Oil and gas producer Cimarex Energy Co. (NYSE: XEC) has been among the potential targets of an acquisition since last year’s Occidental buyout of Anadarko. Last month’s acquisition of WPX Energy by Devon lifted Cimarex’s takeover potential a bit more.
Analyst Neal Dingmann at Truist, however, sees Cimarex continuing to prosper as a stand-alone producer, even with a relatively low market cap of around $2.5 billion. On Tuesday, Dingmann raised his rating on Cimarex from Hold to Buy and lifted his price target on the stock from $30 to $40, based largely on strong free cash flow and rising prices for natural gas.
He expects Cimarex to generate the highest free cash flow yield of any large-cap producer well into 2022 “driven by disciplined spending, stable production & upside potential should gas prices trend higher.” The company’s shares are forecast to trade at a discount of at least 20% to its Permian Basin-focused peers, primarily on headline risks such as pipeline takeaway capacity from the Permian, high natural gas liquids (NGLs) and natural gas production percentages, and the potential for fewer (or no) fracking permits on federal leases if Democrat Joe Biden is elected in November.
Truist views these topics as having a limited impact on Cimarex’s operations and expects the company to generate “above average free cash flow” from a growing production base. Dingmann also estimates that Cimarex trades at a discount of 10% to its peer-group average, despite the outlook for free cash flows, a high-quality asset base, and the “flexibility to benefit from all three commodity streams [natural gas, NGLs, and oil].”
Dingmann notes that Cimarex has been penalized in the past for targeting a “more modest” growth rate by choosing instead to focus on sustainable operations and long-term shareholder returns. He believes that these strategies will start to pay off for shareholders, resulting in 2021 estimated free cash flow of about $280 million (roughly $370 million excluding dividends) and 2022 free cash flow of $390 million ($485 million excluding dividends).
The company has no debt maturities until 2024 and excess free cash flow “should give Cimarex the flexibility to achieve previously laid out targets including growing the dividend, paying down debt, reinvesting in the asset base, and achieving <1x leverage.”
Truist estimates 2021 and 2022 free cash flow-to-enterprise value yields of 9% and 13%, respectively, compared to large Permian pure-play estimated averages of 7% in 2021 and 9% in 2022. Dingmann sees more potential upside for Cimarex if natural gas prices remain at current levels or rise even higher, if current services costs remain stable, if more production is wrung from the Delaware basin, or if the company can further increase efficiencies.
Cimarex shares traded up about 1.5% late Tuesday morning, at $25.12 in a 52-week range of $12.15 to $55.29 and with a consensus price target of $41.06. The company pays a dividend yield of 3.53%.
It is also worth noting that the share price is down more than 50% from its January high and more than 80% from its three-year high. That leaves plenty of room for improvement.
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