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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D C 20549
Form 10-K
| (Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number 001-31446
CIMAREX ENERGY CO.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 45-0466694 (I.R.S. Employer Identification No.) |
1700 Lincoln Street, Suite 1800, Denver, Colorado 80203
(Address of principal executive offices including ZIP code)
(303) 295-3995
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of each exchange on which registered | |
|---|---|---|
| Common Stock ($.01 par value) | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, (as definedor a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Securities Exchage Act of 1934). (Check One):Exchange Act.
| Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.Act). YES o NO ý
Aggregate market value of the voting stock held by non-affiliates of Cimarex Energy Co. as of June 30, 20072008 was approximately $3,227,233,825.$5,701,925,730.
Number of shares of Cimarex Energy Co. common stock outstanding as of February 15, 200818, 2009 was 82,779,666.83,350,488.
Documents Incorporated by Reference: Portions of the Registrant's Proxy Statement for its 20082009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
DESCRIPTION
GLOSSARY
Bbl/d—d—Barrels (of oil) per day
Bbls—Bbls—Barrels (of oil)
Bcf—Bcf—Billion cubic feet
Bcfe—Bcfe—Billion cubic feet equivalent
MBbls—MBbls—Thousand barrels
Mcf—Mcf—Thousand cubic feet (of natural gas)
Mcfe—Mcfe—Thousand cubic feet equivalent
MMBbls—MMBbls—Million barrels
MMBtu—MMBtu—Million British Thermal Units
MMcf—MMcf—Million cubic feet
MMcf/d—d—Million cubic feet per day
MMcfe—MMcfe—Million cubic feet equivalent
MMcfe/d—d—Million cubic feet equivalent per day
Net Acres—Acres—Gross acreage multiplied by working interest percentage
Net Production—Production—Gross production multiplied by net revenue interest
NGL—NGL—Natural gas liquids
Tcf—Tcf—Trillion cubic feet
Tcfe—Tcfe—Trillion cubic feet equivalent
One barrel of oil is the energy equivalent of six Mcf of natural gas.
Forward-Looking Statements
Throughout this Form 10-K, we make statements that may be deemed "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, that address activities, events, outcomes and other matters that Cimarex plans, expects, intends, assumes, believes, budgets, predicts, forecasts, projects, estimates or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements are based on management's current belief, based on currently available information, as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Forward-looking statements include statements with respect to, among other things:
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, many of which are beyond our control, incident to the exploration for and development, production and sale of oil and gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of goods and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures and other risks described herein.
Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data and the interpretation of such data by our engineers. As a result, estimates made by different engineers often vary from one another. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the timing of future production and development drilling. Accordingly, reserve estimates are generally different from the quantities of oil and natural gas that are ultimately recovered.
Should one or more of the risks or uncertainties above or elsewhere in this Form 10-K cause our underlying assumptions to be incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, express or implied, included in this Form 10-K and attributable to Cimarex are qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Cimarex or persons acting on its behalf may issue. Cimarex does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of filing this Form 10-K with the Securities and Exchange Commission, except as required by law.
General
Cimarex Energy Co. is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, New Mexico, Kansas, Louisiana and Wyoming. Proved oil and gas reserves as of year-end 20072008 totaled nearly 1.51.3 Tcfe, consisting of 1.1 Tcf of gas and 58.345.2 million barrels of oil and natural gas liquids. Of total proved reserves, 7680 percent are gas and 7982 percent are classified as proved developed. Our 2008 production averaged 485.8 MMcfe per day, comprised of 348.2 MMcf of gas per day and 22,937 barrels of oil per day. We operate the wells that account for 8283 percent of our total proved reserves and approximately 7981 percent of production.
Our corporate headquarters are located at 1700 Lincoln Street, Suite 1800, Denver, Colorado 80203 and our main telephone number at that location is (303) 295-3995. Cimarex is a Delaware corporation.
Our Web site address iswww.cimarex.com. There you will find our news releases, annual reports, proxy statements, 10-Ks, 10-Qs, 8-Ks, insider (Section 16) filings and all other SEC filings. We have also posted our Code of Ethics, Code of Business Conduct, Corporate Governance Guidelines, Audit Committee Charter and Governance Committee Charter. Copies of these documents are also available in print upon a written or telephone request to our Corporate Secretary. Throughout this Form 10-K we use the terms "Cimarex," "Company," "we," "our," and "us" to refer to Cimarex Energy Co. and its subsidiaries.
During 2007 we accomplished the following highlights:
History
Cimarex a Delaware corporation, was formed in February 2002 as a wholly owned subsidiary of Tulsa-based Helmerich & Payne, Inc. On September 30, 2002, Cimarex was completely spun off to Helmerich and Payne shareholders and simultaneously merged with Denver-based Key Production Company, Inc. Our common stock began trading on the New York Stock Exchange on October 1, 2002 under the symbol XEC.
On June 7, 2005, we acquired Dallas-based Magnum Hunter Resources, Inc. in a $1.5 billion stock-for-stock merger plusincluding assumption of liabilities. That transaction effectively tripled our proved reserves and doubled our production. Since 2005, we have principally focused on exploration and development drilling and have funded these investments with cash flow provided by operating activities.
Market Conditions
During the fourth quarter of 2008, severe disruptions in the credit markets and reductions in global economic activity caused significant decreases in oil and gas prices. Oil prices fell from a mid-year 2008 peak of $130 per barrel to $37 per barrel at year-end. Gas prices fell from $12.00 per Mcf in mid 2008 to $4.50 per Mcf in the fourth quarter 2008. The large decrease in prices had a significant adverse impact on the amount of cash flow available to invest in exploration and development drilling, the present value of our proved reserves, our stock price and total market capitalization.
The continued credit crisis and related turmoil in the global financial system may have further impact on our business and our financial position. A further decrease in oil and gas prices would have a negative impact on our earnings, cash flow available for reinvestment, and future growth in proved reserves and production. Our ability to access the capital markets to fund our growth may also be restricted. Further, the economic situation could have an impact on our lenders and customers, causing them to fail to meet their obligations to us.
As a result of lower commodity prices we have sharply reduced our drilling activity. Our exploration and development capital investment is expected to decrease from $1.4 billion in 2008 to $400-$600 million in 2009, depending on prices and corresponding cash flow.
2008 Summary
During 2008 we accomplished the following positive highlights:
However, largely as a result of the collapse in oil and gas prices we also experienced the following negative consequences:
Business Strategy
Our principal business objective is to profitably grow our proved reserves and production for the long-term benefit of our investors. Our strategy centers on continually expanding our drilling program and maximizing cash flow from our production.producing properties and profitably reinvesting that cash flow in exploration and development.
A cornerstone to our approach is a detailed evaluation of each drilling decision based on its risk-adjusted discounted cash flow rate of return on investment. Our analysis includes estimates and assessments of potential reserve size, geologic and mechanical risks, expected costs, future production profiles and future production profiles.oil and gas prices.
During 2007, we drilled 452 gross wells and invested $983 million on2008, our cash flow from operating activities totaled approximately $1.4 billion. Our 2008 investment in ongoing exploration and development.development activity also approximated $1.4 billion.
Our integrated teams of geoscientists, landmen and petroleum engineers continually generate new prospects to maintain a rolling portfolio of drilling opportunities in different basins with varying geologic characteristics. We have a centralized exploration management system that measures actual results and provides feedback to the originating exploration team in order to help them improve and refine future investment decisions. We believe that our detailed technical analysis and disciplined risk assessment is a competitive advantage and best positions us to continue to achieve attractive rates of return and consistent increases in proved reserves and production.
While our primary focus is drilling, we occasionally consider acquisition and merger opportunities that allow us to either enhance our competitive position in existing core areas or to add new areas. The 2005 Magnum Hunter acquisition significantly increased our presence in the Permian Basin and enhanced our Mid-Continent operations in the Texas Panhandle.
We also periodically divest selected assets In 2008, we acquired 38,000 net acres in our Western Oklahoma Woodford Shale core area. The cost of that we no longer deem important to our ongoing operations. During 2007, we sold properties with estimated proved reserves of 123 Bcfe, or about eight percent of our beginning of the year reserves.acquisition was $180.9 million.
Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet enables us to carry on a consistent drilling programwithstand low prices and pursue acquisitionchallenging capital markets. At year-end 2008 we had $591 million of long-term debt and other opportunities, when conditions warrant. Our year-end 2007our debt to total capitalization ratio was 1320 percent.
Business Segments
Cimarex has one reportable segment (exploration and production).
Exploration and Development Activity Overview
Our operations are currently focused in the Mid-Continent region which consists of Oklahoma, the Texas Panhandle and southwest Kansas; the Permian Basin region of west Texas and southeast New Mexico; and the Gulf Coast areas of Texas, south Louisiana, and offshore Louisiana. We also have operations in Michigan and Wyoming.
A summary of our 20072008 exploration and development (E&D) activity by region is as follows.
| | Exploration and Development Capital | Gross Wells Drilled | Net Wells Drilled | Completion Rate | 12/31/07 Proved Reserves (Bcfe) | Exploration and Development Capital | Gross Wells Drilled | Net Wells Drilled | Completion Rate | 12/31/08 Proved Reserves (Bcfe) | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in millions) | | | | | (in millions) | | | | | |||||||||||||||||
| Mid-Continent | $ | 385 | 237 | 134 | 95 | % | 617 | $ | 648 | 256 | 138 | 96 | % | 609 | |||||||||||||
| Permian Basin | 368 | 172 | 118 | 91 | % | 528 | 549 | 164 | 117 | 98 | % | 442 | |||||||||||||||
| Gulf Coast | 225 | 42 | 29 | 71 | % | 125 | 210 | 28 | 21 | 54 | % | 74 | |||||||||||||||
| Other | 5 | 1 | — | 100 | % | 202 | 31 | 2 | 1 | 50 | % | 214 | |||||||||||||||
| $ | 983 | 452 | 281 | 91 | % | 1,472 | $ | 1,438 | 450 | 277 | 94 | % | 1,339 | ||||||||||||||
Company-wide, we participated in drilling 452450 gross wells during 2007,2008, with an overall completion rate of 9194 percent. On a net basis, 256253 of 281277 total wells drilled during 20072008 were completed as producers.
Our 2007 exploration and development expenditures (E&D)2008 E&D investment totaled $983$1,438 million and resulted in 242215 Bcfe of proved reserve additions. Of total expenditures, 3945 percent were invested in projects located in the Mid-Continent area; 3738 percent in the Permian Basin; and 2315 percent in the Gulf Coast.
Mid-Continent
Our Mid-Continent region encompasses operations encompass broad areas in Oklahoma, southwest Kansas and the Texas Panhandle. We drilled 237256 gross (134(138 net) Mid-Continent wells during 2007,2008, completing 9596 percent as producers. The bulk of this drilling activity occurredis directed at gas-bearing geological formations in the Texas Panhandle and the Anadarko Basin of western Oklahoma.Oklahoma and Texas Panhandle. Full-year 20072008 investment in this area was $385$648 million, or 3945 percent of total E&D capital.
We drilled 10682 gross (75(22 net) Anadarko Basin wells, of which 95 percent were completed as producers. Our drilling activity mainly targets the Woodford Shale, Red Fork and Clinton Lake/Atoka formations at depths ranging from 11,000-15,000 feet. Our largest investment in this area is the Anadarko-Woodford Shale play. Our activities began in this area in 2007, and our early success in drilling led to leasing a significant land position. We have approximately 98,000 net acres in the play, which includes the purchase of 38,000 net acres in the fourth quarter of 2008 for $180.9 million.
The Woodford formation is a shale interval that varies in thickness from 120-280 feet at depths of 12,000-16,000 feet throughout our acreage. During 2008, we drilled 22 (10 net) horizontal Anadarko-Woodford wells. At year-end 2008 our production was over 50 MMcfe per day gross. Our acreage position developed on 160-acre well spacing has multiple years of drilling opportunity.
In the Texas Panhandle, we drilled 118 gross (84 net) wells with 9996 percent being completed as producers. Most of these wells targeted the Granite Wash formation in Roberts and Hemphill counties at depths ranging from 11,000-14,000 feet. Drilling activity in the Granite Wash remains active with 125-150 wells planned for 2008.
We drilled 70 gross (14 net) Anadarko Basin wells,Table of which 89 percent were completed as producers. Our drilling activity mainly targets the Red Fork and Clinton Lake/Atoka formations at depths ranging from 12,000-15,000 feet. We began in the fourth quarter of 2007 evaluating a potential horizontal drilling program targeting the Woodford Shale formation at 13,000 feet.
We also have a large inventory of recompletion, workover and in-fill drilling locations in southern Oklahoma and in the Texas Panhandle Panoma field. The Panoma field produces from the Brown Dolomite formation at depths of approximately 2,200 feet. In 2007 we drilled 27 gross (26 net) wells at Panoma with a 100 percent success rate, increasing field production by 2.7 MMcfe/d.Contents
Permian Basin
Our Permian Basin operations cover both west Texas and southeast New Mexico. In total, we drilled 172164 gross (118(117 net) wells in this area during 20072008 completing 157160 gross (106(114 net) as producers. Full-year 20072008 investment in this area totaled $368$549 million, or 3738 percent of total E&D capital. Our 2008 drilling focused on horizontal oil plays.
In West Texas, a total of 82 gross (59 net) wells were drilled, of which 100 percent were successful. Geologic targets include the Bone Spring, Devonian and Ellenburger formations. In Ward and Reeves Counties drilling totaled 30 gross (25 net) horizontal Third Bone Spring oil wells.
Southeast New Mexico drilling totaled 6782 gross (48(58 net) wells with 8495 percent being completed as producers. The primary formations we target in this area are the Abo/Wolfcamp, Morrow, Atoka and Strawn at depths ranging from 9,000-14,000 feet.
In West Texas, a total of 71 Our largest investment was in drilling 33 gross (58 net) wells were drilled, of which 94 percent were successful. Geologic targets include the Devonian, Ellenburger and Bone Spring formations. In Ward and Reeves Counties drilling totaled 16 gross (9.5(24 net) horizontal Abo/Wolfcamp oil wells in the Third Bone Spring formation.during 2008.
Gulf Coast
�� Our onshore Gulf Coast focus area generally encompasses coastal Texas, south Louisiana and Mississippi. This effort is generally characterized by a greater reliance on three-dimensional (3-D) seismic information for prospect generation, larger potential reserves per well, greater drilling depths and lower success rates.
We also own interestinterests in offshore Louisiana on the Gulf of Mexico shelf (water depth less than 300 feet). We obtained all of our offshore position through the Magnum Hunter acquisition. Our Gulf Coast effort is generally characterized by a greater reliance on three-dimensional (3-D) seismic information for prospect generation, larger potential reserves per well, greater drilling depths and lower success rates. Full-year 2007 investment2008 activity in this area consisted primarily of workovers and recompletions.
Full-year 2008 investment in the Gulf Coast area was $225$210 million, or 2315 percent of total E&D capital.
During 20072008 we drilled 4228 gross (29(21 net) Gulf Coast wells, realizing a 7154 percent success rate. A significant portion of the drilling occurred in Liberty and Hardin Counties, Texas. Targeting the Yegua and Cook Mountain formations at approximately 10,500 feet, we drilled 1918 gross (16(15 net) wells with a success rate of 7950 percent.
Other
We are currently conducting exploration activity in Michigan and have a large gas development project in Sublette County, Wyoming.Wyoming where we are developing the deep Madison gas formation and constructing a gas processing plant. During 2008 we invested a total of $23.9 million in this project and our cumulative investment in this project is $32.4 million. We presently expect that we will initiate gas sales from this project in 2010. Our total investment, including planned expansion, will approximate $208 million.
Production and Pricing Information
The following table sets forth certain information regarding the company's production volumes and the average oil and gas prices received:
| | | Years Ending December 31, | | Years Ending December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | ||||||||||
| Production Volumes | Production Volumes | Production Volumes | ||||||||||||||||
| Gas (MMcf) | 119,937 | 124,733 | 100,272 | Gas (MMcf) | 127,444 | 119,937 | 124,733 | |||||||||||
| Oil (MBbls) | 7,445 | 6,529 | 4,804 | Oil (MBbls) | 8,395 | 7,445 | 6,529 | |||||||||||
| Equivalent (MMcfe) | 164,607 | 163,907 | 129,096 | Equivalent (MMcfe) | 177,814 | 164,607 | 163,907 | |||||||||||
| Net Average Daily Volumes: | Net Average Daily Volumes: | Net Average Daily Volumes: | ||||||||||||||||
| Gas (MMcf) | 328.6 | 341.7 | 274.7 | Gas (MMcf) | 348.2 | 328.6 | 341.7 | |||||||||||
| Oil (MBbl) | 20.4 | 17.9 | 13.2 | Oil (MBbls) | 22.9 | 20.4 | 17.9 | |||||||||||
| Equivalent (MMcfe) | 451.0 | 449.1 | 353.7 | Equivalent (MMcfe) | 485.8 | 451.0 | 449.1 | |||||||||||
| Average Sales Price | Average Sales Price | Average Sales Price | ||||||||||||||||
| Gas ($/Mcf) | $ | 7.05 | $ | 6.50 | $ | 8.05 | Gas ($/Mcf) | $8.43 | $7.05 | $6.50 | ||||||||
| Oil ($/Bbl) | $ | 69.71 | $ | 61.96 | $ | 55.25 | Oil ($/Bbl) | $96.03 | $69.71 | $61.96 | ||||||||
Total 20072008 oil and gas production averaged 451grew eight percent averaging 485.8 MMcfe per day versus 449as compared to 451.0 MMcfe per day in 2006.2007. Gas production in 2007 decreased four2008 increased six percent to 328.6348.2 MMcf per day and oil production increased 14grew 12 percent to 20,39922,937 barrels per day. The decline in gas volumesvolume growth resulted primarily from decreased investment in the Gulf of MexicoTexas Panhandle and property divestitures.Anadarko-Woodford shale drilling. The increase ingrowing oil volumesvolume was principally a result of successful explorationhorizontal Third Bone Spring and developmentAbo/Wolfcamp drilling in the Permian Basin.
We sold our 20072008 gas at an average price of $7.05$8.43 per Mcf, which was eight20 percent higher than the $6.50$7.05 per Mcf we received in 2006.2007. We had natural gas collars for calendar year 2008 covering 40,000 MMBtu per day. The collars increased our 2008 average realized gas price by $0.09 per Mcf. For a discussion of derivatives, see Note 3 of Notes to Consolidated Financial Statements contained herein. Our annual average realized oil price during 20072008 increased by 1338 percent to $96.03 per barrel from $69.71 per barrel from $61.96 per barrel in 2006. Improved2007.
Strong global demand and overall tight commodity market conditions for oil, natural gas and natural gas liquids were the primary reason for the first nine months of 2008 resulted in overall higher average realized price in 20072008 compared to 2006.
We had natural2007. During the fourth quarter of 2008, reductions in global economic activity and energy demands caused significant decreases in oil and gas collars for calendar year 2007 covering 80,000 MMBtu per day. The collars increasedprices. Year-end 2008 oil and gas prices fell 50-70% from their mid-year peak. Our overall average fourth quarter equivalent price realization was approximately 50% below our 2007 average realized gas price by $0.23 per Mcf. For 2008, we have collars that cover 40,000 MMBtu per day of Mid-Continent production with a floor price of $7.00 per MMBtu and a ceiling of $9.90
per MMBtu. For a discussion of derivatives, see Note 5 of Notes to Consolidated Financial Statements contained herein.third quarter equivalent price.
The following table summarizes Cimarex's daily production by region for 20072008 and 2006.2007.
| | 2007 Average Daily Production | 2006 Average Daily Production | 2008 Average Daily Production | 2007 Average Daily Production | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Oil (MBbl/d) | Gas (MMcf/d) | Total (MMcfe/d) | Oil (MBbl/d) | Gas (MMcf/d) | Total (MMcfe/d) | Oil (MBbl/d) | Gas (MMcf/d) | Total (MMcfe/d) | Oil (MBbl/d) | Gas (MMcf/d) | Total (MMcfe/d) | |||||||||||||||||||
| Mid-Continent | 5.4 | 160.2 | 192.3 | 4.7 | 152.5 | 180.7 | 5.6 | 190.3 | 223.9 | 5.4 | 160.2 | 192.3 | |||||||||||||||||||
| Permian Basin | 9.5 | 87.2 | 144.3 | 8.1 | 83.8 | 132.4 | 12.9 | 88.6 | 166.2 | 9.5 | 87.2 | 144.3 | |||||||||||||||||||
| Gulf Coast | 5.3 | 75.0 | 106.9 | 4.8 | 98.0 | 126.6 | 4.3 | 65.8 | 91.3 | 5.3 | 75.0 | 106.9 | |||||||||||||||||||
| Other | 0.2 | 6.2 | 7.5 | 0.3 | 7.4 | 9.4 | 0.1 | 3.5 | 4.4 | 0.2 | 6.2 | 7.5 | |||||||||||||||||||
| 20.4 | 328.6 | 451.0 | 17.9 | 341.7 | 449.1 | 22.9 | 348.2 | 485.8 | 20.4 | 328.6 | 451.0 | ||||||||||||||||||||
Our largest producing area is the Mid-Continent region whichregion. During 2008 our Mid-Continent production averaged 192.3223.9 MMcfe per day, or 4346 percent of our total 20072008 production. Successful drilling programs in the Texas Panhandle and the Anadarko Basin helped boost our Mid-Continent production by six16 percent in 2007.
2008. The Permian Basin contributed 144.3166.2 MMcfe per day in 2007,2008, which was 3234 percent of our total production for this period. Production increased nine15 percent as a result of successful Morrow and horizontal oil drilling in the Abo/Wolfcamp drilling programsformations in southeast New Mexico and new horizontal oil wells in the West Texas Third Bone Spring formation. Gulf Coast production averaged 106.991.3 MMcfe per day during 2007,2008, or 2419 percent of total production. Gulf Coast volumes decreased in 20072008 as a result of natural production declines and no new drilling in the Gulf of Mexico.
Acquisitions and Divestitures
Cimarex acquired Magnum Hunter Resources, Inc, on June 7, 2005. Magnum Hunter was an independent oil and gas exploration and production company with operations concentrated in the Permian Basin and the Gulf of Mexico. Magnum's oil and gas properties were valued at $1.8 billion and resulted in the addition of 886.7 Bcfe of proved reserves (60 percent gas and 73 percent proved developed).
During 2007 we sold various interests in oil and gas properties located in West Texas, California and Gulf of Mexico. In total we sold 123 Bcfe of proved reserves for $177 million. During 2008 we sold various interests in oil and gas properties located in South Texas. In total we sold 17 Bcfe of proved reserves for $38.1 million.
�� During 2007 we purchased $40.9 million of assets, with the largest acquisition being in the Texas Panhandle Area. During 2008 we purchased 38,000 acres in western Oklahoma, Anadarko Basin Woodford Shale play for $180.9 million. In total we have approximately 98,000 net acres in the play.
Marketing
Our oil and gas production is sold under various short-term arrangements at market-responsive prices. We sell our oil at various prices directly or indirectly tied to field postings and monthly futures contract prices on the New York Mercantile Exchange (NYMEX). Our gas is sold under pricing mechanisms related to either monthly index prices on pipelines where we deliver our gas or the daily spot market.
We sell our oil and gas to a broad portfolio of customers. Our largest customer accounted for eightten percent of 20072008 revenues. Because over two-thirds95 percent of our gas production is from wells in Kansas, Oklahoma, Texas and Louisiana, most of our customers are either from those states or nearby end-user market centers. We regularly monitor the credit worthiness of all our customers and may require parental guarantees, letters of credit or prepayments when we deem such security is necessary.
Employees
We employed 760831 people on December 31, 2007.2008. None of our employees are subject to collective bargaining agreements.
Competition
The oil and gas industry is highly competitive. Competition is particularly intense for prospective undeveloped leases and purchases of proved oil and gas reserves. There is also competition for rigs and related equipment we use to drill for and produce oil and gas. Our competitive position is also highly dependent on our ability to recruit and retain geological, geophysical and engineering expertise. We compete for prospects, proved reserves, oil-field services and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human and technological resources than we do.
We compete with integrated, independent and other energy companies for the sale and transportation of oil and gas to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these
competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted.
Title to Oil and Gas Properties
We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect or acquire proved properties. We believe that the titles to our properties are good and defensible, and are in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time which result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens and other burdens and minor encumbrances, easements and restrictions.
