NEW YORK (TheStreet) -- Oil and gas producer Cimarex Energy (XEC) - Get Cimarex Energy Co. Report is gearing up to report its third quarter results on Nov. 4 and savvy investors may want to take a pass on the stock -- for now.
Cimarex is an exploration and production company that gets around three-quarters of its production from the prolific Permian Basin in West Texas. However, unlike other Permian Basin oil producers, such as, Energen (EGN) , Diamondback Energy (FANG) - Get Diamondback Energy, Inc. Report and Pioneer Natural Resources (PXD) - Get Pioneer Natural Resources Company Report , Cimarex is heavily weighted toward natural gas. Roughly half of Cimarex's total production output comes from natural gas, while oil and natural gas liquids comprise the rest.
Over the last three months, Cimarex's stock has fallen by over 21% as Brent and WTI oil futures plummeted by around 19% in the corresponding period. The Colorado-based company, which receives the vast majority of its revenue from oil, has been punished by the markets on the back of the tumbling oil prices.
Cimarex's upcoming third quarter earnings report isn't likely to make matters better. Gabriele Sorbara, an analyst at Topeka Capital Markets, said in a research report emailed to TheStreet that investors should stay on the sidelines as the company prepares to report its quarterly results. Sorbara has a "hold" on the stock.
That rating is due in part to concerns Cimarex may come up short in meeting Wall Street's expectations for its production levels. Currently, Wall Street expects Cimarex to report total production levels of 931 million cubic feet equivalents per day in the third quarter. Sorbara, meanwhile, is anticipating 921.3 million cubic feet, the low end of the company's guidance of between 920 million to 945 million cubic feet equivalents a day.
Adverse weather conditions in the Southwest have had a negative impact on the performance of some of Cimarex's wells, especially those that operate in the prolific Permian Basin in West Texas. Furthermore, an increase in the price of fracking sand, which is used by companies to extract oil and gas from rocks by using pressurized liquids, could also have a negative impact on the company's performance in the third quarter.
Sorbara has identified about a dozen different catalysts at work that could impact Cimarex's stock on the upside or downside, based on the results of its drilling program. Early results from these catalysts "may be mixed," therefore, prudent investors should avoid this stock at the moment.
That's not to say investors should avoid this stock in the future, however.
Cimarex is still positioned to deliver double-digit revenue and production growth through 2016, as per Sorbara's projections. He attributes this to Cimarex drilling deeper into its core Permian Basin properties. Moreover, the company has shown renewed interest in the Cana-Woodford shale formation that extends through Western Oklahoma, an area where the company has been drilling for years but its yield has been overshadowed by the Permian Basin.
The company said in a presentation this week that it will spend $1.2 billion this year on drilling in the Permian Basin, where it will target multiple oil and gas properties. Meanwhile, the company plans to accelerate the development of its Cana-Woodford properties, spending $480 million in the region following the completion of an asset acquisition there valued at $238 million in June that represented 50,000 net acres.
Cimarex hasn't reported any meaningful increase in production from Cana-Woodford since the end of 2012, but it changed this year thanks to improvements in the process of making a well ready for production. The Cana-Woodford shale formation has become a promising region for further development.
In the second quarter, Cimarex reported a 22% sequential increase in production from Cana-Woodford, significantly higher than any other property in the company's portfolio and an improvement from the 13% sequential growth in the first quarter. Cimarex is optimistic about Cana-Woodford's future prospects. In terms of a rate of return, the company said during the second quarter conference call that Cana-Woodford is becoming about as good as the Permian Basin.
Over the next couple of years, Cimarex's revenues could increase by 27% this year, 17% in 2015 and 18% in 2016, according to Topeka Capital market's projections. Those figures are based on Topeka's expectations of an increase in Cimarex's production of 25% this year, 24% in 2015 and 15% in 2016.
Cimarex did not respond to email and phone messages from TheStreet requesting comment.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates CIMAREX ENERGY CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate CIMAREX ENERGY CO (XEC) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, good cash flow from operations, expanding profit margins and increase in stock price during the past year. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."
You can view the full analysis from the report here: XEC Ratings Report