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Cimarex Energy Company (NYSE:XEC)

Q2 2008 Earnings Call Transcript

August 5, 2008 1:00 pm ET

Executives

Mark Burford – Director of Capital Markets

Mick Merelli – Chairman, President and CEO

Tom Jorden – EVP of Exploration

Joe Albi – EVP of Operations

Paul Korus – VP, CFO and Treasurer

Analysts

Larry Busnardo – Tristone Capital

Eric Hagen – Merrill Lynch

Jeff Robertson – Lehman Brothers

Duane Grubert – CRT Capital

Matt Sherwood – ZS Fund

Andrew Coleman – UBS

Operator

Good afternoon. My name is Brei and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cimarex Energy second quarter 2008 earnings and operating conference call. All lines are placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator instructions) It's now my pleasure to turn the floor over to your host, Mark Burford. Sir, you may begin your conference.

Mark Burford

Thank you, Brei. Thank you very much for joining us today everyone at Cimarex second quarter earnings conference call. We did issue our press release this morning. Copies can be found on our websites and we'll be making forward-looking statements on today's call and I'll refer to the end of our press release which does have some language regarding forward-looking statements. In today's call, we have Mick Merelli, Chairman and CEO; Tom Jorden, Executive Vice President of Exploration; Joe Albi, Executive Vice President of Operations; and Paul Korus, Vice President and CFO; and James Shonsey, our Vice President and Controller.

Mick will be making some opening comments on the same quarter results and where we're going second half of the year. Tom will provide some details on drilling program in each of our core operating areas, and Joe will cover our production and exploration programs, and Paul will comment on the financials. We'll go ahead and get going and jump right in. I turn the call over to Mick Merelli.

Mick Merelli

Thank you. Good morning to those of you to our West and East. It's noon here – 11 o'clock here in Denver. Thanks for joining us on today's call. We're very pleased to announce record quarterly financial results. Second quarter earnings, totaled $229 million, or $2.68 per share, bringing our year-to-date earnings to $379 million, or $4.44 per share. It is interesting that we've earned more in the first half of 2008, than we did in all of 2007, and 2007 was a pretty good year.

Our results benefited from higher commodity price and some nice production gains. Our average realized price this quarter was $10.57 per MCF for gas, and $121.64 per barrel for oil. We grew our production to an all-time high of 488 million cubic feet equivalent per day in the second quarter of this year, and that's a 10% increase over last year's second quarter.

For the first half of 2008, our exploration and development investment totaled $667 million. For the full year of 2008, we expect to invest $1.3 billion to $1.5 billion on exploration and development activities. We continue to build our acreage position where we see potential for good returns, and we're realizing very good results in all of our programs.

We continue to expand our drilling activity particularly in the Permian and Mid-continent areas. This is a very active drilling program, from a capital standpoint where we all spend something like 40% more this year, than we did last year. So far, this year, our program for generating good rates of returned.

Looking at the second half of '08, and further, we'll continue to expand our drilling and future opportunities in multiple place. We have a portfolio of horizontal drilling in the Texas Panhandle, Anadarko, Arkoma, Permian, and then Permian Basin. And we also have an extensive 3D conventional drilling program in the Gulf Coast. We continue to grow this inventory and our organization is structured to develop grassroots opportunities. We expect this year to spend something in the range of $150 million to $200 million on acreage and seismic and may wind up being more than that.

We're well positioned as we've ever been and we expect continued growth in drilling activity and inventory. So with that, I'll turn the call over to Tom to cover the detail of our drilling program.

Tom Jorden

Thank you, Mick. This is Tom Jorden and I'm going to walk you through our exploration and development activity for the second quarter.

So far this year, we drilled 252 grows [ph], or a 158 net wells completing 94% of those as producers. So most of our program is at moderate risk repeatable project driven drilling.

Exploration and Development. Capital investment for the first half of 2008 totaled $667 million and we're looking for a more active second half than we did at first half. Our full-year 2008 exploration development capital was projected at approximately $1.3 billion to $1.5 billion and we have increased our guidance for this capital. Previously, we've described our capital to be in the range of $1.1 billion to $1.3 billion, so we've raised our guidance and that's always a moving target depending on our project availability, depending on the prevailing price, depending on the rig availability. But this is the time of year when we're doing – or focusing for the second half and we do expect a more active second-half than our first-half, so we ought to be in that $1.3 billion to $1.5 billion range.

The update of the range reflects the culmination of higher activity in our Permian and mid-continent drilling programs and some price inflation. We were running approximately 36 operated rigs when we reported our first quarter results and we've increased to 39 operated rigs currently. So we've got very active program going and it's a lot of fun to see our various regions having a good year getting after – bearing some of the successes for some of the projects we put in place the last couple of years. And now I'll cover our drilling program region by region starting with the Mid-continent.