Government Regulation
Oil and gas production and transportation is subject to extensive Federal,federal, state and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significantly adverse effect upon our operations or financial condition. In recent years, we have been most directly affected by Federalfederal and state environmental regulations and energy conservation rules. We are also indirectly affected by Federalfederal and state regulation of pipelines and other oil and gas transportation systems.
The states in which we conduct operations establish requirements for drilling permits, the method of developing new fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to often limit the amounts of oil and natural gas that we can produce from our wells and to limit the number of wells or locations at which we can drill.
Environmental Regulation. Various Federal,federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact our operations and costs. These laws and regulations govern, among other things, emissions to the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation and disposal of waste materials, and protection of public health, natural resources and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas.
We are committed to environmental protection and believe we are in substantial compliance with applicable environmental laws and regulations. We routinely obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a
significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. We have made, and will continue to make, expenditures in our efforts to comply with environmental regulations and requirements. These costs are considered a normal, recurring cost of our ongoing operations and not an extraordinary cost of compliance with government regulations.
We do not aniticipateanticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with these governmental requirements. We do maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water or other substances.
Gas Gathering and Transportation. The Federal Energy Regulatory Commission (FERC) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines.
Under the Natural Gas Policy Act (NGPA), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes "gathering" under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional "gathering" systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and Federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities.
In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets.
Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, state legislatures, state agencies and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state and local laws, rules or regulations will have a material adverse effect upon our capital expenditures, earnings or competitive position.
Federal and State Income and Other Local Taxation
Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any undisclosed impact on our capital expenditures, earnings or competitive position.
Certain Risks
The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. If any of the following risks and uncertainties develop into actual events, this could have a material adverse affect on our business, financial condition or results of operations and could negatively impact the value of our common stock.
Oil and gas prices fluctuate due to a number of uncontrollable factors, creating a component of uncertainty in our development plans and overall operations. Any declineContinued declines in prices could adversely affect our financial results and future rate of growth in proved reserves and production.
Our revenues and results of operations are highly dependent onThe oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. The prices we receive for our production are baseddepend on prevailing market conditions and are influenced by manynumerous factors that are beyond our control. Historically,These factors include, but are not limited to, changes in global supply and demand for oil and gas, prices have fluctuated widely. For example, in 2007 we sold our gas at an average pricethe actions of $7.05 per Mcf, which was eight percent higher than our 2006 average sales price of $6.50 per Mcf. The 2006 average gas sales price was 19 percent lower than our 2005 average sales price of $8.05 per Mcf. Our average 2007 oil price of $69.71 per barrel was 13 percent higher than the price we received in 2006 of $61.96 per barrel, while the 2006 price was 12 percent higher than the price we received in 2005 of $55.25 per barrel.
The volatility in oil and gas prices limits the predictability of the prices, which directly impacts future development plans and operations. If prices decline, future earnings would be reduced and growth could be adversely affected.
In recent years, oil prices have responded to changes in supply and demand stemming from actions taken by the Organization of Petroleum Exporting Countries, worldwide economicthe level of global oil and gas exploration and production activity, weather conditions, growing transportationtechnological advances affecting energy consumption, domestic and power generation needs,foreign governmental regulations, proximity and capacity of oil and gas pipelines and other events. Factors affecting gas prices have included domestic supplies; the level and price of natural gas imports into the U.S.; weather conditions; the economytransportation facilities and the price and leveltechnological advancement of alternative sourcesfuels.
Table of energy such as renewable energy assets, nuclear power, hydroelectric power, coal,Contents
During the fourth quarter of 2008, severe disruptions in the credit markets and other petroleum products.reductions in global economic activity caused significant decreases in oil and gas prices. Oil and gas prices fell 50-70% from the mid-year 2008 peak to the end of the year and 30-60% from the third to the fourth-quarter 2008. The dramatic decrease in prices significantly decreased the amount available to invest in exploration and development drilling, the present value of our proved reserves and our stock price and corresponding market capitalization. As a result of the drop in commodity prices in 2008, we recorded $1.4 billion after-tax, full-cost ceiling test write-down of proved properties book-value.
Our proved oil and gas reserves and production volumes will decrease in quantity unless we successfully replace the reserves we produce with new discoveries or acquisitions. For the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves to replace the reserves we produce and to increase our total proved reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations. To the extent we have not hedged our production, any decline in oil and gas prices would negatively affect the amount of cash flow available to fund these capital investments. Low prices may also reduce the amount of oil and gas that we can economically produce and may cause us to curtail, delay or defer certain exploration and development projects. We may be required under accounting rules to write down the carrying value of our properties or impair goodwill when gas and oil prices are low. Moreover, our ability to borrow under our bank credit facility and to raise additional debt or equity capital to fund acquisitions would also be impacted.
Our use of hedging arrangements could result in financial losses or reduce our income.
To reduce our exposure to fluctuations inIf oil and natural gas prices from timedecrease further, we may be required to time we enter into hedging arrangements for a portiontake additional write-downs of the carrying values of our naturaloil and gas production. These hedging arrangements could expose us to riskproperties and/or our goodwill.
Accounting rules require that we review the carrying value of financial loss in some circumstances, including when:
The global financial crisis may have impacts on our business and actual prices received.
In July 2006, using zero-cost collars with Mid-Continent weighted average floorThe continued credit crisis and ceiling prices of $7.00related turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to $10.17 for 2007 and $7.00 to $9.90 for 2008, we hedged 80,000 MMBtu per day for 2007 and 40,000 MMBtu per day for 2008. Though associated volumes foraccess the existing contracts are significantly less than our overall production, hedging arrangements could limit the benefitcapital markets may be restricted at a time when we would otherwise receive from increases in natural gas prices.like, or need, to raise financing, which could have an impact on our flexibility to react to changing economic and business conditions. The economic situation could have an impact on our lenders or customers, causing them to fail to meet their obligations to us.
Failure of our exploration and development program to find commercial quantities of new oil and gas reserves could negatively affect our financial results and future rate of growth.
Most of our wells produce from reservoirs characterized by high initial production rates which decline rapidly and stabilize within three to five years. In order to replace the reserves depleted by production and to maintain or grow our total proved reserves and overall production levels, we must locate and develop new oil and gas reserves or acquire producing properties from others. While we may from time to time seek to acquire proved reserves, our main business strategy is to grow through drilling. Without successful exploration and development, our reserves, production and revenues could decline rapidly, which would negatively impact our results of operations.
Exploration and development involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be discovered. Exploration and development can also be unprofitable, not only from dry wells, but from productive wells that do not produce sufficient reserves to return a profit.
Our drilling operations may be curtailed, delayed or canceled as a result of several factors, including unforeseen poor drilling conditions, title problems, unexpected pressure or irregularities in formations, equipment failures, accidents, adverse weather conditions, compliance with environmental and other
governmental requirements, and the cost of, or shortages or delays in the availability of, drilling rigs and related equipment.
The high-rate production characteristics of our properties subject us to high reserve replacement needs and require significant capital expenditures to replace our reserves.
Unless we conduct successful development activities or acquire properties containing proved reserves, our proved reserves will decline as they are produced. Producing natural gas and oil reservoirs are generally characterized by declining production rates that vary depending on reservoir characteristics and other factors. Because of the high-rate production profiles of our properties, replacing produced reserves is more difficult for us than for companies whose reserves have longer-life production profiles. This imposes greater reinvestment risk for our company as we may not be able to continue to economically replace our reserves.
Our proved reserve estimates may be inaccurate and future net cash flows are uncertain.
Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Among others, changes in any of the following factors may cause estimates to vary considerably from actual results:
The estimation of the category of proved undeveloped reserves can be subject to an even greater possibility of revision. At December 31, 2007, 21.42008, 18 percent of our total proved reserves are categorized as
proved undeveloped. Of these proved undeveloped reserves, 6289 percent are related to a project in Wyoming.
Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the Securities and Exchange Commission (SEC). DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80 percent of the discounted future net cash flows before income taxes, using a 10 percent discount rate, as of December 31, 2007.2008.
The values referred to in this report should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different.
We have been an early entrant into new or emerging plays; as a result, our drilling results in these areas are uncertain, and the value of our undeveloped acreage will decline and we may incur impairment charges if drilling results are unsuccessful.
New or emerging plays have limited or no production history. Consequently, we are unable to use past drilling results in those areas to help predict our future drilling results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. Furthermore, if drilling results are unsuccessful, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays.
Our business depends on oil and natural gas transportation facilities, most of which are owned by others.
The marketability of our oil and natural gas production depends in large part on the availability, proximity and capacity of pipeline systems owned by third parties. The lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of drilling plans for properties. The lack of availability of these facilities for an extended period of time could negatively affect our revenues. Federal and state regulation of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce, gather and transport oil and natural gas.
The differential between the NYMEX or other benchmark price of oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.
The prices that we receive for our oil and natural gas production generally trade at a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating hedge positions. The difference between the benchmark price and the price we receive is called a differential. We cannot accurately predict oil and natural gas differentials. Increases in the differential between the benchmark price for oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.
Competition in our industry is intense and many of our competitors have greater financial and technological resources.
We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources than we do. These companies may be able to pay more for exploratory prospects and productive oil and gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit.
We are subject to complex laws and regulations that can adversely affect the cost, manner or feasibility of doing business.
Exploration, development, production and sale of oil and gas are subject to extensive Federal, state and local laws and regulations, including complex environmental laws. We may be required to make large expenditures to comply with environmental and other governmental regulations. Failure to comply with these laws and regulations may result in the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, spacing of wells, unitization and pooling of properties, environmental protection, and taxation. Our operations create the risk of environmental liabilities to the government or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil or water. In the event of environmental violations, we may be charged with remedial costs. Pollution and similar environmental risks generally are not fully insurable. Such liabilities and costs could have a material adverse effect on our financial condition and results of operations.
Our limited ability to influence operations and associated costs on properties not operated by us could result in economic losses that are partially beyond our control.
Other companies operate approximately 2119 percent of our net production. Our success in properties operated by others depends upon a number of factors outside of our control, including timing and amount
of capital expenditures, the operator's expertise and financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities.
Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate.
Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures or cement failures, and environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution and other environmental damages, regulatory investigations and penalties, suspension of our operations and repair and remediation costs. In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease.
We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation.
We may not be able to generate enough cash flow to meet our debt obligations.
At December 31, 2007,2008, we had total long-term debt of $487.2$591.2 million, consisting of $220 million of bank debt, $350 million of unsecured 7.125% Senior Notes and $137.2$21.2 million of Convertible Notes ($12519.45 million face value). Subject to the limits contained in the agreements governing our senior revolving credit facility, we would have been able to incur up to $1 billion of debt as of December 31, 2007,2008, only $500 million of which is currently committed. We have demands on our cash resources in addition to interest expense and principal on our long-term debt, including, among others, operating expenses and capital expenditures.
Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon our future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, our financial condition, results of operations and prospects and other factors, many of which are beyond our control. Our ability to meet our debt service obligations may also be affected by changes in
prevailing interest rates, as borrowing under our existing senior revolving credit facility and our Convertible Notes bear interest at floating rates.
We have outstanding $125 million of Convertible Notes (face value) that mature on December 15, 2023, and that are currently convertible into a combination of cash and our common stock. If the holders of our convertible notes choose to convert them, we might be required to borrow additional funds under our senior revolving credit facility in order to repay the required cash amount. Also, upon conversion of a Convertible Note, the holder would receive not only cash equal to the principal amount of the Convertible Note, but also Cimarex common stock for the Convertible Note's conversion value in excess of such principal amount. The number of Cimarex common shares into which the Convertible Notes are convertible is dependent upon the conversion value in excess of the principal amount of the Convertible Notes and our future common stock price. Any such conversion will be dilutive to our existing shareholders.
Our business may not generate sufficient cash flow from operations, nor could there be adequate future sources of capital to enable us to service our indebtedness, or to fund our other liquidity needs. If
we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include:
We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations.
The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business.
The indentures governing our senior subordinated notes and credit agreement contain various restrictive covenants that may potentially limit our management's discretion in certain respects. In particular, these agreements will limit our and our subsidiaries' ability to, among other things:
In addition, our revolving credit agreement requires us to maintain a debt to EBITDA ratio (as defined in the credit agreement) of less than 3.0 to 1 and a working capital ratio of greater than 1 to 1. Also, the indentures under which we issued our senior unsecured notes restrict us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.25 to 1. If we were in violation of this covenant, then we may not incur
additional indebtedness above our $1.0 billion revolving credit facility. See Note 6, Long-term Debt, in Notes to Consolidated Financial Statements for further information.
If we fail to comply with the restrictions in the indentures governing our senior notes or credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds.
Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations.
We evaluate opportunities and engage in bidding and negotiating for acquisitions, some of which are substantial. Under certain circumstances, we may pursue acquisitions of businesses that complement or expand our current business and acquisition and development of new exploration prospects that complement or expand our prospect inventory. We may not be successful in identifying or acquiring any material property interests, which could hinder us in replacing our reserves and adversely affect our financial results and rate of growth. Even if we do identify attractive opportunities, there is no assurance that we will be able to complete the acquisition of the business or prospect on commercially acceptable terms. If we do complete an acquisition, we must anticipate difficulties in integrating its operations, systems, technology, management and other personnel with our own. These difficulties may disrupt our ongoing operations, distract our management and employees and increase our expenses.
Competition for experienced, technical personnel may negatively impact our operations.
Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. In particular, our Chairman and Chief Executive Officer, F.H. Merelli, has over 4548 years of oil and gas experience and is well known in the industry. The loss of his services for any reason could adversely affect our business, revenues and results of operations. As we continue to grow our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations.
There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
While we have taken actions designed to address compliance with the internal control, disclosure control and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in its ability to control all circumstances. See Item 9A of this report for a complete discussion of controls and procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
The Cimarex certificate of incorporation, by-laws and stockholders' rights plan include provisions that could discourage an unsolicited corporate takeover and could prevent stockholders from realizing a premium on their investment.
The certificate of incorporation and by-laws of Cimarex provide for a classified board of directors with staggered terms, restrict the ability of stockholders to take action by written consent and prevent stockholders from calling a meeting of the stockholders. In addition, Delaware General Corporation Law imposes restrictions on business combinations with interested parties. Cimarex also has adopted a stockholders' rights plan. The stockholders' rights plan, the certificate of incorporation and the by-laws may have the effect of delaying, deferring or preventing a change in control of Cimarex, even if the change in control might be beneficial to Cimarex stockholders.
Item ITEM 1B. Unresolved Staff CommentsUNRESOLVED STAFF COMMENTS
None.
Oil and Gas Properties and Reserves
All of our proved reserves and undeveloped acreage are located in the United States. We have varying levels of ownership interests in our properties consisting of working, royalty and overriding royalty interests. We operate the wells that comprise 8283 percent of our proved reserves.
Our engineers estimate our proved oil and gas reserve quantities in accordance with guidelines established by the SEC. DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for those properties that comprised at least 80 percent of the discounted value of the projected future net cash flow before income taxes as of December 31, 2007.2008. All information in this Form 10-K relating to oil and gas reserves is net to our interest unless stated otherwise. See Note 17,16, Supplemental Oil and Gas Disclosures, in Notes to Consolidated Financial Statements for further
information. The following table sets forth the present value and estimated volume of our oil and gas proved reserves:
| | | Years Ending December 31, | | Years Ending December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | ||||||||||
| Total Proved Reserves— | Total Proved Reserves— | Total Proved Reserves— | ||||||||||||||||
| Gas (MMcf) | 1,122,694 | 1,090,362 | 1,004,482 | Gas (MMcf) | 1,067,333 | 1,122,694 | 1,090,362 | |||||||||||
| Oil, condensate and NGLs (MBbls) | 58,250 | 59,797 | 64,710 | Oil, condensate and NGLs (MBbls) | 45,202 | 58,250 | 59,797 | |||||||||||
| Equivalent (MMcfe) | 1,472,195 | 1,449,146 | 1,392,742 | Equivalent (MMcfe) | 1,338,545 | 1,472,195 | 1,449,146 | |||||||||||
| Standardized measure of discounted future net cash flow after-tax, discounted at 10 percent (in thousands) | Standardized measure of discounted future net cash flow after-tax, discounted at 10 percent (in thousands) | $ | 2,897,631 | $ | 2,200,889 | $ | 3,028,100 | Standardized measure of discounted future net cash flow after-tax, discounted at 10 percent (in thousands) | $1,724,253 | $2,897,631 | $2,200,889 | |||||||
| Average price used in calculation of future net cash flow— | Average price used in calculation of future net cash flow— | Average price used in calculation of future net cash flow— | ||||||||||||||||
| Gas ($/Mcf) | $ | 6.51 | $ | 5.54 | $ | 7.89 | Gas ($/Mcf) | $5.33 | $6.51 | $5.54 | ||||||||
| Oil ($/Bbl) | $ | 93.66 | $ | 56.91 | $ | 57.65 | Oil ($/Bbl) | $36.34 | $93.66 | $56.91 | ||||||||
Significant Properties
As of December 31, 2007, 782008, 79 percent of proved reserves were located in the Mid-Continent and Permian Basin regions. In total we owned an interest in 12,84112,980 gross (4,845(4,960 net) productive oil and gas wells.
The following table summarizes our estimated proved oil and gas reserves by region as of December 31, 2007.2008.
| | Oil (MBbl) | Gas (MMcf) | Equivalent (MMcfe) | Percent of Proved Reserves | Oil (MBbl) | Gas (Bcf) | Equivalent (Bcfe) | Percent of Proved Reserves | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Mid-Continent | 9,166 | 561,998 | 616,992 | 42 | % | 7,773 | 562.5 | 609.2 | 46 | % | ||||||||||||
| Permian Basin | 43,122 | 269,040 | 527,777 | 36 | % | 33,542 | 240.8 | 442.0 | 33 | % | ||||||||||||
| Gulf Coast | 5,435 | 93,058 | 125,668 | 8 | % | 3,649 | 51.8 | 73.8 | 5 | % | ||||||||||||
| Other | 527 | 198,598 | 201,758 | 14 | % | |||||||||||||||||
Wyoming/Other | 238 | 212.2 | 213.5 | 16 | % | |||||||||||||||||
| 58,250 | 1,122,694 | 1,472,195 | 100 | % | 45,202 | 1,067.3 | 1,338.5 | 100 | % | |||||||||||||
Our ten largest producing fields hold 2841 percent of our total equivalent proved reserves. We are the principal operator of our production in each of these fields (except Jo-Mill).fields. The table below summarizes certain key statistics about these properties.
| Field | Region | % of Total Proved Reserves | Avg. Working Interest | Avg. Depth (feet) | Primary Formation | Region | % of Total Proved Reserves | Avg. Working Interest | Avg. Depth (feet) | Primary Formation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Riley Ridge | Wyoming | 15.7 | % | 56.9 | % | 16,000' | Madison | |||||||||||||||
Watonga-Chichasha | Mid-Continent | 4.6 | % | 42.6 | % | 13,000' | Woodford | |||||||||||||||
Eola-Robberson | Mid-Continent | 4.4 | % | 92.7 | % | 5,500'-11,000' | Bromide/McLish/Oil Creek | |||||||||||||||
| Hemphill | Mid-Continent | 4.4 | % | 96 | % | 11,000' | Granite Wash | Mid-Continent | 3.8 | % | 97.0 | % | 11,000' | Granite Wash | ||||||||
| Hugoton | Mid-Continent | 3.9 | % | 60 | % | 2,600' | Chase | Mid-Continent | 3.1 | % | 58.7 | % | 2,600' | Chase | ||||||||
| Eola-Robberson | Mid-Continent | 3.8 | % | 94 | % | 5,500' - 11,000' | Bromide/McLish/Oil Creek | |||||||||||||||
Mendota | Mid-Continent | 2.9 | % | 78.5 | % | 11,000' | Granite Wash | |||||||||||||||
| Red Deer Creek | Mid-Continent | 3.3 | % | 63 | % | 11,000' | Granite Wash | Mid-Continent | 2.3 | % | 63.1 | % | 11,000' | Granite Wash | ||||||||
| Jo-Mill | Permian | 2.7 | % | 13 | % | 7,500' | Spraberry | |||||||||||||||
| Mendota | Mid-Continent | 2.4 | % | 64 | % | 11,000' | Granite Wash | |||||||||||||||
Phantom | Permian Basin | 1.8 | % | 87.4 | % | 11,500' | Bone Spring | |||||||||||||||
| Quail Ridge | Permian | 2.3 | % | 68 | % | 13,000' | Morrow | Permian Basin | 1.7 | % | 66.6 | % | 13,000' | Morrow | ||||||||
| Westbrook | Permian | 1.9 | % | 90 | % | 3,500' | Clearfork | |||||||||||||||
| Howard Glasscock | Permian | 1.7 | % | 59 | % | 2,000' - 2,600' | San Andres/Clearfork | |||||||||||||||
| War-Wink West | Mid-Continent | 1.2 | % | 58 | % | 11,500' | Wolfcamp/Bone Spring | |||||||||||||||
East Sour Lake | Gulf Coast | 0.7 | % | 72.1 | % | 12,000' | Yegua/Cook Mountain | |||||||||||||||
| 27.6 | % | 41 | % | |||||||||||||||||||
Acreage
The following table sets forth as of December 31, 2007,2008, the gross and net acres of both developed and undeveloped leases held by Cimarex. Gross acres are the total number of acres in which we own a working interest. Net acres are the gross acres multiplied by our working interest.
