Cimarex Energy (XEC, Financial) is an independent oil and gas exploration company with assets primarily in Texas, Oklahoma and New Mexico. The company's current activity is focused on the Permian Basin and the Cana-Woodford shale play in western Oklahoma.
From a low of $91.9 on January 15, Cimarex Energy has surged to $110.6. The 20% upside in two months has been backed by strong fundamental factors and I believe that these fundamental factors will continue to take the stock higher. This article discusses the reasons to be bullish on Cimarex Energy, even after the recent rally.
From a long-term perspective, the first reason to be bullish on Cimarex Energy is the company’s strong balance sheet. This is a critical aspect to analyze in difficult times for the oil and gas industry. As of December 2014, Cimarex Energy had a total debt of $1.5 billion and a debt to capitalization of just 25%. In addition, the company had a cash position of $406 million as of December 2014 and this implies a net debt position of just $1.1 billion. Therefore, the company is not significantly leveraged and has a high financial flexibility for growth in better times.
The second positive about Cimarex Energy from a value creation perspective is a quarterly dividend of $0.16 per share that is very sustainable, even in the current oil price environment. On February 25, Cimarex Energy declared its quarterly cash dividend and the sustainability factor of the dividends is clear from the company’s operating cash flow trend.
For 2015, Cimarex Energy has already announced a capital expenditure of $0.9 to $1.1 billion and the company expects production growth of 3% to 8% during the year. According to the company, the capital expenditure program is expected to be funded from the existing cash and operating cash flows. This implies that the company’s OCF will be robust in 2015 after strong cash flows in 2014. For FY14, the company’s cash flow was $1.6 billion and even if the company’s cash flow is around $1 billion for 2015 considering lower oil prices, the cash flow will be enough to fund the investment and pay dividends.
While I have talked about the production and balance sheet profile, one key factor that will drive the stock higher once oil prices recover is the company’s focus on the Permian Basin. The company’s Permian assets will start generating a very strong IRR once oil prices move above $75 per barrel. While this might be likely only in 2016, I believe that this is a good time to consider exposure to the stock for robust EBITDA and operating cash flow numbers in the coming years.
Cimarex intends to invest approximately 50% of its 2015 capital in the Permian region and 48% in the Mid-Continent. I believe that the investment in the Permian will increase significantly once oil prices recover and to the company’s advantage, the high financial flexibility will allow strong investments. My long-term view on Cimarex Energy is also backed by the point that the company has 3.1Tcfe in proved reserves and a strong multi-year drilling inventory.
With all these positives, it is not surprising to see Cimarex Energy surge in the recent past and I believe that the rally will continue as the company’s continues to pay dividends and also steadily progress with its production growth plans. Further, the assets with an attractive IRR deserve better valuations than a current EV/EBITDA of 6.6. In my view, Cimarex Energy is a buy and hold stock with a time horizon of 3-5 years.
