Cimarex Energy (NYSE:XEC) keeps a relatively low profile compared to its peers. So, not many people know that the company has a strong position in an existing shale play, is solid financially, and may be a decent place to invest and ride a rebound in the economy and an improvement in natural gas prices.

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Cimarex Energy is an oil and gas exploration and production company with operations in the Mid-continent, the Permian Basin in Texas, and the Gulf Coast region. Its proved reserves totaled 1.34 Tcfe (trillion cubic feet equivalent) at the end of 2008, and 80% were natural gas.

Operations
Cimarex's marquis property is in the Woodford shale in Oklahoma, where it has 88,000 acres. The company purchased additional assets in this area from Chesapeake Energy (NYSE:CHK) in October 2008. Chesapeake was forced to sell these and other non-core assets after the sharp drop in natural gas prices hurt the company's finances. The Chesapeake assets were valuable because 88% were held by production, and it wasn't necessary for Cimarex to rush and drill on them immediately.

Another company active in the Woodford shale is Devon Energy (NYSE:DVN), which has 54,000 acres under lease. The company plans to drill 26 wells in the shale in 2009. Some larger integrated companies are also involved in the play, such as Marathon Oil (NYSE:MRO), which announced a discovery in January 2009, and holds 30,000 acres under lease. (Learn more about investing in the energy market, read Become An Oil And Gas Futures Detective.)

Financials
Cimarex announced one of the most severe capital spending cuts in the industry. The company spent $1.4 billion in 2008, and cut 2009 spending to a range of $400 million to $600 million.

This cut was surprising as the company had a debt to total capitalization of only 20% at the end of 2008, with total debt of $591.223 million. The debt is composed principally of two pieces: a $220 million credit facility that expires July 1, 2010, and a $350 million senior note due in 2017. (Find out how a company's capital structure is an indication of financial fitness in Evaluating A Company's Capital Structure.)

It's possible that the cuts reflect an intentional overreaction by the company in anticipation of sharp drops in oil service and rig costs. In the future, this will allow for cheaper drilling, rather than having a large inventory of acreage that is uneconomical to drill.

Many other exploration and production companies were forced to slash capital spending due to deteriorating finances. Quicksilver Resources (NYSE:KWK) finalized its 2009 capital budget at $400 million for exploration and development spending, which was down significantly from the original plan of $750 million.

Issues
There are some issues with Cimarex. The company's production and reserves are exposed to the annual hurricane season in the Gulf of Mexico, where the company has non-operated assets. In the fall of 2008, the company saw its production fall temporarily due to hurricane activity. At its peak, cuts in production totaled 126 mmcfe/day. Although production was eventually restored, it does reduce the company's cash flow.

The company also has a low reserve to production ratio of 7.5 times at the end of 2008. This means that at the current rate of production, the company's reserves would be exhausted in 7.5 years. Some of this can be explained by the write-down of its reserves base at the end of the year due to lower prices for oil and gas; however, even when considering this factor, 7.5 is low.

The Bottom Line
Cimarex Energy is not as well known as some of its higher profile peers in the oil patch, but it is solid financially, and has significant acreage in the Woodford shale, which should provide growth once the economy recovers. (Read our Oil And Gas Industry Primer for more information on investing in stocks such as these.)



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Tickers in this Article: XEC, CHK, DVN, KWK, MRO

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