Why You Should Bail on Cimarex Energy Stock

Cimarex Energy [stock_market_widget type="inline" template="generic" color="default" assets="XEC" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is having a forgettable year so far, with shares of the oil producer down more than 36% in 2019 as the oil pricing environment has taken a turn for the worse after a bright start. Cimarex has also taken a hit thanks to the company’s weak earnings performance at the beginning of May, which clearly demonstrated how weak oil prices could hurt the company.

On the Back Foot

Cimarex missed Wall Street’s earnings estimates by a mile for the first quarter of 2019. Its non-GAAP earnings came in at $1.20 per share, missing the consensus estimate by $0.15 per share.

This bottom line miss was a result of the weak oil prices realized by Cimarex during the quarter. The company’s average realized oil price fell from $59.93 per barrel in the prior-year period to $48.87 per barrel in the first quarter of 2019, a decline of 18%.

Similarly, average realized natural gas prices fell 16% year over year to $1.91 per thousand cubic feet (Mcf) during the first quarter of 2019. The realized prices of natural gas liquids also fell 19% to $16.44 per barrel.

Cimarex was unable to take advantage of the increase in its production and that trend might continue despite the company’s best efforts.

Cimarex’s production, however, was up substantially on a year over year basis. The company delivered daily average production of 258,882 barrels of oil equivalent during the first quarter of 2019. This was an increase of 25% as compared to the prior-year period.

But thanks to the weak energy pricing environment, Cimarex’s revenue increased just 1.7% year over year to $577 million and missed the Wall Street estimate by a whisker. What’s more, the company’s adjusted net income also shrunk to $117 million during the quarter as compared to $173 million a year ago.

So Cimarex was unable to take advantage of the increase in its production and that trend might continue despite the company’s best efforts.

What’s in Store for Cimarex Going Forward?

Despite the oil price weakness, Cimarex has kept its capital expenditure guidance unchanged for the year. The company will be spending between $1.35 billion and $1.45 billion as capex in 2019. At this level of capital expenditure, Cimarex plans to achieve average daily production of 260,000 to 275,000 barrels of oil equivalent per day.

Cimarex was originally expecting revenue between 250,000 and 270,000 barrels of oil equivalent per day in 2019, so it has bumped up its production guidance for the year. So it seems like the company is trying to offset the oil price weakness with improved production. But despite this strategy, Cimarex investors shouldn’t expect a turnaround because the company will need an improvement in oil prices in order to make a comeback.

WTI oil has now slipped to almost $53 per barrel as compared to $60-plus levels it was at a few weeks ago. The picture doesn’t look bright going forward either as the International Energy Agency has slashed its global oil demand forecast. The Agency now sees oil demand of 1.2 million barrels per day as compared to its earlier forecast of 1.3 million barrels per day.

This is the second straight month when the IEA has slashed its oil demand forecast. So the chances of an oil price recovery look bleak, which is why investors shouldn’t be expecting a turnaround at Cimarex.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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