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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period endedSeptember 30, 2020
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
 Commission File No. 001-31446
CIMAREX ENERGY CO.
(Exact name of registrant as specified in its charter)
Delaware 45-0466694
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
 
1700 Lincoln Street, Suite 3700DenverColorado 80203
(Address of principal executive offices) (Zip Code)
(303) 295-3995
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)Name of each exchange on which registered
Common Stock ($0.01 par value) XECNew York Stock Exchange

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   No 
    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   No 
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting company
Emerging growth company
    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
      Yes   No 

    The number of shares of Cimarex Energy Co. common stock outstanding as of October 31, 2020 was 101,963,311.


CIMAREX ENERGY CO.
Table of Contents
 
 Page
 
  
 
   
 
   
 
  
 
  
 
  
 
  
  
  
  
 
  
  
  



GLOSSARY

Bbls—Barrels
Bcf—Billion cubic feet
BOE—Barrels of oil equivalent
Gross Wells—The total wells in which a working interest is owned.
MBbls—Thousand barrels
MBOE—Thousand barrels of oil equivalent
Mcf—Thousand cubic feet
MMBtu—Million British thermal units
MMcf—Million cubic feet
Net Wells—The sum of the fractional working interest owned in gross wells expressed in whole numbers and fractions of whole numbers.
NGL or NGLs—Natural gas liquids

Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas.

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

Throughout this Form 10-Q, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In particular, in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide projections of our 2020 capital expenditures. All statements, other than statements of historical facts, that address activities, events, outcomes, and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates, or anticipates (and other similar expressions) will, should, or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-Q and our Form 10-K for the year ended December 31, 2019. All the risks disclosed in this Form 10-Q and our Form 10-K may be amplified by the COVID-19 pandemic and its unpredictable nature. Forward-looking statements include statements with respect to, among other things:

Fluctuations in the price we receive for our oil, gas, and NGL production, including local market price differentials, which may be exacerbated by the demand destruction resulting from the highly transmissible and pathogenic coronavirus known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that causes the disease known as COVID-19;

Cash flow and anticipated liquidity;

Disruptions to the availability of workers and contractors due to illness and stay at home orders related to the COVID-19 pandemic;

Cost and availability of gathering, pipeline, refining, transportation and other midstream and downstream activities and our ability to sell oil, gas, and NGLs, which may be negatively impacted by the COVID-19 pandemic and other risks and lead to a lack of any available markets;

Availability of supply chains and critical equipment and supplies, which may be negatively impacted by the COVID-19 pandemic and other risks;

Higher than expected costs and expenses, including the availability and cost of services and materials, which may be negatively impacted by the COVID-19 pandemic;

3

Availability of financing and access to capital markets;

The effectiveness of our internal control over financial reporting and our ability to remediate a material weakness in our internal control over financial reporting;

Declines in the SEC PV10 value of our oil and gas properties resulting in full cost ceiling test impairments to the carrying values of our oil and gas properties;

Impairments of goodwill;

Continuing compliance with the financial covenant contained in our amended and restated credit agreement;

Establishing valuation allowances against our net deferred tax assets;

Hedging activities and the viability of our hedging counterparties, many of whom have been negatively impacted by the COVID-19 pandemic;

Timing and amount of future production of oil, gas, and NGLs;

Reductions in the quantity of oil, gas, and NGLs sold and prices received because of decreased demand and/or curtailments in production relating to mechanical, transportation, storage, capacity, marketing, weather, the COVID-19 pandemic, or other problems;

Potential payments for failing to meet minimum oil, gas, and NGL delivery or sales commitments;

Estimates of proved reserves, exploitation potential, or exploration prospect size;

Ability to successfully integrate the business acquired from Resolute Energy Corporation (“Resolute”);

Unknown liabilities related to Resolute;

Amount, nature, and timing of capital expenditures;

Administrative, legislative, and regulatory changes;

Operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated;

Exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties;

Drilling of wells;

Increased financing costs due to a significant increase in interest rates;

Proving up undeveloped acreage;

Compliance with environmental and other regulations, including new regulations that may result from a change in federal and state administrations and legislatures;

Risks associated with concentration of operations in one major geographic area;

4

Environmental liabilities;

The ability to receive drilling and other permits and rights-of-way in a timely manner, which may be negatively impacted by the impact of COVID-19 restrictions on regulatory employees who process and approve permits and rights-of-way or a change in federal and state administrations and legislatures;

Development drilling and testing results;

Production decline rates are greater than expected;

Performance of acquired properties and newly drilled wells;

