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Cimarex Ups Ante in Woodford Shale

October 27, 2008
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Denver-based Cimarex Energy Co. agreed to pay $180 million cash to Chesapeake Energy Corp. to add 38,000 net acres in its emerging Woodford Shale position in the Anadarko Basin of western Oklahoma.

The acreage, 88% held by production and with average net revenue interest of 84%, is in Blaine and Canadian counties. With the transaction's completion, Cimarex would have 88,000 net acres in the Woodford play. The transaction closed last week, CEO Nick Merelli told energy analysts during a conference call.

"This is about the long term, which is why this acreage is so important to us," Merelli said. "We continue to drill in this play...we're not waiting, but we are taking a measured approach to develop the resource. This [transaction] is really about the long term. Depending on the well spacing, this is a big drilling program that would be around a long time for us."

According to an analysis by SunTrust Robinson Humphrey/the Gerdes Group, the transaction equates to about $4,700/acre, "a relatively fair valuation for Woodford Shale acreage."

Cimarex only entered the Woodford play about 14 months ago, Merelli noted. "Since then, we put together about 55,000 acres tract by tract. During that period we participated in 28 wells, with 16 wells completed," he said.

Merelli disclosed that Cimarex originally had set its sights on another Woodford Shale asset being sold by Linn Energy LLC. However, Linn earlier this month sold that central Oklahoma acreage to an undisclosed buyer for $229 million (see NGI, Oct. 13). Chesapeake's acreage was as enticing, and it straddles Cimarex's acreage, he said.

"It's an area that's been quiet, but there's competition in it," Merelli said. "Only 31 wells have been drilled out there, and we've been in all but three...So we have as much information as anyone" about the play.

In the Woodford Shale, 30-day average initial production rates on Cimarex's wells with 4,000 foot laterals have averaged 5 MMcf/d, the company said. Cimarex is spending around $8.5-9 million per well in the play, but those costs are expected to moderate as it gains efficiencies in drilling and if service costs fall in the coming months, as expected.

In anticipation of analysts' concerns about the credit crunch, Cimarex noted that at the end of September, the company had more than $200 million in cash and $500 million available under its undrawn bank credit facility.

In related news, Cimarex's 3Q2008 production averaged 484.9 MMcfe/d, which was about 2% above Wall Street estimates. However, because of lower gas prices, Cimarex plans to lower its rig count to 30 from 42 rigs by the end of November. Cimarex now is running 13 rigs in the Midcontinent, including 10 in Oklahoma and three in the Texas Panhandle.

Cimarex's guidance for 2009 is still being formulated "under varied natural gas and oil prices," CFO Paul Korus said during the conference call. "Our business approach and our history is to reinvest whatever our capital turns out to be...

"We are pleased to expand our portfolio of opportunities, high-grade our program. We are in good financial shape with our lenders. In contrast to others, we've continued to keep our powder dry, and we're basically funding this purchase with cash on hand...We're really not changing our basic business approach, which is to maximize cash from our properties and reinvest in drilling."

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