Denver-based Cimarex Energy Co., which plies its oil and natural gas expertise in the Permian Basin and Midcontinent, is digging in to cope with the turnabout in demand and pricing until it’s time to begin drilling again.

CEO Tom Jorden shared a microphone with his executive team on Thursday to share insight into first quarter results. He also was upfront about the outlook for the entire energy industry.

The Cimarex team is anxious to resume activity, he told investors, but “any outlook for the future is at best murky.” With insight from past downturns, the plan is to be “inherently conservative financially, as if the downturn will last a long time.”

In one scenario, the plan is to bring back rigs by midsummer to drill but completions would be deferred into 2021.

“On the downside, we can forego this second half drilling and conserve cash,” Jorden said. “To the upside, if conditions improve, we can bring the rigs back and stage completions in the second half of the year.”

In any case, the energy industry will recover, he said.

“There will be an effective treatment or vaccine for Covid-19. The world economy will restart and respond in ways we do not anticipate. Fossil fuels power our world and will continue to do so for decades to come. As in prior crises, we will look back on the prognosticators and marvel at how much they got wrong. We can’t be certain what the future looks like but Cimarex will be there to respond to it.”

[Want to see more earnings? See the full list of NGI’s 1Q2020 earnings season coverage.]

The operations team built tools to track wellhead netbacks to make “prudent, informed decisions on which properties to produce and which properties to shut-in,” Jorden said. “Good relationships with some marketing counterparties have borne fruit during this time and allowed us to lock in fixed price contracts where appropriate. We have also added to our hedge position further strengthening our confidence in our marketing and production decisions.”
Flexibility is something Cimarex has found it has in abundance.

Cimarex began preparations in February as Covid-19 spread before stay-at-home orders were launched. Most staff is working remotely, and the executive team has had daily calls to address issues as they arise.

“Our engineers have found new ways to slice and dice our cost structure in an attempt to

lower lease operating expenses and liberate precious cash,” Jorden said. “Our marketing group has been heroic in finding markets for our products. We have built new tools to analyze

fixed and variable lease operating expenses in an attempt to understand our net operating income on each and every one of our properties.”

Properties that are not cash flow positive have been shut-in, and Cimarex has discovered “creative ways” to honor volume commitments.”

Cimarex did not have its oilfield services under long-term contracts nor was it burdened with honoring minimum volume commitments. “Our prior caution in entering into long-term commitments has paid off allowing us to react quickly to market signals.”
The workforce has been negatively impacted, as contract labor was released, with redeployed company personnel taking on many of the jobs. In addition, Cimarex happened upon some luck as the year began.

“What was either tremendous foresight or blind luck, we initiated an early retirement incentive program in January of this year and in aggregate, our early retirement program has allowed us to reduce over 10% of our headcount on a purely voluntary basis,” Jorden noted. “We enter the second half of 2020 with a lower cost structure and a better higher performing organization.”

The situation remains volatile. Some things are a matter of timing, but the ups and downs in the market today have led management to forego issuing an outlook for the year.

However, at one point over the last couple of months, Cimarex had expected to shut-in “a massive amount of our oil production, and then at the very last minute, we got a call from one of our marketing counterparties that said they were short oil for the month of May,” Jorden said. The counterparty offered Cimarex a premium to produce more oil.

“I am hopeful that we’re going to be back to a growth trajectory in 2020, not just 2021, I’m hopeful that we’ll be bringing completion activity back in the second half of the year.” Cimarex expects to have 47 net wells in progress entering 2021.

“But we know the band is so wide on what it could look like that we just decided not to give that degree of granularity at this point.”

As it began to deal with lower demand and activity, Cimarex in April reduced capital spend by up to 60% for the year, with plans now to spend $500-600 million. About $274 million was deployed in the first quarter, 93% in the Permian and 7% in the Midcontinent. Cimarex brought online 20 net wells, and at the end of March it had 35 awaiting completion.

Realized natural gas prices fell sharply from a year ago, down 71% year/year, with Cimarex fetching on average 55 cents/Mcf. Realized oil prices were down 10% to $44.18/bbl, while natural gas liquids prices declined 40% to $9.84/bbl.

Gas prices were stung by “local price differentials,” management said. For the Permian gas, the average differential to Henry Hub was $1.85, compared with $1.91 a year earlier and $1.67 in 4Q2019. However, in the Midcontinent, the average differential to Henry was 57 cents, versus 46 cents in 1Q2019 and 74 cents in 4Q2019.

Meanwhile, the realized Permian oil differential to West Texas Intermediate improved, averaging $2.00/bbl in 1Q2020, versus $6.90 in 1Q2019 and $2.18 in 4Q2019.

Production volumes combined averaged 276,600 boe/d in the first quarter, with oil output up 13% year/year at 89,800 b/d.

In the Permian, production averaged 203,400 boe/d, up 21% year/year. Oil volumes climbed 23% to 79,600 b/d. Twenty net wells were tied to sales, with 33 awaiting completion at the end of March. The two rigs now running will drop by half in the next week or so; no completion crews scheduled.

Midcontinent output fell 20% from a year ago and was 15% lower than in the fourth quarter at 72,700 boe/d. Cimarex brought online 19 gross (0 net) wells to production. At the end of the quarter, two net wells were awaiting completion, with no operated rigs nor completion crews working.

Net losses in the first quarter, including one-time impairments to assets, was $774.3 million (minus $7.77/share), compared with year-ago net income of $26.3 million (26 cents).

Total debt at the end of March consisted of $2 billion of long-term notes, with no debt maturities until 2024. Cimarex had no borrowings under its revolving credit facility and a cash balance of $89 million at the end of the quarter.