Regulatory approvals, including regulatory restrictions on state and federal lands, which may be negatively impacted by the impact of COVID-19 restrictions on regulatory employees responsible for regulatory approvals and by a change in presidential administration and legislatures;

Legislative or regulatory changes, including initiatives related to hydraulic fracturing, emissions, and disposal of produced water, which may be negatively impacted by a change in presidential administration or legislatures;

Unexpected future capital expenditures;

Economic and competitive conditions;

Availability and cost of capital;

Ability to obtain industry partners to jointly explore certain prospects, and the willingness and ability of those partners to meet capital obligations when requested;

Changes in estimates of proved reserves;

Derivative and hedging activities;

Success of the company’s risk management activities;

Title to properties;

Litigation;

Ability to complete property sales or other transactions; and

Other factors discussed in the company’s reports filed with the Securities and Exchange Commission (“SEC”).

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production, and sale of oil, gas, and NGLs.

These risks include, but are not limited to, commodity price volatility, demand, capacity, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and gas reserves and in projecting future rates of production, production type curves, well spacing, timing of development expenditures, and other risks described herein. Many of these risks can be exacerbated by epidemics and pandemics including the current COVID-19 pandemic.

5

Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing, and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and gas that are ultimately recovered.

Risk factors related to acquisitions, including our acquisition of Resolute, include, among others: the risk that problems may arise in successfully integrating the businesses of the companies, which may result in the combined company not operating as effectively and efficiently as expected; the risk that the combined company may be unable to achieve synergies or other anticipated benefits of the transaction; or it may take longer than expected to achieve those synergies or benefits, and other important factors, such as expenses related to integration, that could cause actual results to differ materially from those projected.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q or in our Annual Report on Form 10-K for the year ended December 31, 2019 cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements, express or implied, included in or incorporated by reference into this Form 10-Q and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-Q with the SEC, except as required by law.


6

PART I
ITEM 1. Financial Statements
CIMAREX ENERGY CO.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
(Unaudited)
 September 30,December 31,
 20202019
Assets  
Current assets:  
Cash and cash equivalents$272,957 $94,722 
Accounts receivable, net of allowance: 
Trade67,358 57,879 
Oil and gas sales196,008 384,707 
Gas gathering, processing, and marketing6,074 5,998 
Oil and gas well equipment and supplies45,959 47,893 
Derivative instruments39,402 17,944 
Prepaid expenses6,053 10,759 
Other current assets218 1,584 
Total current assets634,029 621,486 
Oil and gas properties at cost, using the full cost method of accounting: 
Proved properties21,076,796 20,678,334 
Unproved properties and properties under development, not being amortized1,208,733 1,255,908 
 22,285,529 21,934,242 
Less—accumulated depreciation, depletion, amortization, and impairment(18,862,339)(16,723,544)
Net oil and gas properties3,423,190 5,210,698 
Fixed assets, net of accumulated depreciation of $439,968 and $389,458, respectively
457,010 519,291 
Goodwill 716,865 
Derivative instruments952 580 
Deferred income taxes21,971  
Other assets68,818 71,109 
 $4,605,970 $7,140,029 
Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity 
Current liabilities: 
Accounts payable: 
Trade$20,053 $36,280 
Gas gathering, processing, and marketing14,582 12,740 
Accrued liabilities: 
Exploration and development32,049 112,228 
Taxes other than income43,450 54,446 
Other205,362 252,304 
Derivative instruments96,763 16,681 
Revenue payable123,705 207,939 
Operating leases59,989 66,003 
Total current liabilities595,953 758,621 
Long-term debt principal2,000,000 2,000,000 
Less—unamortized debt issuance costs and discounts(13,215)(14,754)
Long-term debt, net1,986,785 1,985,246 
Deferred income taxes 338,424 
Asset retirement obligation160,250 154,045 
Derivative instruments26,048 1,018 
Operating leases144,755 184,172 
Other liabilities66,757 60,742 
Total liabilities2,980,548 3,482,268 
Commitments and contingencies (Note 10)
Redeemable preferred stock - 8.125% Series A Cumulative Perpetual Convertible Preferred Stock, $0.01 par value, 62,500 shares authorized and issued (Note 5)
81,620 81,620 
Stockholders’ equity:  
Common stock, $0.01 par value, 200,000,000 shares authorized, 101,970,811 and 102,144,577 shares issued, respectively
1,020 1,021 
Additional paid-in capital3,226,828 3,243,325 
(Accumulated deficit) retained earnings(1,684,046)331,795 
Total stockholders’ equity1,543,802 3,576,141 
 $4,605,970 $7,140,029 
See accompanying Notes to Condensed Consolidated Financial Statements.