| | | Undeveloped Acreage | Developed Acreage | Total Acreage | | Undeveloped Acreage | Developed Acreage | Total Acreage | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Gross | Net | Gross | Net | Gross | Net | | Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||
| Mid-Continent | Mid-Continent | Mid-Continent | |||||||||||||||||||||||||||||||
| Kansas | 3,454 | 2,388 | 158,391 | 105,601 | 161,845 | 107,989 | Kansas | 2,727 | 2,480 | 156,080 | 103,914 | 158,807 | 106,394 | ||||||||||||||||||||
| Oklahoma | 98,806 | 79,284 | 401,370 | 175,246 | 500,176 | 254,530 | Oklahoma | 148,459 | 125,661 | 429,061 | 193,117 | 577,520 | 318,778 | ||||||||||||||||||||
| Texas | 138,539 | 106,389 | 175,063 | 106,394 | 313,602 | 212,783 | Texas | 126,706 | 110,940 | 179,629 | 110,913 | 306,335 | 221,853 | ||||||||||||||||||||
| 240,799 | 188,061 | 734,824 | 387,241 | 975,623 | 575,302 | 277,892 | 239,081 | 764,770 | 407,944 | 1,042,662 | 647,025 | ||||||||||||||||||||||
Permian Basin | Permian Basin | Permian Basin | |||||||||||||||||||||||||||||||
| New Mexico | 86,652 | 65,262 | 150,942 | 99,596 | 237,594 | 164,858 | New Mexico | 91,688 | 70,427 | 154,478 | 102,651 | 246,166 | 173,078 | ||||||||||||||||||||
| Texas | 49,551 | 35,890 | 183,679 | 113,150 | 233,230 | 149,040 | Texas | 60,689 | 31,380 | 189,595 | 117,531 | 250,284 | 148,911 | ||||||||||||||||||||
| 136,203 | 101,152 | 334,621 | 212,746 | 470,824 | 313,898 | 152,377 | 101,807 | 344,073 | 220,182 | 496,450 | 321,989 | ||||||||||||||||||||||
Gulf Coast | Gulf Coast | Gulf Coast | |||||||||||||||||||||||||||||||
| Louisiana | 16,361 | 11,792 | 21,535 | 6,371 | 37,896 | 18,163 | Louisiana | 7,623 | 2,476 | 19,442 | 5,558 | 27,065 | 8,034 | ||||||||||||||||||||
| Mississippi | 6,209 | 3,265 | 26,090 | 7,046 | 32,299 | 10,311 | Mississippi | 6,851 | 4,274 | 25,785 | 6,919 | 32,636 | 11,193 | ||||||||||||||||||||
| Texas | 80,322 | 37,501 | 141,880 | 57,930 | 222,202 | 95,431 | Texas | 97,678 | 53,621 | 134,137 | 53,647 | 231,815 | 107,268 | ||||||||||||||||||||
| Offshore | 476,601 | 294,041 | 264,146 | 84,988 | 740,747 | 379,029 | Offshore | 290,862 | 155,951 | 218,828 | 72,116 | 509,690 | 228,067 | ||||||||||||||||||||
| 579,493 | 346,599 | 453,651 | 156,335 | 1,033,144 | 502,934 | 403,014 | 216,322 | 398,192 | 138,240 | 801,206 | 354,562 | ||||||||||||||||||||||
Other | Other | Other | |||||||||||||||||||||||||||||||
| Arkansas | — | — | 6,719 | 2,115 | 6,719 | 2,115 | Arkansas | 870 | 55 | 5,190 | 1,616 | 6,060 | 1,671 | ||||||||||||||||||||
| Arizona | 914,695 | 914,695 | — | — | 914,695 | 914,695 | Arizona | 914,695 | 914,695 | — | — | 914,695 | 914,695 | ||||||||||||||||||||
| California | 6,536 | 5,046 | 1,523 | 1,342 | 8,059 | 6,388 | California | 1,061 | 407 | 364 | 364 | 1,425 | 771 | ||||||||||||||||||||
| Colorado | 95,255 | 6,759 | 27,971 | 6,498 | 123,226 | 13,257 | Colorado | 107,277 | 18,800 | 27,971 | 6,498 | 135,248 | 25,298 | ||||||||||||||||||||
| Illinois | 1,782 | 1,191 | 554 | 183 | 2,336 | 1,374 | Illinois | 1,782 | 1,191 | 554 | 183 | 2,336 | 1,374 | ||||||||||||||||||||
| Michigan | 35,200 | 35,083 | 598 | 598 | 35,798 | 35,681 | Michigan | 57,729 | 57,729 | 598 | 598 | 58,327 | 58,327 | ||||||||||||||||||||
| Montana | 47,893 | 15,283 | 10,785 | 2,882 | 58,678 | 18,165 | Montana | 42,946 | 13,077 | 10,646 | 2,871 | 53,592 | 15,948 | ||||||||||||||||||||
| Nebraska | 4,560 | 116 | 2,118 | 168 | 6,678 | 284 | Nebraska | 4,560 | 116 | 1,043 | 168 | 5,603 | 284 | ||||||||||||||||||||
| Nevada | 160 | 1 | 440 | 1 | 600 | 2 | Nevada | 160 | 1 | 440 | 1 | 600 | 2 | ||||||||||||||||||||
| New Mexico | 1,626,253 | 1,614,523 | 13,604 | 2,289 | 1,639,857 | 1,616,812 | New Mexico | 1,640,553 | 1,622,486 | 16,011 | 2,708 | 1,656,564 | 1,625,194 | ||||||||||||||||||||
| North Dakota | 77,441 | 39,483 | 15,361 | 1,899 | 92,802 | 41,382 | North Dakota | 66,492 | 29,091 | 14,953 | 1,820 | 81,445 | 30,911 | ||||||||||||||||||||
| South Dakota | 10,482 | 9,329 | 2,414 | 373 | 12,896 | 9,702 | South Dakota | 10,482 | 9,329 | 2,414 | 373 | 12,896 | 9,702 | ||||||||||||||||||||
| Utah | 105,724 | 59,591 | 32,990 | 2,303 | 138,714 | 61,894 | Utah | 104,764 | 59,351 | 33,950 | 2,543 | 138,714 | 61,894 | ||||||||||||||||||||
| Wyoming | 247,652 | 30,702 | 72,874 | 13,525 | 320,526 | 44,227 | Wyoming | 237,304 | 28,028 | 113,589 | 22,968 | 350,893 | 50,996 | ||||||||||||||||||||
| 3,173,633 | 2,731,802 | 187,951 | 34,176 | 3,361,584 | 2,765,978 | 3,190,675 | 2,754,356 | 227,723 | 42,711 | 3,418,398 | 2,797,067 | ||||||||||||||||||||||
4,130,128 | 3,367,614 | 1,711,047 | 790,498 | 5,841,175 | 4,158,112 | 4,023,958 | 3,311,566 | 1,734,758 | 809,077 | 5,758,716 | 4,120,643 | ||||||||||||||||||||||
Gross Wells Drilled
We participated in drilling the following number of gross wells during calendar years 2008, 2007, 2006, and 2005:2006:
| | Exploratory | Developmental | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Productive | Dry | Total | Productive | Dry | Total | Exploratory | Developmental | |||||||||||||||||||||||
| | Productive | Dry | Total | Productive | Dry | Total | |||||||||||||||||||||||||
Year ended December 31, 2008 | 36 | 16 | 52 | 384 | 14 | 398 | |||||||||||||||||||||||||
| Year ended December 31, 2007 | 55 | 18 | 73 | 361 | 18 | 379 | 55 | 18 | 73 | 361 | 18 | 379 | |||||||||||||||||||
| Year ended December 31, 2006 | 20 | 32 | 52 | 490 | 16 | 506 | 20 | 32 | 52 | 490 | 16 | 506 | |||||||||||||||||||
| Year ended December 31, 2005 | 55 | 20 | 75 | 283 | 24 | 307 | |||||||||||||||||||||||||
We were in the process of drilling 3031 gross (23(22 net) wells at December 31, 2007.2008.
Net Wells Drilled
The number of net wells we drilled during calendar years 2008, 2007, 2006, and 20052006 are shown below:
| | Exploratory | Developmental | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Productive | Dry | Total | Productive | Dry | Total | Exploratory | Developmental | |||||||||||||||||||||||
| | Productive | Dry | Total | Productive | Dry | Total | |||||||||||||||||||||||||
Year ended December 31, 2008 | 25.9 | 13.6 | 39.5 | 226.5 | 10.9 | 237.4 | |||||||||||||||||||||||||
| Year ended December 31, 2007 | 36.7 | 13.1 | 49.8 | 221.9 | 9.6 | 231.5 | 36.7 | 13.1 | 49.8 | 221.9 | 9.6 | 231.5 | |||||||||||||||||||
| Year ended December 31, 2006 | 12.4 | 23.9 | 36.3 | 303.7 | 6.2 | 309.9 | 12.4 | 23.9 | 36.3 | 303.7 | 6.2 | 309.9 | |||||||||||||||||||
| Year ended December 31, 2005 | 33.2 | 15.6 | 48.8 | 144.8 | 16.8 | 161.6 | |||||||||||||||||||||||||
Productive Wells
We have working interests in the following productive wells as of December 31, 2007:2008:
| | Gas | Oil | Gas | Oil | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||||||
| Mid-Continent | 3,660 | 1,892 | 1,061 | 580 | 3,931 | 2,044 | 1,021 | 540 | |||||||||||||
| Permian | 1,057 | 593 | 5,811 | 1,471 | 1,060 | 591 | 5,779 | 1,506 | |||||||||||||
| Gulf Coast | 514 | 180 | 221 | 104 | 493 | 161 | 207 | 94 | |||||||||||||
| Other | 110 | 8 | 407 | 17 | 108 | 8 | 381 | 16 | |||||||||||||
| 5,341 | 2,673 | 7,500 | 2,172 | 5,592 | 2,804 | 7,388 | 2,156 | ||||||||||||||
In January 2009, the Tulsa County District Court issued a judgment in the H.B. Krug, et al versus Helmerich & Payne, Inc. ("H&P") case. This lawsuit was originally filed in 1998 and addresses H&P's conduct pertaining to a 1989 take-or-pay settlement, along with potential drainage issues and other related matters. Damages of $6.9 million plus $119.5 million for disgorgement of H&P's estimated potential compounded profit since 1989, resulting from the noted damages, were awarded to plaintiff royalty owners, for a total of $126.4 million. This amount was subsequently adjusted by the court to a total of $119.6 million. Pursuant to the 2002 spin-off transaction to shareholders of H&P by which Cimarex became a publicly-traded entity, Cimarex assumed the assets and liabilities of H&P's exploration and production business. We periodically assess the probability of estimable amounts related to litigation matters, as required by Financial Accounting Standard No. 5 (Accounting for Contingencies) and adjust our accruals accordingly. In September 2008, based on the available information at the time, we accrued an estimated litigation expense of $12 million for both damages and probable disgorgement. The higher disgorgement award could not be reasonably estimated until the final judgment in January 2009. We therefore accrued an additional $107.6 million, bringing the total accrued litigation expense for the year ended December 31, 2008 to $119.6 million for this lawsuit. We have appealed the District Court's judgments.
As of December 31, 2007,2008, in the normal course of business, we have other various litigation related matters and associated accruals. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our company.financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth quarter of 2007.2008.
The executive officers of Cimarex as of February 28, 200827, 2009 were:
Name | Age | Office | |||
|---|---|---|---|---|---|
F.H. Merelli | 72 | Chairman of the Board, Chief Executive Officer, and President | |||
Joseph R. Albi | |||||
| 50 | Executive Vice President, Operations | ||||
Thomas E. Jorden | 51 | Executive Vice President, Exploration | |||
Stephen P. Bell | 54 | Senior Vice President, Business Development and Land | |||
Paul Korus | 52 | Vice President, Chief Financial Officer, and Treasurer | |||
Gary R. Abbott | 36 | Vice President, Corporate Engineering | |||
Richard S. Dinkins | 64 | Vice President, Human Resources | |||
James H. Shonsey | 57 | Vice President, Chief Accounting Officer, and Controller | |||
Thomas A. Richardson | 63 | Vice President, General Counsel | |||
There are no family relationships by blood, marriage, or adoption among any of the above executive officers. All executive officers are elected annually by the board of directors to serve for one year or until a successor is elected and qualified. There is no arrangement or understanding between any of the officers and any other person pursuant to which he was selected as an executive officer.
F.H. MERELLI was elected chairman of the board, chief executive officer, and president on September 30, 2002. Prior to its merger with Cimarex, Mr. Merelli served as chairman and chief executive officer of Key Production Company, Inc. from September 1992 to September 2002. From June 1988 to July 1991 he was president and chief operating officer of Apache Corporation.
JOSEPH R. ALBI was named executive vice president of operations on March 1, 2005. Since December 8, 2003, Mr. Albi served as senior vice president of corporate engineering. From September 30, 2002 to December 8, 2003, Mr. Albi served as vice president of engineering. Prior to September 30, 2002, Mr. Albi was with Key Production Company, Inc. where he served as vice president of engineering (October 1999 to September 2002) and manager of engineering (June 1994 to October 1999).
THOMAS E. JORDEN was named executive vice president of exploration on December 8, 2003 and has served in a similar capacity since September 30, 2002. Prior to September 2002, Mr. Jorden was with Key Production Company, Inc., where he served as vice president of exploration (October 1999 to September 2002) and chief geophysicist (November 1993 to September 1999). Prior to joining Key, Mr. Jorden was with Union Pacific Resources.
STEPHEN P. BELL was elected senior vice president of business development and land on September 30, 2002. Prior to its merger with Cimarex, Mr. Bell had been with Key Production Company, Inc. since February 1994. In September 1999, he was appointed senior vice president, business development and land. From February 1994 to September 1999, he served as vice president, land.
PAUL KORUS was elected vice president, chief financial officer and treasurer on September 30, 2002. Mr. Korus was vice president and chief financial officer of Key Production Company, Inc. from September 1999 to September 2002. Prior to September 1999 and since June 1995, Mr. Korus was an equity research analyst with Petrie Parkman & Co., an investment banking firm.
GARY R. ABBOTT was elected vice president of corporate engineering on March 1, 2005. Since January 2002, Mr. Abbott served as manager, corporate reservoir engineering. From April 1999 to January 2002, Mr. Abbott was a reservoir engineer with Key Production Company, Inc.
RICHARD S. DINKINS was named vice president of human resources on December 8, 2003. Mr. Dinkins joined Key Production Company, Inc. in March 2002 as its director of human resources and continued in that position with Cimarex commencing in September 2002. Prior to joining Key and since February 1999, Mr. Dinkins was with Sprint.
JAMES H. SHONSEYwas named vice president in April 2006. Mr. Shonsey was elected chief accounting officer and controller on May 28, 2003. From 2001 to May 2003, Mr. Shonsey was chief financial officer of The Meridian Resource Corporation; and from 1997 to 2001, he served as the chief financial officer of Westport Resources Corporation.
THOMAS A. RICHARDSONjoined Cimarex in August 2008 and was elected vice president and general counsel on September 20, 2008. Mr. Richardson retired as a senior partner of Holme Roberts & Owen LLP, a Denver law firm, in December 2007. Mr. Richardson joined Holme Roberts in June 1970 and served as a partner of the firm from 1975 to his retirement. His specialties at the firm included corporate, securities and merger and acquisition law.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.MATTERS
Our $.01 par value common stock trades on the New York Stock Exchange under the symbol XEC. A $.04cash dividend of $.06 per share cash dividend was paid to shareholders in every quarter through fourth quarter of 2007. In December 2007, the Board of Directors declared a $.06 per share dividend payable in the firsteach quarter of 2008. Future dividend payments will depend on the Company's level of earnings, financial requirements and other factors considered relevant by the Board of Directors.
Stock Prices and Dividends by Quarters. The following table sets forth, for the periods indicated, the high and low sales price per share of Common Stock on the NYSE and the quarterly dividends paid per share.
| 2007 | High | Low | Dividends Per Share | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | High | Low | Dividends Paid Per Share | ||||||||||||||||
| First Quarter | $ | 38.07 | $ | 34.06 | $ | .04 | $ | 56.53 | $ | 37.03 | $ | .06 | |||||||
| Second Quarter | $ | 42.87 | $ | 36.99 | $ | .04 | $ | 74.50 | $ | 54.35 | $ | .06 | |||||||
| Third Quarter | $ | 42.01 | $ | 33.83 | $ | .04 | $ | 72.00 | $ | 42.85 | $ | .06 | |||||||
| Fourth Quarter | $ | 42.86 | $ | 36.88 | $ | .04 | $ | 48.94 | $ | 22.38 | $ | .06 | |||||||
| 2006 | High | Low | Dividends Per Share | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2007 | High | Low | Dividends Paid Per Share | ||||||||||||||||
| First Quarter | $ | 47.80 | $ | 39.21 | $ | .04 | $ | 38.07 | $ | 34.06 | $ | .04 | |||||||
| Second Quarter | $ | 47.40 | $ | 35.84 | $ | .04 | $ | 42.87 | $ | 36.99 | $ | .04 | |||||||
| Third Quarter | $ | 43.03 | $ | 33.57 | $ | .04 | $ | 42.01 | $ | 33.83 | $ | .04 | |||||||
| Fourth Quarter | $ | 38.46 | $ | 32.56 | $ | .04 | $ | 42.86 | $ | 36.88 | $ | .04 | |||||||
The closing price of Cimarex stock as reported on the New York Stock Exchange on February 15, 2008,18, 2009, was $44.73.$21.82. At December 31, 2007,2008, Cimarex's 82,541,65883,258,632 shares of outstanding common stock were held by approximately 4,5954,356 stockholders of record.
ITEM 5C. STOCK REPURCHASES.REPURCHASES
In December 2005, the Board of Directors authorized the repurchase of up to four million shares of our common stock. The authorization is currently set to expire on December 31, 2009. Through December 31, 2007, we havehad repurchased and cancelled a total of 1,364,300 shares at an overall average price of $39.05. ThePurchases may be made in both the open market and through negotiated transactions, and purchases may be increased, decreased or discontinued at any time without prior notice. There were no shares were acquired as follows:repurchased in the fourth quarter of 2008, or since the quarter ended September 30, 2007.
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2008
| Period | Total Number of Shares Purchased | Average Price Paid per Share | |||
|---|---|---|---|---|---|
| Year ended December 31, 2005 | 68,000 | $ | 43.03 | ||
| Year ended December 31, 2006 | 182,100 | $ | 44.43 | ||
| Year ended December 31, 2007 | 1,114,200 | $ | 37.93 | ||
| 1,364,300 | $ | 39.05 | |||
| Total Number of Shares purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of shares that may yet be Purchased Under the Plans or Programs | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
October, 2008 | None | NA | None | 2,635,700 | ||||||
November, 2008 | None | NA | None | 2,635,700 | ||||||
December, 2008 | None | NA | None | 2,635,700 | ||||||
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with the consolidated financial statements and accompanying notes thereto provided in Item 8 of this Form 10-K.
| | | For the Years Ended December 31, | | For the Years Ended December 31, | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | 2004 | 2003 | | 2008 | 2007 | 2006 | 2005 | 2004 | |||||||||||||||||||||
| Operating results: | Operating results: | Operating results: | |||||||||||||||||||||||||||||||
| Revenues | $ | 1,431,166 | $ | 1,267,144 | $ | 1,118,622 | $ | 475,164 | $ | 325,621 | Revenues | $ | 1,970,347 | $ | 1,430,513 | $ | 1,265,400 | $ | 1,117,241 | $ | 475,164 | ||||||||||||
| Net income | 346,469 | 345,719 | 328,325 | 153,592 | 94,633 | Net income (loss) | (901,685 | ) | 346,469 | 345,719 | 328,325 | 153,592 | |||||||||||||||||||||
| Basic earnings per share | 4.23 | 4.21 | 5.07 | 3.70 | 2.28 | Basic earnings (loss) per share | (11.07 | ) | 4.23 | 4.21 | 5.07 | 3.70 | |||||||||||||||||||||
| Diluted earnings per share | 4.09 | 4.11 | 4.90 | 3.59 | 2.22 | Diluted earnings (loss) per share | (11.07 | ) | 4.09 | 4.11 | 4.90 | 3.59 | |||||||||||||||||||||
| Cash dividends declared per share | .18 | .16 | — | — | — | Cash dividends declared per share | .24 | .18 | .16 | — | — | ||||||||||||||||||||||
| Balance sheet data: | Balance sheet data: | Balance sheet data: | |||||||||||||||||||||||||||||||
| Total assets | 5,362,794 | 4,829,750 | 4,180,335 | 1,105,446 | 805,508 | Total assets | 4,164,933 | 5,362,794 | 4,829,750 | 4,180,335 | 1,105,446 | ||||||||||||||||||||||
| Total debt | 487,159 | 443,667 | 352,451 | — | — | Total debt | 591,223 | 487,159 | 443,667 | 352,451 | — | ||||||||||||||||||||||
| Stockholders' equity | 3,259,287 | 2,976,143 | 2,595,453 | 700,712 | 534,740 | Stockholders' equity | 2,349,365 | 3,259,287 | 2,976,143 | 2,595,453 | 700,712 | ||||||||||||||||||||||
| Other financial data: | Other financial data: | Other financial data: | |||||||||||||||||||||||||||||||
| Oil and gas sales | 1,364,622 | 1,215,411 | 1,072,422 | 472,389 | 324,119 | Oil and gas sales | 1,880,891 | 1,364,622 | 1,215,411 | 1,072,422 | 472,389 | ||||||||||||||||||||||
| Oil and gas capital expenditures | 1,023,434 | 1,074,673 | 2,462,826 | 296,429 | 162,627 | Oil and gas capital expenditures | 1,620,778 | 1,023,434 | 1,074,673 | 2,462,826 | 296,429 | ||||||||||||||||||||||
| Proved Reserves: | Proved Reserves: | Proved Reserves: | |||||||||||||||||||||||||||||||
| Gas (MMcf) | 1,122,694 | 1,090,362 | 1,004,482 | 364,641 | 337,344 | Gas (MMcf) | 1,067,333 | 1,122,694 | 1,090,362 | 1,004,482 | 364,641 | ||||||||||||||||||||||
| Oil (MBbls) | 58,250 | 59,797 | 64,710 | 14,063 | 14,137 | Oil (MBbls) | 45,202 | 58,250 | 59,797 | 64,710 | 14,063 | ||||||||||||||||||||||
| Total equivalent (MMcfe) | 1,472,195 | 1,449,146 | 1,392,742 | 449,020 | 422,167 | Total equivalent (MMcfe) | 1,338,545 | 1,472,195 | 1,449,146 | 1,392,742 | 449,020 | ||||||||||||||||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included in Item 8 of this report. Certain amounts in prior years' financial statements have been reclassified to conform to the 20072008 financial statement presentation. This discussion also includes forward-lookingforward- looking statements. Please refer to "Cautionary Information about Forward-LookingForward- Looking Statements" in Part I of this Form 10-K for important information about these types of statements.
OVERVIEW
We are an independent oil and gas exploration and production company with operations entirely located in the United States. We have determined that our business is comprised of only one segment because our gathering, processing and marketing activities are ancillary to our production operations and are not separately managed.
In 2007, we achieved the following financial and operating results:
We seek to achieve profitable growth in proved reserves and production primarily through exploration and development. We generally fund our growth with cash flow provided by our operating activities. To achieve a consistent rate of growth and mitigate risk, we maintainhave historically maintained a blended portfolio of low, moderate, and higher risk exploration and development projects. To further mitigate risk, we have chosen to seek geologic and geographic diversification by operating in multiple basins. Our oil and gas reserves and operations are mainly located in Texas, Oklahoma, New Mexico, Kansas, Louisiana and Wyoming.
To supplement our growth and to provide for new drilling opportunities, we also consider mergers and acquisitions. In 2005 we acquired Magnum Hunter Resources, Inc, in a stock-for-stock merger with a total transaction value of approximately $2.1 billion. Magnum Hunter was a Dallas-based independent oil and gas exploration and production company with operations concentrated in the Permian Basin of West Texas
and New Mexico and in the Gulf of Mexico. During 2007 we purchased $40.9 million of assets, with the largest acquisition being in the Texas Panhandle area for $35.8area. In October 2008 we acquired 38,000 net acres in our western Oklahoma, Anadarko Basin Woodford shale play, at a total cost of $180.9 million. This transaction added over 50 locationsWe have increased our position in the play to our already active Texas Panhandle drilling program and eight Bcfe of proved reserves.approximately 98,000 net acres.
From time to time we also consider selling certain assets. DuringIn 2007, we sold $177.0 million of non-core properties. The two largest sales were $87.5 million for our West Texas Spraberry oil properties and $53.5 million for our Gulf of Mexico Main Pass area operated properties. We continueDuring 2008, we sold 17 Bcfe of proved reserves for $38.1 million.
Market Conditions
During the fourth quarter of 2008, severe disruptions in the credit markets and reductions in global economic activity caused significant decreases in oil and gas prices. The dramatic decrease in prices had a significant adverse impact on the amount of cash flow available to evaluate alternatives forinvest in exploration and development drilling, the restpresent value of our Gulfproved reserves, our stock price and market capitalization.
The continued credit crisis and related turmoil in the global financial system may have further impact on our business and our financial position if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted, which could have an impact on our flexibility to react to changing economic and business conditions. Further, the economic situation could have an impact on our lenders or customers, causing them to fail to meet their obligations to us.
As a result of Mexico assets.lower commodity prices we have sharply reduced our drilling activity. Our exploration and development capital investment is expected to decrease from $1.4 billion in 2008 to $400-$600 million in 2009, depending on prices and corresponding cash flow.
2008 Summary
During 2008 we accomplished the following positive operating and financial highlights:
However, largely as a result of the collapse in oil and gas prices we also experienced the following negative consequences:
Oil and Gas Prices
While our revenues are a function of both production and prices, wide swings in prices have had the greatest impact on our results of operations. Our annual average realized gas price increased from $6.50 $7.05
per Mcf in 20062007 to $7.05$8.43 per Mcf in 2007;2008; and oil prices increased from $61.96 per barrel in 2006 to $69.71 per barrel in 2007 to $96.03 per barrel in 2008.
Strong global demand and overall tight commodity market conditions for oil, natural gas and natural gas liquids for the first nine months of 2008 resulted in overall higher average realized prices in 2008 compared to 2007. During the fourth quarter of 2008, reductions in global economic activity and energy demands caused significant decreases in oil and gas prices. Year-end 2008 oil and gas prices fell 50-70% from their mid-year peak. Our overall average fourth quarter equivalent price realization was approximately 50% below our average third quarter equivalent price.