Our first-half 2008 drilling totaled 133 gross or 73 net wells, and we completed 98% of those as producers. Our first-half Mid-continent capital totaled $295 million, or 44% of our total expenditures. And the Mid-continent, as we define it, is a combination of our Western and Southern Oklahoma and our Texas Panhandled projects. In our Texas Panhandle or granite wash drilling totaled 61 gross, or 45 net wells, with 100% of those completed as producers. Now we're always bringing on wells in the course of business, but some notable wells commencing production the second quarter included our Killbrew 218-4 well on the Texas Panhandle, where we had 100% working interest, came on in 5.3 million cubic feet a day. The Earp 6010H horizontal well, 100% working interest, came on at 4.6 million cubic feet a day. The Issex [ph] 17 horizontal, 100% working interest came on at 3.2 million cubic feet equivalent a day. And the Campbell 538 horizontal well, again 100% working interest, came on at 3.1 million cubic feet equivalent a day.

So, those numbers kind of show you a couple of things. One is we're increasing our emphasis on horizontal drilling. We have a nice program that continues to grow there. And second, our work interest resides [ph] there. Nothing is more efficient for use in organization having a high working interest in our projects. We're continuing to see good returns on this great program. We have growing opportunity and that's thanks to team work in the area, with a very aggressive technical and land staff working on our panhandle and they are doing an excellent job building our program.

And, in the Anadarko Basin, the Arkoma Basin in Southern Oklahoma, our drilling a totaled of 72 grows and 28 net wells, with 96% of those being completed as producers. And in the Anadarko Basin, 11 horizontal wells have now been drilled in the Woodford Shale play. Those are wells that we have participated in. The wells are in various stages of completion. Evaluation of those 11, 10 of those are currently producing and one is being completed. We have four operated rigs currently drilling in the horizontal Anadarko Woodford.

We're still leasing acreage. We're trying to increase with our current 34,000 net acre possession. But until we've determined that we're not able to lease, we're going to be a little cagey on giving details about that program. Obviously, with four rigs running, we think it's meeting an economic threshold for us, but we're just not to the point yet where we are prepared to give details. I will say the jury is still out on well cost and performance and it's a very active focus area of ours.

Otherwise in Oklahoma, we have brought on some good wells and production rates from those notable wells – vertical wells in Oklahoma, include the Toelle 247, where we had a 63% working interest came on at 12 million cubic feet equivalent data, that was the vertical Atoka well. The Fox 113, where we had a 43% working interest, came on at 5.9 million cubic feet equivalent per day. So we have 16 operator rigs, in our mid-con and region and of those 16, that's 9 new Texas Panhandle and 7 in Oklahoma, and very, very active program for us.

Moving on to the Permian Basin, our first half 2008 drilling totaled 97 gross and 69 net wells, 97% of those were completed as producers. In the first half of the Permian, we invested $255 million, or 38% of our total expenditures. Permian continues to be just a great arena for us, you know, by and large, these are properties that we acquired through the Magnum Hunter acquisition 2005. It's been a great 2007 and 2008 for that project. Our group in Midland, Denver, and Dallas has really stepped up to the plate to bring new projects online.

In Southeastern Mexico, for first half 2008 drilling, mainly targeting the Morrow and Wolfcamp formations, we drilled 49 gross and 33 net wells with 94% of those being completed as producers. Recent horizontal Wolfcamp wells, brought on production, include our drumstick 7 Federal 1-H horizontal well where we had 50% working interest, came on at 325 barrels of oil equivalent per day. Our County Line Federal 1-H horizontal well, 55% working interest, came online at 225 barrels of oil equivalent per day. And our Cave Lake 24 Federal 3-H horizontal well where we had a 62% working interest, came online at 190 barrels of oil equivalent per day. So we have an ongoing horizontal program there that's bringing on some very, very nice oil rates.

We also have a strong Morrow well come on in the quarter. The White City 31 Fed 4 in Southeast in Mexico where we have a 100% working interest, commenced production averaging 5.1 million cubic feet equivalent per day. Moving over to West Texas, also in our Permian region, we drill a total of 48 gross or 36 net wells in the first half, of which, 100% were completed as producers. Our Third Bone Spring horizontal oil drilling totaled 10 gross or 9 net wells, and we have 9 rigs working here in the Third Bone Spring place. That's a very, very active play for us. We've talked about that in the past and will continue in the future. Of those nine wells, six are drilling horizontal laterals and three are drilling the vertical hole. The way we prosecute that play, we have a big rigs that drill the vertical hole and then we come in behind that with a smaller rig drill the lateral. So we have six horizontal and three vertical wells operating and in play for a total of nine.

So recent Bone Spring wells that were brought on production include the Cimarex University 18-41 B1 horizontal well, 100% working interest that came on at 670 barrels of oil equivalent a day; the Monroe Estate 1H horizontal well, again, 100% working interest came out at 450 barrels of oil per day; and the Warwink University 18-26 A 2H were we have a 37.5% working interest, came out at 380 barrels of oil equivalent per day. We have 19 operated rigs drilling at Permian Basin and that's 9 in Southeast in Mexico and 10 in the West Texas. So, as we move on to the Gulf Coast, and I leave the Mid-Continent and Permian, I just want to make a comment that we're seeing the fruits of some of the project drilling we've discussed in the past. A number of these are horizontal plays. These projects have legs that will be on going for years to come and we're just very, very pleased with not only of our economic results but the way our teams have gotten after it both geology engineering, land. Getting these things prosecuted and get in the mood [ph] ahead.