7


CIMAREX ENERGY CO.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except per share information)
(Unaudited)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenues:    
Oil sales$249,826 $435,094 $749,623 $1,196,166 
Gas and NGL sales140,761 135,483 339,503 479,442 
Gas gathering and other11,555 11,200 36,727 31,231 
Gas marketing(483)528 (1,981)(1,114)
 401,659 582,305 1,123,872 1,705,725 
Costs and expenses:    
Impairment of oil and gas properties351,029  1,625,878  
Depreciation, depletion, and amortization155,467 227,978 565,507 631,722 
Asset retirement obligation4,159 2,194 10,544 6,400 
Impairment of goodwill  714,447  
Production62,025 89,820 213,598 257,219 
Transportation, processing, and other operating53,130 59,797 161,334 173,479 
Gas gathering and other4,649 5,273 16,473 17,015 
Taxes other than income22,822 30,873 70,269 105,600 
General and administrative28,598 15,499 80,333 69,494 
Stock compensation9,738 6,797 22,879 20,004 
Loss (gain) on derivative instruments, net65,607 (38,735)(37,448)35,949 
Other operating expense, net167 10,141 548 19,057 
 757,391 409,637 3,444,362 1,335,939 
Operating (loss) income(355,732)172,668 (2,320,490)369,786 
Other (income) and expense:    
Interest expense23,361 24,586 69,589 69,665 
Capitalized interest(12,286)(16,264)(38,407)(41,811)
Loss on early extinguishment of debt   4,250 
Other, net(1,572)(140)1,053 (4,548)
(Loss) income before income tax(365,235)164,486 (2,352,725)342,230 
Income tax (benefit) expense(72,495)40,639 (360,556)82,758 
Net (loss) income$(292,740)$123,847 $(1,992,169)$259,472 
Earnings (loss) per share to common stockholders:    
Basic$(2.94)$1.21 $(19.99)$2.56 
Diluted$(2.94)$1.21 $(19.99)$2.56 
Comprehensive (loss) income:    
Net (loss) income$(292,740)$123,847 $(1,992,169)$259,472 
Other comprehensive income:    
Change in fair value of investments, net of tax of $0, ($648), $0 and ($220), respectively
 (2,198) (745)
Total comprehensive (loss) income$(292,740)$121,649 $(1,992,169)$258,727 
 


See accompanying Notes to Condensed Consolidated Financial Statements.

8


CIMAREX ENERGY CO.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:  
Net (loss) income$(1,992,169)$259,472 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:  
Impairment of oil and gas properties1,625,878  
Depreciation, depletion, and amortization565,507 631,722 
Asset retirement obligation10,544 6,400 
Impairment of goodwill714,447  
Deferred income taxes(360,395)82,758 
Stock compensation22,879 20,004 
(Gain) loss on derivative instruments, net(37,448)35,949 
Settlements on derivative instruments120,729 (1,118)
Loss on early extinguishment of debt 4,250 
Amortization of debt issuance costs and discounts2,488 2,285 
Changes in non-current assets and liabilities6,070 (2,630)
Other, net9,083 9,061 
Changes in operating assets and liabilities:  
Accounts receivable179,953 80,183 
Other current assets6,688 2,140 
Accounts payable and other current liabilities(161,564)(146,319)
Net cash provided by operating activities712,690 984,157 
Cash flows from investing activities:  
Acquisition of oil and gas properties(7,250)(285,596)
Oil and gas capital expenditures(482,141)(999,225)
Other capital expenditures(39,965)(59,035)
Sales of oil and gas assets69,836 28,547 
Sales of other assets1,892 859 
Net cash used by investing activities(457,628)(1,314,450)
Cash flows from financing activities:  
Borrowings of long-term debt172,000 2,239,310 
Repayments of long-term debt(172,000)(2,610,000)
Financing, underwriting, and debt redemption fees(1,566)(11,798)
Finance lease payments(3,863)(2,731)
Dividends paid(68,893)(60,130)
Employee withholding taxes paid upon the net settlement of equity-classified stock awards(2,505)(2,406)
Proceeds from exercise of stock options 1,267 
Net cash used by financing activities(76,827)(446,488)
Net change in cash and cash equivalents178,235 (776,781)
Cash and cash equivalents at beginning of period94,722 800,666 
Cash and cash equivalents at end of period$272,957 $23,885 
 

See accompanying Notes to Condensed Consolidated Financial Statements.