In addition to supply and demand, oil and gas prices are affected by seasonal, economic and geo-political factors that we can neither control nor predict. However, we have made limited use of hedging transactions during 2007 and 2008 to somewhat reduce price risk as discussed further below.
| | Years Ended December 31, | Years Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||
| Gas Prices: | |||||||||||||||||||
| Average Henry Hub price ($/Mcf) | $ | 6.86 | $ | 7.23 | $ | 8.60 | $ | 9.04 | $ | 6.86 | $ | 7.23 | |||||||
| Average realized sales price ($/Mcf) | $ | 7.05 | $ | 6.50 | $ | 8.05 | $ | 8.43 | $ | 7.05 | $ | 6.50 | |||||||
| Effect of hedges ($/Mcf) | $ | 0.23 | $ | — | $ | — | $ | 0.09 | $ | 0.23 | $ | — | |||||||
Oil Prices: | |||||||||||||||||||
| Average WTI Cushing price ($/Bbl) | $ | 72.31 | $ | 66.22 | $ | 56.44 | $ | 99.65 | $ | 72.28 | $ | 66.22 | |||||||
| Average realized sales price ($/Bbl) | $ | 69.71 | $ | 61.96 | $ | 55.25 | $ | 96.03 | $ | 69.71 | $ | 61.96 | |||||||
On an energy equivalent basis, 73%72% of our 20072008 aggregate production was natural gas. A $0.10 per Mcf change in our average realized gas sales price would have resulted in approximately a $12$12.7 million change in our gas revenues. Similarly, 27%28% of our production was crude oil. A $1.00 per barrel change in
our average realized crude oil sales price would have resulted in approximately a $7.4an $8.4 million change in our oil revenues.
To mitigate a portion of our exposure to potentially adverse gas market changes, inIn July 2006 we entered into certain derivative contracts covering approximately 24% of our overall 2007 gas production and about 12%11% of our estimated 2008 gas volumes. We executed cash flow effective hedges by purchasing $7.00/MMbtu put options on a portion of our 2007 and 2008 Mid-Continent gas production. We used the proceeds from selling call options on the same volume of gas to pay for the puts, thus establishing what is commonly known as a "zero-cost collar." We hedged 29.2 million MMbtu and 14.6 million MMbtu for 2007 and 2008, respectively. See Note 53 to the Consolidated Financial Statements and Item 7A of this report for additional information regarding our derivative instruments.
Reserve replacement and Growth
Because oil and gas are non-renewable forms of energy resources, exploration and production companies face the challenge of resource depletion and natural production decline. Our operations also entail significant complexities that requiredrequire the use of advanced technologies and highly trained personnel. Even when modern exploration technology is properly used, the interpreter still may not know conclusively if hydrocarbons will be present, the rate at which they will be produced, or economic viability. Historically, we have been able to grow our proved reserves and production each year through drilling and acquisitions. Future growth will continue to depend upon our ability to economically add reserves in excess of production.
In 2007 ourYear end 2008 total proved oil and gas reserves increaseddecreased by 1.5%9% from 1.4491.47 Tcfe to 1.4721.34 Tcfe. This was despitedecrease includes production of 165177.8 Bcfe, and property sales of 123.416.8 Bcfe and negative price related revisions of 156.8 Bcfe. Proved natural gas reserves at year-end 20072008 were 1.121.07 Tcf compared to 1.091.12 Tcf at year-end 2006.2007. Natural gas comprised 76%80% and 75%76% of our total proved reserves at year-end 20072008 and 2006,2007, respectively. Our proved oil reserves at year-end 20072008 were 58.345.2 MMBbls compared to 59.858.3 MMBbls at the end of 2006.2007. Overall, about 42%46% of our proved reserves are in our Mid-Continent region and 36%33% are in
the Permian Basin. Our onshore Gulf Coast and other onshore operations collectively make another 20% of total proved reserves. Only 2%1% of our total proved reserves are in the Gulf of Mexico.
The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, subjective decisions and available data for our various fields make these estimates generally less precise than other estimates included in financial statement disclosures. For 2007,2008, negative revisions of previous estimates boosted proved reserves by 57.5 Bcfe or 4% of total proved reserves on December 31, 2007. Most of our positive revisions resultedresulting from higherlower oil and gas prices and new data for one of our large fields in Wyoming.higher lease operating expenses decreased proved reserves by 12% on December 31, 2008. See Note 17,16, Supplemental Oil and Gas Disclosures for more reserve information.
In most years our primary source for reserve replacement and growth is exploration and development (E&D). We invested $982.5$1,438.4 million on E&D during 20072008 and $1,048.2$982.5 million in 2006.2007. Approximately 39%45% of 20072008 expenditures were in the Mid-Continent area, 37%38% in the Permian Basin, 17%15% in the Gulf Coast area, and 5%2% in the GulfWestern/other. Cash flow from operating activities for 2008 totaled $1,367.5 million, which largely funded our drilling program.
As a result of Mexico. Weexpected lower commodity prices and corresponding cash flow we project that 20082009 exploration and development expenditures will range from $1.1 billion$400 million to $1.3 billion.
Cash flow from operating activities for 2007 totaled $994.7 million, which more than funded our drilling program. Based on expected cash flow provided by operating activities, cash on hand and monies
available under our bank credit facility, we are well positioned to fund the capital program we have planned for 2008.$600 million.
Production and other operating expenses
The costs associated with finding and producing oil and gas are substantial. Some of these costs vary with oil and gas prices, some trend with production volume and some are a function of the number of wells we own. At the end of 2007,2008, we owned interests in over 12,84112,980 wells.
Production expense generally consists of the cost of power and fuel, direct labor, third-party field services, compression, water disposal, and certain maintenance activity necessary to produce oil and gas from existing wells.
Transportation expense is comprised of costs paid to move oil and gas from the wellhead to a specified sales point. In some cases we receive a payment from purchasers which is net of transportation costs, and in other instances we separately pay for transportation. If costs are netted in the proceeds received, both the gross revenues and gross costs are shown in sales and expenses, respectively.
Depreciation, depletion and amortization (DD&A) of our producing properties is computed using the units-of-production method. Because the economic life of each producing well depends upon the assumed price for future sales of production, fluctuations in oil and gas prices may impact the level of proved reserves used in the calculation. Higher prices generally have the effect of increasing reserves, which reduces depletion expense, while lower prices generally have the effect of decreasing reserves, which increases depletion expense. In addition, changes in estimates of reserve quantities and estimates of future development costs or reclassifications from unproved properties to proved properties will impact depletion expense.
General and administrative expenses consist primarily of salaries and related benefits, office rent, legal fees, consultants, systems costs and other administrative costs incurred in our offices and not directly associated with exploration, development or production activities. While we expect these costs to increase with our growth, we also expect such increases to be proportionately smaller than our production growth.
Production taxes are assessed by state and local taxing authorities pertaining to production, revenues or the value of properties. These typically include production severance, ad valorem and excise taxes.
Significant expenses that generally do not trend with production
Stock compensation expense consists of non-cash charges resulting from the issuance of restricted stock and restricted stock units to certain employees and the expensing of stock options resulting from the adoption of SFAS No. 123R,Share Based Payment. Net stock compensation expense in 20072008 was $10.8$10.1 million compared to $8.2$10.8 million in 2006.2007.
The derivative fair value (gain) loss is the net realized and unrealized gain or loss on derivative financial instruments that do not qualify for hedge accounting treatment and fluctuates based on changes in the fair value of underlying commodities. As of December 31, 2006 all contracts associated with derivative instruments that did not qualify for hedge accounting treatment had settled. The net derivative fair value gain was $23.0 million in 20062006.
RESULTS OF OPERATIONS
2008 compared to 2007
We recognized a net loss for 2008 of $901.7 million or $11.07 per share. This compares to net income of $346.5 million, or $4.09 per diluted share for the same period in 2007. The decrease in net income is primarily the result of a non-cash full cost ceiling write-down recorded in the third and fourth quarters of 2008. The full cost ceiling impairment is discussed further in the operating costs and expenses section below.
Oil and Gas Sales | For the Years Ended December 31, | Percent Change Between | Price/Volume Analysis | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands or as indicated) | 2008 | 2007 | 2008/2007 | Price | Volume | Variance | ||||||||||||||
Gas sales | $ | 1,074,705 | $ | 845,631 | 27 | % | $ | 175,873 | $ | 53,201 | $ | 229,074 | ||||||||
Oil sales | 806,186 | 518,991 | 55 | % | 220,956 | 66,239 | 287,195 | |||||||||||||
Total oil and gas sales | $ | 1,880,891 | $ | 1,364,622 | 38 | % | $ | 396,829 | $ | 119,440 | $ | 516,269 | ||||||||
Total gas volume—Mcf | 127,444 | 119,937 | 6 | % | ||||||||||||||||
Gas volume—MMcf per day | 348.2 | 328.6 | ||||||||||||||||||
Average gas price—per Mcf | $ | 8.43 | $ | 7.05 | 20 | % | ||||||||||||||
Effect of hedges—per Mcf | $ | 0.09 | $ | 0.23 | ||||||||||||||||
Total oil volume—thousand barrels | 8,395 | 7,445 | 13 | % | ||||||||||||||||
Oil volume—barrels per day | 22,937 | 20,399 | ||||||||||||||||||
Average oil price—per barrel | $ | 96.03 | $ | 69.71 | 38 | % | ||||||||||||||
Oil and gas sales during 2008 totaled $1.9 billion, compared to $1.4 billion in 2007. Of the $516.3 million increase in sales between the two periods, $396.8 million related to higher prices and $119.4 million resulted from higher production volumes.
Compared to 2007, our 2008 oil production increased by 13% to an average of 22,937 barrels per day in 2008. This increase resulted in $66.2 million of incremental revenues. Gas volumes averaged 348.2 MMcf per day in 2008 compared to 328.6 MMcf per day in 2007, resulting in an increase in revenues of $53.2 million. Total 2008 oil and gas production volumes were 485.8 MMcfe per day, up 34.8 MMcfe per day from 2007. Both our gas and oil volumes increased as 2008 unfolded. During the fourth quarter of 2008, our gas production averaged 350.3 MMcf per day up from 341.1 MMcf per day (a three percent increase) in the fourth quarter of 2007. Fourth quarter oil production increased by 10% to 23,907 barrels per day, up from 21,680 barrels per day in 2007.
Average realized gas prices increased by 20% to $8.43 per Mcf in 2008, compared to $7.05 per Mcf for 2007. This price increase boosted gas sales by $175.9 million between the two periods. Included in our 2008 realized gas price is $11.3 million of cash receipts (a positive $0.09 per Mcf effect) from settlement of cash flow hedges on 40,000 MMBtu per day of Mid-Continent gas production.
Realized oil prices averaged $96.03 per barrel during 2008, compared to $69.71 per barrel in 2007. The increase in oil sales resulting from this 38% improvement in oil prices totaled $221.0 million.
Changes in realized gas and oil prices were mostly the result of overall market conditions and our modest gas hedging program.
| | For the Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | ||||||
Gas Gathering, Processing and Marketing (in thousands): | ||||||||
Gas gathering, processing and other revenues | $ | 87,757 | $ | 60,818 | ||||
Gas gathering and processing costs | (43,838 | ) | (29,860 | ) | ||||
Gas gathering and processing margin | $ | 43,919 | $ | 30,958 | ||||
Gas marketing revenues, net of related costs | $ | 1,699 | $ | 5,073 | ||||
We sometimes transport, process and market third-party gas that is associated with our gas. In 2008, third-party gas gathering and processing contributed $43.9 million of pre-tax cash operating margin (revenues less direct cash expenses) versus $31 million in 2007. Our gas marketing margin (revenues less purchases) decreased to $1.7 million in 2008 from $5.1 million in 2007. Changes in net margins from gas gathering, processing and marketing activities are the direct result of changes in volumes and overall market conditions.
| | For the Years Ended December 31, | Variance Between | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2008/2007 | |||||||
Operating costs and expenses (in thousands): | ||||||||||
Impairment of oil and gas properties | $ | 2,242,921 | $ | — | $ | 2,242,921 | ||||
Depreciation, depletion and amortization | 547,404 | 461,791 | 85,613 | |||||||
Asset retirement obligation | 8,796 | 8,937 | (141 | ) | ||||||
Production | 218,736 | 201,512 | 17,224 | |||||||
Transportation | 38,107 | 26,361 | 11,746 | |||||||
Taxes other than income | 130,490 | 93,630 | 36,860 | |||||||
General and administrative | 44,500 | 49,260 | (4,760 | ) | ||||||
Stock compensation | 10,090 | 10,772 | (682 | ) | ||||||
Other operating, net | 126,433 | 6,637 | 119,796 | |||||||
| $ | 3,367,477 | $ | 858,900 | $ | 2,508,577 | |||||
Total operating costs and expenses (not including gas gathering, marketing and processing costs, or income tax expense) increased to $3,367.5 million in 2008 compared to $858.9 million in 2007.
The largest component of the increase between periods is the non-cash impairment of oil and gas properties in the amount of $2.2 billion ($1.4 billion, net of tax) that was recorded as a result of declines in natural gas and oil prices during the last half of 2008. At September 30, 2008, our ceiling limitation calculation resulted in excess capitalized costs of $657.1 million ($417.4 million, net of tax), for which we recorded a non-cash impairment of oil and gas properties. As a result of further declines in natural gas and oil prices during the fourth quarter of 2008, we recorded an additional non-cash impairment of oil and gas properties. Electing to use period end prices, at December 31, 2008, our ceiling limitation calculation
resulted in excess capitalized costs of $1.6 billion ($1.0 billion after tax). Due to the volatility of oil and gas prices and because the ceiling calculation requires that prices in effect as of the last day of the period be held constant in valuing proved reserves, we may be required to record a ceiling test write-down in future periods. The full cost method of accounting is discussed in detail under "Critical Accounting Policies and Estimates".
DD&A increased $85.6 million between periods from $461.8 million in 2007 to $547.4 million in 2008. On a unit of production basis, DD&A was $3.08 per Mcfe in 2008 compared to $2.81 per Mcfe for 2007. The increase stems from replacement costs for reserves added being higher than costs of reserves produced. Service costs to drill and complete wells have been increasing and we are drilling deeper and more complex wells. Additionally, the significant decrease in oil and gas prices over the last half of 2008 reduced the amount of our estimated reserve quantities (future production), causing an increase in our depletion rate. Due to the reduction to the carrying value of oil and gas properties recorded at year end we expect the DD&A rate to be lower in the first quarter of 2009 in comparison to the full year 2008.
Production costs rose $17.2 million, or nine percent, from $201.5 million ($1.22 per Mcfe) in 2007 to $218.7 million ($1.23 per Mcfe) in 2008. This increase resulted from an eight percent increase in production volumes and a $7.4 million increase in workover expense between periods.
Transportation costs increased from $26.4 million in 2007 to $38.1 million in 2008. The increase is the result of higher sales volumes, increased market rates and a higher fuel cost component due to higher natural gas prices during the year.
Taxes other than income were $36.9 million greater, rising from $93.6 million in 2007 to $130.5 million in 2008. The increase between periods resulted from increases in oil and gas sales stemming from higher production volumes and commodity prices.
General and administrative (G&A) expenses decreased $4.8 million from $49.3 million in 2007 to $44.5 million in 2008. The decrease between periods is due to lower employee-benefit costs due to a decrease in bonus and profit sharing expenses resulting from significant decreases in commodity prices during the last quarter of 2008.
In 2008, the increase in Other operating, net to $126.4 million from $6.6 million was primarily related to the Tulsa County District Court issuing a judgment in the H.B. Krug case. The total accrued litigation expense for the year ended December 31, 2008 for this lawsuit is $119.6 million. We have appealed the District Court's judgments. For further information on this lawsuit and other litigation please see Contingencies under "Critical Accounting Policies and Estimates".
Other income and expense
Interest expense decreased by $5.9 million, or 16%, primarily because of a decrease in our average bank debt outstanding during the year. In addition, in comparison to prior year, we experienced a decrease in our average interest rate on both our bank borrowings and convertible notes. Capitalized interest increased by $2.4 million mainly because we had more costs incurred to develop our unproved properties than we had in 2007. We also had a gain on the repurchase of convertible notes of $9.6 million compared to a $5.1 million gain in 2007 on the early extinguishment of debt arising from redemption of our $195 million face value of 9.6% senior unsecured notes.
Other, net decreased from $14.2 million of income in 2007 to $10.3 million of income in 2008. Components consist of miscellaneous income and expense items that will vary from period to period, including income and loss in equity investees, gain or loss on sale of $67.8inventory, impairments and interest income. Included in our 2008 Other, net is $16.0 million of impairment expense on our equity investments and $0.8 million of impairment on our short-term investments. These additional expenses were offset by a $17.2 million increase in 2005.gain on sale of inventory in comparison to 2007. Another element of the decrease between periods is lower income of $4.2 million from equity investees.
Income tax
During 2008, a net deferred income tax benefit of $528.6 million was recognized (the year end deferred tax benefit included $66.2 million of income tax expense). This compares with 2007 current taxes of $30.6 million and deferred income tax expense of $167.5 million. The combined Federal and state effective income tax rates were 37.0% and 36.4% in the years of 2008 and 2007, respectively. The effective tax rate of 37.0% for 2008 differs from the statutory rate due to effects of the domestic production activities deduction and percentage depletion.
RESULTS OF OPERATIONS
2007 compared to 2006
Net income for 2007 was $346.5 million, or $4.09 per diluted share. This compares to net income of $345.7 million, or $4.11 per diluted share in 2006. The small change in year-over-year net income is generally the result of higher oil and gas sales being offset by higher costs and expenses.
| | For the Years Ended December 31, | | | | | |||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Percent Change Between 2007/2006 | Price/Volume Analysis | |||||||||||||||||||||||||||||||||||
| Oil and Gas Sales | Oil and Gas Sales | 2007 | 2006 | Price | Volume | Variance | Oil and Gas Sales | For the Years Ended December 31, | Percent Change Between | Price/Volume Analysis | ||||||||||||||||||||||||||||
| (In thousands or as indicated) | (In thousands or as indicated) | (In thousands or as indicated) | 2007 | 2006 | 2007/2006 | Price | Volume | Variance | ||||||||||||||||||||||||||||||
| Gas sales | Gas sales | $ | 845,631 | $ | 810,894 | 4 | % | $ | 65,965 | $ | (31,228 | ) | $ | 34,737 | Gas sales | $ | 845,631 | $ | 810,894 | 4 | % | $ | 65,965 | $ | (31,228 | ) | $ | 34,737 | ||||||||||
| Oil sales | Oil sales | 518,991 | 404,517 | 28 | % | 57,699 | 56,775 | 114,474 | Oil sales | 518,991 | 404,517 | 28 | % | 57,699 | 56,775 | 114,474 | ||||||||||||||||||||||
| Total oil and gas sales | $ | 1,364,622 | $ | 1,215,411 | 12 | % | $ | 123,664 | $ | 25,547 | $ | 149,211 | Total oil and gas sales | $ | 1,364,622 | $ | 1,215,411 | 12 | % | $ | 123,664 | $ | 25,547 | $ | 149,211 | |||||||||||||
Total gas volume—Mcf | Total gas volume—Mcf | 119,937 | 124,733 | (4 | )% | Total gas volume—Mcf | 119,937 | 124,733 | (4 | )% | ||||||||||||||||||||||||||||
| Gas volume—MMcf per day | Gas volume—MMcf per day | 328.6 | 341.7 | Gas volume—MMcf per day | 328.6 | 341.7 | ||||||||||||||||||||||||||||||||
| Average gas price—per Mcf | Average gas price—per Mcf | $ | 7.05 | $ | 6.50 | 8 | % | Average gas price—per Mcf | $ | 7.05 | $ | 6.50 | 8 | % | ||||||||||||||||||||||||
| Effect of hedges—per Mcf | Effect of hedges—per Mcf | $ | 0.23 | $ | — | Effect of hedges—per Mcf | $ | 0.23 | $ | — | ||||||||||||||||||||||||||||
Total oil volume—thousand barrels | Total oil volume—thousand barrels | 7,445 | 6,529 | 14 | % | Total oil volume—thousand barrels | 7,445 | 6,529 | 14 | % | ||||||||||||||||||||||||||||
| Oil volume—barrels per day | Oil volume—barrels per day | 20,399 | 17,887 | Oil volume—barrels per day | 20,399 | 17,887 | ||||||||||||||||||||||||||||||||
| Average oil price—per barrel | Average oil price—per barrel | $ | 69.71 | $ | 61.96 | 13 | % | Average oil price—per barrel | $ | 69.71 | $ | 61.96 | 13 | % | ||||||||||||||||||||||||
Oil and gas sales during 2007 totaled $1.4 billion, compared to $1.2 billion in 2006. Of the $149.2 million increase in sales between the two periods, $25.6 million related to higher production volumes and $123.7 million resulted from higher prices.
Compared to 2006, our 2007 oil production increased by 14% to an average of 20,399 barrels per day in 2007. This increase resulted in $56.8 million of incremental revenues. Gas volumes averaged 328.6 MMcf per day in 2007 compared to 341.7 MMcf per day in 2006, resulting in a decrease in revenues of $31.2 million. Total 2007 oil and gas production volumes were 451 MMcfe per day, up 2 MMcfe per day from 2006. Both our gas and oil volumes increased as 2007 unfolded. During the fourth quarter of 2007, our gas production averaged 341.1 MMcf per day up from 329.4 MMcf per day (a 4% increase) in the fourth quarter of 2006. Fourth quarter oil production increased by 17% to 21,680 barrels per day, up from 18,587 barrels per day in 2006.
Average realized gas prices increased by 8% to $7.05 per Mcf in 2007, compared to $6.50 per Mcf for 2006. This price increasedincrease boosted gas sales by $65.9 million between the two periods. Included in our 2007 realized gas price is $27.8 million of cash receipts (a positive $0.23 per Mcf effect) from settlement of cash flow hedges on 80,000 MMBtu per day of Mid-Continent gas production. We currently have 40,000 MMBtu per day of our Mid-Continent gas production hedged for 2008 at a floor price of $7.00/MMBtu.
Realized oil prices averaged $69.71 per barrel during 2007, compared to $61.96 per barrel in 2006. The increase in oil sales resulting from this 13% improvement in oil prices totaled $57.7 million.
Changes in realized gas and oil prices were mostly the result of overall market conditions and our modest gas hedging program. We did not have any cash flow effective hedges in place for 2006 volumes.
| | | For the Years Ended December 31, | | For the Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | | 2007 | 2006 | ||||||||||
| Gas Gathering, Processing and Marketing (in thousands): | Gas Gathering, Processing and Marketing (in thousands): | Gas Gathering, Processing and Marketing (in thousands): | ||||||||||||||
| Gas gathering and processing revenues | Gas gathering and processing revenues | $ | 61,471 | $ | 47,879 | Gas gathering and processing revenues | $ | 60,818 | $ | 46,135 | ||||||
| Gas gathering and processing costs | Gas gathering and processing costs | (30,513 | ) | (27,410 | ) | Gas gathering and processing costs | (29,860 | ) | (25,666 | ) | ||||||
| Gas gathering and processing margin | $ | 30,958 | $ | 20,469 | Gas gathering and processing margin | $ | 30,958 | $ | 20,469 | |||||||
| Gas marketing revenues, net of related costs | Gas marketing revenues, net of related costs | $ | 5,073 | $ | 3,854 | Gas marketing revenues, net of related costs | $ | 5,073 | $ | 3,854 | ||||||
We sometimes transport, process and market third-party gas that is associated with our gas. In 2007, third-party gas gathering and processing contributed $31 million of pre-tax cash operating margin (revenues less direct cash expenses) versus $20.5 million in 2006. Our gas marketing margin (revenues less purchases) increased to $5.1 million in 2007 from $3.9 million in 2006. Increases in net margins from gas gathering, processing and marketing activities are the direct result of increased volumes and overall market conditions.
| | For the Years Ended December 31, | | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Variance Between 2007/2006 | For the Years Ended December 31, | Variance Between | ||||||||||||||||
| | 2007 | 2006 | 2007 | 2006 | 2007/2006 | ||||||||||||||
| Operating costs and expenses (in thousands): | |||||||||||||||||||
| Depreciation, depletion and amortization | $ | 461,791 | $ | 396,394 | $ | 65,397 | $ | 461,791 | $ | 396,394 | $ | 65,397 | |||||||
| Asset retirement obligation | 8,937 | 7,018 | 1,919 | 8,937 | 7,018 | 1,919 | |||||||||||||
| Production | 201,512 | 176,833 | 24,679 | 201,512 | 176,833 | 24,679 | |||||||||||||
| Transportation | 26,361 | 21,157 | 5,204 | 26,361 | 21,157 | 5,204 | |||||||||||||
| Taxes other than income | 93,630 | 91,066 | 2,564 | 93,630 | 91,066 | 2,564 | |||||||||||||
| General and administrative | 49,260 | 42,288 | 6,972 | 49,260 | 42,288 | 6,972 | |||||||||||||
| Stock compensation | 10,772 | 8,243 | 2,529 | 10,772 | 8,243 | 2,529 | |||||||||||||
| Other operating, net | 6,637 | 2,064 | 4,573 | 6,637 | 2,064 | 4,573 | |||||||||||||
| Gain on derivative instruments | — | (22,970 | ) | 22,970 | — | (22,970 | ) | 22,970 | |||||||||||
| $ | 858,900 | $ | 722,093 | $ | 136,807 | $ | 858,900 | $ | 722,093 | $ | 136,807 | ||||||||
Total operating costs and expenses (not including gas gathering, marketing and processing costs, or income tax expense) increased to $858.9 million in 2007 compared to $722.1 million in 2006.
