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Cimarex Misses Production Guidance, Adding Ninth Rig

Cimarex Energy Co. missed its production guidance for the third quarter, and lowered it for the upcoming fourth. The company said it still plans to add a rig by the end of the year to form a nine-rig drilling program going into 2017.

The Denver-based company reported total production of 946.6 MMcfe/d in 3Q2016, just below the guidance range of 950-980 MMcfe/d announced last August (see Shale Daily, Aug. 5). The company cited delays in its completion schedule for the shortfall.

"We don't like to miss our forecast on any of these items, and quite frankly, we need to do better," CEO Thomas Jorden said during an earnings call Thursday to discuss 3Q2016. "As we ramped up our activity in the second half of 2016, a disproportionate amount of our operated and non-operated drilling was on large, multi-pad pilot development projects. This concentration of effort on a handful of large projects put our production ramp-up at particular risk due to timing delays.

"That said, we offer no excuses. We need to do a better job of risking these potential delays and building them into our forecast."

Consequently, Cimarex issued production guidance of 945-985 MMcfe/d for 4Q2016, and 960-970 MMcfe/d for the full-year 2016. The company estimates 52% of production from the fourth quarter and the full year will be liquids.

Capital expenditures (capex) for the full-year 2016 are now expected to be $785 million, up $35 million from previous guidance, due in large part to an increase in planned drilling activity in 4Q2016 and acreage purchases made in the third quarter. The company recently added three operated rigs to form an eight-rig program, five of which are deployed in the Permian's Delaware Basin and four in the Midcontinent. Cimarex said a ninth rig will be added before the end of 2016 and sent to the Anadarko Basin in the Midcontinent.

Capex for 2017, at least for drilling and completions (D&C), is currently pegged at $600 million. Production is estimated to range from 1.05 to 1.1 Bcfe/d in 2017.

"We have the ability to add activity as the year unfolds and in fact, we're currently looking hard at several projects we have on the drawing board," Jorden said. "We will give you an updated look at our capital plans in our next call [in February 2017]. By then, I expect to have tremendous clarity and additional projects and what it looks like as we move ahead."

Production from this third quarter (946.6 MMcfe/d) was a 3.3% decline from 3Q2015 (978.9 MMcfe/d). Natural gas production declined 3.8% between 3Q2015 and 3Q2016 (from 464.3 to 446.7 MMcf/d, respectively) and oil production fell 10.8% (49,951 to 44,532 b/d), but production of natural gas liquids (NGL) increased 8.3% (35,815 to 38,786 b/d).

Broken down by play, Cimarex reported a 5.3% increase in total production in the Midcontinent (from 405.3 MMcfe/d in 3Q2015 to 426.8 MMcfe/d in 3Q2016), but an 8.0% decline in the Permian (562.4 to 517.2 MMcfe/d). Natural gas production climbed 2.3% in the Midcontinent during that time frame (260.8 to 266.7 MMcf/d), as did oil (6,981 to 8,486 b/d, a 21.6% increase). But in the Permian, gas production slipped 9.7% (197.6 to 178.4 MMcf/d) and oil was off 15.2% (42,367 to 35,930 b/d). Only NGL production increased in both regions -- by 11.5% in the Permian (18,430 to 20,549 b/d) and 6.4% in the Midcontinent (17,093 to 18,194 b/d).

Cimarex brought 42 gross (17 net) wells online in 3Q2016, compared to 56 gross (14 net) in the previous third quarter. Of the newest wells brought online, 25 gross (seven net) were in the Midcontinent region while 17 gross (10 net) were in the Permian. So far, the company has brought 98 gross (36 net) wells online during the first three quarters of 2016, compared to 154 gross (71 net) during the same time frame for 2015.

In the Permian, Cimarex completed and brought into production 17 gross (10 net) wells during 3Q2016. The gross operated wells completed included 13 Wolfcamp wells -- 10 in Culberson County, TX, and three in Reeves County, TX -- and two Bone Spring wells in New Mexico. By the end of the quarter, the company had 25 gross (18 net) wells awaiting completion in the Delaware Basin, including 11 gross (nine net) associated with multi-well infill and spacing projects that are expected to be completed during 4Q2016.

"Fourth quarter capital will be focused on completion activities and acreage obligations across our Wolfcamp position in both Culberson and Reeves counties," said John Lambuth, vice president for exploration.

Meanwhile, in the Midcontinent, Cimarex completed and brought into production 25 gross (seven net) wells during 3Q2016. The company had 79 gross (27 net) wells awaiting completion at the end of the quarter, including 47 gross (22 net) that are part of the multi-well infill in the East Cana core, part of the Cana-Woodford Shale.

Lambuth said that in the Midcontinent in 4Q2016, Cimarex would continue "to both delineate and hold our Meramec [formation] acreage with our most recent well results in this play performing as expected relative to our pre-drill expectations. Of the four rigs we plan to operate in the Anadarko Basin next year, three of them will be dedicated to holding our Meramec acreage."

During the Q&A session of the call, CFO Mark Burford commented on the $600 million D&C capex budget for 2017. He said the company is continuing to look for stabilization in commodity prices.

"We've been seeing more stabilization occurring lately, but obviously even more recently as there is some more pressure on oil recently," Burford said. "The Street forecast probably embeds a low- to mid-$50 oil price, and for that kind of environment to start playing out into 2017. We feel that's a good price to be working off of as far as capital generation. We certainly want to increase our capital level."

Cimarex reported a net loss of $12.8 million (minus 14 cents/diluted share) for 3Q2016, but that included an impairment of $89.8 million on oil and gas properties. The company had adjusted net income (non-GAAP) of $38.2 million (41 cents/share) in 3Q2016. By comparison, Cimarex reported a net loss of $763.3 million (minus $8.21/share) in 3Q2015, dragged down by a $1.18 billion impairment on oil and gas properties. It recorded an adjusted net loss of $14.4 million (minus 15 cents/share) in 3Q2015.

Stay up to date on 3Q2016 earnings and projections for the remainder of the year with NGI's Earnings Call and Coverage sheet.

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