JPMorgan Downgrades Cimarex As Oil Growth Doubt Lingers

Petroleum and natural gas production company, Cimarex Energy Co. XEC experienced a fall in production, as prices were hindered by local price differentials. The company's Q2 EPS missed estimates Tuesday afternoon.

The Analysts

JPMorgan analyst Arun Jayaram downgraded Cimarex from Overweight to Neutral and lowered the price target from $125 to $110.

The Thesis

Jayaram conveys the downgrade to reflect the reduced oil production outlook and margin pressure from less than expected results.

“Despite the higher than expected 2018 capex guide that was disclosed in February, we maintained our OW stance on the stock throughout 2018 in anticipation that the company’s 2018 drilling program would deliver upside oil volumes relative to the Street consensus,” Jayaram said in a note.

Due to the deterioration of the Permian Basin oil mix, the analysts have since adjusted estimates to express no upside to oil forecasts. Margin compression from larger oil and gas differentials also factor.

“While these margin fears are well understood by the buy side and have to a large extent been discounted in the share price, we do expect weaker price realizations to garner more attention as realized Permian and Mid-Continent gas prices of $1.49 per Mcf and $1.77 per Mcf trailed our expectations of $1.66 per Mcf and $1.93 per Mcf, respectively,” Jayaram said.

Cimarex plans to have more than 80 percent of oil volumes on pipe by the end of 2018. This exposure caused Permian oil differential to widen.

Price Action

Cimarex shares were down 8.8 percent at $88.71 at time of publication.

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