The drill on Cimarex Energy...
6/23/2008 6:59 PM ET
As an oil and gas producer, Cimarex Energy Co. (XEC: News, Chart, Quote ) basks in the glow of all-time high oil and gas prices. The company is the resultant product of a spin-off from contract driller Helmerich & Payne (HP) and the subsequent acquisition of oil and gas explorer Key Production. Cimarex is boosting production at a time when the era of cheap energy is a ghost of the past. The stock has gained about 70% since Feb this year. While the boom in energy prices shows no signs of abating in the near-term, is the stock poised for more upside?
The company put up a spectacular showing in its most recent first quarter, thanks to higher production and mind-blowing oil and gas prices. Net income rose about 132% to $149.8 million, or $1.76 per share, from year-ago $64.6 million, or 77 cents per share. Revenues from oil and gas totaled $454.4 million, up 54.8% from $293.5 million in the same period last year. Cash flow from operations was $334.7 million, compared to $215.4 million in the prior-year period.
During 2007, the company invested $983 million in exploration and development activities and drilled 452 wells. The drilling program added 300 Billion cubic feet equivalent or Bcfe of proved reserves and replaced 182% of 2007 production. Total proved reserves as of December 31, 2007, increased 11% to 1.47 trillion cubic feet equivalent or Tcfe from the previous year. About 76% of total proved reserves is gas, and about 79% is classified as proved developed.
As of December 31, 2007, the company had proved reserves* of about 1.1 trillion cubic feet of gas and 58.3 million barrels of oil and natural gas liquids.
Cimarex' primary operations revolve around oil and gas plays principally located in the Mid-Continent, Permian Basin and Gulf Coast regions. Through concurrent operations across multiple basins, the company attempts to diversify its geographic and geological risk. The Mid-Continent and Permian Basin properties accounted for 75% of the company's production in 2007 and for 78% of proved reserves at 2007-end.
- Mid-continent operations cover Oklahoma, southwest Kansas and the Texas Panhandle. The region accounted for 42% of proved reserves at 2007-end and 43% of production in 2007.
- Permian Basin operations cover west Texas and New Mexico. The Permian Basin accounted for 36% of proved reserves at the end of last year and 32% of 2007 production.
- Gulf Coast operations encompass coastal Texas, south Louisiana and southern Mississippi. The Gulf Coast area had 9% of proved reserves at 2007-end and accounted for 24% of production last year.
The company says its Gulf Coast efforts rely on three-dimensional or 3-D seismic information to generate prospects and is characterized by larger potential reserves per well, greater drilling depths and lower success rates. In short, Gulf Coast activities are considered higher-risk but potential higher-return projects or projects with lower success rates but large reserve/production opportunities.
Cimarex circumvents the risk by balancing its portfolio with low-to-medium risk projects having historically high success rates, as well as the higher risk/reward ones. The company injects most of its annual budget towards lower-cost moderate-risk drilling activities in the Mid-Continent and Permian Basin properties and a much smaller portion for the risky yet potentially high-return exploratory drilling efforts in the Gulf Coast region. The company spent 39% of its 2007 exploration and development capital on the Mid-continent region, 37% on the Permian basin properties, and just 23% on the Gulf Coast.
During 2007, the company drilled
- 237 gross wells in the Mid-continent region, completing 95% of the wells as producers.
- 172 gross wells in the Permian Basin, completing 91% as producers. The drilling program led to a 18% growth in 2007-oil-production in the Permian Basin.
- just 42 gross wells on Gulf Coast , realizing a 71% success rate.
The company's disciplined drilling approach and partiality towards moderate-risk projects is perhaps what renders support to its industry-leading margins. Cimarex' gross margin for the trailing twelve months is 83.11%, higher than bigger rival Anadarko Petroleum Corp.'s (APC) 79.04%, BP Plc's (BP) 19%, and the industry's 74.58%. The company's operating margin for the period is 42.11%, higher than Anadarko's 27.31%, BP's 10.14% and the industry's 31.92%.
The stock attracts high institutional interest. Institutional investors hold about 87.3% of the company's outstanding float. Surprisingly, corporate insiders own just 0.93% of the float. Usually, low insider ownership signifies low confidence in the stock.
