FPA Capital Fund Comments on Cimarex Energy

Author's Avatar
Jul 23, 2014

Among the stocks we reduced in the quarter was Cimarex Energy (XEC). XEC is an Oil & Gas Exploration and Production company located in Denver, Colorado. Yet the company’s energy assets are primarily located in Oklahoma and Texas, with some acreage in New Mexico as well. XEC closed at a shade over $143 at the end of June and has appreciated more than 36% year-to-date.

One reason why we have a positive bias toward energy companies is that demand for oil continues to increase but new supplies of oil are getting more difficult and expensive to develop. According to Cambridge Energy Research Associates (CERA), in 2013, the global oil discovery rate of 13 billion barrels was the lowest rate since 1952 and was down 30% versus 2012. To put that into perspective, the global consumption of oil is currently running about 33 billion barrels a year. Moreover, CERA estimates that the number of new field discoveries has fallen 50%, and new field sizes are on a slow, downward trend for both oil & gas. Ominously, the previous success rate of a new well drilled was 25%, but that number has declined to 14% currently.

Over the past few years, most of the successful new oil wells and higher production has come from shale oil projects in the U.S. It is companies like Cimarex that are helping to keep a lid on oil prices from sky- rocketing and potentially preventing another consumer-led recession. Despite our positive view on the long-term prospects for the energy markets, we trimmed backed the XEC position in the quarter to take some risk off the table. The oil & gas business is still a risky and cyclical industry. Given that the stock price has nearly tripled over the last two years and is up roughly eight-fold from early 2009, we believe it is prudent to cash-in on some profits.

From FPA Capital Fund (Trades, Portfolio)’s Second Quarter 2014 Commentary.