In the Gulf Coast, we drilled 19 gross or 15 net wells in the first half of 2008 and we completed 58% of those as producers. Most productivity occurred in South Texas which includes the Texas Coast – Southern Texas Coast, really, over into Liberty county, southeast part of the state. There are – we have Yegua/Cook Mountain joint program. This year we drilled a total of 11 gross or 9 net Yegua/Cook Mountain wells with a 55% success rate. We have four rigs drilling in the Yegua/Cook Mountain trend and we're on track to drill 25 wells here in '08. That's up from 19 in '07. So, the Yegua/Cook Mountain continues to be a very, very nice play for us. In terms of just pure profitability, it's our most profitable play. We've recently shot and processed some new 3D data. We're drilling on a program that we shot late last year and we just have a 3D seismic program that the tape just came off the field couple of weeks ago and we hope to be drilling on that shortly.

Recent wells commencing production include the Jack Knife Number 1, where we have 70% working interest came online at 4.5 million cubic feet equivalent per day and the Clubb West 2, where we have 70% working interest, came online at 3.8 million cubic feet equivalent per day. That play, the Yegua/Cook Mountain play, continues to expand. We're – and now we're shooting additional data but we're looking to expand those – that trend going both East and West.

So, in conclusion, we're in the middle of a great drilling program this year. We have a growing opportunity set, and we're really thrilled to be putting some production growth to evidence of the results that we're seeing. So with that, I will turn the call over to Joe Albi, our Executive Vice President of Operations.

Joe Albi

Thanks. Thanks, Tom. Q2 '08 was very good to us from a production standpoint, with reported production of 448.4 million a day, we exceeded the top end of our guidance, and have now logged, excuse me, advanced 488. I'm sorry, 488.4, I was going to say, “Holy Cow. What happened?” 488.4. We've exceeded the top end of our guidance. And we've logged our fifth consecutive quarter of production growth and this, despite us selling a good number of properties here in 2007.

Our second quarter production sets a new record for the company and it represents a 2.5% increase from our first quarter average of 476.2 million a day, and 10.3% increase from our Q2 '07 average of 442.6 million a day.

Our production gains, and Tom just hit on this, tied directly to our activity. In the second quarter of '07, we're running 22 to 24 operated rigs. In Q2 '08, we're running 37 to 39, that's more than the 50% increase. The result? Well, it simply increases in both our oil and gas production. Our average net daily oil production has jumped 13% from 19,800 barrels a day in Q2 '07 to 22,471 barrels a day during Q2 '08, while our average net daily gas production has increased 9%, from 324 million a day in the second quarter of '07 to 354 million a day during Q2 '08, and that is a record for the company.

We continue to see double digit production growth in each of the core areas of activity. As compared to the second quarter of '07, our Q2 '08 equivalent daily production increased 20% in the Mid-Continent, 15% in the Permian, and 12% in the Gulf Coast.

Our Texas Panhandle program is a driver behind the 20% increase we've seen in the Mid-Continent area over the last year. At the end of Q2, we had 16 worth rigs working in the Mid-Continent area; 7 in Oklahoma, with 4 focused on the wood produce Tom mentioned, and 9 in the Texas Panhandle with 5 of those working up horizontal Granite Wash program. Together, this increased activity just rig count alone, boosted our second quarter Mid-Continent equivalent production to 219 million a day, which is a record for the company for the region.

Our increase in company oil production is primarily driven by our horizontal oil activity in the Permian Basin. Those plays have increased our Permian oil production 35% from 9,163 barrels a day in Q2 '07, to 12,399 barrels a day in Q2 '08. Total equivalent production from the Permian hit a 163.3 million a day in the second quarter, again, a region record for the company. We now have 19 rigs running in the Permian, 15 of which, are dedicated to our horizontal oil programs. In the Gulf Coast, as Tom mentioned, our focus continues to be on or South Texas, Yegua/Cook Mountain place, where the recent successes that we've had there have contributed and are the direct contributor to the 12% increase in production we've seen since the second quarter of '07.

Looking forward, we provided third quarter guidance of 483 to 495 million a day, and with anticipations for continued growth we hope to obviously fall on the upper end of that range. This range equates to an 8 to 10% increase from our thirds quarter '07 reported average of 448.6 million a day. With our strong second quarter, we've raised the lower end of our full year guidance to 418 million a day, with no change on our upper end of 495 million a day. In this new range, 480 to 495 million a day, equates to a healthy 9% to 12% increase in production in 2008 after accounting for our 2007 property sales.