9


CIMAREX ENERGY CO.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
Additional
Paid-in Capital
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
 Common Stock
 SharesAmount
Balance, December 31, 2019102,145 $1,021 $3,243,325 $331,795 $3,576,141 
Dividends paid on stock awards subsequently forfeited— — 6 23 29 
Dividends declared on common stock ($0.22 per share)
— — — (22,548)(22,548)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — — (1,269)(1,269)
Net loss— — — (774,282)(774,282)
Common stock reacquired and retired(12)— (165)— (165)
Restricted stock forfeited and retired(31)— — — — 
Stock-based compensation— — 11,594 — 11,594 
Balance, March 31, 2020102,102 $1,021 $3,254,760 $(466,281)$2,789,500 
Dividends paid on stock awards subsequently forfeited— — 1 7 8 
Dividends declared on common stock ($0.22 per share)
— — (22,561)2 (22,559)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — (1,269)— (1,269)
Net loss— — — (925,147)(925,147)
Issuance of restricted stock awards66 1 (1)— — 
Common stock reacquired and retired(2)— (24)— (24)
Restricted stock forfeited and retired(15)— — — — 
Stock-based compensation— — 10,338 — 10,338 
Balance, June 30, 2020102,151 $1,022 $3,241,244 $(1,391,419)$1,850,847 
Dividends paid on stock awards subsequently forfeited— — 17 80 97 
Dividends declared on common stock ($0.22 per share)
— — (22,472)33 (22,439)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — (1,270)— (1,270)
Net loss— — — (292,740)(292,740)
Issuance of restricted stock awards7 — — — — 
Common stock reacquired and retired(94)(1)(2,315)— (2,316)
Restricted stock forfeited and retired(93)(1)1 — — 
Stock-based compensation— — 11,623 — 11,623 
Balance, September 30, 2020101,971 $1,020 $3,226,828 $(1,684,046)$1,543,802 










See accompanying Notes to Condensed Consolidated Financial Statements.

10


CIMAREX ENERGY CO.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
Additional
Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
 Common Stock
 SharesAmount
Balance, December 31, 201895,756 $958 $2,785,188 $542,885 $755 $3,329,786 
Dividends paid on stock awards subsequently forfeited— — — 2 — 2 
Dividends declared on common stock ($0.20 per share)
— — — (20,308)— (20,308)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — — (1,269)— (1,269)
Net income— — — 26,316 — 26,316 
Issuance of stock for Resolute Energy acquisition (Note 13)5,652 56 412,959 — — 413,015 
Unrealized change in fair value of investments, net of tax— — — — 1,149 1,149 
Issuance of restricted stock awards11 — — — — — 
Common stock reacquired and retired(10)— (654)— — (654)
Restricted stock forfeited and retired(4)— — — — — 
Exercise of stock options3 — 80 — — 80 
Stock-based compensation— — 13,245 — — 13,245 
Balance, March 31, 2019101,408 $1,014 $3,210,818 $547,626 $1,904 $3,761,362 
Dividends paid on stock awards subsequently forfeited— — 1 4 — 5 
Dividends declared on common stock ($0.20 per share)
— — — (20,330)— (20,330)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — — (1,270)— (1,270)
Net income— — — 109,309 — 109,309 
Unrealized change in fair value of investments, net of tax— — — — 304 304 
Issuance of restricted stock awards54 1 (1)— — — 
Restricted stock forfeited and retired(4)— — — — — 
Exercise of stock options15 — 594 — — 594 
Stock-based compensation— — 11,919 — — 11,919 
Balance, June 30, 2019101,473 $1,015 $3,223,331 $635,339 $2,208 $3,861,893 







See accompanying Notes to Condensed Consolidated Financial Statements.

11




CIMAREX ENERGY CO.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)

Additional
Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Common Stock
SharesAmount
Balance, June 30, 2019101,473 $1,015 $3,223,331 $635,339 $2,208 $3,861,893 
Dividends paid on stock awards subsequently forfeited— — — 6 — 6 
Dividends declared on common stock ($0.20 per share)
— — — (20,390)— (20,390)
Dividends declared on redeemable preferred stock ($20.3125 per share)
— — — (1,270)— (1,270)
Net income— — — 123,847 — 123,847 
Unrealized change in fair value of investments, net of tax— — — — (2,198)(2,198)
Issuance of restricted stock awards375 3 (3)— — — 
Common stock reacquired and retired(35)— (1,752)— — (1,752)
Restricted stock forfeited and retired(4)— — — — — 
Exercise of stock options11 — 593 — — 593 
Stock-based compensation— — 12,149 — — 12,149 
Balance, September 30, 2019101,820 $1,018 $3,234,318 $737,532 $10 $3,972,878 

























See accompanying Notes to Condensed Consolidated Financial Statements.

