In the recent past, I have discussed several names in the energy sector as the best time to buy a stock or sector is when sentiments are depressed. At the same time, I have cautioned against big exposure to the sector as there can be a prolonged “U”-shaped recovery for oil prices. However, certain stocks seem to have bottomed out and are trading at valuations that are too attractive to be ignored.
This article discusses Cimarex Energy (XEC, Financial), an independent oil and gas exploration and production company primarily in Texas, Oklahoma and New Mexico. I mentioned above that several stocks seem to have bottomed out, and it’s important to note that Cimarex Energy has trended higher by 11% in YTD15. These are good returns for a stock in the energy sector and probably indicate that the worst is over for the stock. Still, small exposure is advisable.
Coming to the factors that make Cimarex Energy an attractive investment, I would first start with the company’s fundamentals as it is an important analysis in challenging times for the industry. I see the following positives in the company’s fundamentals:
- As of September, Cimarex Energy had cash and equivalents of $899 million with the company’s cash position boosted by May equity offering of $730 million.
- As of September, Cimarex Energy had total balance sheet debt of just $1.5 billion, and this translated into a LTM debt to EBITDA of 1.5. Further, the company’s long-term debt to capitalization stands at 30% as of 3Q15. Cimarex Energy therefore has high financial flexibility to fund future growth.
For the remainder of 2015, Cimarex Energy has $150 million to $200 million in capital expenditure and even if 2016 capital expenditure is approximately $1.0 billion, the company is fully financed for investments for the next 15 months (also considering the company’s operating cash flow). Therefore, the company’s total debt will remain largely the same, and this leaves Cimarex Energy with high financial flexibility for robust organic and inorganic growth when energy prices recover.
The second part of the discussion involves the company’s assets and the potential near-term and long-term growth potential from the assets. The following points are important to note in this aspect of discussion.
Cimarex Energy has significant proved reserves of 3.1Tcfe. More importantly, the company’s proved developed reserves are 77% of the total reserves. This provides Cimarex Energy with a long reserve life coupled with scope of meaningfully increasing production when oil and gas prices trend higher.
Nearly 53% of the company’s assets are natural gas assets. However, the company’s Permian Basin asset has 45% oil and 20% natural gas liquids. On a year-on-year basis, the company oil volume from the Permian Basin increased by 24%, and higher oil and natural gas production in the coming years will help improve the EBITDA margin.
The company’s biggest opportunity is in the Delaware Basin where Cimarex Energy has 235,000 net acres, and I see capital expenditure focus on the Delaware Basin in the coming quarters. I am also focusing on the Basin as it has an attractive IRR and can deliver decent cash flows even if oil prices remain sideways to gradually higher in the near-term. Besides the Permian asset in Delaware Basin, a diversified asset (Mid-Continent) is also a positive. However, I expect the company to focus on the Permian Basin where 65% of the asset is oil and natural gas liquids as compared to 65% natural gas in the Mid-Continent Basin.
Overall, Cimarex Energy is well placed from a fundamental perspective and I see tremendous potential in the company’s Permian (Delaware Basin) asset. If oil prices gradually trend higher, the Delaware Basin asset can generate robust EBITDA margins and operating cash flow. Given the company’s high financial flexibility, I consider inorganic growth also as a possibility. Importantly, even if there is no inorganic growth, Cimarex Energy will have ample funds to significantly accelerate development and production in the current asset base.
Disclosure: No positions in the stock
