Cimarex Energy Co. (XEC)

Oil and gas exploration and production companies have done quite well over the beginning of this year. Many believe that much of this is over as oil looks to be in bubble mode and gas may soon follow. With respect to many of these companies, I believe they are working their way to new multiyear highs on the basis of energy demand and a switch in usage between commodities. With respect to multiyear highs, these companies have a basis for growth even if there is a pullback in commodity pricing due to hedges that are already placed.





I do not argue that oil looks to have over run itself and speculation is being seen in the market. I just don’t think that there will be a major pullback within the next three months. With respect to the natural gas pricing, it looks as though this chart is a little undervalued if anything, and seems to be pushing upward even on days when oil tracks back. Two months ago, I made a call on CHK. http://www.updown.com/displayStockPick.do?stock_pick_key=11349


In that time frame this stock is up 31.5%. Reasons for this are simple. People are buying the stock because a major production growth, while having hedged positions on the price of natural gas to protect downside. This adds clarity to where the stock may be going, as natural gas is very volatile and could pullback. With respect to this article, I am pitching a three month scenario on energy pricing and its effect on XEC.





XEC has made a wonderful run, as investors have piled into the stock. My call on natural gas two months ago is up 23% with respect to UNG, but if we compare the UNG and USO over the past three months, the UNG is trailing by 10%. This presents a much more compelling valuation and less downside. The natural gas exploration and production companies not only look to be headed for multiyear highs, they also seem to be moving to more consolidation. XEC will participate and be able to pay for it with growth through the drill bit. First quarter of 2008 was a good one, with record production of 476 MMcfe/d. By year end of 2007, they added 300 Bcfe of proved reserves. They replaced 182% of production. They also replaced reserves 11% year over year from 2006, to 1.47 Tcfe.





XEC has taken a position of reinvesting in itself, as they get cash from operations they are poring that money back into new drilling programs to increase growth. Tracing back to 2001, proven reserves have increased from 154 Bcfe to 1472 Bcfe in 2007. Growth in production, over the same period, increased from 71 MMcfe/d to 451 MMcfe/d. Approximations for 2008 have this increasing to 475-495 MMcfe/d. XEC is also diversifying itself from current positions and bringing on line production from the Gulf Coast. They are currently bringing more oil on line through horizontal drilling which will also add some diversification. Look for this stock to continue to run over the short term. There is still some money to be made, and on any pullback this stock can be bought for the long term.