Cimarex Energy Co. (XEC - Free Report) is well poised to grow on the back of its Permian and Mid-Continent acreage strength. However, takeaway capacity constraint and rising expenses are causes of concern.
Denver, CO-based Cimarex Energy is an independent oil & gas exploration, and production firm. The company’s operations are located mainly in Oklahoma, Kansas, Texas and New Mexico. Its exploration and production (E&P) activities take place primarily in two areas: the Permian Basin and Mid-Continent region.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
Cimarex Energy boasts significant acreage, and strong presence in the prolific Permian Basin and Mid-Continent resources. Last year, the company’s output from Permian and Mid-Continent regions grew 19.9% and 12.4%, respectively. The growth is expected to continue in the coming quarters as well. Notably, in 2019, the company plans to invest $1.1-$1.2 billion for drilling and completion of 83 net wells, of which 66 are from the Permian Basin. As a result, around 85% of its total drilling and completion capital will be directed toward the Permian Basin.
Cimarex Energy's Resolute Energy acquisition is appreciable as it is expected to aid the company in significantly increasing volumes, which will be reflected in the upcoming production results. As such, for 2019, Cimarex Energy forecasts upbeat average production volumes, which are expected in the band of 263-272 thousand barrels of oil equivalent per day (MBoe/d), indicating a significant improvement from the 2018 level of 251.3 MBoe/d. Oil production is expected to grow 23-29% year over year. This output growth is expected to lead to a year-over-year increase in 2019 revenues, which are estimated to be $2.4 billion.
Cimarex Energy displays a healthy balance sheet, with low leverage and high liquidity. This will provide the company with ample financial flexibility for future growth projects. Its debt-to-capitalization ratio stands at 33.9%, lower than the industry’s 40.4%. Markedly, Cimarex Energy’s commitment to enhance its shareholders’ value gives investors a reason to cheer. A few months back, the company hiked its payout by 11% to 20 cents per share sequentially.
There are a few factors that are impeding the growth of the stock lately.
A significant portion of Cimarex Energy’s activities is based in the Permian Basin, wherein dearth of takeaway capacity has created a bottleneck situation for oil and gas producers. The capacity constraint is expected to persist until the end of 2019, thereby hurting the company’s operations.
Expenses related to production increased nearly 12% year over year through 2018 and almost 10% in first-half 2019. Total cost and expenses jumped 10.7% year over year during 2018. Even in the first half of 2019, overall costs and expenses rose almost 36.2% from the corresponding period of last year. The company’s profit levels will be hurt, if this trend continues.
To Sum Up
Despite the company’s significant prospects, takeaway capacity constraint and rising expenses are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space are National Oilwell Varco, Inc. (NOV - Free Report) , Dril-Quip, Inc. (DRQ - Free Report) and NuStar Energy L.P. (NS - Free Report) . While National Oilwell has a Zacks Rank #1 (Strong Buy), Dril-Quip and NuStar Energy have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
National Oilwell’s 2019 earnings per share are expected to rise 100% year over year.
Dril-Quip’s 2019 earnings per share are expected to rise 131.8% year over year.
NuStar Energy’s third-quarter 2019 earnings per share are expected to gain more than 107% year over year.
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