12


CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)


1.BASIS OF PRESENTATION

Cimarex Energy Co. (“Cimarex,” “company,” “we,” or “us”), a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, and New Mexico. The accompanying unaudited financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2019.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary to fairly present our financial position, results of operations, and cash flows for the periods and as of the dates shown. The accounts of Cimarex and its subsidiaries are presented in the accompanying financial statements, with intercompany balances and transactions eliminated in consolidation.

On March 1, 2019, we acquired Resolute Energy Corporation (“Resolute”) in a cash and stock transaction. The results of Resolute’s operations have been included in our consolidated financial statements since the March 1, 2019 acquisition date. See Note 13 for more information on this transaction.

Use of Estimates

Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, lease liabilities, and contingencies.

Prior Year Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the 2020 financial statement presentation. These reclassifications include reclassifying certain “Gas gathering and other” expenses to “Transportation, processing, and other operating” expense and “Production” expense. These reclassifications were made to reflect an allocation of the costs incurred to operate our gas gathering facilities as a cost to transport our equity share of gas produced and operate our wells. The following table shows the reclassifications made:
Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
(in thousands)Prior
Year Presentation
Current
Year Reclassifications
Current Year PresentationPrior
Year Presentation
Current
Year Reclassifications
Current Year Presentation
Production$88,300 $1,520 $89,820 $253,259 $3,960 $257,219 
Transportation, processing, and other operating$52,697 7,100 $59,797 $154,636 18,843 $173,479 
Gas gathering and other$13,893 (8,620)$5,273 $39,818 (22,803)$17,015 
$ $ 

13

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

Oil and Gas Well Equipment and Supplies

Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is estimated selling prices in the ordinary course of business, less reasonably predictable costs of disposal and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity.

Oil and Gas Properties

We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Under the full cost method of accounting, we are required to perform a quarterly ceiling test calculation to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures.

The quarterly ceiling test is primarily impacted by commodity prices, changes in estimated reserve quantities, overall exploration and development costs, and deferred taxes.  If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling test impairment. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet.  Any impairment of oil and gas properties is not reversible at a later date. 

For the nine months ended September 30, 2020, we incurred ceiling test impairments totaling $1.626 billion ($351.0 million for the three months ended September 30, 2020, $941.2 million for the three months ended June 30, 2020, and $333.7 million for the three months ended March 31, 2020). These impairments resulted primarily from the impact of decreases in the 12-month average trailing prices for oil, gas, and NGLs as well as significant basis differentials utilized in determining the estimated future net cash flows from proved reserves. We expect these conditions to continue at least through December 31, 2020 and possibly beyond and, therefore, expect to incur another ceiling test impairment at December 31, 2020.

Goodwill

Goodwill represents the excess of the purchase price of business combinations over the fair value of the net assets acquired and is tested for impairment at least annually. In performing the goodwill test, we compare the fair value of our reporting unit with its carrying amount. If the carrying amount of the reporting unit were to exceed its fair value, an impairment charge would be recognized in the amount of this excess, limited to the total amount of goodwill allocated to that reporting unit. We evaluate our goodwill for impairment in the fourth quarter of each year and whenever events or changes in circumstances indicate the possibility that goodwill may be impaired. Based upon our assessment as of October 31, 2019, goodwill was not impaired. However, during the three months ended March 31, 2020 the company’s market capitalization declined significantly, caused by macroeconomic and geopolitical conditions including the collapse of oil prices driven by surplus supply and decreased demand caused by the COVID-19 pandemic. In addition, the uncertainty related to oil demand significantly impacted our investment and operating decisions. As a result, we concluded that a triggering event had occurred, which required us to perform an interim quantitative impairment test for goodwill as of March 31, 2020. As a result of that quantitative
14

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

impairment test, which utilized quoted market prices for our common stock as a basis for determining fair value, we concluded that goodwill was fully impaired at March 31, 2020.

The following table reflects components of the change in the carrying amount of goodwill for the nine months ended September 30, 2020:
(in thousands)Nine Months Ended
September 30, 2020
Goodwill balance at January 1, 2020$716,865 
Resolute acquisition purchase price adjustments (Note 13)(2,418)
Impairment(714,447)
Goodwill balance at September 30, 2020$ 

Revenue Recognition

Oil, Gas, and NGL Sales

Revenue is recognized from the sales of oil, gas, and NGLs when the customer obtains control of the product, when we have no further obligations to perform related to the sale, and when collectability is probable. All of our sales of oil, gas, and NGLs are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain that variable consideration or to estimate the amount of transaction price attributable to future performance obligations for accounting purposes. As of September 30, 2020, we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through monthly delivery of oil, gas, and/or NGLs. Our contracts with customers typically require payment within one month of delivery.

