The oil and gas industry didn't have a great year in 2019, as crude oil prices dropped about 9% and natural gas prices dropped 18% amid a continued increase in supply. While that's good for consumers, it wasn't so positive for oil and gas companies and their investors. Over the past 12 months, the oil and gas production sector has declined about 6%. One of the laggards in the sector has been Cimarex Energy (XEC +0.00%), which was down about 14% in 2019 and is down roughly 8% year-to-date.
Cimarex, based in Denver, is a shale oil and gas driller with operations in Oklahoma, Texas, and New Mexico. Most of its drilling and exploration activity is in the Permian Basin in Texas and the Anadarko Basin in western Oklahoma. Its production mix is more weighted toward gas, which saw even lower commodity prices than oil last year due to the continued boom in natural gas production in the United States. More supply means lower prices.
Cimarex Energy is company that drills for gas and oil in Texas and Oklahoma. Image source: Getty Images.
While Cimarex stock has plummeted, there are three key reasons why now may be a good time to consider adding it to your portfolio.
Direction of oil and gas prices
The biggest factor that could spur a turnaround for Cimarex is an increase in oil and gas prices. Exploration and production companies like Cimarex make money by drilling oil and gas wells and selling the raw materials to companies that refine them. Generally, the higher the price of the commodity, the more money the drillers make.
There could be some tailwinds for Cimarex, particularly in the latter half of the year, as oil prices are expected to rise. The U.S. Energy Information Administration (EIA) forecasts that Brent crude oil will average $65 per barrel in 2020 and $68 per barrel in 2021. Last year, Brent Crude averaged about $64 per barrel. West Texas Intermediate (WTI) will average $59 per barrel in 2020 and $62 per barrel in 2021. Last year, WTI averaged $57 per barrel.
On the other hand, natural gas prices are expected to continue to fall in 2020, by an estimated 9%, according to EIA. But prices are expected to return to near 2019 levels in 2021. Overall, it's not much of a change, but heading in the right direction.
Expense reductions
Through a down year for the stock price, Cimarex has managed to increase its oil and gas production by about 40 percent while reducing costs.
At the start of last year, CEO Thomas Jorden made a commitment to cut production costs and be cash-flow neutral without adding any debt. Through the third quarter of last year, the company had delivered on that goal, as production expenses dropped 12% year over year. Further, investments in exploration and development (E&D) were funded with cash flow from operating activities. The company had a positive cash balance of $24 million at the end of the quarter. Jorden expects that to improve in 2020.
"We are laser-focused on all elements of our cost structure capital expenditures and lease operating expenses," Jorden said on the third-quarter earnings call. "As we look into 2020 our plan is to generate free cash in a $50 WTI oil, $2.50 NYMEX Gas environment." He believes that these changes will make the company more resilient to price drops than it was in the past.
Is it a buy?
The third reason to like this stock is its valuation. As the stock price has declined, it's become extremely undervalued, trading at just over nine times earnings. Analysts have taken notice as many rate the stock as a solid buy. After four straight years of negative returns, Cimarex seems headed in the right direction and could be a good value stock. But investors may want to proceed with caution and watch the direction of commodity prices as the year progresses.
