas reserves?

Paul Korus

Yeah, it’s Paul, we have a project in [Sublet] County Wyoming, we refer to it as Riley Ridge because that’s the geographic area. It’s around, it’s a large gas reservoir and we are in the process of developing it. This dates back to 2005 when we acquired Magnum Hunter, that’s how we came across, came into this asset. But we have a pretty aggressive plan going forward to develop those reserves. It involves building a gas plant, completing some wells, drilling some wells, so we have made significant progress and so we have had an increase in what’s are presently proven undeveloped reserves associated with that field.

Tim Curro – Value Holdings

What do you think the potential is there?

Mick Merelli

It’s hard to say Tim, you know right now we own 40% of it I think something like that and it’s a huge structure, you know that’s where Exxon’s [huge] creek plant is, they’ve been out there for what 20 years or so, so it’s you know this is we’ll just have to see what it looks like going forward. We have a little bit of different technical put together of our plant. And so we’ll just have to see where it goes. It’s definitely a different kind of a project you know, there’s virtually no reserve risk in terms of whether the gas is there or not.

It’s in [Madison] formation, Exxon’s producing it and frankly what makes it a little more attractive economically now is the helium associated with the gasses. So, we’ll just kind of have to see. It’s a pretty good sized project though and but at the end of the day you know it’s, the plants going to initially will make like 20 million cubic feet a day or something of methane. So and it’s, but it’s a 50 year project, so, it’s, that ought to be long enough life for those guys that like long life.

Paul Korus

So we’ll be developing and building a gas plant and what not during 2008 and hope to see initial production from it in 2009, but it’ll be the type of production which is very uncharacteristic of Cimarex and that is you know fairly low rate and lasts forever.

Mick Merelli

Yeah the only, the gas rate is just a function of the plant capacity, there’s no decline, you don’t have a declining stream. So it’ll, whatever the plant puts out, it’ll just put out for the life of the plant and that’s how you get back to the reserves.

Tim Curro – Value Holdings

Alright, thanks Mick, Paul.

Operator

Thank you there appears to be no further questions at this time I will turn the floor over back to management for any closing remarks.

Mark Burford

Well thank everyone for joining us today and we look forward to continue to report to you in future quarters and we’re sure off to a good start in 08 and again look forward to talking in the future and if you have any other calls please don’t hesitate to give us a call. Have a great day. Thank you.

Operator

Thank you this concludes today’s Cimarex Energy fourth quarter 2007 results conference call. You may now disconnect.

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Source: Cimarex Energy Co. Q4 2007 Earnings Call Transcript
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