Cimarex Energy Co.
Cimarex Energy Co.
Sales: $1.1 billion (2005)
Stock Exchanges: New York
Ticker Symbol: XEC
NAIC: 211111 Crude Petroleum Extraction
Based in Denver, Colorado, Cimarex Energy Co. is an independent oil and gas exploration production company listed on the New York Stock Exchange. The company believes in growth by the drill bit, eschewing the practice of hedging (making a future contract at a set price in order to minimize possible financial loss) to reap the full rewards of its efforts. Cimarex generally avoided growth through acquisition, albeit the $2.1 billion stock purchase of Magnum Hunter Resources in 2005 proved a major exception, in effect doubling the company's size. Rather than hedging, Cimarex achieves balance by drilling in lower-risk areas, the Mid-Continent (Oklahoma, the Texas Panhandle, and southwest Kansas),and to a lesser extent the Permian Basin region of west Texas and southeast New Mexico, with higher-risk properties in the Gulf of Mexico and the Gulf Coast areas of Texas, south Louisiana, and Mississippi. In addition, Cimarex is involved in projects in California, Michigan, and North Dakota. The company's proved reserves at the end of 2005 totaled 1.4 trillion cubic feet equivalent, of which nearly three-quarters was natural gas.
DEEPEST ROOTS REACHING TO 1920
Cimarex was formed in 2002 when the exploration and production assets of Tulsa-based Helmerich & Payne, Inc. (H&P) were spun off and merged with Denver-based Key Production Company, Inc. Founded in 1920, the H&P operation was by far the older of the two. The men behind the H&P name were Walter Helmerich and William Payne. A member of the U.S. fledgling air force in World War I, Helmerich planned to become a barnstorming stunt pilot, only to have his two partners killed before they had a chance to perform. Instead, Chicago-born Helmerich took a job in the oil industry, in which his father-in-law, Charles F. Colcord, had been a major force in Oklahoma. After he and his brother-in-law struck oil in a Colcord property in Kansas, Helmer-ich permanently gave up the dangers of stunt flying for the uncertainties of the oil business. He junked his airplanes to raise enough money to buy a drilling rig, and in 1920 teamed up with a Colcord oil scout named William Payne. Unlike Helmerich, who dropped out of college, Payne held a degree from Oklahoma A&M, where he studied bacteriology and chemistry, and did graduate work in microbiology at Massachusetts A&M and Amherst.
The Helmerich and Payne partnership struggled for six years before enjoying their first strike in Braman, Oklahoma. Now established, the company was incorporated, with Payne overseeing the drilling activities and Helmerich handling the administrative responsibilities. Payne split from H&P in 1936 and went on to enjoy success with the Big Chief Drilling Company in Oklahoma City. Helmerich kept Payne's name but almost lost the company to bankruptcy during the final years of the Depression. With World War II came renewed success, and the company thrived for several years after the war, spurred in large part by the United States' growing love affair with the automobile and the need for increasing amounts of gasoline. Growth was curtailed, however, when the oil industry hit one of its periodic slumps in the early 1950s.
In need of a fresh start, H&P turned to a new generation of leadership in 1954 when Helmerich's son, Walter Helmerich III, joined the company as an executive vice-president. A graduate of Harvard Business School, he installed an increased level of professionalism, bringing in a new management team as well as the company's first drilling engineers, who would introduce technology that dramatically increased well production. By the end of the decade, the company went public and in 1960 the younger Helmerich assumed the presidency.
To meet the challenge of another downturn in the oil industry, H&P in the 1960s began to diversify, becoming involved in areas such as the manufacture of products and chemicals used by oil and pipeline companies, the laying of telephone cables, and even real estate. Nevertheless, H&P remained very much an oil and gas company, although much of its business came from contract drilling. With a spike in oil prices caused by the oil embargo of the early 1970s, H&P expanded overseas, drilling wells for both itself and others in Venezuela, Columbia, Ecuador, Peru, Belize, Guatemala, and Bolivia. By the start of the 1980s, H&P had more than 50 drilling rigs in operation.
The 1980s proved to be a brutal period for the oil and gas industry, as about four out of five companies went bankrupt. Unlike its rivals, however, H&P had outside business interests that had acted more conservatively during the boom years of the previous decade. As a result, H&P experienced a serious erosion in revenues during the 1980s but remained profitable. In fact, H&P was the world's only drilling company to turn a profit in 1989. Because it was in solid shape financially and could land long-term drilling contracts with the major oil companies, H&P was able in the early 1990s to add new rigs and compete for even larger contracts.
SPINOFF, MERGER: 2002
The company continued its own exploration activities during the 1990s, but despite enjoying success in both drilling and exploration, boasting the latest in drilling technology, and possessing no long-term debt, the company did not feel it had the respect of investors that it deserved. The company, now headed by a third generation of the Helmerich family, Hans Helmerich, believed the price of its stock was too low. In November 2000 H&P announced that it planned to spin off its production division in order to create a pure-play contract land drilling company that analysts could better evaluate. The investment banking firm of Petrie Park-man & Co. was retained to help find a suitable partner with which to merge the operation. The process took more than a year, during which time a number of candidates were evaluated. Finally, in February 2002, H&P agreed to spin off and merge its production division with Key Production Company, represented by Merrill Lynch. Key was selected, according to the Oil Daily, "because of its staff, organizational strength, and the complementary nature of their E&P portfolios, especially in the Midcontinent." They were also a good cultural fit, due in large measure to Key's chairman and chief executive, Francis H. "Mick" Merelli.