The company also divests non-core assets from time to time. In 2007, the company sold its West Texas Spraberry oil properties for $87.5 million and Gulf of Mexico Main Pass area operated properties for $53.5 million. The properties comprised 123 Bcfe of proved reserves.
Gulf of Mexico shelf is a high-risk region for the company because the former is vulnerable to natural catastrophes like hurricanes. In addition to hurricanes Katrina and Rita in 2005, Cimarex' drilling efforts in 2006 in the Gulf of Mexico area proved to be unfruitful, inciting the company's skepticism for future drilling opportunities. The 2006 drilling disaster is perhaps what added emphasis to the company's strategy to restrict investment in such high-risk areas. The company still has a small position offshore Louisiana on the Gulf of Mexico shelf, but plans to complete its offshore exit this year.
The company is focused on natural gas production and only 24% of its proved reserves are crude oil and natural gas liquids. Natural gas prices have not grown at the same rapid pace as oil prices - a reason why the company has not experienced the same acceleration in the top line as its more oil-focused rivals. In the last two years, crude, heating oil and gasoline futures have gained 60-85%, where as natural gas is up by only about 40%. However, of late natural gas is playing catch up and narrowing the spread.
Looking ahead, Cimarex expects second-quarter output to equal 478 million to 488 million cubic feet of equivalent of gas per day or MMcfe/d. Full-year 2008 production is projected to be in the range of 475-495 MMcfe/d, or an 8-12% increase over 2007, after adjusting for property sales. The company plans to invest $1.1 billion to $1.3 billion for its 2008 drilling program.
Analysts expect the company's bottom-line to grow 147.8% in the second quarter, compared to growth projections of 24.5% for the industry, 23.4% for the sector and a negative 10.5% for the S&P 500. For the full year, the expectations are 94.9% earnings growth for Cimarex, 34.7% for the industry, 32.3% for the sector and 7.2% for the S&P 500.
The imbalance characterizing the long-term, global demand-supply equation in the energy sector provides favorable trends for oil and gas producers like Cimarex. The company's disciplined drilling approach and risk mitigation strategy to generate strong returns on its investment serve as positive catalysts for the stock. On the other hand, Cimarex is skewed towards natural gas production and may not reach the same dizzying heights in top line in the near-term as its oil-focused rivals. However, natural gas is one of the cleanest forms of fossil fuels, which emits fewer pollutants into the atmosphere when burned - A reason why demand for natural gas may go up, beyond the obvious clamoring for energy commodities. Cimarex' cautious approach towards exploration activities may be a cause for concern, when its existing reserves get depleted at some point of time.
Oil reserves are the estimated quantities of crude oil that are claimed to be recoverable under existing economic and operating conditions.
- All reserve estimates involve uncertainty and the relative degree of uncertainty can be expressed by classifying reserves into - proved and unproved. Proved reserves are claimed with reasonable certainty or 80% to 90% confidence -- to be recoverable in future years by specified techniques.
- Proved reserves are further subdivided into Proved Developed (PD) and Proved Undeveloped (PUD). PD reserves can be produced with existing wells and perforations, or from additional reservoirs where minimal additional investment is required. PUD reserves require additional capital investment like drilling new wells, installing gas compression to bring the oil and gas to the surface.
by RTT Staff Writer
rttnews.com
Average gas prices for the first quarter increased 25% to $8.38 per thousand cubic feet from last year, while oil prices rose 71% to $94.38 per barrel. Combined oil and gas production per day grew 8%. Gas production rose 5% averaging 339.7 million cubic feet per day, and oil production grew 16% to an average of 22,757 barrels per day.
The stellar first quarter results coupled with surging energy prices, has analysts scurrying to raise the company's earnings estimates aggressively for the second quarter and the full year - a very bullish sign! In the last 90 days, earnings per share estimates have been revised up by $1.05 to $2.23 from $1.18 for the second quarter, and by $2.82 to $7.97 from $5.15 for the full year.
The company has surpassed analysts' earnings expectations in the last three quarters by 11.4%, 25.2% and 8.6%, respectively.
The cornerstone of Cimarex' operating philosophy is to maximize production and reserves through aggressive drilling in existing reserves and to generate strong returns on its drilling investment. While acquisitions are also on the agenda, the company continues to rely on drill-bit driven growth. Each drilling decision is made after assessing a project's anticipated post-tax rate of return, a criterion that the company depends on for evaluating the project's financial feasibility. |
