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Cimarex Cuts Capex 50%, Going to Six Rigs in 2Q2015

Permian Basin and Midcontinent operator Cimarex Energy Co. reported record quarterly production for 4Q2014, as it cut its capital expenditures by half for 2015 and unveiled a plan to reduce its operated rig count to six during 2Q2015.

The company said total production volumes hit a record 949.5 MMcfe/d during 4Q2014, an increase of 34.7% from 4Q2013 (704.9 MMcfe/d). The latest quarterly production figure includes 446.4 MMcfe/d from the Permian Basin and 488.0 MMcfe/d from the Midcontinent. Full-year production increased 25.4% between 2013 and 2014, from 692.6 MMcfe/d to 868.6 MMcfe/d, respectively. Oil production during the period increased 26.2%, from 37,237 b/d in 2013 to 46,990 b/d in 2014.

Cimarex said it plans to invest between $900,000 and $1.1 billion on exploration and development (E&D) in 2015, with about 50% allocated to the Permian Basin and 48% to the Midcontinent. It also projects production growth of 3-8% this year, with total output expected to average 895-935 MMcfe/d,

By comparison, Cimarex spent $2.2 billion on capex in 2014, including $1.9 billion on E&D and $250 million on property acquisition.

The company said the focus of its Permian activities would be twofold: drilling long-lateral wells into the Wolfcamp A and D intervals in Culberson County, TX, and holding Wolfcamp acreage in Reeves County, TX. In the Midcontinent, most of the investment would be devoted to a seven-section joint infill development program in the Cana-Woodford Shale, with production from the seven sections expected in mid-2015. The company also plans to continue delineating the Meramec formation.

"Our approach to our business has not changed," said CEO Tom Jorden. "We are focused on long-term value creation for shareholders through drilling and development. Our technically driven culture has provided us with enormous opportunities, many of which have strong economic returns even at current commodity prices.

"However, low commodity prices cause us to be especially vigilant in protecting our strong financial position. As a result, we presently have no plans to increase borrowings in 2015. As the year unfolds we anticipate increasing our activity if market conditions improve."

Cimarex estimated that about 35-40% of its capex budget for 2015 would be spent before the end of March, and the majority would be spent on well completions. The company is currently operating an all-horizontal, 16-rig drilling program, down from 22 rigs at the end of December. Cimarex said it plans to reduce the number of operated rigs to six during 2Q2015, while continuing to invest in drilling non-operated wells in the Cana-Woodford.

The company said it believes 1Q2015 production will average 920-940 MMcfe/d, after taking into consideration recent shut-ins in the Permian due to weather and pipeline maintenance issues. Oil production is projected to increase about 4% in 1Q2015, while gas production is expected to decline slightly.

BMO Capital Markets Corp. an analyst Phillip Jungwirth said Cimarex's adjusted 4Q2014 earnings beat his estimate (63 cents/share) and that of the consensus (80 cents). Although the company's total 4Q2014 production was below the firm's estimate (960 MMcfe/d) and the consensus (950 MMcfe/d), Cimarex beat both estimates of 44,900 b/d of crude oil.

Gabriele Sorbara, an analyst with Topeka Capital Markets, reaffirmed a “hold” rating. "We view this as a solid 2015 program, especially considering volumes are tracking oilier," he said in a note Wednesday. "Despite the lack of hedges, our projected outspend of [about] $107.4 million in 2015 [(about) $327.4 million at the current strip] is more than funded with the $405.9 million of cash on hand at year-end."

Analysts with Tudor, Pickering, Holt & Co. said, "as expected, management [is] sticking to disciplined capital approach...We anticipate that some rigs will shift back to the Permian once operated-Cana drilling is completed, and that Cimarex [will] remain flexible if commodity prices improve."

Jefferies LLC set Cimarex stock at “underperform” and wrote, "Production guidance is up on an annual basis but more flat on an exit rate basis. Budget mix has shifted towards a fairly equal balance of Midcontinent and Permian versus a greater Permian focus in 2014 (75% of budget). Expect negative reaction to lower capex…

"We expect a big bump in production in 3Q2015 when the seven-section Cana-Woodford development is connected to sales, but declining sequential production in 2Q2015 and 4Q2015."

On Tuesday, Denver-based Cimarex reported net income of $75.8 million (86 cents/share) for 4Q2014, down 63.3% from year-ago earnings of $206.8 million ($2.37). Adjusted net income was $76.4 million (87 cents/share), down 35.1%. For 2014, net income was $507.2 million ($5.78/share), down 10.2% in 2013. Adjusted net income in 2014, however, increased 7.7% to $505.4 million from $469.3 million.

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