Buy-recommended Cimarex (XEC) offers unlevered appreciation potential of 11% to a McDep Ratio of 1.0, where stock price would equal Net Present Value (NPV) of $120 a share. On the strength of today’s disclosure of 2011 results showing an 80% increase in oil and natural gas liquids reserves (partly a reclassification from natural gas to natural gas liquids), NPV is up from $100 on January 22.
The shift from lower price natural gas to higher price oil is expected to continue in 2011, along with a further shift in spending to oil drilling in West Texas. The company’s timely emphasis on oil leads us to attribute more than half of present value to liquid fuel resources for the first time in our 21st century coverage of the company run by Chief Mick Merelli and his loyal team. We wish we could have been smarter in anticipating that last year’s estimated NPV would more than double in a year, but we are thankful that the company has been successful beyond expectations.
The outlook remains positive, presuming the Cimarex team can continue doing what it has done. Aside from commodity prices, the main risk may be costs of drilling and completion equipment and services, which appear to be under control for now.
Originally published on February 16, 2011
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