Morningstar | Initiating Coverage of Cimarex Energy With $75 FVE
We are initiating coverage of Cimarex Energy with a fair value estimate of $75 per share and a no-moat rating. Although the shares trade at a discount to our fair value estimate, our very high uncertainty rating leaves them in 3-star territory. Cimarex is a pure-play U.S. shale producer with acreage in the Permian (Texas and New Mexico) and Anadarko (Oklahoma) basins.Currently, Cimarex’s main drilling focus is the Delaware portion of the Permian Basin, the lowest-cost source of oil in North America. The company is devoting the vast majority of its drilling rigs to the Delaware in 2019 and plans to spend 85% of its drilling and completion capital budget in the region. Oil growth from the company’s Permian assets is likely to reach double digits over the next few years, even without much increase in the rig count. For 2019, Cimarex is targeting production growth of 13%-22% and projects to be cash flow break-even at a West Texas Intermediate oil price of $52 per barrel. Still, we estimate that Cimarex’s acreage in the Delaware is not quite as attractive as some of its peers', mainly because the company holds acreage in the relatively higher-cost Texas counties of Reeves and Culberson.
The company’s other main asset, 326,000 net acres in the Anadarko Basin, is struggling to compete for capital with opportunities in the Permian. Management will continue to dedicate a portion of the drilling and completion capital budget, about 15% in 2019, to the region, but spacing issues have delayed a full-field development mode for now. Cimarex is currently operating only one rig in Oklahoma.
We like management’s focus on fully loaded returns on invested capital and expect its conservative balance sheet and capital approach will continue. Still, Cimarex is unlikely to generate returns on capital that would exceed costs of capital at our midcycle oil and gas prices of $55/barrel WTI and $3/thousand cubic feet Henry Hub, respectively.
Cimarex Energy is an independent oil and gas exploration and production company. The company's operations are mainly located in Texas, New Mexico, and Oklahoma. The company's operations are focused in two main areas: the Permian Basin and the Mid-Continent. The company's Permian Basin region encompasses west Texas and southeast New Mexico. The company's Mid-Continent region consists of Oklahoma and the Texas Panhandle.
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