A few words on our exploitation program. With total CapEx of $69 million down at the end of Q2, our '08 exploitation program is still on track to meet the $125 million to $150 million spending range that we mentioned to you on our last conference call. Through Q2, we've completed a total of 190 significant exploitation projects, 46 new wells, and 144 recompletion and/or work-over projects. The program continues to meet all of our expectations with regard to production adds and project economics.

The majority of our exploitation drilling activity took place in the Southwest Westbrook field, our West Texas area, where we drilled 28 wells and performed 16 recompletion and/or work-over projects, which represented $17 million in capital that we spend since the beginning of the year. Our focus on the field during Q3 and Q4 will shift slightly, more directed towards water injection in order to optimize flood conformance and the likely result would be fewer wells drilled in the field during the last half of the year.

Year-to-date, mid-Kansas and mid-Continent areas, we've performed 11 drilling projects and 88 work-over and/or recompletion projects, representing $32 million in CapEx, $6 million of which has been directed to our Walnut Bend field located just North of Dallas. We've performed in that field 25 recompletion projects and three deepenings since the beginning of the year. And currently, have seven work-over rigs work in the field and it looks like we're on course to put another $7 plus million down by the end of the year.

This has been a real nice project for us. Over the last two years, our exploitation efforts have arrested our field decline and increased field production to 1500 barrels a day, which is more than double the 700 barrels a day the field was producing when we acquired it.

In over our other areas, our production group has been focused on our base properties. Finding ways to maximize production and lower LOE. Via compressor optimization, artificial lift, salt water disposal projects, and enhancement to our chemicals and training programs. Too numerous to mention are all of these projects but the reference are certainly surfacing, in both our production and our LOE. As an example, since the fourth quarter of last year, we project that the salt water disposal projects performed in just the Texas Panhandle and West Texas areas alone will save approximately $8 to 9 million in LOE.

In a nutshell, our production group has done a great job this year, managing our base properties as well as our exploitation program and we hope to match their first half performance here as we get in into the second half of the year. Just a couple of comments on the market before turning the call over to Paul. Rig rates. Although our average onshore rig rates have hovered around – have been hovering around 18,000 a day during the first half of the year, we're just now beginning to see some signs of upward pressure. We're also seeing the market tighten a bit. But even with the tightening of the market, we're comfortable with our existing rigs and relationships and commitments that we have that we'll be able to continue to expand our program here into the remainder of '08 and then further again as we going into 2009.

Steel cost. We touched on in our last call. They continue to be on the up tick due to a run up in material and shipping cost, tightening supply, weakness in the dollar, we've now seen nearly a doubling in the market price for pipes since January. Again, with the tight market, we believe we're very well positioned to fight the tight supply having a good inventory of pipe, a physical inventory of pipe, and by aligning ourselves with various suppliers to obtain a portion of their allocated deliveries as we move down the road.

All of these, our increased pipe materials, fuel, day rate cost, they're going to find their way to the bottom line of our completed well cost and are now season shown [ph] that they probably represent anywhere from a 5% to 7% increase in our total well cost as compared to the beginning of the year. That said, as always, as we continue to move our program forward, we'll incorporate current market conditions into all of our project economics and make sure we're drawing economically viable programs. With that, I'll turn the call over to Paul and I'll correct you if get the production rate wrong in the second quarter.

Paul Korus

Thank you, Joe. Much has been covered already, I'll just touch on a few things that may requires some clarifications.

The increase in the capital program for this year to $1.3 billion to $1.5 billion, just some regional ranges that you can think about. In the Mid-Continent, we now expect we would be about $600 million to $700 million. In our Permian Basin area, we would expect to be between $500 million and $600 million. So those areas have both increased by about a $100 million each. And then our Gulf Coast – our expectations for our Gulf Coast area is broadly defined all the way from South Texas – Southeast Texas. In the Louisiana and Mississippi, we would still expect to be around $200 million.

So that will – that gives you the breakdown of the range $1.3 billion to $1.5 billion. So how that fits in to our overall results? Well, obviously, we have a very large drilling program this year, but it is funded cash flow. There had been no borrowings in our credit facility and no dead offerings in the equity issue. And the satisfying part or gratifying part about that is it is delivering 10% volume growth which we do believe is sustainable. You know, other things you should consider is that because we have always been largely on hedge – unhedged, we're – are reaping full benefit of the high prices is then in turn resulting in record earnings in cash flow. So we're very satisfied with where we are and what we've done so far this year, and look forward to finishing it off strongly,

In the news release, we provide guidance on most of our expenses. Some have changed a little bit, but we're really talking pennies and nickles, some things not discussed in the news release that I think it's worthwhile for the – especially the analysts and those with model future earnings and cash quota [ph], to think about, is that you'll notice that our second quarter gas price realization relative to NYMEX was $0.36 below NYMEX or Henry Hub index, whichever you track.

As you know, in the first quarter of this year and last year's fourth quarter, we actually had positive differentials. First quarter, we were $0.31 above it. So we had quite a large swing from $0.31 positive to $0.36 negative. It's influenced by many factors but that the single most important factor is an expanding Mid-Continent and Permian Basin gas price differential relative to the Gulf Coast.