DD&A was the largest component of the increase between periods. DD&A equaledtotaled $461.8 million in 2007 compared to $396.4 million in 2006. On a unit of production basis, DD&A was $2.81 per Mcfe in 2007 compared to $2.42 per Mcfe for 2006. The increase stems from replacement costs for reserves added being higher than costs of reserves produced. Service costs to drill and complete wells have been increasing and we are drilling deeper and more complex wells.
Production costs rose $24.7 million from $176.8 million ($1.08 per Mcfe) in 2006 to $201.5 million ($1.22 per Mcfe) in 2007. We have experienced higher direct labor cost, higher third-party field service costs, increased electricity rates and greater water disposal costs.
Transportation costs increased from $21.2 million in 2006 to $26.4 million in 2007. The increase is the result of higher sales volumes and that expiring contracts are being renewed with increased current market rates.
General and administrative (G&A) expenses increased $7.0 million from $42.3 million in 2006 to $49.3 million in 2007. The increase between periods is due to an expansion of staff, higher average salaries, higher employee-benefit costs, and increased legal representation costs.
In 2007, the increase in Other operating, net to $6.6 million from $2.1 million was primarily related to resolution of and accruals related to title and royalty issues.
Another component of change in total operating costs and expenses between 2007 and 2006 stems from the $23 million derivative fair value gain we recognized in 2006. This gain was associated with price risk management contracts that were not designated for hedge accounting. These contracts all expired on December 31, 2006.
Other income and expense
Interest expense increased by $8 million, or 27%, primarily because of a 10% increase in our total debt outstanding at an average interest rate of 7.1%. Capitalized interest decreased by $4.6 million mainly because we are carrying less value associated with unproved properties than we were in 2006. We also had a gain in 2007 on the early extinguishment of debt arising from redemption of our $195 million face value of old 9.6% senior unsecured notes. We replaced the old notes with new ten-year, 7.125% senior unsecured notes.
Other, net decreased from $28.6 million of income in 2006 to $14.2 million of income in 2007. Components consist of miscellaneous income and expense items that will vary from period to period, including income and loss in equity investees, gain or loss on sale of inventory and interest income. The decrease from 2006 to 2007 is due primarily to the 2006 liquidation of the Company's investment in the Company's limited partnership affiliates, Teal Hunter L.P. and Mallard Hunter L.P. Excess distributions of $19.8 million from this liquidation were recorded during 2006. In 2007, we received an additional distribution from this liquidation in the amount of $3.0 million.
Income tax expense
Income tax expense totaled $198.2 million for 2007 versus $198.6 million for 2006. Tax expense equaled aThe combined federal and state effective income tax rate ofwas 36.4% and 36.5% in 2007 and 2006, respectively. Included in the 2007 income tax expense of $198.2 million was a current tax expense of $30.6 million.
RESULTS OF OPERATIONS
2006 compared to 2005: Our financial and operating results for 2005 include the operating results of properties acquired in the Magnum Hunter merger beginning June 7, 2005.
Net income for the year 2006 was $345.7 million, or $4.11 per diluted share, compared to net income of $328.3 million, or $4.90 per diluted share in 2005. The change in net income results from the effect of changes in revenues and costs, as discussed further.
| | For the Years Ended December 31, | | | | | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Percent Change Between 2006/2005 | Price/Volume Analysis | ||||||||||||||||
| Oil and Gas Sales | 2006 | 2005 | Price | Volume | Variance | |||||||||||||
| (In thousands or as indicated) | ||||||||||||||||||
| Gas sales | $ | 810,894 | $ | 807,007 | 1 | % | $ | (192,982 | ) | $ | 196,869 | $ | 3,887 | |||||
| Oil sales | 404,517 | 265,415 | 52 | % | 43,821 | 95,281 | 139,102 | |||||||||||
| Total oil and gas sales | $ | 1,215,411 | $ | 1,072,422 | 13 | % | $ | (149,161 | ) | $ | 292,150 | $ | 142,989 | |||||
Total gas volume—Mcf | 124,733 | 100,272 | 24 | % | ||||||||||||||
| Gas volume—MMcf per day | 341.7 | 274.7 | ||||||||||||||||
| Average gas price—per Mcf | $ | 6.50 | $ | 8.05 | (19 | )% | ||||||||||||
Total oil volume—thousand barrels | 6,529 | 4,804 | 36 | % | ||||||||||||||
| Oil volume—barrels per day | 17,887 | 13,162 | ||||||||||||||||
| Average oil price—per barrel | $ | 61.96 | $ | 55.25 | 12 | % | ||||||||||||
Oil and gas sales for the year 2006 totaled $1.2 billion, compared to $1.1 billion for 2005. The $143.0 million increase in sales between the two periods results from $292.0 million related to higher production volumes, offset by a decrease of $149.0 million resulting from lower commodity prices.
Sales benefited from higher production volumes. Average daily gas production rose 67.0 MMcf in 2006 to 341.7 MMcf from 274.7 MMcf in 2005, resulting in $197.0 million of incremental revenues. Oil volumes averaged 17,887 barrels per day for 2006, compared to 13,162 barrels per day in 2005, resulting in increased revenues of $95.0 million. The increase in sales volumes between the periods of 2006 and 2005 is due to the inclusion of Magnum Hunter operations beginning June 7, 2005 (date of acquisition) and positive drilling results during 2005 and 2006. Production volumes in the Gulf of Mexico and along the Texas and Louisiana Gulf Coast area were negatively impacted during the fourth quarter of 2005 as a result of hurricanes. It is estimated to have negatively impacted fourth-quarter 2005 production by 41 to 45 MMcf equivalent per day. These volumes were brought back online throughout 2006, and by the fourth quarter of 2006 less than one MMcf equivalent per day was shut-in from the 2005 hurricane activity. No oil and gas reserves have been lost as a result of the storms and the majority of associated repair costs will be covered by insurance.
Realized gas prices averaged $6.50 per Mcf for 2006, compared to $8.05 per Mcf for 2005. This 19% change decreased sales by $193.0 million between the two periods. Realized oil prices, however, averaged $61.96 per barrel for 2006, compared to $55.25 per barrel for 2005. The increase in sales between periods resulting from this 12% improvement in oil prices totaled $44.0 million. Changes in realized prices were the direct result of overall market conditions.
| | For the Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2006 | 2005 | ||||||
| Gas Gathering, Processing and Marketing (in thousands): | ||||||||
| Gas gathering and processing revenues | $ | 47,879 | $ | 44,238 | ||||
| Gas gathering and processing costs | (27,410 | ) | (31,890 | ) | ||||
| Gas gathering and processing margin | $ | 20,469 | $ | 12,348 | ||||
| Gas marketing revenues, net of related costs | $ | 3,854 | $ | 1,962 | ||||
We sometimes transport, process and market third-party gas that is associated with our gas. In 2006, third-party gas gathering and processing contributed $20.5 million of pre-tax cash operating margin (revenues less direct cash expenses) versus $12.4 million in 2005. Our gas marketing margin (revenues less purchases) increased to $3.9 million in 2006 from $2.0 million in 2005. Increases in net margins from gas gathering, processing and marketing activities are the direct result of increased volumes and overall market conditions.
| | For the Years Ended December 31, | | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Variance Between 2006/2005 | |||||||||
| | 2006 | 2005 | ||||||||
| Operating costs and expenses (in thousands): | ||||||||||
| Depreciation, depletion and amortization | $ | 396,394 | $ | 258,287 | $ | 138,107 | ||||
| Asset retirement obligation | 7,018 | 3,819 | 3,199 | |||||||
| Production | 176,833 | 104,067 | 72,766 | |||||||
| Transportation | 21,157 | 15,338 | 5,819 | |||||||
| Taxes other than income | 91,066 | 73,360 | 17,706 | |||||||
| General and administrative | 42,288 | 33,497 | 8,791 | |||||||
| Stock compensation | 8,243 | 4,959 | 3,284 | |||||||
| Other operating, net | 2,064 | 15,897 | (13,833 | ) | ||||||
| (Gain) Loss on derivative instruments | (22,970 | ) | 67,800 | (90,770 | ) | |||||
| $ | 722,093 | $ | 577,024 | $ | 145,069 | |||||
Total operating costs and expenses (not including gas gathering, marketing and processing costs, or income tax expense) were $722.1 million in 2006 compared to $577.0 million in 2005.
Depreciation, depletion and amortization (DD&A) was the largest component of the increase between periods. DD&A equaled $396.4 million in 2006 compared to $258.3 million in 2005. On a unit of production basis, DD&A was $2.42 per Mcfe in 2006 compared to $2.00 per Mcfe for 2005. The increase stems from higher costs for reserves added during 2005 and 2006. Service costs to drill and complete wells have been increasing. That along with certain high cost dry holes in our Gulf Coast and Gulf of Mexico regions have influenced our per unit rates, even though overall drilling success rates have remained high.
Asset retirement obligation increased $3.2 million from $3.8 million in 2005 to $7.0 million in 2006. The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Oil and gas producing companies incur this liability which includes costs related to the plugging of wells, the removal of facilities and equipment, and site restorations, upon acquiring or drilling a successful well. Since 2005 the liability has increased $28.0 million from $101.1 million in 2005 to $129.1 million in 2006.
Production costs rose $72.7 million from $104.1 million ($.81 per Mcfe) in 2005 to $176.8 million ($1.08 per Mcfe) in 2006. The higher costs in 2006 resulted from higher field operating expenses from an expanded number and type of properties, higher maintenance costs and increased insurance costs due to past hurricanes. Additional workover/maintenance projects were implemented in 2006, totaling $28.9 million ($0.18 per Mcfe) compared to $11.6 million ($0.09 per Mcfe) in 2005.
Transportation costs increased from $15.3 million in 2005 to $21.2 million in 2006. The increase is the result of higher sales volumes and that expiring contracts are being renewed with increased current market rates.
Taxes other than income were $17.7 million greater, rising from $73.4 million in 2005 to $91.1 million in 2006. The increase between periods resulted from increases in oil and gas sales stemming from higher production volumes and oil prices.
General and administrative (G&A) expenses increased $8.8 million from $33.5 million in 2005 to $42.3 million in 2006. The increase between periods is due to an expansion of staff and higher employee-benefit costs.
Stock compensation expense consists of non-cash charges resulting from the issuance of restricted stock, restricted stock units and stock option awards. Stock compensation increased from $5.0 million in 2005 to $8.2 million in 2006.
Other operating, net decreased from $15.9 million in 2005 to $2.1 million in 2006. These expenses in 2005 consisted primarily of $9.4 million of costs associated with the Magnum Hunter merger. Of this $9.4 million, $3.6 million is due to the acceleration of vesting of stock options and restricted stock units resulting from change of control provisions under our stock incentive plan becoming effective due to the Magnum Hunter merger. The remaining $5.8 million consists of $4.3 million of general integration costs, $1.0 million for retention bonuses, and $0.5 million of related financing costs. In addition to merger costs, 2005 expenses also included a mediated $6.5 million litigation settlement pertaining to post-production deductions on properties operated by Cimarex. Other expense for 2006 included $2.1 million of litigation settlements pertaining primarily to resolution of oil and gas property title issues.
Another component of change in total operating costs and expenses for 2006 and 2005 was the gain and loss on derivative instruments. In connection with the Magnum Hunter merger, Cimarex recognized a $39.3 million liability associated with Magnum Hunter's existing commodity derivatives at the merger date (June 7, 2005). These derivative instruments were not designated for hedge accounting treatment. As a result, Cimarex recognized net gains for the year 2006 of $23.0 million and net losses for 2005 of $67.8 million, respectively. Activity includes both non-cash mark-to-market derivative gains and losses as well as cash settlements. Cash payments related to these contracts that settled in 2006 and 2005 totaled $19.0 million and $64.3 million, respectively. These contracts expired December 31, 2006.
Other income and expense
Net interest expense in 2006 totaled $1.9 million, comprised of $29.9 million of interest expense, offset by $24.2 million of capitalized interest and $3.8 million of amortization of fair value of debt. We capitalize interest related to borrowings associated with costs incurred to bring properties under development, not being amortized, to their intended use. This has decreased from $5.8 million of net interest expense in 2005, which was comprised of $19.6 million of interest expense, offset by $11.7 million of capitalized interest and $2.1 million of amortization of fair value of debt. The increases in the components of the 2006 net interest amount results from amounts associated with the debt assumed in the Magnum Hunter merger and an increase in costs incurred to bring properties under development, not being amortized, to their intended use. Prior to the Magnum Hunter merger, Cimarex had no outstanding debt.
Other, net increased from $12.5 million of income in 2005 to $28.6 million of income in 2006. The components of this other income net of other expenses consist of miscellaneous items that will vary from period to period, including income and loss in equity investees. The large increase from 2005 to 2006 is due primarily to distribution received in excess of our investment in the Company's limited partnership affiliates, Teal Hunter L.P. and Mallard Hunter L.P. These partnerships sold all of their interest in oil and gas properties during 2006. Cimarex's investments in these partnerships had been reflected in other assets, net. Net sales consideration received via distributions from the partnerships equaled $59.3 million, which are in excess of the Company's investment balance in the partnerships. The excess distributions of $19.8 million have been recorded in other income for 2006.
Income tax expense
Income tax expense totaled $198.6 million for 2006 versus $188.1 million for 2005. Tax expense equaled a combined federal and state effective income tax rate of 36.5% and 36.4% in 2006 and 2005, respectively. Included in the 2006 income tax expense of $198.6 million is a current benefit of $21.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The world's economy is being driven by the economic downturn and continuing credit crisis. These constraints, in turn, have pulled down energy prices because of slowing demand. If the capital and credit markets continue to experience volatility or prices continue to decline, and the availability of funds remains limited, we, and third parties with whom we do business, will continue to be negatively impacted. This could lead to losses associated with uncollectible receivables as well as affect our ability to advance our strategic plans as currently anticipated.
To adapt to current conditions and to prepare for an eventual economic upswing, we have focused on maintaining liquidity, promoting operational efficiency, and expanding long-term reserves through focused drilling projects and potential acquisitions. Historically our exploration and development expenditures and dividend payments have generally been funded by cash flow provided by operating activities ("operating cash flow"). With the intent to continue to operate within our operating cash flows, we have significantly scaled back our planned 2009 drilling program, focusing on our highest rate of return projects which are primarily in our Woodford Shale position in the Anadarko Basin of Western Oklahoma and our south Texas Yegua and Cook Mountain play. With this reduced capital program, we believe that our operating cash flow and other capital resources will be adequate to fund our planned 2009 capital expenditures.
Because our 2009 exploration program has been reduced, we may not be able to replace the reserves in 2009.
Sources and Uses of Cash
Our primary sources of liquidity and capital resources are cash flow from operating activities, occasional property sales, borrowings under our bank credit facility and public offerings of debt securities. Our primary uses of funds are exploration and development, property acquisitions, common stock dividends and occasional share repurchases.
ExplorationThe following table presents the sources and development expenditures and dividend payments have generally been funded by cash flow provided by operating activities. We believe thatuses of our cash flowand cash equivalents from operating activities and other2006 to 2008. The table presents capital resources will be adequateexpenditures on a cash basis; these amounts differ from the amounts of capital expenditures (including accruals) that are referred to fund our planned 2008 capital expenditures.elsewhere in this document.
| | For the Years Ended December 31. | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
| | (in thousands) | ||||||||||
Sources of cash and cash equivalents: | |||||||||||
Operating cash flow | $ | 1,367,488 | $ | 994,680 | $ | 878,419 | |||||
Proceeds from sale of assets | 39,096 | 177,195 | 10,705 | ||||||||
Net increase in bank debt | 220,000 | — | 95,000 | ||||||||
Distributions from equity investees | 39 | 3,015 | 59,823 | ||||||||
Sales of short term investments | 10,679 | 1,424 | — | ||||||||
Increase in other long-term debt | — | 350,000 | — | ||||||||
Proceeds from issuance of common stock and other | 13,141 | 9,886 | 4,311 | ||||||||
Total sources of cash and cash equivalents | 1,650,443 | 1,536,200 | 1,048,258 | ||||||||
Uses of cash and cash equivalents: | |||||||||||
Oil and gas expenditures | (1,594,775 | ) | (1,021,456 | ) | (1,054,581 | ) | |||||
Merger related costs | — | — | (439 | ) | |||||||
Purchase of short-term investments | — | (16,000 | ) | — | |||||||
Other expenditures | (51,757 | ) | (19,574 | ) | (25,310 | ) | |||||
Net decrease in bank debt | — | (95,000 | ) | — | |||||||
Decrease in other long-term debt | (105,550 | ) | (204,360 | ) | — | ||||||
Financing costs incurred | (158 | ) | (6,113 | ) | (153 | ) | |||||
Treasury stock acquired and retired | — | (42,266 | ) | (11,016 | ) | ||||||
Dividends paid | (20,040 | ) | (13,429 | ) | (13,358 | ) | |||||
Total uses of cash and cash equivalents | (1,772,280 | ) | (1,418,198 | ) | (1,104,857 | ) | |||||
Net increase (decrease) in cash and cash equivalents | $ | (121,837 | ) | $ | 118,002 | $ | (56,599 | ) | |||
Cash and cash equivalents at end of year | $ | 1,213 | $ | 123,050 | $ | 5,048 | |||||
Analysis of Cash Flow Changes (See the Consolidated Statements of Cash Flows)
Cash flow provided by operating activities for 20072008 was $994.7$1,367.5 million, compared to $994.7 million for 2007 and $878.4 million for 20062006. The increase from 2007 to 2008 resulted primarily from higher gas prices, higher oil prices and $704.7 million for 2005.increased production. The increase from 2006 to 2007 resulted primarily from higher gas prices, higherhigh oil prices and increased oil production. The increase from 2005 to 2006 resulted primarily from higher production and from higher oil prices. Our production volumes were higher in 2006 versus 2005 because we owned the Magnum Hunter properties for a full year versus seven months in 2005.
Cash flow used in investing activities for 20072008 was $1.6 billion, compared to $875.4 million compared tofor 2007 and $1.0 billion for 2006 and $497.5 million for 2005.2006. Changes in the cash flow used in investing activities are generally the result of changes in our exploration and development programs, acquisitions and property sales. The increase from 2007 to 2008 was mostly caused by increased oil and gas expenditures resulting from a more active drilling
program. In addition, we had $138.1 million less proceeds from sales of assets in 2008 when compared to 2007. The decrease from 2006 to 2007 was mostly caused by increased proceeds from property sales. We sold $177 million of oil and gas properties in 2007 versus $4.5 million in 2006. The increase
Net cash flow provided from 2005financing activities in 2008 was $107.4 million versus $1.3 million used in 2007. In 2008 we had borrowings under our credit facility of $220.0 million and $13.1 million in proceeds from issuance of common stock and other. We used $105.6 million of the borrowings under our credit facility to 2006 resulted primarily from an increaserepurchase a portion of our convertible notes in explorationDecember and development expenditures.we made $20.0 million in dividend payments during the year.
Net cash flow used in financing activities in 2007 was $1.3 million versus $74.8 million provided in 2006. Two significant uses were for share repurchases of $42.3 million and $13.4 million for dividends. Proceeds from our May 2007 issuance of $350 million of ten-year, 7.125% senior unsecured notes were used to redeem our old 9.6% notes and reduce outstanding borrowings under our credit facility.
Cash flow provided by financing activities in 2006 was $74.8 million versus $261.4 million used in 2005. The cash provided by financing activities in 2006 resulted primarily from the borrowing of $95.0 million on our credit facility. The cash used in financing activities in 2005 resulted primarily from the payment of debt (including $3.5 million of capital lease debt) assumed in the Magnum Hunter acquisition, offset by proceeds from issuance of common stock from stock option exercises.
Capital Expenditures
The following table sets forth certain historical information regarding capitalized expenditures by us in our oil and gas acquisition, exploration, and development activities (in thousands):
| | | For Years Ended December 31, | | For Years Ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | ||||||||||||||
| Acquisitions: | Acquisitions: | Acquisitions: | ||||||||||||||||||||
| Proved | $ | 17,334 | $ | 25,970 | $ | 1,523,356 | Proved | $ | 6,618 | $ | 17,334 | $ | 25,970 | |||||||||
| Unproved | 23,580 | 513 | 297,692 | Unproved | 175,777 | 23,580 | 513 | |||||||||||||||
| 40,914 | 26,483 | 1,821,048 | 182,395 | 40,914 | 26,483 | |||||||||||||||||
| Exploration and development: | Exploration and development: | Exploration and development: | ||||||||||||||||||||
| Land & Seismic | 98,162 | 104,527 | 68,703 | Land & Seismic | 157,403 | 98,162 | 104,527 | |||||||||||||||
| Exploration | 217,696 | 251,717 | 197,459 | Exploration | 245,538 | 217,696 | 251,717 | |||||||||||||||
| Development | 666,662 | 691,946 | 375,616 | Development | 1,035,442 | 666,662 | 691,946 | |||||||||||||||
| 982,520 | 1,048,190 | 641,778 | 1,438,383 | 982,520 | 1,048,190 | |||||||||||||||||
Property sales | Property sales | (176,659 | ) | (4,459 | ) | (149,262 | ) | Property sales | (38,093 | ) | (176,659 | ) | (4,459 | ) | ||||||||
| $ | 846,775 | $ | 1,070,214 | $ | 2,313,564 | $ | 1,582,685 | $ | 846,775 | $ | 1,070,214 | |||||||||||
Property2008 property acquisitions in 2007 and 2006 primarily relate to various producing properties and exploratory nonproducing leases. The acquisitionsleases that we purchased in 2005 relate primarily toOctober. This $180.9 million acquisition expanded our Woodford Shale position in the purchaseAnadarko Basin of Magnum Hunter.western Oklahoma by 38,000 net acres.
We have experiencedmake significant serviceexpenditures to find, acquire, and material cost inflation over the past three years. We are starting to see a flattening of drillingdevelop oil and services costs and expect to see this remain dependent upon commodity prices.natural gas reserves. Our exploration and development expenditures decreased six percentincreased 46% in 20072008 compared to 2006.2007. The decreaseincrease in 20072008 resulted primarily from a decreaseincreases in exploration activity in the Gulf of Mexico.our Mid-continent and Permian regions.
ExplorationWe have reduced our planned capital program for 2009 to approximately $500 million due to the expectation of continued low oil and developmentgas prices. If these prices drop even further, or if operating difficulties are encountered that result in cash flow from operations being less than expected, we may have to reduce our capital expenditures increased 63% in 2006 compared to 2005. The increase in 2006 resulted from a larger exploration and development program. We drilled 558 gross wells in 2006 compared to 382 gross wells in 2005.even more.
We have made, and will continue to make, expenditures to comply with environmental and safety regulations and requirements. These costs are considered a normal recurring cost of our ongoing operations and not an extraordinary cost of compliance. We do not anticipate that we will be required to expend amounts that will have a material adverse effect on our financial position or operations, nor are we aware of any pending regulatory changes that would have a material impact.
Our 20072008 exploration and development drilling program is discussed inExploration and Development Activity Overview under Item 1 of this Form 10-K.
Financial Condition
Future cash flows and the availability of financing will be subject to a number of variables, such as our success in locating and producing new reserves, the level of production from existing wells and prices of oil and natural gas. To meet our capital and liquidity requirements, we rely on certain resources, including cash flows from operating activities, access to capital markets, and bank borrowings. While we attempt to operate within forecasted cash flows from operations, we do periodically access our credit facility to finance our working capital needs and growth. Recent adverse developments in financial and credit markets have made it more difficult and more expensive to access the short-term capital market to meet our liquidity needs. Due to the tightened credit markets and significantly lower commodity prices we have planned to scale back our 2009 capital program by approximately 60% in comparison to 2008. With these planned reductions and amounts available to us under our existing credit facility we believe we will be able to continue to meet our needs for working capital, construction expenditures, debt servicing and dividend payments.