Key grew out of Apache Oil Corporation, founded in 1954 in Minneapolis, although it found success drilling in Oklahoma. The company was also an early practitioner of limited partnership investment vehicles, which it would not only apply to oil and gas endeavors but also to commercial real estate. Apache diversified into a number of directions, and in 1971 formed Apache Exploration Company to focus on the oil and gas business. A decade later Apache formed Apache Petroleum Company (APC), the United States' first master limited partnership, which consolidated the interests in more than 30 Apache programs. APC units were traded on the New York Stock Exchange, providing liquidity for investors.
Our approach is focused on drill-bit driven growth in production and reserves utilizing risked rate of return economics to evaluate projects.
The 1980s was a time of major changes for Apache, as the heyday of limited partnerships, which had for many years been the company's bread and butter, came to an end. The Tax Reform Act of 1986 eliminated the tax breaks that had made the partnerships so attractive to investors. As they fled, Apache, which like the rest of the industry had to contend with stubbornly low prices, was forced to restructure its approach to the oil and gas business. In 1988 APC investors were given the option either to exchange their units for shares in Apache Corporation, the manager of APC, or in a newly created corporation called Key Production Company, which would become a pure exploration and production company.
For the first four years, Key had no employees and was operated under a management contract. It was mostly in the business of liquidating assets, paying dividends to stockholders, buying back its stock on the open market, and paying off nearly $35 million in debt. By this time, the fees it generated for Apache were so small that it was no longer worth keeping and in 1992 Apache began taking steps to spin off the business. Key would launch active exploration of its undeveloped acreage, which included 23,614 net acres in the Rocky Mountains and 30,284 acres in Oklahoma, Texas, and Louisiana. In preparation of spinning off Key, a move completed in 1993, Mick Merelli, Apache's president and chief operating officer, quit to become Key's president, CEO, and chairman.
A 1959 graduate of the Colorado School of Mines with a degree in petroleum engineering, Merelli started out as a field engineer in Casper, Wyoming, for a company that would become part of Tulsa-based Terra Resources, Inc. Merelli climbed the ranks of Terra, becoming vice-president in 1976 and president and CEO three years later, a position he held until 1988 when he was named president and chief operating officer at Apache, bringing with him a wealth of technical knowledge and managerial experience.
After Key gained its independence, Merelli built up the business over the course of the next decade. He proved adept at growth through the drill bit, pursuing a "base hit" approach to exploration, preferring modest but more predictable successes, and then maximizing the returns by not engaging in the practice of hedging. Nevertheless, Merelli was willing to expand externally when opportunities arose, completing acquisitions in 1994 and 1998, and mergers in 1996 and 2000. As a result of his steady hand, Key was able to achieve growth even during a period of difficult conditions for the oil and gas industry in 1998 and 1999. All told, Key tripled its production from 1992 to 2001, while its market capitalization increased from $25 million to $240 million.
Merelli became interested in merging with H&P because of Key's inability to replace reserves in 2001 due to some mistakes made in the company's Gulf Coast drilling program. He recognized that H&P was a good fit in terms of culture and because their property portfolios complemented one another, especially in the Midcontinent region. Because both companies had enjoyed success in western Oklahoma, the former Cima-rron Territory, the executives of the two companies wanted to name the new company Cimarron Exploration. The name was already taken, however, leading to the coining of Cimarex Energy Co., which was formed as a wholly owned H&P subsidiary in February 2002. Over the next several months the parties completed a "spin-merge" maneuver, more formally known as a Morris Trust structure. In July the H&P assets were transferred to the new entity, which then acquired Key on September 30, and on that same day the company was spun off from H&P, with its stock distributed to H&P shareholders on a tax-free basis.
Merelli took over as president, CEO, and chairman of Cimarex, and the rest of the senior management team was split between Key and H&P executives. Given that about 80 percent of the company's reserves were in natural gas, Cimarex became a gas-oriented company. In its first full year in operation, Cimarex invested more than $160 million on exploration and development activities and spent another $2 million on several small acquisitions. Merelli continued to follow his "base hit" approach to drilling, leading to a success rate of more than 80 percent, and as he had done with Key he avoided hedging. With a rise in energy prices during this time, Cimarex was thus able to reap the full reward of its labors. Revenues grew rapidly, from $209.6 million in 2002 to $454.2 million in 2003 and $675 million in 2004. Net income kept pace, increasing from $40 million in 2002 to $94.6 million in 2003 and $153.6 million in 2004.
- Helmerich & Payne, Inc. is founded.
- Key Production Company is formed by Apache Corporation.
- Key Production is spun off.
- Helmerich & Payne's production division merges with Key to form Cimarex Energy Co.
- Magnum Hunter Resources, Inc. is acquired.
Cimarex achieved its success with virtually no debt. The company was able to take advantage of a strong balance sheet to complete a major acquisition in 2005, the $2.1 billion purchase of Texas-based Magnum Hunter Resources, which included the assumption of $645 million in debt. The deal tripled Cimarex's reserves and doubled its production. Cimarex also picked up some unwanted hedging contracts from Magnum Hunter, but they were due to expire in 2005 and 2006.
With the Magnum Hunter properties in the fold, Cimarex experienced a surge in revenues to more than $1.1 billion in 2005, and net income more than doubled to $328.3 million. Continued success followed in the first quarter of 2006 when the company enjoyed an 89 percent success rate with new wells, and revenues more than doubled the amount generated in the same period the previous year. With energy prices remaining high, Cimarex was poised to experience ongoing success. In addition, Merelli, despite approaching 70 years of age, showed no inclination to turn over the reins any time soon. "I don't play golf," he told the Denver Post. "This is what I like to do. I don't have any plans for retirement."
Key Production Company, Inc.; Magnum Hunter Resources, Inc.
Anadarko Petroleum Corporation; BP PLC; Royal Dutch Shell PLC.
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