Cimarex Energy Co. is banking on the "tremendous repeatability" of its 2017 growth program to support its current production pace and capital spending and to return value to shareholders in the long term.
The Permian Basin-focused oil and gas producer believes in looking to the past to move forward, performing annual "look-backs" on not just the previous year but every program and every well drilled since its inception in 2003, according to Thomas Jorden, CEO of Cimarex. The look-backs, Jorden said, are key to Cimarex's program calibration.
"There is a treasure trove of data within our annual look-back, and we mine it thoroughly. We look at the impact of commodity prices, actual to expected production, actual to expected reserves and actual to expected expenditures," Jorden said during Cimarex's fourth-quarter 2017 earnings call on Feb. 15. "This analysis helps us understand the relative influence of each factor in our value creation."
In 2017, Cimarex achieved production growth of 19%, including a 27% rise in oil production. Daily volumes amounted to 1,142 MMcfe/d, compared to 963 MMcfe/d in 2016. The company also managed to fund its $1.28 billion of exploration and development investments in 2017 using cash flow and cash on hand.
"Our challenge now is to do it again," Jorden said, as the company plans to make $1.6 billion to $1.7 billion in investments for 2018. About 70% of the budget would be poured into operations in the Permian's Delaware Basin, while the rest would be allocated for projects in the Anadarko Basin's liquids-rich Woodford and Meramec shales. Cimarex expects this strategy to balance the company's exposure to commodity price fluctuations. Total production growth in 2018 is forecast at 11% to 16%, with 21% to 26% oil growth, while again living within cash flow and cash on hand.
"We had such a strong year in '17, we looked at that cash on the balance sheet, and said, why would be have that cash sitting here?" Jorden said. "And all of the choices were available to us ... We could have embarked on some modest share buybacks, we could have returned that cash to the shareholders ... [but] we said no, this is a very challenging commodity environment. So we better make sure that our actual expected results are really well-tolerated."
In the long term, Cimarex does intend to return cash to shareholders through a dividend increase instead of share buybacks. The company implemented a dividend reduction in 2016, but based on recent results, the management team plans to recommend restoring the dividend to its high-water mark along with a good growth trajectory, according to Jorden.
Cimarex reported fourth-quarter 2017 net income of $174.7 million, or $1.83 per share, up from $47.8 million, or 50 cents per share, in the year-ago quarter. For the full year, net income amounted to $494.3 million, or $5.19 per share, recovering from a loss of $408.8 million, or $4.38 per share, a year ago.