For instance, the second quarter Mid-Con NYMEX differential was about $1.75 versus only $0.89 in the first quarter and we see a similar widening in the Permian Basin. As many of you know that track the gas market very closely, we already have July and August index prices in, and for July and August fifth [ph] weeks, the differential between Henry Hub and the Mid-continent averaged to $1.67. So with all that said, we would expect, and so therefore we're modeling ourselves, that will have a differential of somewhere probably between $0.35 to $0.70 for the third and fourth quarters.

Then also on the oil price realization side of things. Our differential was only $2.34 in the second quarter. We did have some one-off oil revenue collections in there. We have a little project that away [ph] we call it our value-add team and they're doing a very good job of this some revenues that didn't have related volume adjustments. So on a go forward basis, we wouldn't expect to see that and ourselves are modeling a $3 differential to WTI.

And then lastly, I've mentioned in the news releases, income taxes. We continue to see an effective rate of above 36.5% on our book earnings, but given our capital spending program, we would expect that roughly 30% to 40% of that total cash provision will be current with the other 60% to 70% deferred as we move forward to the rest of this year.

I think that's enough comments on the numbers. So Brei, we would be very happy to entertain questions now.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Thank you. Our first question is coming from Larry Busnardo from Tristone Capital.

Larry Busnardo – Tristone Capital

Hey, good morning, everyone.

Mick Merelli

Good morning.

Larry Busnardo – Tristone Capital

First in the WoodFord programs. Tom, did you say you're currently running

Tom Jorden

Yes, we are. Four operator rigs.

Larry Busnardo – Tristone Capital

Four operator's rigs. How many wells do you think you can get done this year? And do you plan on maintaining the four rigs for the remainder of the year?

Tom Jorden

We do. We have – well, I'm going to quote “operated, non-operated“. We've been in 12 wells year-to-date and our current projection is between 27 and 30 for the year. And that's – a number of those are non-operated. Right now, we are participating in eight wells in that play. Four we're operating and four we're non-operating. So, the non-op portion was a little harder to predict.

Larry Busnardo – Tristone Capital

And those are all Woodford wells? Are they all horizontal?

Tom Jorden

They are all horizontal Woodford wells.

Larry Busnardo – Tristone Capital

Okay. And then, I guess, just from your standpoint with the four rigs running, how many wells, looking ahead to next year, I know you still got to set the budget and things like that, but how many wells could you get done in – for the year with the four rig program?

Tom Jorden

That's an active program. It's expanding. I really – don't really want to comment to much about next year other than say it's going to expand and that we're making provisions for that expansion right now.

Larry Busnardo – Tristone Capital

Okay. On the wells you drilled to date, from, I guess, a geological standpoint. Do they all look very similar?

Larry Busnardo – Tristone Capital

Any variances, or –

Tom Jorden

There is, there, yeah. We've seeing variances from well to well, and Larry, again, we're really not prepared to discuss this play in any significant detail, other than to say that we are encouraged. There are a lot of challenges ahead of us, and we anticipate our activity going forward to being to (inaudible) to what we're currently doing, but we are seeing variances, and its a very challenging problem.

Larry Busnardo – Tristone Capital

Challenging just from drilling and completion, then obviously it's still very early so you're working to the program, is that –?

Tom Jorden

Yes. These are deep expensive wells, and so there are just a lot of variables that control this play including drilling cost, product price, sub-surface completion technology, and I probably left a list out. So we're working our way through it and we'll be giving more details as we get more results in, and as we evaluate, you know, we're not going to talk about it freely until we're feeling confident that we've got the opportunity control that we want to control.

Larry Busnardo – Tristone Capital

Okay, understood. Just shifting over to Southeaster New Mexico. Could – just remind me, looking at an average well there, how much they cost EURs and then what type of returns you're getting at current prices and then kind of – what's kind of a break even on those? I know, its probably going to be a fairly low oil price but–@

Tom Jorden

Yeah, I know, you know, a garden variety well in Southeaster New Mexico, you know of course, Southeaster New Mexico is a pretty broad section of real estate. Horizontal Wolfcamp program, a garden variety well is going to be $4.5 million to drill and complete. It's going to come online at somewhere between 200 and 400 barrels per day. It will probably ultimately recover 250,000 barrels, again, that's a pretty wide variance there, and at $120 oil, that's a phenomenal rate of return. And, we run price sensitivity. I can't tell you the break even, but I will tell you that we run price sensitivities at $75 flat, NYMEX less local market deduction, our program is still profitable at that price. So, we would, you know – prices – why we run that? Because when we buy land or when we commit to drilling opportunities, we want to make sure that prices would exclude all to that level, that we would still drill that well. That we would – that prices with $75 NYMEX, that's a program that could sustain that price. And, it is.

Larry Busnardo – Tristone Capital

Could you do the same just for the Bone Spring program just in terms of well costs, IPs, and the EURs?