Our gas is sold under various contracts. Under these contracts the gas and its components, including residue gas and NGLs, may be sold to a single purchaser or separate purchasers. Regardless of the contract, we are compensated for the value of the residue gas and NGLs at current market prices for each product. Depending on the specific contract terms, certain gathering, treating, transportation, processing, and other charges may be deducted against the prices we receive for the products. Our oil typically is sold at specific delivery points under contract terms that also are common in our industry.

Gas Gathering

When we transport and/or process third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services.

Gas Marketing

When we market and sell gas for other working interest owners, we act as agent under short-term sales and supply agreements and may earn a fee for such services. Revenues from such services are recognized as gas is delivered.

Gas Imbalances

Revenue from the sale of gas is recorded on the basis of gas actually sold by or for us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or
15

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented.

2.LONG-TERM DEBT

Long-term debt at September 30, 2020 and December 31, 2019 consisted of the following:
 September 30, 2020December 31, 2019
(in thousands)Principal
Unamortized Debt
Issuance Costs
and Discounts (1)
Long-term
Debt, net
Principal
Unamortized Debt
Issuance Costs
and Discounts (1)
Long-term
Debt, net
4.375% Notes due 2024
$750,000 $(2,884)$747,116 $750,000 $(3,535)$746,465 
3.90% Notes due 2027
750,000 (5,731)744,269 750,000 (6,289)743,711 
4.375% Notes due 2029
500,000 (4,600)495,400 500,000 (4,930)495,070 
$2,000,000 $(13,215)$1,986,785 $2,000,000 $(14,754)$1,985,246 
________________________________________
(1)The 4.375% Notes due 2024 were issued at par, therefore, the amounts shown in the table are for unamortized debt issuance costs only. At September 30, 2020, the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were $4.4 million and $1.3 million, respectively. At September 30, 2020, the unamortized debt issuance costs and discount related to the 4.375% Notes due 2029 were $4.0 million and $0.6 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were $4.8 million and $1.5 million, respectively. At December 31, 2019, the unamortized debt issuance costs and discount related to the 4.375% Notes due 2029 were $4.3 million and $0.6 million, respectively.

Bank Debt

On June 3, 2020, we entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”) dated as of February 5, 2019 for our senior unsecured revolving credit facility (“Credit Facility”). The Credit Facility has aggregate commitments of $1.25 billion with an option for us to increase the aggregate commitments to $1.5 billion, and matures on February 5, 2024. There is no borrowing base subject to the discretion of the lenders based on the value of our proved reserves under the Credit Facility. The First Amendment, among other things: (i) allows up to $3.5 billion of non-cash impairment charge add-backs to Shareholders’ Equity for covenant calculation purposes, (ii) institutes traditional anti-cash hoarding provisions at a consolidated cash threshold of $175.0 million, (iii) reduces the priority lien debt basket from 15% of Consolidated Net Tangible Assets (as defined in the credit agreement) to a $50.0 million cap, and (iv) adds an acknowledgement and consent to European Union bail-in legislation. As of September 30, 2020, we had no bank borrowings outstanding under the Credit Facility, but did have letters of credit of $2.5 million outstanding, leaving an unused borrowing availability of $1.248 billion. During the three and nine months ended September 30, 2020, we borrowed and repaid an aggregate of $11.0 million and $172.0 million, respectively, on the Credit Facility to meet cash requirements as needed.

At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR (or an alternate rate determined by the administrative agent for the Credit Facility in accordance with the Credit Facility when LIBOR is no longer available) plus 1.1252.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.1251.0%, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.1250.35%, based on the credit rating for our senior unsecured long-term debt.

16

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capitalization ratio of no greater than 65%. As of September 30, 2020, we were in compliance with all of the financial covenants.

At September 30, 2020 and December 31, 2019, we had $4.7 million and $4.0 million, respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in “Other assets” on our Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2020, we incurred $1.5 million in fees paid to the creditor and third-party costs for the First Amendment. These costs are being amortized to interest expense ratably over the life of the Credit Facility.

Senior Notes

On March 8, 2019, we issued $500 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum. We received $494.7 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs. The notes bear an annual interest rate of 4.375% and interest is payable semiannually on March 15 and September 15, with the first payment made on September 15, 2019.  We used the net proceeds to repay borrowings outstanding under our Credit Facility that were used to help fund the Resolute acquisition on March 1, 2019. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50%.

