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Cimarex on ‘Glide Path’ to Maintain Delaware Basin Leasehold

Cimarex Energy Co. executives said the company has completed two wells targeting the Wolfcamp Shale of the Permian Basin with 10,000-foot laterals and plans to drill three more at that length as it looks to continue testing and lock up the majority of its leases by 2017.

The Denver-based company reported Wednesday adjusted net income for 4Q2013 totaled $117.6 million ($1.35/share), a 14.4% increase from the $102.8 million ($1.19) earned during the preceding fourth quarter. Full-year adjusted net income totaled $469.3 million ($5.38/share) for 2013, up 27.9% from $366.8 million ($4.22 ) earned in 2012.

Although production was impacted by weather and pipeline disruptions in the Permian Basin during 4Q2013, the company averaged 704.9 MMcfe/d, up 4.2% from the 676.7 MMcfe/d produced in 4Q2012. Full-year production hit a record 692.6 MMcfe/d for 2013, fed by a 21% increase in Permian volumes.

Natural gas production rose year/year, hitting 32.3 Bcf in 4Q2013, up 5.4% from 30.7 Bcf, and it was up 5.7% from 2012 at 125.2 Bcf from 118.5 Bcf/

Oil production also grew, climbing from 3.2 million bbl in 4Q2012 to 3.4 million bbl in 4Q2013. Full-year oil production jumped 16.2% from 11.5 million bbl in 2012 to 13.4 million bbl.

Cimarex drilled and completed 365 gross (185 net) wells during 2013, and spent $1.57 billion on exploration and development. The company said it was currently operating 19 horizontal rigs, with 17 deployed in the Permian Basin. It reaffirmed plans to spend $1.8 billion on capital expenditures (capex) in 2014 (see Shale Daily, Jan. 15).

During a question and answer session with analysts to discuss results, Cimarex CEO Thomas Jorden said Wednesday the company was making decisions today that will affect it in 2018 and 2019.

"We have to collect the science and do the spacing pilots in order to come up with prudent development plans. We don't know what the ultimate spacing will be," Jorden said, adding that it could be 40-, 80- or 105-acre downspacing. "We just don’t know until we get out there and test it. We're looking carefully at our competitors, but right now there aren't a lot of spacing pilots going on in the Delaware Basin.

"Overall in the basin we're on a glide path to hold all of our acreage. We certainly want all of it that we see as prospective, which is darn near every acre. That's a very manageable program. If we did the minimum, it would probably be $300-350 million a year for the next few years, but we're accelerating that and we'll front-load that so we can get that held [by production] earlier."

Jorden added that leases in the Wolfcamp A, C and D intervals vary, with some allowing the company to hold a lease by drilling just one well but others require that the deepest interval be targeted first.

"A lot has changed since we've gone into this project," Jorden said. "There was a day when we would have said that we thought the Wolfcamp A was our most economic target. Today, we don't know. If leases weren't a concern, I couldn't tell you today which would be our primary target. We've got a lot of experimentation with these long laterals and upsize fracs before we can make that kind of economic [decision].

"We do have a development plan and it's changing every day based on these pilot projects. That's why we're doing them. We don't think we're going to have any issues with land going into full development. Whether that will be [Texas'] Culberson, Reeves or Ward [counties] we don't know today, but we're getting ready for it."

John Lambuth, vice president for exploration, said Cimarex has so far drilled two wells with 10,000-foot laterals and had plans to drill three more in Culberson County -- one targeting the Wolfcamp D interval and two targeting Wolfcamp C. Another seven wells with 7,500-foot laterals were also planned, with four wells targeting Wolfcamp D and three to hit Wolfcamp A.

"Quite frankly, that's just because of the way the acreage lined up," Lambuth said. "We have a schedule and we know each year what kind of capital that schedule requires. It's safe to say that certainly by the end of 2017 we'll have a majority of that held [by production]. There might be just a few more wells we have to do, but we'll be in pretty good shape by 2017 for sure."

Jorden added that all of the company's pilot wells are drilled with 5,000-foot laterals. "We can get out and drill faster, [get] completed quicker and spend a little less per well as we experiment," he said. "Everything we're learning in these pilots should directly translate to longer laterals."

Analysts reacted favorably to the news.

"We're raising our target price to $150 [per share] from $140, as we believe Cimarex's upsized fracs in the Culberson County Wolfcamp play have the potential to add significant net asset value and increase the company's long-term growth rate," A.J. Donnell, analyst with BMO Capital Markets Corp., said in a note Wednesday.

Donnell added that Cimarex has "significant NAV [net asset value] upside" from its 500 net drilling locations per zone at 160-acre spacing, or 1,000 net locations per zone at 80-acre spacing.

"On a returns basis, we view the upsized frac[tured] Wolfcamp D bench well as competitive with the Third Bone Spring, which has historically been the highest return play in the portfolio," Donnell said. "Inventory, returns, and growth are what we view as contributors to Cimarex's relative valuation discount, but we think the positive rate-of-change across all these categories is likely to continue to improve."

Abhishek Sinha, analyst with Wunderlich Securities Inc., said 4Q2013 earnings of $1.35/share missed the consensus earnings forecast by 6 cents and Wunderlich’s of 8 cents. The analyst set the price target at $135.00/share.

"We reiterate our buy rating as we believe [Cimarex] is one of the most levered names to the emerging and attractive Wolfcamp play in the Delaware Basin and, as the company and the industry continue to de-risk multiple pays in the Wolfcamp Shale across many counties, [Cimarex] is well positioned to gain from the positive impact on its valuation," Sinha said in a note Wednesday.

Topeka Capital Markets analyst Gabriele Sorbana noted that Cimarex had revised its forecast for 1Q2014 production from 705.1 MMcfe/d to 740.2 MMcfe/d, and boosted its estimate for full-year 2014 production from 772.1 MMcfe/d to 779.8 MMcfe/d.

"Despite the solid operational update, shares [of Cimarex] may underperform on the quarterly earnings and cash flow miss (relative to the Street), as well as the light 1Q production guidance," Sorbana said. Topeka set a price target of $106/share.

Shares of Cimarex, which is traded under the symbol XEC on the New York Stock Exchange, were trading at $112.12/share on Thursday morning, a gain of 28 cents/share (0.16%). The stock’s 52-week high and low prices on the exchange are $116.18/share and $62.98/share, respectively.

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