We understand the market’s bearishness on RDC since the offshore drilling market’s recovery has lagged the U.S. shale oil recovery, but Cimarex’s second quarter stock performance strikes us as an over-reaction to oil’s roughly 10% price decline. As we noted above, XEC can produce excellent profits when oil is around $50 a barrel. The reason is that its oil reserves are among the lowest cost and highest productivity of all U.S. oil shale companies. Let’s look at the numbers. In the first quarter of this year, XEC generated a remarkable 50% adjusted operating profit margin, compared to 9.5% for ExxonMobil and 11.5% for EOG, the self-proclaimed low-cost producer. While most E&P oil companies struggled to make little or no money in the first quarter, XEC crushed the ball out of the stadium.
Moreover, we estimate that XEC’s net asset value (NAV) is over $207 per share using $70 as the price of oil. However, at $60 oil, XEC’s NAV is roughly $162 per share. Thus, at the above range for oil prices, XEC is trading at nearly a 40% to 55% discount to our estimate of its NAV, and that assumes no improvement in any of the company’s outstanding oil shale reserves and projects. Even we accept the oil bear’s long-term price of oil at $50 a barrel, XEC is trading at a 13% discount to our estimate of its NAV. Again, this assumes no enhancement to the company’s best-in-class assets.
From FPA Capital's second quarter 2017 shareholder letter.