Tom Jorden

Yes. First, Bone Spring has a little more variable IP and reserves because in some areas we're drilling in the field and some areas we're drilling out of the field. But, Bone Spring is a little deeper drilling, so, a well in the Bone Spring is going to be a little north of $5 million. If its a single lateral, if its a dual lateral, it will probably be a little north of $7 million or $8 million. Those are depths of 11 to 13,000 feet. A Bone Spring well for single lateral will IP between 250 and 500 barrels a day, if its a new area. A new well is going to produce between 250,000 and 350,000 barrels and again, very profitable today's oil price. We're very, very pleased with the (inaudible) set of programs and the critical measure to us is can that program sustain that $75 flat NYMEX price and indeed it can. Now, that's – price that get too much lower than that and that will probably near our limit there but it's a good program.

Larry Busnardo – Tristone Capital

And then on the dual lateral. Is that the range then, the single versus dual that you just gave out?

Tom Jorden

Dual lateral – of course, we don't have a lot of production as to a dual lateral but we model them as a 400,000 barrels, 600,000 barrels a day IP and that's an extrapolation. The truth of the matter is, we don't know. We don't have enough history there.

Larry Busnardo – Tristone Capital

Okay. Great. Thanks a lot.

Operator

Thank you. Our next question is coming from Eric Hagen with Merrill Lynch.

Eric Hagen – Merrill Lynch

Hey, good morning. A question following up on Larry's. In the Granite Wash, what kind of EURs are you seeing? Have those improved and if so, it's because of some kind of new drilling completion process and what's the completed well cost out there?

Tom Jorden

You know, Eric, we – Granite Wash is again a big slot of real estate and so, the EUR's are highly variable and it depends on the area. A typical Granite Wash vertical well currently is probably a little less than a Bcf. For horizontal well, our program is young, so we really don't know yet firmly what those EURs are going to be. We're looking at well cost under or between $3 million and 4 million. So, we'd hope for significant uplift over a vertical well and EUR that – yes, it's very young progress so we couldn't be definitive on that.

Eric Hagen – Merrill Lynch

What's a threshold price when you said $75 NYMEX for the horizontal Wolfcamp for the oil plays. What about for the Granite Wash?

Tom Jorden

The granite wash is price sensitive, it's a fantastic program because it's highly predictable. And again that's all credit to our exploration an operations group. They're doing a fantastic job of projecting the results and drilling their wells at the cost that we estimate. But at $7.50 NYMEX it gets a little skinny. So we run that flat price case. It can stand $7.50 NYMEX but if prices go a little lower than that, we would be concerned. Now if you follow this, as I know have, Eric, for last few years, we've put some hedges in place, couple of years ago, and it was indeed because of that sensitivity. We were spending more and more money in Panhandle and we were concern about stability to sustain a little price sensitivity and we put some hedges in place of that time to protect their capital investment. So all of our areas as we look at price sensitivity the Panhandle has fair degree of sensitivity.

Mick Merelli

I think one other thing – it's Mick – it's a big program. We're one of the most active drillers in the Panhandle, and that sensitivity, we're kind of talking a lot – obviously different wells have different sensitivity. Different areas have different sensitivity. So, even if gas prices went below – if it was perceived that you had a future strip that was less than $7.50 flat, there'd still be a significant amount of that drilling that would make economic sense.

Operator

Does that conclude your question? The next question is coming from Jeff Robertson from Lehman Brothers.

Jeff Robertson – Lehman Brothers

Good afternoon. I apologize if you've already answered this question, but, Tom, in Anadarko Basin, Woodford play, your acreage looks like it's scattered over a pretty broad geographic area. Can you talk about a little bit about the drilling results to-date? And how much of your acreage you've evaluated, and what the plans are going forward?

Tom Jorden

Yeah, Jeff, we – I'm not sure the broad geographic area. In the area we're drilling, our area is actually fairly concentrated with – the easy answer is, we participated in 11 wells that are in productions so, we've evaluated 11 sections. Those are all in 11 unique sections. We're seeing variability in those well results and our (inaudible) forward.

Jeff Robertson – Lehman Brothers

Is the variability, or do you know yet, Tom, whether or not the variabilities are related to structure or just different rock characteristics?

Tom Jorden

We do not know. I don't think the variability – I can't say – I don't think it's related to structure but we can not – we're still working through the science to explain our variability.

Jeff Robertson – Lehman Brothers

Okay. Thank you.

Operator

Thank you. Our next question is coming from Duane Grubert from CRT Capital.

Duane Grubert – CRT Capital

With the recent sector sell off, could you comment a little bit about your views on the idea of doing buybacks perhaps?

Mick Merelli

Well, we'll just have to – I really can't comment. I wouldn't take that off the board. We obviously, we generate a lot of cash flow, and we stand a lot on – we have very active drilling program, we spend a lot of money, we generate a lot of money. So that's – it's always a possibility, and there's different ways that can be accomplished. We're looking at those, we'll just have to see what happens. I know that's a kind of a round – around the bend way to answer your question, but I'm just saying that we're open to that, but to tell that we're considering it or anything else would you know – we're just open to it, we'll have to see what happens.

