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Cimarex Isn't Sinking
By Toby Shute May 14, 2007
Don't bother Cimarex Energy (NYSE: XEC) right now -- it's busy drilling. The company is in the midst of a large exploration program across various basins in the lower 48. Given that the company is in full-on expansion mode, it's important not to get too worked up over Wednesday's mediocre earnings report. The quarter's well completion rate of 94% should indicate to you that these folks know what they're doing.
Sure, the year-over-year comparisons weren't pretty. If you've been following Cimarex for some time, you know that a severe drought hit the Gulf Coast region in 2006, and it's only just recently turned the corner. This region explains most of the quarter's sales shortfall not stemming from lower price realizations. In that light, the nearly 9% sequential growth in the Gulf Coast region is encouraging.
Production was solid in the core mid-continent and Permian Basin areas. These regions, which constitute the low- to medium-risk end of Cimarex's blended portfolio, grew 4% and 8% year over year, respectively. The riskier plays have been and will continue to be more unpredictable. Nevertheless, the company's balanced approach toward risk management should make it easier to ride out that volatility.
If you're just exploring Cimarex for the first time, I'd suggest that this is a long-term, conservative investment, not a speculative gamble on the direction of commodity prices. The company sports one of the cleanest balance sheets in the industry, carrying less than half the relative debt load of competitors such as XTO Energy (NYSE: XTO) and Chesapeake Energy (NYSE: CHK). Not only will this financial strength assist Cimarex in operating over the full commodity cycle, but it will also enable management to make smart acquisitions when the industry does turn down.
At present prices, you don't pay much of a premium, if any, for Cimarex's financial strength. The company is the cheapest among its peers, relative to trailing EBITDA. The discount appears to stem from a low average Wall Street estimate of future growth, compared to the lofty growth expectations priced into Plains Exploration & Production (NYSE: PXP) and Pioneer Natural Resources (NYSE: PXD). Given management's long-term record of success, I think this discount may be unwarranted.
Chairman and CEO Mick Merelli was a significant buyer back in December. That management conviction is part of the reason the Inside Value team recommended Cimarex to subscribers the following month.