During the year our total assets, net oil and gas assets, net income and stockholders' equity were reduced by a non-cash impairment of oil and gas properties in the amount of $2.2 billion ($1.4 billion after tax). Total assets increaseddecreased by $0.5$1.2 billion in 20072008 from $4.8$5.4 billion at the beginning of the year to reach $5.3$4.2 billion by year end. Our net oil and gas assets increaseddecreased by $0.4 billion, primarily because of our drilling program, and our$1.2 billion. Our cash position increaseddecreased by $118$121.8 million primarily as a result of property sales that closedour Woodford Shale acquisition in October and a decrease in commodity prices during December.the fourth quarter. As of December 31, 2007,2008, stockholders' equity totaled $3.3$2.3 billion, updown from $3.0$3.3 billion at December 31, 2006.2007. The increasedecrease resulted primarily from 2007a 2008 net incomeloss of $346.5$901.7 million.
Dividends
In December 2005, the Board of Directors declared the Company's first quarterly cash dividend of $.04 per share payable to shareholders. A $.04 per share dividend has been authorized in every quarter since then. On December 12, 2007 the Board of Directors increased the regular cash dividend on our common stock from $0.04 to $0.06 per common share.
Common Stock Repurchase Program
In December 2005, the Board of Directors authorized the repurchase of up to four million shares of common stock. During 2007 we repurchased a total of 1,114,200 shares at an average purchase price of $37.93. Cumulative purchases through December 31, 2007 total 1,364,300 shares at an average price of $39.05. No purchases were made in 2008.
Working Capital
Working capital increased $77.8decreased $94.7 million from year-end 20062007 to $140.0$45.4 million at year-end 2007.2008. Working capital increaseddecreased primarily because of the following.following:
These working capital increasesdecreases were partiallymostly offset by:
Our receivables are a major component of our working capital and are made up of a diverse group of companies including major energy companies, pipeline companies, local distribution companies and end-users in various industries. The collection of receivables during the period presented has been timely. Historically, losses associated with uncollectible receivables have not been significant.
Financing
Debt at December 31, 20072008 and 20062007 consisted of the following (in thousands):
| | December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2008 | 2007 | ||||||||||
| Bank debt | $ | — | $ | 95,000 | $ | 220,000 | $ | — | ||||||
| 9.6% Notes due 2012 (face value $195,000) | — | 210,746 | (1) | |||||||||||
| 7.125% Notes due 2017 | 350,000 | — | 350,000 | 350,000 | ||||||||||
| Floating rate convertible notes due 2023 (face value $125,000) | 137,159 | (2) | 137,921 | (2) | ||||||||||
Floating rate convertible notes due 2023 (face value $19,450 and $125,000, respectively) | 21,223 | 137,159 | (1) | |||||||||||
| Total long-term debt | $ | 487,159 | $ | 443,667 | $ | 591,223 | $ | 487,159 | ||||||
Bank Debt
OurWe have a $1.0 billion senior secured revolving credit facility provides for("credit facility") with a syndicate of banks that had a borrowing base of $1.0 billion as of December 31, 2008. At our option we set the banks' lending commitment under the credit facility at $500 millionmillion. The borrowing base is determined at the discretion of long-term committed credit.the lenders, based on the collateral value of our proved reserves and is subject to potential special and regular semi-annual redeterminations.
The credit facility is scheduled to maturematures on July 1, 2010 and is secured by mortgages on certain oil and gas properties and the stock of certain wholly-owned operating subsidiaries. Amounts outstanding bear interest at our election at either a floating London Interbank Offered Rate (LIBOR) plus 1%-1.75% or at the JP Morgan Chase Bank prime rate plus 0%-0.5%. At December 31, 2007,2008, there were nowas $220 million of borrowings outstanding borrowings under the revolving credit facility.facility at a weighted average interest rate of approximately 1.66%. We also had outstanding letters of credit for approximately $2.7outstanding of $2.8 million posted against the borrowing base, leaving an unused borrowing amountavailability of approximately $497.3 million.$277.2 million at December 31, 2008.
The credit facility contains various covenants and restrictive provisions which may limit our ability to incur additional indebtedness, make investments or loans and create liens. The credit agreement contains bothrequires us to maintain a current ratio (current assets to current liabilities, as defined) greater than 1 to 1 and a leverage ratio (indebtedness to EBITDA, as defined) not to exceed 3.0 to 1. The current ratio, as defined by the credit agreement, at December 31, 2008, was 1.69 to 1 and our leverage ratio was 0.42 to 1. As of December 31, 2008, we were in compliance with all of the financial and non-financial covenants, including restricting our cash investments to "Cash Equivalent Investments" as defined under the agreement.covenants.
We noted in early December 2007 that an investment of $16 million in a money market fund was not in compliancehave initiated discussions with our covenants. We then obtained waivers from our lenders for the related investments and amended the definitionsyndicate of "Cash Equivalent Investments". We are in compliancebanks regarding a new three-year senior secured revolving credit facility with the amended covenants and do not view them as materially restrictive.
The 9.6% notes assumedintent to increase the banks' lending commitment from $500 million to $800 million. In addition, we may consider a high-yield bond offering in the Magnum Hunter merger were redeemed on May 18, 2007 at a redemption pricefuture, if appropriate.
7.125% Notes due 2017
Also inIn May, 2007, we soldissued $350 million of new 7.125% senior unsecured notes that will mature May 1, 2017. The notes were sold to the public2017 at par. Net proceeds from the sale were used to redeem the 9.6% notes and reduce borrowings under our credit facility. Interest on the new notes is payable May 1 and November 1 of each year. The first interest payment was made on November 1, 2007.notes are governed by an indenture containing covenants that could limit our ability to incur additional indebtedness; pay dividends or repurchase our common stock; make investments and other restricted payments; incur liens; enter into sale/leaseback transactions; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets.
The notes are redeemable at our option, in whole or in part, at any time on and after May 1, 2012 at the following redemption prices (expressed as percentages of the principal amount) plus accrued interest, if any, thereon to the date of redemption.
Year | Percentage | |||
|---|---|---|---|---|
2012 | 103.6 | % | ||
2013 | 102.4 | % | ||
2014 | 101.2 | % | ||
2015 and thereafter | 100.0 | % | ||
At any time prior to May 1, 2010, we may redeem up to 35% of the original principal amount of the notes with the proceeds of certain equity offerings of our shares of common stock at a redemption price of 107.125% of the principal amount of the notes, together with accrued and unpaid interest, if any, to the date of redemption.
At any time prior to May 1, 2012, we may also redeem all, but not part, of the notes at a price equal toof 100% of the principal amount of the notes plus accrued and unpaid interest plus a "make-whole" premium.
If a specified change of control occurs, subject to certain conditions, we must make an offer to purchase the notes at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to the date of the purchase.
Floating rate convertible notes due 2023
The floating rate convertible senior notes were assumed in the Magnum Hunter merger and mature on December 15, 2023. The notes are senior unsecured obligations and bear interest at an annual rate equal to three-monthof three month LIBOR, reset quarterly. On December 31, 2007,2008, the interest rate was 4.99%2.0%.
HoldersThe holders as of December 15, 2008, had the right to require us to repurchase all or a portion of the notes at a price of 100% of the principal amount (plus accrued interest). As of December 15, 2008, holders with principal of $105.550 million submitted their notes for repurchase leaving $19.450 million still outstanding. We repurchased the $105.550 million in notes with borrowings under our credit facility. The remaining notes have future repurchase dates as of December 15, 2013, and 2018. We have the right at any time to redeem some or all of the notes still outstanding at a redemption price of 100% of the principal amount (plus accrued interest).
In addition to the repurchase rights, holders of the convertible notes may surrender their notes for conversion into a combination of cash and shares of our common stock upon the occurrence of certain circumstances, including if the price of our common stock has been trading above the fixed conversion price of $28.99$28.59 per share. On December 31, 2007,2008, the closing price of our common stock traded on the New York Stock Exchange was $42.53. There is not$26.78.
If a specified change of control occurs, subject to certain conditions, we must make an observable market for the notes. Based on an average common stock price of $42.53, management estimates the fair value of the notes at December 31, 2007 was approximately $183.4 million (or $1,467 per bond).
In additionoffer to the holders' right to redeem the notes if our common stock price is above the conversion price, the holders also have the right to require us to repurchase all or a portion ofpurchase the notes at a repurchasepurchase price equal to 100%of 101% of the principal amount (plus accrued interest) on December 15, 2008, 2013, and 2018. The indenture agreement also provides us with an option to redeem some or all of the notes, at a redemption price equalplus accrued and unpaid interest to 100%the date of the principal amount and shares for the valuepurchase.
Table of the convertible feature (plus accrued interest) anytime after December 22, 2008.Contents
Contractual Obligations and Material Commitments
At December 31, 2007,2008, we had contractual obligations and material commitments as follows:
| | Payments Due by Period | Payments Due by Period | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual obligations | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | ||||||||||||||||||||||
| | (In thousands) | (In thousands) | ||||||||||||||||||||||||||||||
| Long-term debt(1) | $ | 475,000 | $ | — | $ | — | $ | — | $ | 475,000 | $ | 589,450 | $ | 220,000 | $ | — | $ | — | $ | 369,450 | ||||||||||||
| Fixed-Rate interest payments(1) | 236,906 | 24,938 | 49,875 | 49,875 | 112,218 | 211,969 | 24,938 | 49,875 | 49,875 | 87,281 | ||||||||||||||||||||||
| Operating leases | 32,491 | 5,855 | 10,778 | 9,585 | 6,273 | 28,233 | 5,681 | 10,814 | 9,632 | 2,106 | ||||||||||||||||||||||
| Drilling commitments | 98,153 | 98,153 | — | — | — | |||||||||||||||||||||||||||
| Gas processing facility(2) | 57,871 | — | 57,871 | — | — | |||||||||||||||||||||||||||
Drilling commitments(2) | 187,412 | 187,412 | — | — | — | |||||||||||||||||||||||||||
Inventory commitments(3) | 81,929 | 81,929 | — | — | — | |||||||||||||||||||||||||||
Gas processing facility(4) | 108,611 | 38,887 | 42,348 | 27,376 | — | |||||||||||||||||||||||||||
| Asset retirement obligation | 113,054 | 7,270 | — | (3) | — | (3) | — | (3) | 139,948 | 14,610 | — | (5) | — | (5) | — | (5) | ||||||||||||||||
| Other liabilities | 6,828 | 37 | 65 | 56 | 6,670 | |||||||||||||||||||||||||||
Other liabilities(6) | 51,216 | 8,823 | 17,636 | 17,636 | 7,121 | |||||||||||||||||||||||||||
At December 31, 2007,2008, we had a firm sales contractcontracts to deliver approximately one8.5 Bcf of natural gas over the next threetwelve months. If this gas is not delivered, our financial commitment would be approximately $2.9$40 million. This commitment may fluctuate due to either price volatility or volumes delivered. However, we do not anticipate that a financial commitment will be due.
In connection with a gas gathering and processing agreement, we have commitments to deliver 59.4 Bcf of gas over the next five years. If no gas was delivered, the maximum amount that would be payable under these commitments would be approximately $45.1 million.
We have other various delivery commitments in the normal course of business, none of which are individually material. In aggregate, these commitments have a maximum amount that would be payable, if no gas is delivered, of approximately $3.1$5.9 million.
All of the noted commitments were routine and were made in the normal course of our business.
Based on current commodity prices and anticipated levels of production, we believe that the estimated net cash generated from operations, coupled with the cash on hand and amounts available under our
existing bank credit facility will be adequate to meet future liquidity needs, including satisfying our financial obligations and funding our operations and planned exploration and development activities.
20082009 Outlook
Our exploration and development expenditures program for 20082009 are projected to range from $1.1 billion$400 million to $1.3 billion.$600 million. Though there are a variety of factors that could curtail, delay or even cancel some of our planned operations, we believe our projected program is likely to occur. The majority of projects are in hand, drilling rigs are being scheduled, and the historical results of our drilling efforts warrant pursuit of the projects. Approximately 43% of the expenditures will be in the Mid-Continent area, 38% in the Permian Basin, 16% in the Gulf Coast area, and 3% in our other areas.
Production estimates for 20082009 range from 465440 to 485460 MMcfe per day. Revenues from production will be dependent not only on the level of oil and gas actually produced, but also the prices that will be realized. During 2007,2008, our realized prices averaged $7.05$8.43 per Mcf of gas and $69.71$96.03 per barrel of oil. Prices can be very volatile and the possibility of 20082009 realized prices being different than they were in 20072008 is high.
Costs of operationsCertain expenses for 2009 on a per Mcfe basis for 2008 are currently estimated as follows:
| | 2008 | 2007 | ||||
|---|---|---|---|---|---|---|
| Production expense | $1.20 - $1.30 | $ | 1.22 | |||
| Transportation expense | 0.16 - 0.18 | 0.16 | ||||
| DD&A and Asset retirement obligation | 2.85 - 3.00 | 2.86 | ||||
| General and Administrative | 0.28 - 0.32 | 0.30 | ||||
| Production taxes (% of oil and gas revenue) | 6.5% - 7.5 | % | 6.9 | % | ||
| 2009 | ||||
|---|---|---|---|---|
Production expense | $ | 1.20 - $1.30 | ||
Transportation expense | 0.17 - 0.22 | |||
DD&A and Asset retirement obligation | 1.85 - 2.10 | |||
General and Administrative | 0.27 - 0.30 | |||
Production taxes (% of oil and gas revenue) | 7.0% - 8.0% | |||
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operation are based upon Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A complete list of our significant accounting policies are described in Note 43 to our Consolidated Financial Statements included in this report. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following to be our most critical accounting policies and estimates that involve significant judgments and discuss the selection and development of these policies and estimates with our Audit Committee.
Oil and Gas Reserves
The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances
in available data for various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. Estimations of proved undeveloped reserves can be subject
to an even greater possibility of revision. At year-end, 2118 percent of our total proved reserves are categorized as proved undeveloped. Of these proved undeveloped reserves, 6289 percent are related to a project in Wyoming. Our reserve engineers review and revise our reserve estimates annually. Additionally, we annually engage an independent petroleum engineering firm to review our proved reserve estimates associated with at least 80% of the discounted future net cash flows before income taxes.
We use the units-of-production method to amortize our oil and gas properties. For depletion purposes, reserve quantities are adjusted at interim quarterly periods for the estimated impact of additions, dispositions and price changes. Changes in reserve quantities cause corresponding changes in depletion expense in periods subsequent to the quantity revision. It is also possible that a full cost ceiling limitation charge could occur in the period of the revision.
The following table presents information regarding reserve revisions largely resulting from items we do not control, such as revisions due to price, and other revisions resulting from better information due to production history, well performance and changes in production costs.
| | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||
| | Bcfe Change | Percent of total Reserves | Bcfe Change | Percent of total Reserves | Bcfe Change | Percent of total Reserves | Bcfe Change | Percent of total Reserves | Bcfe Change | Percent of total Reserves | Bcfe Change | Percent of total Reserves | ||||||||||||||||||||
| Revisions resulting from price changes | 35.5 | 2.45 | % | (40.1 | ) | (2.88 | )% | 13.1 | 2.92 | % | (145.2 | ) | (9.86 | )% | 35.5 | 2.45 | % | (40.1 | ) | (2.88 | )% | |||||||||||
| Other changes in estimates | 22.0 | 1.52 | % | 3.5 | 0.25 | % | (1.9 | ) | (0.42 | %) | (11.6 | ) | (0.79 | )% | 22.0 | 1.52 | % | 3.5 | 0.25 | % | ||||||||||||
| Total | 57.5 | 3.97 | % | (36.6 | ) | (2.63 | )% | 11.2 | 2.50 | % | (156.8 | ) | (10.65 | )% | 57.5 | 3.97 | % | (36.6 | ) | (2.63 | )% | |||||||||||
Non-price related revisions added 23.613.9 Bcfe over the three-year period 2005-2007, comprising 1.4 percent of total reserves added over2006-2008. Over the same period of 1,669 Bcfe. An 8.5we have seen a 149.8 Bcfe increase resulteddecrease resulting from higherlower prices. See Note 17,16, Supplemental Oil and Gas Disclosures for additional reserve data.
Full Cost Accounting
We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. In addition, gains or losses on the sale or other disposition of oil and gas properties are not recognized in earnings unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to our full cost pool.
At the end of each quarter, we make a full cost ceiling limitation calculation, whereby net capitalized costs related to proved properties less associated deferred income taxes may not exceed anthe amount equal toof the present value discounted at ten percent of estimated future net revenues from proved reserves less estimated future production and development costs and related income tax expense. Future net revenues used in the calculation of the full cost ceiling limitation are determined based on current oil and gas prices and are adjusted for designated cash flow hedges. Changes in proved reserve estimates (whether based upon quantity revisions or oil and gas prices) will cause corresponding changes to the amount of full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be charged to expense. However, if commodity prices increase after period end and before issuance of the financial
statements, these higher commodity prices willmay be used to determine if the capital costs are in fact impaired as of the end of the period. Any recorded impairment of oil and gas properties is not reversible at a later date.
Due to a significant decrease in period end commodity prices, at September 30, 2008, our ceiling limitation calculation resulted in excess capitalized costs of $657.1 million ($417.4 million, net of tax), for which we recorded a non-cash impairment of oil and gas properties. As a result of further declines in natural gas and oil prices during the fourth quarter of 2008, we recorded an additional non-cash impairment of oil and gas properties. Based on prices at December 31, 2008, our ceiling limitation calculation resulted in excess capitalized costs of $1.6 billion ($1.0 billion after tax). The Company's quarterly and annual ceiling test is primarily impacted by period end commodity prices, reserve quantities added and produced, overall exploration and development costs and depletion expense. Holding all factors constant other than commodity prices, a 10% decline in prices as of December 31, 2008 would have resulted in an additional ceiling test impairment of approximately 12% of our full cost pool. Also, goodwill could be potentially impaired. Changes in actual reserve quantities added and produced along with our actual overall exploration and development costs will impact the Company's actual ceiling test calculation and impairment analyses.
Goodwill
We assessAt December 31, 2008, we had $691.4 million of goodwill recorded in conjunction with past business combinations. Goodwill is subject to annual reviews for impairment at least annually, and more often if volatility inbased on a two step accounting test. The first step is to compare the estimated fair value of the Company with the recorded net book value (including the goodwill), after giving effect to all other period impairments, including the impairment of oil and gas prices or other circumstances warrant. Theproperties from the full cost pool ceiling limitation calculation. If the estimated fair value is higher than the recorded net book value, no impairment assessment requires usis deemed to make estimates regardingexist and no further testing is required. If, however, the estimated fair value is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, a hypothetical acquisition value of the Company is computed utilizing purchase business combination accounting rules.
We perform our annual goodwill impairment review in the fourth quarter of each year. During the fourth quarter of 2008, there were severe disruptions in the credit markets and reductions in global economic activity which had significant adverse impacts on stock markets and oil-and-gas-related commodity prices. Management must apply judgment in determining the estimated fair value of the Company for purposes of performing the annual goodwill impairment test. As of December 31, 2008, the book value per share of our common stock exceeded the market price by less than $2 per share. Management does not consider the market value of our shares to be an accurate reflection of our net assets, for impairment purposes. To estimate the fair value of goodwill. Thethe Company, we used all available information, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets. This estimated fair value differs significantly from the valuation used in the ceiling limitation calculation, which requires the use of prices and costs in effect at year end, discounted at 10 percent. The ceiling calculation is based on numerous factors, including future net cash flowsnot intended to be indicative of our estimates of proved reserves as well asfair value.
In estimating the fair value of our nonproducing leasesoil and othergas properties, we used projected future prices based on the NYMEX strip index at December 31, 2008 (adjusted for estimated delivery point price differentials). Based on our current exploration plans, we included estimated future cash flows from development of our unproved properties and applied a discount rate of 15% to 20%, depending on the reserve category. This resulted in a slight excess of fair value over the carrying value of our net assets and liabilities. Ifat year end. Should lower prices or quantities result in the future, or higher discount rates be necessary, the carrying value of our carrying amount for goodwill exceeds itsnet assets may exceed the estimated fair value, then a measurementresulting in an impairment of the loss must be performed and any deficiency is recorded as an impairment. To date, no related impairment has been recorded but we cannot predict when or if goodwill may be impaired in the future. Impairment charges may occur if we are unable to replace the valuegoodwill.
DerivativesContents
We determine the fair value of derivative contracts based on the stated contract prices and current and projected market prices at the determination date discounted to reflect the time value of money until settlement. The accounting treatment for the changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge for accounting treatment purposes. Realized and unrealized gains and losses on derivatives that are not designated as hedges are recognized currently in costs and expenses associated with operating income in our consolidated statements of operations. For derivatives designated as cash flow hedges, changes in the fair value, to the extent the hedge is effective, are recognized in other comprehensive income until the hedged item is settled. Changes in the fair value of the hedge resulting from ineffectiveness are recognized currently as unrealized gains or losses in other income and expense in the consolidated statements of operations. Gains and losses upon settlement of the cash flow hedges will be recognized in gas revenues in the period the contracts are settled.
Depending on changes in oil and gas futures markets and management's view of underlying oil and natural gas supply and demand trends, we may increase or decrease our current hedging positions. See Note 5 to the Consolidated Financial Statements and Item 7A of this report for additional information regarding our derivative instruments.
Contingencies
A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental and other contingencies and periodically determine when we should record losses for these items based on information available to us.
In January 2009, the Tulsa County District Court issued a judgment in the H.B. Krug, et al versus Helmerich & Payne, Inc. ("H&P") case. This lawsuit was originally filed in 1998 and addressed H&P's conduct pertaining to a 1989 take-or-pay settlement, along with potential drainage issues and other related matters. Damages of $6.9 million plus $119.5 million for disgorgement of H&P's estimated potential compounded profit since 1989, resulting from the noted damages, were awarded to plaintiff royalty owners, for a total of $126.4 million. This amount was subsequently adjusted by the court to a total of $119.6 million. Pursuant to the 2002 spin-off transaction to shareholders of H&P by which Cimarex became a publicly-traded entity, Cimarex assumed the assets and liabilities of H&P's exploration and production business. We periodically assess the probability of estimable amounts related to litigation matters, as required by Financial Accounting Standard No. 5 (Accounting for Contingencies) and adjust our accruals accordingly. In September 2008, based on the available information at the time, we accrued an estimated litigation expense of $12 million for both damages and probable disgorgement. The higher disgorgement award could not be reasonably estimated until the final judgment in January 2009. We therefore accrued an additional $107.6 million, bringing the total accrued litigation expense for the year ended December 31, 2008 to $119.6 million for this lawsuit. We have appealed the District Court's judgments.
In the normal course of business, we have other various litigation related matters and associated accruals. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our company.financial condition or results of operations.
Asset Retirement Obligation
Our asset retirement obligation primarily represents the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives, in accordance with applicable state laws. We determine our asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of the asset's inception, with an offsetting increase to producing properties. Periodic accretion of discount of the estimated liability is recorded as an expense in the income statement.
Our liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. For example, as we analyze actual plugging and abandonment information, we may revise our estimates of current costs, the assumed annual inflation of these costs and/or the assumed productive lives of our wells. During 2007,2008, we revised our existing estimated asset retirement obligation by $1.0$23.0 million, or approximately one16.4 percent of the asset retirement obligation at December 31, 2006,2008, due to changes in the various related attributes. Over the past three years, revisions to the estimated asset retirement obligation averaged approximately 15% of the asset retirement obligation at the beginning of the year.9.3 percent. Revisions to the asset retirement obligation are recorded with an offsetting change to producing properties, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of
assumptions and the relatively long lives of most of our wells, the costs to ultimately retire our wells may vary significantly from prior estimates.