Duane Grubert – CRT Capital

Yeah, that's a fair answer, and kind of similarly, you integrated the Magnum Hunter properties, you've been getting oilier with your recent programs. Do you see Cimarex as having a capacity to expand into yet a further business unit and backhanded, I'm asking are you also looking at the acquisition market given this relative softness lately in the market?

Mick Merelli

No, again, I think that that's, you know, really what we learned out at Magnum Hunter was that its one thing to buy things, its another thing to have the organization to digest it. And so we've spent the last three years building up the organization and getting over what we have bought. That was a big buy, and I really underestimated how much time to take to get around it.

Having said that, we feel that – we really feel pretty good about having our arms around it right now, so any thing's a possibility. We might buy something or it just have to be something we really like. We're not acquirers that just go out to buy things because they're cheap. It would have to be something that really took us somewhere, that had some drilling potential, that expanded us, brought us something, you know, besides just a nice place to borrow some money and invest at a lower rate return.

Duane Grubert – CRT Capital

Finally, on operational question. In that, you are having really nice success with a lot of your oil completions out there. Is there some learning curves still to be forecast on maybe the completion side. So, I'll ask a very specific question. Do you think your completion are going to look materially different a year or two from now on oil price?

Tom Jorden

Well, there's – it's a good question. I wish I have a crystal ball to answer

Joe Albi

This is Joe. What we've seen historically on these programs is that there's a maturation in cost efficiencies and completion efficiencies over time and the more and more wells that we drill and complete, we're learning something new each time. We've tried different completion techniques that have seemed to improve our productivity over time but I think a lot of the results we're seeing are tied with to the rock as well. So, we'll continue to use science, micro seismic, altering our simulation designs, modeling them, seeing what we get and compare that to what we thought we're going to get and continue to enhance the program. In a kind of a top level answer, I guess, to your question is a new play, I think the chances of improving production into our cost, certainly, it's a lot better to walking into the play than as you get further down into it. Our West Texas, horizontal program, we've learned a lot and, I think, we've really come along way. As is the case, I guess, to some degree and Southeast New Mexico and of course, our Granite Wash program. We have technical specialist that do nothing bad. Design our fracs and monitor results and in fact we oftentimes, monitor and change our fracs on the fly, which I think is different than some other companies. But hopefully, that gives you an answer. Albeit maybe a little bit vague.

Mick Merelli

I think the other thing that's involved in that is that all of these plays, lateral length and geometry of laterals and all of that. Pretty much everything we've done has just been single lateral. And, I'm not sure that we have the potential to take exotically long laterals like we're seeing in some of these other place. But, those things will be things that we'll continue to look at and if they make sense, that's a potential protect [ph] that I think in these oil wells to, maybe, be beneficial to us.

Tom Jorden

You know, Duane, this is Tom, just my take on that. One of the things that you heard us talk about and we've moved towards in the last two years as more project drilling, a lot of horizontal drilling, but also projects. And the thing with projects is we do have the opportunity to try different things and learn from it and adapt within that project that has additional drilling. And you mentioned oil completion, for example, in a horizontal Wolfcamp play in Southeast New Mexico, we've had the opportunity to experiment with open hole completions. We've had the opportunity to experiment with case liners, cementing the liner in place. We've had the opportunity to experiment with open hole packer systems. And, because we have dozens and dozens of wells ahead of us in that program, we are able to optimize and learn. And I have great confidence in our drilling completion group. Everywhere we've given them a project, they've optimized. So, we'll continue to do that.

Duane Grubert – CRT Capital

That's very helpful, thank you.

Operator

(Operator instructions) Our next question is coming from Matt Sherwood of ZS Fund.

Matt Sherwood – ZS Fund

Strong quarter, congratulations on that. Just had a couple of questions. First of all, can you walk through the rationale? It seems like you've increased your drilling program pretty substantially, be at on the gas side at least? With – what you were talking about with the mid-Continent basis? Gas prices are really not any higher than where they were. Could you sort of, walk through the rationale?

Paul Korus

Well, with drilling programs, you really can't make decisions in real time.

Matt Sherwood – ZS Fund

Right.

Paul Korus

If you have ten rigs running in the Texas Panhandle, you're out six months in terms of permeating and things like that. So, really what drives us is a longer term view on gas prices. So, why are we active in the Texas Panhandle, why are we active in the Woodford Shale? It's because of – as we looked at cost and opportunities that we had under our control and match that up with a future price deck, the economics drove us to those places. So, it's a much longer term, time horizon that causes us to accelerate programs than it is anything else. So, we're not likely to just shut down a program or release rigs when we get some sort of dip in prices. But keep in mind that it's still – I mean, it's not all that bad out there in terms of prices. I mean, we're still getting $8 in the Mid-Continent. So, now you know, that's as of today.

