The shares of Cimarex Energy (NYSE: XEC) surpassed the pre-Covid level of $55 as OPEC announced the extension of production curtailments at its ministerial meeting on March 4. Cimarex is an independent exploration and production company with operations in Texas, New Mexico, and Oklahoma. The company has a flexible cash flow allocation plan for 2021 given the uncertain demand environment due to short-term spikes in coronavirus cases in the U.S. and other countries. Due to the recently introduced restriction measures in Europe, high commercial crude oil inventory levels in the U.S., and EIA’s expectation of lower benchmark prices during the latter half of the year, Trefis believes that the stock has reached its near-term potential. We highlight the historical trends in revenues, earnings, and stock prices in an interactive dashboard analysis on Buy Or Fear Cimarex Energy Stock?
Asset impairments slashed the company’s asset base by 35%
Cimarex Energy’s revenues declined by 33% from $2.3 billion in 2018 to $1.6 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. While the earnings margin fell into negative territory due to a $1.6 billion impairment charge, the company’s balance sheet shrunk by 35% in 2020. Improvement in the company’s finances largely depends on global crude oil demand and supply constraints by the OPEC. With oil majors including Exxon Mobil, Chevron, BP, and Royal Dutch Shell also registering sizable impairment charges, we expect oil demand to recover gradually in the post-pandemic period.
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Brent and WTI benchmarks crossed the $60/bbl mark in the past month due to the extension of OPEC’s mandatory production cuts. The ending stocks of crude oil and other petroleum products in the U.S. are yet to reach pre-Covid levels as travel demand rebounds and the vaccination rate picks up. EIA expects the WTI benchmark to average around $50/bbl in 2021, negatively affecting revenues and margins of upstream companies. While supply-side constraints have supported benchmark prices, the demand-related factors including the emergence of another coronavirus wave in Europe and a slow vaccination rate in emerging economies might remain a deterrent.
With XEC stock gaining from the extension of OPEC curtailments, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for New Jersey Resources vs. World Wrestling Entertainment shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.