RecentRecently Issued Accounting DevelopmentsStandards
In December 2007,May, 2008, the Financial Accounting Standards Board ("FASB") issued twoa new Statements. FASB Statement 141R,Staff Position (No. APB 14-1),Business Combinations,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at "full fair value". The Statement redefines various aspects related tothat will impact the accounting for a business combination by now applying the acquisition methodcomponents of accounting (previously referredconvertible debt that can be settled wholly or partly in cash upon conversion. The new requirements apply not only to asnew instruments, but also would be applied retrospectively to previously issued convertible instruments. The debt and equity components of the purchase method). FASB Statement 160,Noncontrolling Interests in Consolidated Financial Statements, requires noncontrolling interests (previously referred to as minority interests)instruments are to be reportedaccounted for separately. The value assigned to the debt component is the estimated value of similar debt without a conversion feature as of the issuance date, with the remaining proceeds allocated to the equity component and recorded as additional paid-in capital. The debt component is recorded at a componentdiscount and is subsequently accreted to its par value, thereby reflecting an overall market rate of equity, which changesinterest in the accounting for transactions with noncontrolling interest holders. Both Statements areincome statement. This Staff Position is effective for both new and previously issued instruments for current and comparative periods in fiscal years beginning on or after December 15, 2008, and earlierinterim periods within those years. We will adopt this in the first quarter of 2009. Upon adoption, without considering tax effects, we will retrospectively record a decrease in the book value of our Floating Rate Convertible Notes of approximately $30 million as of June 7, 2005, and a corresponding increase in additional paid-in-capital. In addition, we will record additional non-cash interest expense of approximately $1.9 million per year for 2008, 2007 and 2006.
In June, 2008, the FASB issued a new Staff Position (EITF 03-6-1),Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which holds that unvested share-based payment awards that contain non forfeitable rights to dividends or dividend equivalents are "participating securities" (as defined by EITF 03-6 as securities that may participate in undistributed earnings with common stock, whether that participation is prohibited.conditioned upon the occurrence of a specified event or not, regardless of the form of participation),and therefore should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This Staff Position is effective for financial statements issued in fiscal years beginning after December 15, 2008, and interim periods within those years. Once effective, the requirements will be applied by restating previously reported earnings per share data. We do not expectwill adopt this in the adoptionfirst quarter of either Statement to have a material impact on our financial statements.2009.
ITEM 7A. Qualitative and Quantitative Disclosures about Market RiskQUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The term "market risk" refers to the risk of loss arising from adverse changes in oil and gas prices, interest rates and value of our short-term investments. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses.
Price Fluctuations
Our major market risk is pricing applicable to our oil and gas production. The prices we receive for our production are based on prevailing market conditions and are influenced by many factors that are beyond our control. Pricing for oil and gas production has been volatile and unpredictable (See risk factors in Item 1).
Currently, we are largely accepting the volatility risk that the change in prices presents. None of our future oil and gas production is subject to hedging. With regard to our future natural gas production, based on contracts currently in place, we have 40 MMBtu per day of gas production in 2008 that is subject to zero-cost collars (with weighted average floor and ceiling prices of $7.00 to $9.90). This amount represents approximately 12% of our estimated 2008 gas production (eight percent of our total Mcfe production).
While hedging limits the downside risk of adverse price movements, it may also limit future revenues from favorable price movements. Mid-Continent gas would have to be above the $9.90 ceiling for us to have any downside risk. At December 31, 2007, the weighted average Mid-Continent prices for the 2008, our derivative contracts approximated $6.74. These contracts are not expected to have a material effect on our realized gas prices for 2008.were completed. See Note 53 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding our derivative instruments.
Interest Rate Risk
At December 31, 2007,2008, we had total debt outstanding of $487.2$591.2 million. Of this amount, $220 million is outstanding under our senior secured revolving credit facility and $350 million is senior unsecured notes that bear interest at a fixed rate of 7.125% and will mature on May 1, 2017. The credit facility matures on July 1, 2010 and amounts outstanding bear interest at our election at either a floating LIBOR rate plus 1%-1.75% or the prime rate plus 0%-0.5%. The remaining debt is $125 million of our unsecured convertible senior notes is $19.45 million (face value) that maturewhich matures on December 15, 2023. These convertible notes bear interest at an annual rate equal toof three-month LIBOR, reset quarterly. The book value of our debtrevolving credit facility and the convertible notes approximates the current fair value. The fair value of our 7.125% notes was approximately $267.8 million at December 31, 2008.
We consider our interest rate exposure to be minimal because as of December 31, 20072008 about 74%59% of our long-term debt obligations were at fixed rates. A 1% increase in the three-month LIBOR rate would increase annual interest expense by $1.25$2.4 million. This sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. See Note 54 and Note 76 to the Consolidated Financial Statements in Item 8 of this report for additional information regarding debt.
Market Value of Investments
We currently have $14.4$2.5 million invested in an asset backasset-backed securities fund. We expect to liquidate our investment in this fund within the next 12 months. A five percent change in these investments' market value would have a $0.7 million$125 thousand impact on our investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CIMAREX ENERGY CO.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
| | Page | |
|---|---|---|
Report of Independent | ||
Consolidated balance sheets as of December 31, | ||
Consolidated statements of operations for the years ended December 31, 2008, 2007 | ||
Consolidated statements of cash flows for the years ended December 31, 2008, 2007 | ||
Consolidated statements of stockholders' equity and comprehensive income (loss) for the years ended December 31, 2008, 2007 | ||
Notes to consolidated financial statements |
All other supplemental information and schedules have been omitted because they are not applicable or the information required is shown in the consolidated financial statements or related notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors
Cimarex Energy Co.:
We have audited the accompanying consolidated balance sheets of Cimarex Energy Co. and subsidiaries (the Company) as of December 31, 20072008 and 2006,2007, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2007.2008. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cimarex Energy Co. and subsidiaries as of December 31, 20072008 and 2006,2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007,2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2007,2008, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 200827, 2009 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
KPMG LLP
Denver
February 28, 200827, 2009
CIMAREX ENERGY CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
| | | December 31, | | December 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | | 2008 | 2007 | ||||||||||||||
| Assets | Assets | Assets | ||||||||||||||||||
| Current assets: | Current assets: | Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 1,213 | $ | 123,050 | ||||||||||||||||
| Cash and cash equivalents | $ | 123,050 | $ | 5,048 | Restricted cash | 502 | — | |||||||||||||
| Short-term investments | 14,391 | — | Short-term investments | 2,502 | 14,391 | |||||||||||||||
| Accounts receivable: | Accounts receivable: | |||||||||||||||||||
| Trade, net of allowance | 64,600 | 62,866 | Trade, net of allowance | 73,676 | 64,600 | |||||||||||||||
| Oil and gas sales, net of allowance | 244,299 | 189,906 | Oil and gas sales, net of allowance | 136,606 | 244,299 | |||||||||||||||
| Gas gathering, processing, and marketing, net of allowance | 6,428 | 8,083 | Gas gathering, processing, and marketing, net of allowance | 6,974 | 6,428 | |||||||||||||||
| Other | — | 45,603 | Other | 41,826 | — | |||||||||||||||
| Inventories | 29,642 | 39,397 | Inventories | 186,062 | 29,642 | |||||||||||||||
| Deferred income taxes | 5,697 | 1,498 | Deferred income taxes | 2,435 | 5,697 | |||||||||||||||
| Derivative instruments | 12,124 | 41,945 | Derivative instruments | — | 12,124 | |||||||||||||||
| Other current assets | 64,346 | 22,411 | Other current assets | 63,148 | 64,346 | |||||||||||||||
| Total current assets | 564,577 | 416,757 | Total current assets | 514,944 | 564,577 | |||||||||||||||
| Oil and gas properties at cost, using the full cost method of accounting: | Oil and gas properties at cost, using the full cost method of accounting: | Oil and gas properties at cost, using the full cost method of accounting: | ||||||||||||||||||
| Proved properties | 5,545,977 | 4,656,854 | Proved properties | 7,052,464 | 5,545,977 | |||||||||||||||
| Unproved properties and properties under development, not being amortized | 364,618 | 425,173 | Unproved properties and properties under development, not being amortized | 465,638 | 364,618 | |||||||||||||||
| 5,910,595 | 5,082,027 | 7,518,102 | 5,910,595 | |||||||||||||||||
| Less—accumulated depreciation, depletion and amortization | (1,938,863 | ) | (1,494,317 | ) | Less—accumulated depreciation, depletion and amortization | (4,709,597 | ) | (1,938,863 | ) | |||||||||||
| Net oil and gas properties | 3,971,732 | 3,587,710 | Net oil and gas properties | 2,808,505 | 3,971,732 | |||||||||||||||
| Fixed assets, less accumulated depreciation of $49,629 and $33,273 | 90,584 | 88,924 | ||||||||||||||||||
Fixed assets, less accumulated depreciation of $67,020 and $49,629 | Fixed assets, less accumulated depreciation of $67,020 and $49,629 | 119,616 | 90,584 | |||||||||||||||||
| Goodwill | Goodwill | 691,432 | 691,432 | Goodwill | 691,432 | 691,432 | ||||||||||||||
| Derivative instruments | — | 7,051 | ||||||||||||||||||
| Other assets, net | Other assets, net | 44,469 | 37,876 | Other assets, net | 30,436 | 44,469 | ||||||||||||||
| $ | 5,362,794 | $ | 4,829,750 | $ | 4,164,933 | $ | 5,362,794 | |||||||||||||
| Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | Liabilities and Stockholders' Equity | ||||||||||||||||||
| Current liabilities: | Current liabilities: | Current liabilities: | ||||||||||||||||||
| Accounts payable: | Accounts payable: | |||||||||||||||||||
| Trade | $ | 41,213 | $ | 40,735 | Trade | $ | 89,221 | $ | 41,213 | |||||||||||
| Gas gathering, processing, and marketing | 11,458 | 15,506 | Gas gathering, processing, and marketing | 11,936 | 11,458 | |||||||||||||||
| Accrued liabilities: | Accrued liabilities: | |||||||||||||||||||
| Exploration and development | 92,640 | 94,403 | Exploration and development | 111,511 | 92,640 | |||||||||||||||
| Taxes other than income | 26,109 | 25,376 | Taxes other than income | 26,473 | 26,109 | |||||||||||||||
| Other | 121,638 | 82,384 | Other | 126,010 | 121,638 | |||||||||||||||
| Revenue payable | 131,513 | 96,184 | Revenue payable | 104,438 | 131,513 | |||||||||||||||
| Total current liabilities | 424,571 | 354,588 | Total current liabilities | 469,589 | 424,571 | |||||||||||||||
| Long-term debt | Long-term debt | 487,159 | 443,667 | Long-term debt | 591,223 | 487,159 | ||||||||||||||
| Deferred income taxes | Deferred income taxes | 1,076,223 | 921,665 | Deferred income taxes | 499,634 | 1,076,223 | ||||||||||||||
| Asset retirement obligation | Asset retirement obligation | 105,784 | 124,821 | Asset retirement obligation | 125,338 | 105,784 | ||||||||||||||
| Other liabilities | Other liabilities | 9,770 | 8,866 | Other liabilities | 129,784 | 9,770 | ||||||||||||||
| Total liabilities | 2,103,507 | 1,853,607 | Total liabilities | 1,815,568 | 2,103,507 | |||||||||||||||
| Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||||
| Stockholders' equity: | Stockholders' equity: | Stockholders' equity: | ||||||||||||||||||
| Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued | — | — | Preferred stock, $0.01 par value, 15,000,000 shares authorized, no shares issued | — | — | |||||||||||||||
| Common stock, $0.01 par value, 200,000,000 shares authorized, 83,620,480 and 83,962,132 shares issued, respectively | 836 | 840 | Common stock, $0.01 par value, 200,000,000 shares authorized, 84,144,024 and 83,620,480 shares issued, respectively | 841 | 836 | |||||||||||||||
| Treasury stock, at cost, 1,078,822 shares held | (40,628 | ) | (40,628 | ) | Treasury stock, at cost, 885,392 and1,078,822 shares held, respectively | (33,344 | ) | (40,628 | ) | |||||||||||
| Paid-in capital | 1,842,690 | 1,867,448 | Paid-in capital | 1,855,825 | 1,842,690 | |||||||||||||||
| Retained earnings | 1,448,763 | 1,117,402 | Retained earnings | 526,998 | 1,448,763 | |||||||||||||||
| Accumulated other comprehensive income | 7,626 | 31,081 | Accumulated other comprehensive (loss) income | (955 | ) | 7,626 | ||||||||||||||
| 3,259,287 | 2,976,143 | 2,349,365 | 3,259,287 | |||||||||||||||||
| $ | 5,362,794 | $ | 4,829,750 | $ | 4,164,933 | $ | 5,362,794 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CIMAREX ENERGY CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | For the Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||||
Revenues: | |||||||||||||
Gas sales | $ | 1,074,705 | $ | 845,631 | $ | 810,894 | |||||||
Oil sales | 806,186 | 518,991 | 404,517 | ||||||||||
Gas gathering, processing and other | 87,757 | 60,818 | 46,135 | ||||||||||
Gas marketing, net of related costs of $141,668, $107,678 and $144,702 respectively | 1,699 | 5,073 | 3,854 | ||||||||||
| 1,970,347 | 1,430,513 | 1,265,400 | |||||||||||
Costs and expenses: | |||||||||||||
Impairment of oil and gas properties | 2,242,921 | — | — | ||||||||||
Depreciation, depletion and amortization | 547,404 | 461,791 | 396,394 | ||||||||||
Asset retirement obligation | 8,796 | 8,937 | 7,018 | ||||||||||
Production | 218,736 | 201,512 | 176,833 | ||||||||||
Transportation | 38,107 | 26,361 | 21,157 | ||||||||||
Gas gathering and processing | 43,838 | 29,860 | 25,666 | ||||||||||
Taxes other than income | 130,490 | 93,630 | 91,066 | ||||||||||
General and administrative | 44,500 | 49,260 | 42,288 | ||||||||||
Stock compensation, net | 10,090 | 10,772 | 8,243 | ||||||||||
(Gain) loss on derivative instruments | — | — | (22,970 | ) | |||||||||
Other operating, net | 126,433 | 6,637 | 2,064 | ||||||||||
| 3,411,315 | 888,760 | 747,759 | |||||||||||
Operating income (loss) | (1,440,968 | ) | 541,753 | 517,641 | |||||||||
Other (income) and expense: | |||||||||||||
Interest expense | 32,064 | 37,966 | 29,940 | ||||||||||
Capitalized interest | (22,108 | ) | (19,680 | ) | (24,248 | ) | |||||||
Amortization of fair value of debt | (709 | ) | (1,908 | ) | (3,784 | ) | |||||||
Gain on early extinquishment of debt | (9,569 | ) | (5,099 | ) | — | ||||||||
Other, net | (10,348 | ) | (14,151 | ) | (28,591 | ) | |||||||
Income (loss) before income tax expense | (1,430,298 | ) | 544,625 | 544,324 | |||||||||
Income tax expense (benefit) | (528,613 | ) | 198,156 | 198,605 | |||||||||
Net income (loss) | $ | (901,685 | ) | $ | 346,469 | $ | 345,719 | ||||||
Earnings (loss) per share: | |||||||||||||
Basic | $ | (11.07 | ) | $ | 4.23 | $ | 4.21 | ||||||
Diluted | $ | (11.07 | ) | $ | 4.09 | $ | 4.11 | ||||||
Weighted average shares outstanding: | |||||||||||||
Basic | 81,478 | 81,819 | 82,066 | ||||||||||
Diluted | 81,478 | 84,632 | 84,090 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CIMAREX ENERGY CO.
CONSOLIDATED STATEMENTS OF OPERATIONSCASH FLOWS
(In thousands, except per share data)thousands)
| | For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | |||||||||
| Revenues: | ||||||||||||
| Gas sales | $ | 845,631 | $ | 810,894 | $ | 807,007 | ||||||
| Oil sales | 518,991 | 404,517 | 265,415 | |||||||||
| Gas gathering and processing | 61,471 | 47,879 | 44,238 | |||||||||
| Gas marketing, net of related costs of $107,678, $144,702 and $213,749 respectively | 5,073 | 3,854 | 1,962 | |||||||||
| 1,431,166 | 1,267,144 | 1,118,622 | ||||||||||
| Costs and expenses: | ||||||||||||
| Depreciation, depletion and amortization | 461,791 | 396,394 | 258,287 | |||||||||
| Asset retirement obligation | 8,937 | 7,018 | 3,819 | |||||||||
| Production | 201,512 | 176,833 | 104,067 | |||||||||
| Transportation | 26,361 | 21,157 | 15,338 | |||||||||
| Gas gathering and processing | 30,513 | 27,410 | 31,890 | |||||||||
| Taxes other than income | 93,630 | 91,066 | 73,360 | |||||||||
| General and administrative | 49,260 | 42,288 | 33,497 | |||||||||
| Stock compensation, net | 10,772 | 8,243 | 4,959 | |||||||||
| (Gain) loss on derivative instruments | — | (22,970 | ) | 67,800 | ||||||||
| Other operating, net | 6,637 | 2,064 | 15,897 | |||||||||
| 889,413 | 749,503 | 608,914 | ||||||||||
| Operating income | 541,753 | 517,641 | 509,708 | |||||||||
Other (income) and expense: | ||||||||||||
| Interest expense | 37,966 | 29,940 | 19,607 | |||||||||
| Capitalized interest | (19,680 | ) | (24,248 | ) | (11,686 | ) | ||||||
| Amortization of fair value of debt | (1,908 | ) | (3,784 | ) | (2,132 | ) | ||||||
| Gain on early extinquishment of debt | (5,099 | ) | — | — | ||||||||
| Other, net | (14,151 | ) | (28,591 | ) | (12,536 | ) | ||||||
Income before income tax expense | 544,625 | 544,324 | 516,455 | |||||||||
| Income tax expense | 198,156 | 198,605 | 188,130 | |||||||||
| Net income | $ | 346,469 | $ | 345,719 | $ | 328,325 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 4.23 | $ | 4.21 | $ | 5.07 | ||||||
| Diluted | $ | 4.09 | $ | 4.11 | $ | 4.90 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 81,819 | 82,066 | 64,761 | |||||||||
| Diluted | 84,632 | 84,090 | 67,000 | |||||||||
| | Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income (loss) | $ | (901,685 | ) | $ | 346,469 | $ | 345,719 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
Impairment of oil and gas properties | 2,242,921 | — | — | |||||||||||
Depreciation, depletion and amortization | 547,404 | 461,791 | 396,394 | |||||||||||
Asset retirement obligation | 8,796 | 8,937 | 7,018 | |||||||||||
Deferred income taxes | (594,802 | ) | 167,507 | 220,539 | ||||||||||
Stock compensation, net | 10,090 | 10,772 | 8,243 | |||||||||||
Derivative instruments | — | — | (41,926 | ) | ||||||||||
Gain on liquidation of equity investees | (39 | ) | (3,015 | ) | (19,785 | ) | ||||||||
Changes in non-current assets and liabilities | 136,328 | 354 | 593 | |||||||||||
Other | (5,794 | ) | (1,392 | ) | 1,540 | |||||||||
Changes in operating assets and liabilities | ||||||||||||||
(Increase) decrease in receivables, net | 56,245 | (7,777 | ) | (9,811 | ) | |||||||||
(Increase) in inventory and other current assets | (155,222 | ) | (32,180 | ) | (11,812 | ) | ||||||||
Increase (decrease) in accounts payable and accrued liabilities | 23,246 | 43,214 | (18,293 | ) | ||||||||||
Net cash provided by operating activities | 1,367,488 | 994,680 | 878,419 | |||||||||||
Cash flows from investing activities: | ||||||||||||||
Oil and gas expenditures | (1,594,775 | ) | (1,021,456 | ) | (1,054,581 | ) | ||||||||
Merger related costs | — | — | (439 | ) | ||||||||||
Proceeds from sale of assets | 39,096 | 177,195 | 10,705 | |||||||||||
Distributions received from equity investees | 39 | 3,015 | 59,823 | |||||||||||
Purchases of short-term investments | — | (16,000 | ) | — | ||||||||||
Sales of short-term investments | 10,679 | 1,424 | — | |||||||||||
Other expenditures | (51,757 | ) | (19,574 | ) | (25,310 | ) | ||||||||
Net cash used by investing activities | (1,596,718 | ) | (875,396 | ) | (1,009,802 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||
Net Increase (decrease) in bank debt | 220,000 | (95,000 | ) | 95,000 | ||||||||||
Increase in other long-term debt | — | 350,000 | — | |||||||||||
Decrease in other long-term debt | (105,550 | ) | (204,360 | ) | — | |||||||||
Financing costs incurred | (158 | ) | (6,113 | ) | (153 | ) | ||||||||
Treasury stock acquired and retired | — | (42,266 | ) | (11,016 | ) | |||||||||
Dividends paid | (20,040 | ) | (13,429 | ) | (13,358 | ) | ||||||||
Proceeds from issuance of common stock and other | 13,141 | 9,886 | 4,311 | |||||||||||
Net cash provided by (used in) financing activities | 107,393 | (1,282 | ) | 74,784 | ||||||||||
Net change in cash and cash equivalents | (121,837 | ) | 118,002 | (56,599 | ) | |||||||||
Cash and cash equivalents at beginning of period | 123,050 | 5,048 | 61,647 | |||||||||||
Cash and cash equivalents at end of period | $ | 1,213 | $ | 123,050 | $ | 5,048 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
thousands)
| | Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | |||||||||||
| Cash flows from operating activites: | ||||||||||||||
| Net income | $ | 346,469 | $ | 345,719 | $ | 328,325 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation, depletion and amortization | 461,791 | 396,394 | 258,287 | |||||||||||
| Asset retirement obligation | 8,937 | 7,018 | 3,819 | |||||||||||
| Deferred income taxes | 167,507 | 220,539 | 112,890 | |||||||||||
| Stock compensation, net | 10,772 | 8,243 | 4,959 | |||||||||||
| Derivative instruments | — | (41,926 | ) | 3,483 | ||||||||||
| Gain on liquidation of equity investees | (3,015 | ) | (19,785 | ) | — | |||||||||
| Other | (6,791 | ) | 1,540 | 12,844 | ||||||||||
| Changes in operating assets and liabilities | ||||||||||||||
| (Increase) in receivables, net | (7,777 | ) | (9,811 | ) | (45,787 | ) | ||||||||
| (Increase) in inventory and other current assets | (32,180 | ) | (11,812 | ) | (27,293 | ) | ||||||||
| Increase (decrease) in accounts payable and accrued liabilities | 55,436 | (18,293 | ) | 52,488 | ||||||||||
| Increase (decrease) in other non-current liabilities | (6,469 | ) | 593 | 719 | ||||||||||
| Net cash provided by operating activities | 994,680 | 878,419 | 704,734 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Oil and gas expenditures | (1,021,456 | ) | (1,054,581 | ) | (633,522 | ) | ||||||||
| Merger related costs | — | (439 | ) | (13,740 | ) | |||||||||
| Cash received in connection with acquisition | — | — | 33,407 | |||||||||||
| Proceeds from sale of assets | 177,195 | 10,705 | 141,842 | |||||||||||
| Distributions received from equity investees | 3,015 | 59,823 | 302 | |||||||||||
| Purchases of short-term investments | (16,000 | ) | — | — | ||||||||||
| Sales of short-term investments | 1,424 | — | — | |||||||||||
| Other expenditures | (19,574 | ) | (25,310 | ) | (25,742 | ) | ||||||||
| Net cash used by investing activities | (875,396 | ) | (1,009,802 | ) | (497,453 | ) | ||||||||
| Cash flows from financing activites: | ||||||||||||||
| Net Increase (decrease) in bank debt | (95,000 | ) | 95,000 | — | ||||||||||
| Increase in other long-term debt | 350,000 | — | — | |||||||||||
| Decrease in other long-term debt | (204,360 | ) | — | (273,501 | ) | |||||||||
| Financing costs incurred | (6,113 | ) | (153 | ) | (1,516 | ) | ||||||||
| Treasury stock acquired and retired | (42,266 | ) | (11,016 | ) | — | |||||||||
| Dividends paid | (13,429 | ) | (13,358 | ) | — | |||||||||
| Proceeds from issuance of common stock and other | 9,886 | 4,311 | 13,637 | |||||||||||
| Net cash provided by (used in) financing activities | (1,282 | ) | 74,784 | (261,380 | ) | |||||||||
| Net change in cash and cash equivalents | 118,002 | (56,599 | ) | (54,099 | ) | |||||||||
| Cash and cash equivalents at beginning of period | 5,048 | 61,647 | 115,746 | |||||||||||
| Cash and cash equivalents at end of period | $ | 123,050 | $ | 5,048 | $ | 61,647 | ||||||||
| | Common Stock | | | | Accumulated Other Comprehensive Income (Loss) | | | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Paid-in Capital | Unearned Compensation | Retained Earnings | Treasury Stock | Total Stockholders' Equity | ||||||||||||||||||||||
| | Shares | Amount | |||||||||||||||||||||||||
Balance, December 31, 2005 | 83,524 | $ | 835 | $ | 1,865,597 | $ | (15,862 | ) | $ | 788,356 | $ | 81 | $ | (43,554 | ) | $ | 2,595,453 | ||||||||||
Dividends | — | — | — | — | (16,673 | ) | — | — | (16,673 | ) | |||||||||||||||||
Issuance of restricted stock awards | 601 | 6 | 13,682 | (13,688 | ) | — | — | — | — | ||||||||||||||||||
Treasury Stock | — | — | — | — | — | — | (8,090 | ) | (8,090 | ) | |||||||||||||||||
Common stock reacquired and retired | (278 | ) | (3 | ) | (12,039 | ) | — | — | — | 11,016 | (1,026 | ) | |||||||||||||||
Restricted stock forfeited and retired | (55 | ) | (361 | ) | 314 | — | — | — | (47 | ) | |||||||||||||||||
Amortization of unearned compensation | — | — | 7,019 | 2,262 | — | — | — | 9,281 | |||||||||||||||||||
Reclass restricted unit liability to unearned compensation | — | — | — | 13,881 | — | — | — | 13,881 | |||||||||||||||||||
Reclass remaining unearned compensation to paid-in capital | — | — | (13,093 | ) | 13,093 | — | — | — | — | ||||||||||||||||||
Exercise of stock options, net of tax benefit of $1,618 recorded in paid-in capital | 170 | 2 | 4,313 | — | — | — | — | 4,315 | |||||||||||||||||||
