Cimarex Energy Co. (NYSE: XEC) is one of many independent oil and natural gas producers in North America. XEC's holdings are primarily in the Mid-Continent, Texas and Gulf Of Mexico regions. The company's strategy is to invest in low risk high yield oil and gas producing properties, investing less capital on exploration and more in drilling new wells in existing reserves. Thus XEC is focused on improving return on invested capital in the long-term rather than looking for the quick boosts to reserves that many of its competitors seek.
As of 2006, natural gas accounted for 75% of Cimarex's total proven reserves, with the remainder of reserves consisting of oil and natural gas liquids. In 2005 Cimarex strengthened its drilling presence in the Permian Basin, an oil-rich region of Texas, with the acquisition of the Dallas based oil and gas company, Magnum Hunter Resources Inc. This key acquisition also enhanced the company's Mid-Continent holdings in the Texas Panhandle. The acquisition of Magnum Hunter effectively tripled Cimarex's proven reserves, doubled production and more than doubled the company's revenue from $475.16 million in 2004 to $1.12 billion dollars at the end 2005.
Though the acquisition of Magnum Hunter proved profitable for Cimarex's onshore Permian Basin and Mid-Continent properties, the acquisition couldn't have come at a worse time for the company's Gulf of Mexico operations due to hurricanes Katrina and Rita. The hurricanes hit only a few months after the deal closed, leaving Cimarex with the burden of damage expenses as well as significant production loses. In an attempt to cut its loses Cimarex tried to sell the GOM properties in 2006 without success and has since elected to limit development in the region. As of right now two-thirds of Cimarex's operating budget goes to its low risk program in the Mid-Continent and one third to high risk programs in the Gulf of Mexico.
Cimarex has an aggressive drilling strategy that exposes the company to expensive operating costs. The company targets conventional resource basins and invests large amounts of capital into exploiting and developing mature oil and gas deposits. In an attempt to minimize risk and mitigate expenses, Cimarex invests two thirds of its annual budget in lower-cost moderate-risk drilling activities in the Mid-Continent and Permian Basin and about one third of its budget into precarious yet potentially high-return exploratory drilling in the Gulf Coast region. The company’s focus is continual drilling in existing basins, and it prefers not to rely solely on acquisitions.
At the end of 2006, 90 percent of proved reserves were located in the Mid-Continent, Permian Basin, Gulf Coast and Gulf of Mexico regions. The following table illustrates Cimarex's proved oil and gas reserves by region.
In addition to the unfavorable outcomes of the 2005 hurricanes, in 2006 Cimarex encountered several unsuccessful drilling programs in the GOM and Gulf Coast regions. Cimarex drilled several wells that proved to be "dry holes", thus leading the company to have skeptical expectations for future drilling opportunities. Failure to successfully drill in these regions has reinforced Cimarex's strategy to avoid investing excessive capital into high-risk areas.
The chart below illustrates Cimarex's asset-base measured by oil and gas production by region. Currently, the Mid-continent and Permian Basin regions are the company's most prolific.
Cimarex operates in a highly competitive environment in which all firms are price-takers, selling their oil and gas production at given market prices. Firms generally compete on their ability to drill efficiently and earn high returns on investment through intelligent property acquisition and by keeping operation costs to a minimum. Cimarex's biggest cause for concern at this point is its lack of interest in exploration activities. Although the company competes for the acquisition of proven oil and gas properties, little investment in exploring for new resources basins could have substantial impact on Cimarex because the company's existing basins will not last forever. However, Cimarex encounters less geopolitical risk than some of its competitors operating abroad because the company has eschewed expanding operations to the international level. It also enjoys high returns on invested capital, as it focuses on boosting production and drilling into new sources in its existing properties.
Below is a table comparing several independent oil & gas companies across several metrics.
|Proved Reserves||Square Footage|
|Revenue TTM ($M)||Operating Margin||Production (MMcfe/Day)||Oil (MMBbls)||Natural Gas (Bcf)||LNG (MMBbls)||Gross developed acreage (in thou)||Gross undeveloped acreage||Gross Total|
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