Cimarex predicts production growth of 10-15% in 2017
Cimarex Energy (ticker: XEC) reported fourth quarter earnings Wednesday and 2016 reserves today, showing a net income of $38.2 million, or $0.40 per share. Full year results are a loss of $431.0 million, ($4.62) per share. After adjusting for special charges, fourth quarter earnings are $56.7 million, $0.60 per share. This is a significant improvement over Q4 2015, when Cimarex lost $23.0 million, ($0.25) per share.
2016 reserves are 2,891 Bcfe, virtually flat when compared to the 2,909 Bcfe reported last year. 2016 reserves are comprised of 51% gas, 22% oil, and 27% NGL. Total F&D costs for 2016 are estimated at $2.13/Mcfe. Cimarex reported drilling and completing 153 gross wells in 2016, split between projects in the Permian and Mid-Continent. An additional 93 gross wells are currently drilled and awaiting completion.
Operated rigs expected to increase to 18 by Q4 2017
Expected 2017 drilling and completion capital is $850-$900 million, up from the $552 million spent in 2016. While the company is currently operating 11 rigs, Cimarex expects to increase this number to 18 by the end of the year. This increased drilling activity is predicted to generate 10-15% production growth in 2017.
Extended laterals in Delaware basin, Mid-Continent see success
In the Delaware basin, where the company owns 190,000 acres, Cimarex expects to spend 66% of 2017 CapEx. This will primarily be devoted to delineation and infill drilling in the Wolfcamp formation. Cimarex reported successful results in its pilot program of five extended laterals with intensified completions. These 10,000 foot lateral wells had an average 30-day peak IP of 2,077 BOEPD (56% oil, 27% gas, 17% NGL).
Source: Cimarex Q4 2016 Investor Presentation
Cimarex’s holdings in the Mid-Continent area are comprised of a combined 253,000 acres in the Meramec and Woodford formations. These locations will receive the remaining 34% of 2017 CapEx. Infill drilling and spacing tests are currently in progress in both formations. Like in the Permian, Cimarex has been testing extended laterals in the Meramec with success. The nine 10,000 foot lateral wells in the formation had an average 30-day peak IP of 2,057 BOEPD (43% oil, 37% gas, 20% NGL).
Source: Cimarex Q4 2016 Investor Presentation
Q&A from XEC Q4 conference call
Q: I think you had mentioned a 4% to 15% increase from Q4, was that just on completion cost?
XEC COO Joe Albi: That was just for the completion side of the equation. So it would be your water sourcing fracking, stimulation and initial flowback. And there is a tremendous degree of variability there, because the size of this job, John mentioned some of the experiments we are doing and your total well cost is obviously and then a completion cost is a function of service cost, your sand cost, your chemical cost, your sourcing cost. So how all those play together, it’s hard to come, just say, hey, here is our increase.
What I tell you is that the service side has been the biggest increase that we’ve seen. If you look at our service cost per stage as compared to Q3 2016, it might be upwards of 20-plus percent of per stage, but we managed to control other costs through efficiencies and sourcing and what have you. And so it’s really just rather the range I gave you is kind of where current AFEs on the completion side are now, taking into account current frac designs and the current cost today.
Q: As far as the capital budget for this year is concerned, how much service cost increase is baked into that?
XEC CFO Mark Burford: We have a small amount built into the upper end of our range. We look at a range of $850 million to $950 million on drilling and completion cost. It looks our completion cost component for the second half. There was not three quarters of the year and looked at some of the minor amount of inflation as we built into the upper end of range for that capital guidance.
Q: At your year-end 2017 rig count of 18 rigs, if you were to hold that activity level flat into 2018, would you anticipate outspending cash flow at current strip or given the high quality nature of the asset base strong returns, is there a chance that it still be within cash flow?
XEC CFO Mark Burford: If you look at in the 2018 the current – at that level of capital spend that would be increasing from 2017 to 2018, but since we right – taking these rigs in through the year, our increasing capital would be another 30% to 40% over what we are experiencing in for 2017. With that levels – at that level of capital we probably would be at the strip of around $55 oil royalty or gas price to using up a bit of that cash into the 2018.
Analyst Commentary
From Capital One:
• CAPEX guidance: XEC announced its official FY17 budget at $1.16B - $1.26B (including $60MM in midstream expenses), which is 26%/40% above Street/COS ests. D&C CAPEX is expected between $850MM - $950MM, significantly above the preliminary level of $600MM announced on the 3Q call. The D&C budget allocated 66% of the expected spend to the Permian with the remaining portion to the Mid-Con. The D&C budget is expect to support 60 net completions in the Permian and 37 net completions in the Mid-Con. For perspective, we currently model 107 completions company-wide with 52 in the Permian and 55 in the Mid-Con. While the budget is higher than indicated last quarter, the company has made no secret of its bias to increase activity into ’17.
• Increased focus on the Permian in ‘17: We think the planned increased focus on the Permian in ’17 is driven by impressive well results in the play. During ’16, the company brought online roughly half its 61 total wells in each region (30 in the Permian and 31 in the Mid-Con). That split will shift heavily toward the Permian in ’17 as the play is expected to receive almost 2/3 of the total capital budget and 62% of the planned net completions. We expected this focus is driven by impressive recent well results in Culberson County. In ’16, the company brought online five 10K foot Upper Wolfcamp laterals that had an avg IP-30 of over 2,000 boe/d (56% oil).
From KLR Group:
Cimarex reported recurring 4Q/16 EPS of $0.60, below our $0.66 estimate due to slightly lower production partly offset by slightly higher price realizations. Production in 4Q/16 of 960 Mmcfepd (~29% oil) was ~1% below our ~973 Mmcfepd (~29% oil) estimate and ~2% below the consensus forecast of ~980 Mmcfepd. The company announced a ’17 capital plan of $1.1-$1.2 billion (excludes midstream) and expects production of 1,060-1,110 Mmcfepd this year. Preliminarily, we expect 1Q/17 production to be in the upper half of guidance (1,010-1,1050 Mmcfepd) and ’17 production to be around the midpoint of guidance. Cimarex plans to increase operated drilling activity from 11 rigs currently to 18 rigs by 4Q/17. The company plans to complete ~60 wells in the Permian Basin and 35-40 wells in the Anadarko Basin. Year-end ’16 proven reserves were essentially flat y/y at ~2.9 Tcfe (~49% liquids, ~79% PD). Permian comprised ~63% and Mid-Continent ~37% of proven reserves. Permian net production decreased ~1% q/q to ~85.3 Mboepd (~42% oil) and Mid-Continent net production increased ~4% q/q to ~446 Mmcfepd (~13% oil). Normalized for lateral length, recent upper/lower Wolfcamp downspacing infill pilots testing six to eight wells (~7,500’ laterals, ~2,400 lbs. of proppant per ft.) per section have performed comparable to wider spaced upper/lower Wolfcamp wells. This announcement should have a positive value impact due to higher oil composition and price realizations.