In April 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes at 99.748% of par to yield 3.93% per annum. These notes are due May 15, 2027 and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01%.

In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50%.

Our senior unsecured notes are governed by indentures containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of September 30, 2020.


3.    DERIVATIVE INSTRUMENTS

We periodically use derivative instruments to mitigate volatility in commodity prices.  While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. 

As of September 30, 2020, we have entered into oil and gas collars, oil basis swaps, and oil “roll differential” swaps. We also occasionally enter into fixed price swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price plus or minus a fixed differential, as applicable, and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing, Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are
17

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

consistent with the index prices used to sell our production. Our oil roll differential swaps are settled based on the difference between the monthly roll differential and a fixed price per Bbl. The monthly roll differential is calculated as the sum of 2/3 of the difference in the WTI NYMEX closing settlement price for the first nearby month futures contract minus the second nearby futures contract and 1/3 of the difference in the WTI NYMEX closing settlement price for the first nearby month futures contract minus the third nearby month futures contract. By using a roll differential swap, we have fixed the differential in pricing between the WTI NYMEX calendar month average and the physical crude oil delivery month. Under our fixed price swaps, we receive the difference between the fixed price and the published index price if the published index price is below the fixed price and we pay the difference between the fixed price and the published index price if the published index price is above the fixed price. The following tables summarize our outstanding derivative contracts as of September 30, 2020:
Oil CollarsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2020:
WTI (1)
Volume (Bbls)— — — 3,772,000 3,772,000 
Weighted Avg Price - Floor$— $— $— $40.91 $40.91 
Weighted Avg Price - Ceiling$— $— $— $49.84 $49.84 
2021:
WTI (1)
Volume (Bbls)3,600,000 3,094,000 2,300,000 2,300,000 11,294,000 
Weighted Avg Price - Floor$38.06 $34.62 $32.44 $32.44 $34.83 
Weighted Avg Price - Ceiling$46.45 $43.28 $41.49 $41.49 $43.56 
2022:     
WTI (1)
     
Volume (Bbls)990,000 364,000   1,354,000 
Weighted Avg Price - Floor$35.91 $37.50 $ $ $36.34 
Weighted Avg Price - Ceiling$47.37 $51.04 $ $ $48.36 
________________________________________
(1)The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”).
18

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

Gas CollarsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2020:
PEPL (1)
Volume (MMBtu)— — — 9,200,000 9,200,000 
Weighted Avg Price - Floor$— $— $— $1.78 $1.78 
Weighted Avg Price - Ceiling$— $— $— $2.21 $2.21 
Perm EP (2)
Volume (MMBtu)— — — 6,440,000 6,440,000 
Weighted Avg Price - Floor$— $— $— $1.36 $1.36 
Weighted Avg Price - Ceiling$— $— $— $1.64 $1.64 
Waha (3)
Volume (MMBtu)— — — 6,440,000 6,440,000 
Weighted Avg Price - Floor$— $— $— $1.43 $1.43 
Weighted Avg Price - Ceiling$— $— $— $1.73 $1.73 
2021:
PEPL (1)
Volume (MMBtu)9,000,000 8,190,000 6,440,000 6,440,000 30,070,000 
Weighted Avg Price - Floor$1.83 $1.83 $1.88 $1.88 $1.85 
Weighted Avg Price - Ceiling$2.23 $2.22 $2.29 $2.29 $2.25 
Perm EP (2)
Volume (MMBtu)6,300,000 6,370,000 4,600,000 4,600,000 21,870,000 
Weighted Avg Price - Floor$1.50 $1.50 $1.64 $1.64 $1.56 
Weighted Avg Price - Ceiling$1.79 $1.79 $1.95 $1.95 $1.86 
Waha (3)
Volume (MMBtu)8,100,000 8,190,000 6,440,000 6,440,000 29,170,000 
Weighted Avg Price - Floor$1.52 $1.52 $1.65 $1.65 $1.58 
Weighted Avg Price - Ceiling$1.83 $1.83 $1.98 $1.98 $1.90 
2022:     
PEPL (1)
     
Volume (MMBtu)3,600,000    3,600,000 
Weighted Avg Price - Floor$2.00 $ $ $ $2.00 
Weighted Avg Price - Ceiling$2.40 $ $ $ $2.40 
Perm EP (2)
Volume (MMBtu)1,800,000    1,800,000 
Weighted Avg Price - Floor$1.85 $ $ $ $1.85 
Weighted Avg Price - Ceiling$2.18 $ $ $ $2.18 
Waha (3)
       
