In this article, let's take a look at Cimarex Energy Co. (XEC, Financial), a $12.32 billion market cap company, which is an independent oil and gas exploration and production company with operations in the Mid-Continent, the Permian Basin and the Gulf of Mexico.
Double-Digit Growth
The company plans to increase shareholder´s value through growth in proved reserves and production. Further, it plans to maintain a strong financial position while having a capital structure in order to offset price cycles. This policy reflects an effort to mitigate the industry's volatility. Having said this, we are confident that the firm will reach double-digit growth in production and reserves in the near future.
Mid-Continent region
Cimarex has operations in three geologic regions: the Mid-Continent, the Permian Basin, and the Gulf Coast. The Mid-Continent region represents the oldest operating area and accounts for approximately half of the production. As a matter of fact, it should be not be a surprise that Cimarex focuses on the Cana-Woodford in the future, in search of strong returns. We reach this conclusion based on several characteristic of this economic shale, like the high-quality rock and good liquids content. It controls 165,000 net acres there, and more than half is considered core business.
Permian Basin
Looking now into the Permian Basin, it is among the most attractive unconventional resource basins with a 460,000-net-acre position. By operating in multiple basins, the company can diversify its geologic and geographic risk, which is a good thing.
Asset Quality
In the E&P industry, asset quality is a determinant to gain a competitive position. Three things are important: resource potential, production costs and prices. Analyzing the three of them, we see the firm that is well positioned in each of them.
Revenues, Margins and Profitability
Looking at profitability, revenue growth by 28.94% led earnings per share to increase in the most recent quarter compared to the same quarter a year ago ($1.70 vs $1.49). During the past fiscal year, the company increased its bottom line. It earned $6.49 versus $4.08 in the prior year. This year, Wall Street expects an improvement in earnings ($6.95 versus $6.49).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| XEC | Cimarex Energy | 15.85 |
| LINE | Linn Energy LLC | -22.23 |
| TLM | Talisman Energy Inc | -8.95 |
| WLL | Whiting Petroleum Corp | 10.44 |
| BTE | Baytex Energy Corp | 13.10 |
| COG | Cabot Oil & Gas Corp. | 16.24 |
| Â | Industry Median | -0.87 |
The company has a current ROE of 15.85%, which is higher than the industry median and the ones exhibit by Linn Energy (LINE, Financial), Talisman Energy (TLM, Financial), Whiting Petroleum (WLL, Financial) and Baytex Energy (BTE, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Cabot (COG, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.7x, trading at a great discount compared to the industry average. To use another metric, its price-to-book ratio of 2.62x indicates a premium versus the industry average of 1.59x, while the price-to-sales ratio of 4.77x is above the industry average of 3.83x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $32,273, which represents a 26.4% compound annual growth rate (CAGR).
As we can see, the company's shares moved up by 32.59% over the past year.
Final Comment
In this industry, a drop in oil or natural gas prices could hurt the company´s profitability, but we believe Cimarex has a good position to reach high-growth plays while maintaining a strong financial health.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Andreas Halvorsen (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Diamond Hill Capital (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