Matt Sherwood – ZS Fund

Right. Can you sort of walk through, obviously, with the oil, let's say, at $20 an Mcf and gas at, as you said, $8, have you been shifting – obviously your production growth has been a little bit higher in oil. Have you been shifting resources towards oil?

Mick Merelli

We are – we're just victims of – or users of whichever way you want to look at it, of geologic risk and rate of return. Well, actually it is all about risk rate to return. So if you look at a – you know, if we look at the Granite Wash program, we can accept a lower rate to return out there, based on strip pricing and then with 750, $75, $6, $50 flat cases. Those are sensitivity cases, we just look at them on a risk adjusted basis and whether they're gas or oil, we take the best projects, and we just move through it. So, it is all about risk – it is more about risk and rate to return than it is anything else, and of course the big problem is whether you use for a commodity price forecast and in that regard, we run the strip and then we'd like to run some sensitivities to see which projects are more resistive to the lower prices.

Tom Jorden

I think there's probably maybe a bit of a misconception just from your question in, and from other on the call here today. Yes, if you look at our year-over-year numbers, we have a larger growth than our oil production, probably 13%, 14% than we do in our gas production which is still pretty good, 8% or 9%. But remember, we had some property sales last year that are affecting this year's production. If you narrow in and you look at our second quarter volumes relative to our first quarter volumes, you will observe that our gas production went up 14 million a day, and our oil production was roughly flat. So, if things keep moving around, it's the result of timing of activity in these programs more than it is some big strategic move to –

Mick Merelli

We want more – we love what we're doing, I just want more of all of it, so –

Matt Sherwood – ZS Fund

Yes. Just a final big picture question just on the buyback that was mentioned before, but it seems like you've – by the end of the year, you'll have a book value basic where your stock is again because of great earnings. What's your feeling on – I mean it's got to be frustrating that you do a good job, you earn good returns on your equity from your drilling programs, yet the market seems to value you at basically what you paid for everything?

Tom Jorden

Well, we have a lot on our plate. We've increased our capital program 40% to 50% this year compared to last year. We don't plan to shrink next year. All right. Now we always have the uncertainty of prices but we have many, many projects that are very solid at lower prices, so we don't know where cash flow is going to be next year but we do know that we $200 million cash right now, and this year we've been funding our program with cash flow, and unless there's some disaster out there that the futures market not telling us about, we're going to match up pretty well this year, cash flow and capital. But we have our eyes on some things where we're trying to expand in some of our existing core plays, and we could readily eat up the few hundred million dollars.

Matt Sherwood – ZS Fund

I agree. Well, keep up the good work on the exploration side.

Mick Merelli

Thank you very much.

Operator

Thank you. (Operator instructions) Our next question is coming from Andrew Coleman from UBS.

Andrew Coleman – UBS

Good afternoon.

Mick Merelli

Hi, Andrew.

Andrew Coleman – UBS

I had a question on the reserves side, given how nice the production has been growing here in the last three quarters. At what point do we start to get a feel for reserve growth kind of getting over 200%.

Tom Jorden

In terms of production replacement?

Andrew Coleman – UBS

Yes. Sorry about that.

Tom Jorden

Well, we have a long, long track record of not commenting on proved reserves during interim periods. So, we make general comments about we're having a good year but we're not going to get specific beyond that. We've never had year where reserves declined. We've always grown. We would expect that reserve growth and production growth will continue in similar paces just as they always have. And in our case, it's on a per share basis not just an absolute basis.

Andrew Coleman – UBS

Right, yes. You guys are outstanding on a debt adjusted share basis getting close to, what I think, is about 15% which I think is solid growth here on the production side and just looking for signals as to what would move the reserves forward now. Can you guys give any color on that if you think your F&D cost would kind of change a whole lot versus last year? Is that something for later in the year as well?

Tom Jorden

I doubt that they would change a lot.

Andrew Coleman – UBS

Great. I missed the breakdown you guys had read off earlier on the CapEx by region. Is there a possibility that you could go through that one more time?

Tom Jorden

Yes. So, with the new total being $1.3 billion to $1.5 billion. Now, our general expectations is that our mid-continent area would be $600,000 to $700,000; the Permian basin, $500,000 to $600,000; and our Gulf Coast area $200,000 roughly.

Andrew Coleman – UBS

Okay. Thank you.

Operator

Thank you. At this time, there appear to be no further questions. I'd like to turn the call back over to management for any closing remarks.

Tom Jorden

Thank you everyone for joining us today. We appreciate the questions and participation in the call. I look forward to reporting further results. If anybody wasn't covered today, please feel free to contact us and (inaudible) but again look forward to reporting continued strong results in our next call. Thank you very much for participating today.

Mick Merelli

Thank you, yes.

Operator

Thank you. That does conclude today's Cimarex Energy second quarter 2008 earnings and operating conference call. You may now disconnect your lines at this time and have a wonderful day.

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Source: Cimarex Energy Company Q2 2008 Earnings Call Transcript
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