Volume (MMBtu)3,600,000    3,600,000 
Weighted Avg Price - Floor$1.77 $ $ $ $1.77 
Weighted Avg Price - Ceiling$2.15 $ $ $ $2.15 
________________________________________
19

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

(1)The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC.
(2)The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC.
(3)The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC.
Oil Basis SwapsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2020:
WTI Midland (1)
Volume (Bbls)— — — 2,944,000 2,944,000 
Weighted Avg Differential (2)$— $— $— $0.18 $0.18 
2021:
WTI Midland (1)
Volume (Bbls)2,790,000 2,639,000 2,208,000 2,208,000 9,845,000 
Weighted Avg Differential (2)$0.03 $(0.04)$(0.26)$(0.26)$(0.12)
2022:
WTI Midland (1)
Volume (Bbls)990,000 364,000   1,354,000 
Weighted Avg Differential (2)$0.20 $0.35 $ $ $0.24 
________________________________________
(1)The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude.
(2)The index price we receive under these basis swaps is WTI as quoted on the NYMEX plus or minus, as applicable, the weighted average differential shown in the table.

Oil Roll Differential SwapsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2021:
WTI (1)
Volume (Bbls)630,000 637,000 644,000 644,000 2,555,000 
Weighted Avg Price$(0.24)$(0.24)$(0.24)$(0.24)$(0.24)
2022:
WTI (1)
Volume (Bbls)630,000    630,000 
Weighted Avg Price$(0.24)$ $ $ $(0.24)
________________________________________
(1)The index price used to determine the settlement “roll” is WTI as quoted on the NYMEX.

20

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

The following tables summarize our derivative contracts entered into subsequent to September 30, 2020 through October 31, 2020:
Gas CollarsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2021:
PEPL (1)
Volume (MMBtu) 910,000 1,840,000 1,840,000 4,590,000 
Weighted Avg Price - Floor$ $2.40 $2.40 $2.40 $2.40 
Weighted Avg Price - Ceiling$ $2.81 $2.86 $2.86 $2.85 
Perm EP (2)
Volume (MMBtu) 910,000 1,840,000 1,840,000 4,590,000 
Weighted Avg Price - Floor$ $2.40 $2.40 $2.40 $2.40 
Weighted Avg Price - Ceiling$ $2.85 $2.88 $2.88 $2.87 
Waha (3)
Volume (MMBtu) 910,000 1,840,000 1,840,000 4,590,000 
Weighted Avg Price - Floor$ $2.40 $2.40 $2.40 $2.40 
Weighted Avg Price - Ceiling$ $2.82 $2.86 $2.86 $2.85 
2022:
PEPL (1)
Volume (MMBtu)1,800,000 1,820,000   3,620,000 
Weighted Avg Price - Floor$2.40 $2.40 $ $ $2.40 
Weighted Avg Price - Ceiling$2.86 $2.86 $ $ $2.86 
Perm EP (2)
Volume (MMBtu)1,800,000 1,820,000   3,620,000 
Weighted Avg Price - Floor$2.40 $2.40 $ $ $2.40 
Weighted Avg Price - Ceiling$2.88 $2.88 $ $ $2.88 
Waha (3)
Volume (MMBtu)1,800,000 1,820,000   3,620,000 
Weighted Avg Price - Floor$2.40 $2.40 $ $ $2.40 
Weighted Avg Price - Ceiling$2.86 $2.86 $ $ $2.86 
________________________________________
(1)The index price for these collars is PEPL as quoted in Platt’s Inside FERC.
(2)The index price for these collars is Perm EP as quoted in Platt’s Inside FERC.
(3)The index price for these collars is Waha as quoted in Platt’s Inside FERC.
21

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(Unaudited)

Oil Basis SwapsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2021:
WTI Midland (1)
Volume (Bbls) 364,000 368,000 368,000 1,100,000 
Weighted Avg Differential (2)$ $0.16 $0.16 $0.16 $0.16 
2022:
WTI Midland (1)
Volume (Bbls)360,000 364,000   724,000 
Weighted Avg Differential (2)$0.16 $0.16 $ $ $0.16 
________________________________________
(1)The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude.
(2)The index price we receive under these basis swaps is WTI as quoted on the NYMEX plus or minus, as applicable, the weighted average differential shown in the table.

Oil Roll Differential SwapsFirst
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Total
2021:
WTI (1)
Volume (Bbls) 364,000 368,000 368,000 1,100,000 
Weighted Avg Price$ $(0.20)$(0.20)$(0.20)$