Denver-based Cimarex Energy Co. (NYSE: XEC) is relatively inconspicuous, says Mick Merelli, president, chief executive officer and chairman. "We're moving into the Gulf of Mexico now, and people think Cimarex is an arthritis medicine," he said at a recent Houston Producers' Forum program. In the 13 years since its spin-off from Apache Corp. (NYSE: APA), Cimarex has quietly grown through the drillbit and with cash flow. It began with only nonoperated assets. Now, it is venturing into the Gulf of Mexico a first time, via a planned $2.1-billion acquisition of Magnum Hunter Resources Inc. (NYSE: MHR) that will nearly triple reserves to total 1.4 trillion cu. ft. of gas equivalent. Merelli credits Cimarex's success to date with steadily drilling reserves and bringing them into production. Cimarex doesn't book proved undeveloped reserves (PUDs). "We're not a deal-of-the-week outfit," he said. "Our approach is investing in drilling-explore and produce. We do not buy our drilling opportunities, we generate them. Our day-to-day business is just plain old geology and engineering-the nuts and bolts. We like that part of the business, so that's what we do." Cimarex also has no debt and doesn't hedge. "For a public company, we had a reputation like we were contrarians," Merelli said. "We have no debt, no PUDs, it's just because we do business this way. We never take debt on because we're not acquirers. We generate our own opportunities. "As for PUDs, how does anyone get PUDs in the first place? They bought them. It's not any kind of super-conservative strategy; we just never bought PUDs before. Believe me, when we finish the acquisition of Magnum Hunter, we're going to book some PUDs. "As for hedging, if you're not an acquirer and you don't have debt, then you hedge because you know which way prices will go, and if there's one thing we don't know, it's which way prices will go. Sometimes we have an inkling on direction, but we're always off on timing." By the drillbit alone, Cimarex grew production 21% in 2004 and proved reserves increased 6%. "We're the first owner of a lot of our wells...We're ahead of that decline curve." Its cash flow increased by 75%, and it had $116 million in cash on hand. It has expanded its exploration staff 25% in the past year. "So if everything's going so swimmingly, why would we acquire Magnum Hunter? It will allow us to make a substantial footprint in the Permian Basin. It looked like something we could use to make another moderate-risk position. We already had a little Permian drilling going, but we'd just done enough there to know we like it." The exposure to Gulf of Mexico assets is a bonus. Merelli says Cimarex already looks like a Gulf of Mexico producer-its reserve life is short, its finding costs are high and its rate of return is high. "If you want to increase your net present value, invest at a high rate of return." Bringing in Magnum Hunter, it will have 25% debt-to-total-capitalization totaling $645 million. "In the next year, you'll see us getting back to looking a lot more like Cimarex," he said. "We'll be drilling and getting rid of our debt...Those PUDs will start to evaporate (by being converted to producing reserves) and we'll let those hedges roll off." (For more on Cimarex, see "Doubling Down," Oil and Gas Investor, April 2004.) Its new asset mix will be 44% Permian Basin, 40% Midcontinent and 13% Gulf of Mexico/Gulf Coast. "I don't throw any rocks at (the acquire-and-exploit strategy)," Merelli said. It just isn't Cimarex's style. "We're engineers, not financial engineers."

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