Stock Option Compensation Expense | — | — | 2,330 | — | — | — | — | 2,330 | |||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||
Net income | — | — | — | — | 345,719 | — | — | 345,719 | |||||||||||||||||||
Unrealized gain on derivatives, net of tax | — | — | — | — | — | 30,954 | — | 30,954 | |||||||||||||||||||
Unrealized gain on marketable securities of investments, net of tax | — | — | — | — | — | 46 | — | 46 | |||||||||||||||||||
Total comprehensive income | 376,719 | ||||||||||||||||||||||||||
Balance, December 31, 2006 | 83,962 | $ | 840 | $ | 1,867,448 | $ | — | $ | 1,117,402 | $ | 31,081 | $ | (40,628 | ) | $ | 2,976,143 | |||||||||||
Dividends | — | — | — | — | (15,108 | ) | — | — | (15,108 | ) | |||||||||||||||||
Issuance of restricted stock awards | 572 | 5 | (5 | ) | — | — | — | — | — | ||||||||||||||||||
Treasury Stock | — | — | — | — | — | — | (42,266 | ) | (42,266 | ) | |||||||||||||||||
Common stock reacquired and retired | (1,306 | ) | (13 | ) | (49,270 | ) | — | — | — | 42,266 | (7,017 | ) | |||||||||||||||
Restricted stock forfeited and retired | (61 | ) | (1 | ) | 1 | — | — | — | — | — | |||||||||||||||||
Amortization of unearned compensation | — | — | 12,738 | — | — | — | — | 12,738 | |||||||||||||||||||
Exercise of stock options, net of tax benefit of $4,026 recorded in paid-in capital | 454 | 5 | 9,881 | — | — | — | — | 9,886 | |||||||||||||||||||
Stock Option Compensation Expense | — | — | 1,897 | — | — | — | — | 1,897 | |||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||
Net income | — | — | — | — | 346,469 | — | — | 346,469 | |||||||||||||||||||
Net change from hedging activity | — | — | — | — | — | (23,302 | ) | — | (23,302 | ) | |||||||||||||||||
Unrealized loss on short-term investments and other, net of tax | — | — | — | — | — | (153 | ) | — | (153 | ) | |||||||||||||||||
Total comprehensive income | 323,014 | ||||||||||||||||||||||||||
Balance, December 31, 2007 | 83,621 | $ | 836 | $ | 1,842,690 | $ | — | $ | 1,448,763 | $ | 7,626 | $ | (40,628 | ) | $ | 3,259,287 | |||||||||||
Dividends | — | — | — | — | (20,080 | ) | — | — | (20,080 | ) | |||||||||||||||||
Issuance of restricted stock awards | 465 | 5 | (5 | ) | — | — | — | — | — | ||||||||||||||||||
Retirement of treasury stock | (193 | ) | (2 | ) | (7,282 | ) | — | — | — | 7,284 | — | ||||||||||||||||
Common stock reacquired and retired | (154 | ) | (1 | ) | (9,938 | ) | — | — | — | — | (9,939 | ) | |||||||||||||||
Restricted stock forfeited and retired | (54 | ) | (1 | ) | 1 | — | — | — | — | — | |||||||||||||||||
Amortization of unearned compensation | — | — | 15,491 | — | — | — | — | 15,491 | |||||||||||||||||||
Exercise of stock options, net of tax benefit of $6,712 recorded in paid-in capital | 414 | 4 | 13,137 | — | — | — | — | 13,141 | |||||||||||||||||||
Stock Option Compensation Expense | — | — | 1,731 | — | — | — | — | 1,731 | |||||||||||||||||||
Vesting of restricted stock units | 45 | — | — | — | — | — | — | — | |||||||||||||||||||
Comprehensive (loss): | |||||||||||||||||||||||||||
Net (loss) | — | — | — | — | (901,685 | ) | — | — | (901,685 | ) | |||||||||||||||||
Net change from hedging activity | — | — | — | — | — | (7,652 | ) | — | (7,652 | ) | |||||||||||||||||
Unrealized loss on short-term investments and other, net of tax | — | — | — | — | — | (929 | ) | — | (929 | ) | |||||||||||||||||
Total comprehensive (loss) | (910,266 | ) | |||||||||||||||||||||||||
Balance, December 31, 2008 | 84,144 | $ | 841 | $ | 1,855,825 | $ | — | $ | 526,998 | $ | (955 | ) | $ | (33,344 | ) | $ | 2,349,365 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
| | Common Stock | | | | Accumulated Other Comprehensive Income | | | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Paid-in Capital | Unearned Compensation | Retained Earnings | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||
| | Shares | Amount | ||||||||||||||||||||||||
| Balance, December 31, 2004 | 41,729 | $ | 417 | $ | 250,248 | $ | (10,072 | ) | $ | 460,031 | $ | 88 | $ | — | $ | 700,712 | ||||||||||
Issuance of common stock, net of offering costs | 42,185 | 422 | 1,587,775 | — | — | — | — | 1,588,197 | ||||||||||||||||||
| Issuance of restricted stock awards | 249 | 2 | 9,913 | (9,915 | ) | — | — | — | — | |||||||||||||||||
| Issuance of restricted stock unit awards | — | — | — | (2,856 | ) | — | — | — | (2,856 | ) | ||||||||||||||||
| Treasury Stock | — | — | — | — | — | — | (96,161 | ) | (96,161 | ) | ||||||||||||||||
| Common stock reacquired and retired | (1,450 | ) | (14 | ) | (54,723 | ) | — | — | — | 52,607 | (2,130 | ) | ||||||||||||||
| Restricted stock forfeited and retired | (2 | ) | — | (80 | ) | 78 | — | — | — | (2 | ) | |||||||||||||||
| Amortization of unearned compensation | — | — | — | 4,259 | — | — | — | 4,259 | ||||||||||||||||||
| Exercise of stock options, net of tax benefit of $6,442 recorded in paid-in capital | 659 | 7 | 15,761 | — | — | — | — | 15,768 | ||||||||||||||||||
| Stock Option Compensation Expense | — | — | 2,348 | — | — | — | — | 2,348 | ||||||||||||||||||
| Accelerated vesting of stock options, restricted stock and restricted stock units | 154 | 1 | 4,713 | 2,644 | — | — | — | 7,358 | ||||||||||||||||||
| Equity attributable to Floating rate convertible notes | — | — | 49,642 | — | — | — | — | 49,642 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | — | — | — | — | 328,325 | — | — | 328,325 | ||||||||||||||||||
| Unrealized loss on marketable securities of investments, net of tax | — | — | — | — | — | (7 | ) | — | (7 | ) | ||||||||||||||||
| Total comprehensive income | 328,318 | |||||||||||||||||||||||||
| Balance, December 31, 2005 | 83,524 | $ | 835 | $ | 1,865,597 | $ | (15,862 | ) | $ | 788,356 | $ | 81 | $ | (43,554 | ) | $ | 2,595,453 | |||||||||
Dividends | — | — | — | — | (16,673 | ) | — | — | (16,673 | ) | ||||||||||||||||
| Issuance of restricted stock awards | 601 | 6 | 13,682 | (13,688 | ) | — | — | — | — | |||||||||||||||||
| Treasury Stock | — | — | — | — | — | — | (8,090 | ) | (8,090 | ) | ||||||||||||||||
| Common stock reacquired and retired | (278 | ) | (3 | ) | (12,039 | ) | — | — | — | 11,016 | (1,026 | ) | ||||||||||||||
| Restricted stock forfeited and retired | (55 | ) | (361 | ) | 314 | — | — | — | (47 | ) | ||||||||||||||||
| Amortization of unearned compensation | — | — | 7,019 | 2,262 | — | — | — | 9,281 | ||||||||||||||||||
| Reclass restricted unit liability to unearned compensation | — | — | — | 13,881 | — | — | — | 13,881 | ||||||||||||||||||
| Reclass remaining unearned compensation to paid-in capital | — | — | (13,093 | ) | 13,093 | — | — | — | — | |||||||||||||||||
| Exercise of stock options, net of tax benefit of $1,618 recorded in paid-in capital | 170 | 2 | 4,313 | — | — | — | — | 4,315 | ||||||||||||||||||
| Stock Option Compensation Expense | — | — | 2,330 | — | — | — | — | 2,330 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | — | — | — | — | 345,719 | — | — | 345,719 | ||||||||||||||||||
| Unrealized gain on derivatives, net of tax | — | — | — | — | — | 30,954 | — | 30,954 | ||||||||||||||||||
| Unrealized gain on marketable securities of investments, net of tax | — | — | — | — | — | 46 | — | 46 | ||||||||||||||||||
| Total comprehensive income | 376,719 | |||||||||||||||||||||||||
| Balance, December 31, 2006 | 83,962 | $ | 840 | $ | 1,867,448 | $ | — | $ | 1,117,402 | $ | 31,081 | $ | (40,628 | ) | $ | 2,976,143 | ||||||||||
Dividends | — | — | — | — | (15,108 | ) | — | — | (15,108 | ) | ||||||||||||||||
| Issuance of restricted stock awards | 572 | 5 | (5 | ) | — | — | — | — | — | |||||||||||||||||
| Treasury Stock | — | — | — | — | — | — | (42,266 | ) | (42,266 | ) | ||||||||||||||||
| Common stock reacquired and retired | (1,306 | ) | (13 | ) | (49,270 | ) | — | — | — | 42,266 | (7,017 | ) | ||||||||||||||
| Restricted stock forfeited and retired | (61 | ) | (1 | ) | 1 | — | — | — | — | — | ||||||||||||||||
| Amortization of unearned compensation | — | — | 12,738 | — | — | — | — | 12,738 | ||||||||||||||||||
| Exercise of stock options, net of tax benefit of $4,026 recorded in paid-in capital | 454 | 5 | 9,881 | — | — | — | — | 9,886 | ||||||||||||||||||
| Stock Option Compensation Expense | — | — | 1,897 | — | — | — | — | 1,897 | ||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||
| Net income | — | — | — | — | 346,469 | — | — | 346,469 | ||||||||||||||||||
| Net change from hedging activity | — | — | — | — | — | (23,302 | ) | — | (23,302 | ) | ||||||||||||||||
| Unrealized loss on short-term investments and other, net of tax | — | — | — | — | — | (153 | ) | — | (153 | ) | ||||||||||||||||
| Total comprehensive income | 323,014 | |||||||||||||||||||||||||
| Balance, December 31, 2007 | 83,621 | $ | 836 | $ | 1,842,690 | $ | — | $ | 1,448,763 | $ | 7,626 | $ | (40,628 | ) | $ | 3,259,287 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Cimarex was formed in February 2002 as a wholly-owned subsidiary of Helmerich & Payne, Inc. (H&P). On September 30, 2002, Cimarex was spun-off and became a stand-alone company. Also on September 30, 2002, Cimarex acquired 100% of the outstanding common stock of Key Production Company, Inc. (Key) in a tax-free exchange.
In June of 2005, we acquired Magnum Hunter Resources, Inc. in a stock-for-stock merger. Magnum Hunter's results of operations are included in our consolidated statements of operations beginning June 7, 2005.
The accounts of Cimarex and its subsidiaries are presented in the accompanying Consolidated Financial Statements. All intercompany accounts and transactions were eliminated in consolidation.
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Our significant accounting policies are described in Note 43 to our Consolidated Financial Statements. We analyze our estimates, including those related to oil and gas revenues, reserves and properties, as well as goodwill and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Certain amounts in prior years' financial statements have been reclassified to conform to the 20072008 financial statement presentation.
2. DESCRIPTION OF BUSINESS
Cimarex Energy Co. is an independent oil and gas exploration and production company with operations entirely located in the United States. Our oil and gas reserves and operations are mainly located in Texas, Oklahoma, New Mexico, Kansas, Louisiana, and Wyoming. We operate wells that account for a substantial portion of our total proved reserves and production.
3. BUSINESS COMBINATION
On June 7, 2005, Cimarex completed the acquisition of Magnum Hunter Resources, Inc, an independent oil and gas exploration and production company with operations concentrated in the Permian Basin of West Texas and New Mexico and in the Gulf of Mexico. Terms of the merger agreement provided that Magnum Hunter stockholders receive 0.415 shares of Cimarex common stock for each share of Magnum Hunter common stock. As a result of the merger, Cimarex issued 39.7 million common shares to Magnum Hunter's common stockholders. The merger was accounted for as a purchase of Magnum Hunter by Cimarex and the results of operations of Magnum Hunter are included in our consolidated statements of operations for the periods since the acquisition.
The following unaudited pro forma information has been prepared to give effect to the Magnum Hunter acquisition as if it had occurred at the beginning of the year. The unaudited pro forma data is presented for illustrative purposes only, based on estimates and assumptions deemed appropriate by
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. BUSINESS COMBINATION (Continued)
management, and should not be relied upon as an indication of the operating results that Cimarex would have achieved if the transaction had occurred on January 1, 2005.
| For the year ended December 31, 2005: | | |||
|---|---|---|---|---|
| Revenues | $ | 1,393,715 | ||
| Net income | 403,925 | |||
| Net income per share: | ||||
| Basic | $ | 6.24 | ||
| Diluted | 6.03 | |||
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash in banks and investments readily convertible into cash, which have original maturities within three months at the date of acquisition. Cash equivalents are stated at cost, which approximates market value. Restricted cash consists of monies of third parties being held by Cimarex as operator of a property in Oklahoma, until ownership disputes among the third parties are resolved.
Short-term Investments
Our short-term investments consist of investments in an asset-backed securities fund. The investments are classified as available-for-sale and are carried at fair value in our balance sheet. Unrealized holding gains and losses are reported in other comprehensive income.income (loss).
Inventories
Inventories, primarily materials and supplies, are valued at the lower of cost or market.market using weighted average cost.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil and Gas Properties
We use the full cost method of accounting for our oil and gas operations. All costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves. Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized. Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves.
At the end of each quarter, we make a full cost ceiling limitation calculation, whereby net capitalized costs related to proved properties less associated deferred income taxes may not exceed anthe amount equal toof the present value discounted at ten percent of estimated future net revenues from proved reserves less estimated future production and development costs and related income tax expense. Future net revenues used in the calculation of the full cost ceiling limitation are determined based on current oil and gas prices and are adjusted for designated cash flow hedges. Increases and decreaseshedges, if any. Changes in proved reserve estimates due to(whether based upon quantity revisions or fluctuations in commodity prices,oil and gas prices) will result incause corresponding changes to the full cost ceiling limitation. If net capitalized costs subject to amortization exceed this limit, the excess would be
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
charged to expense. However, if commodity prices increase after period end and before issuance of the financial statements, thethese higher commodity prices willmay be used to determine if the capital costs are in fact impaired as of the end of the period. Any recorded impairment of oil and gas properties is not reversible at a later date.
Due to a significant decrease in period end commodity prices, at September 30, 2008, our ceiling limitation calculation resulted in excess capitalized costs of $657.1 million ($417.4 million, net of tax), for which we recorded a non-cash impairment of oil and gas properties. As a result of further declines in commodity prices during the fourth quarter of 2008, we recorded an additional non-cash impairment of oil and gas properties. Based on prices at December 31, 2008, our ceiling limitation calculation resulted in excess capitalized costs of $1.6 billion ($1.0 billion after tax), for which we recorded a non-cash impairment of oil and gas properties. The Company's quarterly and annual ceiling test is primarily impacted by period end commodity prices, reserve quantities added and produced, overall exploration and development costs and depletion expense. Holding all factors constant other than commodity prices, a 10% decline in prices as of December 31, 2008 would have resulted in an additional ceiling test impairment of approximately 12% of our full cost pool. Also, goodwill could be potentially impaired. Changes in actual reserve quantities added and produced along with our actual overall exploration and development costs will impact the Company's actual ceiling test calculation and impairment analyses.
Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserves. The costs of wells in progress and certain unevaluated properties are not being amortized. On a quarterly basis, we evaluate such costs for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments, or reductions in value. To the extent that the evaluation indicates these properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Expenditures for maintenance and repairs are charged to production expense in the period incurred.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill
We account At December 31, 2008, we had $691.4 million of goodwill recorded in conjunction with past business combinations. Goodwill is subject to annual reviews for goodwill in accordanceimpairment based on a two-step accounting test. The first step is to compare the estimated fair value of the Company with Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires an annualthe recorded net book value (including goodwill), after giving effect to any period impairment assessment. A more frequent assessment is required if certain events occur that reasonably indicate an impairment may have occurred. The volatility of oil and gas prices may cause more frequent assessments.properties resulting from the ceiling limitation calculation. If the estimated fair value is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition of the Company. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the Company's assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill and the recorded amount is written down to the hypothetical amount, if lower. We perform our annual goodwill impairment assessment requires usreview in the fourth quarter of each year.
During the fourth quarter of 2008, there were severe disruptions in the credit markets and reductions in global economic activity which had significant adverse impacts on stock markets and oil-and-gas-related commodity prices. Management must apply judgment in determining the estimated fair value of the Company for purposes of performing the annual goodwill impairment test. As of December 31, 2008, the book value per share of our common stock exceeded the market price by less than $2 per share. Management does not consider the market value of our shares to make estimates regardingbe an accurate reflection of our net assets, for impairment purposes. To estimate the fair value of goodwill. The estimatedthe Company, we used all available information to make these fair value isdeterminations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets.
In estimating the fair value of our oil and gas properties, we used projected future prices based on numerous factors, includingthe NYMEX strip index at December 31, 2008 (adjusted for estimated delivery point price differentials). Based on our current exploration plans, we included estimated future net cash flows from development of our estimatesunproved properties and applied a discount rate of proved reserves as well as15% to 20%, depending on the successreserve category. This resulted in a slight excess of future exploration for and development of unproved reserves. Iffair value over the carrying amount exceedsvalue of our net assets at year end. Should lower prices or quantities result in the future, or higher discount rates be necessary, the carrying value of our net assets may exceed the estimated fair value, then a measurementresulting in an impairment of the loss must be performed, with any deficiency recorded as an impairment. To date, no related impairment has been recorded.goodwill.
Revenue Recognition
Oil and Gas Sales
Revenues from oil and gas sales are based on the sales method, with revenue recognized on actual volumes sold to purchasers. There is a ready market for oil and gas, with sales occurring soon after production.
Marketing Sales
We market and sell natural gas for working interest partners under short term sales and supply agreements and earn a fee for such services. Revenues are recognized as gas is delivered and are reflected net of gas purchases on the consolidated statement of operations.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Gas Imbalances
We use the sales method of accounting for gas imbalances. Under this method, revenue is recorded on the basis of gas actually sold. Oil and gas reserves are adjusted to the extent there are sufficient quantities of natural gas to make up an imbalance. In situations where there are insufficient reserves available to make-up an overproduced imbalance, then a liability is established. The natural gas imbalance liability at December 31, 2008 and 2007 and 2006 was $3.6$3.5 million and $3.2$3.6 million, respectively. At December 31, 20072008 and 2006,2007, we were also in an under-produced position relative to certain other third parties.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Oil and Gas Reserves
The process of estimating quantities of oil and gas reserves is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering and economic data. The data for a given field may also change substantially over time as a result of numerous factors including, but not limited to, additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. As a result, material revisions to existing reserve estimates may occur from time to time. Although we make every reasonable effort is made to ensure that reserve estimates reported represent the most accurate assessments possible, the subjective decisions and variances in available data for our various fields make these estimates generally less precise than other estimates included in the financial statement disclosures. RevisionsFor 2008, revisions of previous estimates increased ourdecreased proved reserves by 57.5156.7 Bcfe or 4%12% of total proved reserves aton December 31, 2007. Estimations of proved undeveloped reserves can be subject to an even greater possibility of revision.2008. Our negative revisions resulted from lower oil and gas prices and increased lease operating expenses. See Note 16, Supplemental Oil and Gas Disclosures for more reserve information. At year-end, 21.4%18% of our total proved reserves are categorized as proved undeveloped. Of these proved undeveloped reserves, 62%89% are related to a project in Wyoming.
We use the units-of-production method to amortize the cost of our oil and gas properties. Changes in reserve quantities and commodity prices will cause corresponding changes in depletion expense in periods subsequent to these changes, or in some cases, a full cost ceiling limitation charge in the period of the revision. To date, changes in expense resulting from changes in previous estimates of reserves have not been material.
Transportation Costs
We account for transportation costs under Emerging Issues Task Force ("EITF") 00-10Accounting for Shipping and Handling Fees and Costs. Amounts paid for transportation are classified as an operating expense and are not netted against gas sales.
Derivatives
SFAS No.133,Accounting for Derivative Instruments and Hedging activities,Activities, requires that all derivatives be recorded on the balance sheet at fair value. We determine the fair value of derivative contracts based on the stated contract prices and current and projected market prices at the determination date discounted to reflect the time value of money until settlement. The accounting treatment for the changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge for accounting treatment purposes. Realized and unrealized gains and losses on derivatives that are not designated as hedges are recognized currently in costs and expenses associated with operating income in our consolidated statements of operations. For derivatives designated as cash flow hedges, changes in the fair value, to the extent the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is settled. Changes in the fair value of the hedge resulting from ineffectiveness are recognized currently as unrealized gains or losses in other income and expense in the consolidated statements of operations. Gains and losses upon settlement of the cash flow hedges will beare recognized in gas revenues in the period the contracts are settled.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Existing commodity derivatives acquired in the Magnum Hunter merger did not qualify for hedge accounting treatment. AsDuring 2006, Cimarex recognized a net gain of December 31,$23.0 million. Activity included non-cash mark-to-market derivative gains and losses as well as cash settlements. Cash payments related to these contracts for 2006 alltotaled $19.0 million. All of the contracts assumed with the merger have expired.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)had expired at December 31, 2006.
ToIn 2006, we entered into additional derivative contracts to mitigate a portion of our potential exposure to adverse market changes in an environment of volatile gas prices. Using zero-cost collars with Mid-Continent weighted average floor and ceiling prices of $7.00 to $10.17 for 2007 and $7.00 to $9.90 for 2008, we entered into additional derivativehedged 29.2 million MMBtu and 14.6 million MMBtu of our anticipated Mid-Continent gas production for 2007 and 2008, respectively. At December 31, 2008, there were no remaining contracts in 2006.outstanding.
Under the collar agreements, we received the difference between an agreed upon index price and a floor price if the index price was below the floor price. We paid the difference between the agreed upon contracted ceiling price and the index price only if the index price was above the contracted ceiling price. No amounts are paid or received if the index price is between the contracted floor and ceiling prices. These contracts were designated for hedge accounting treatment as cash flow hedgeshedges.
Settlements received during the year ended December 31, 2008 and 2007 totaled $11.3 million and $27.8 million, which were recorded in gas sales and increased the average realized price for accounting treatment purposes.
Depending on changes in oilthe year by $0.09 per Mcf and gas futures markets$0.23 per Mcf, respectively. During the periods ended December 31, 2008 and management's view2007, we recognized a loss of underlying oil$35 thousand and natural gas supply and demand trend, we may increase or decrease our current hedging positions. See Note 5a gain of $49 thousand, respectively, related to the Consolidated Financial Statementsineffective portion of the derivative contracts.
At December 31, 2007, the fair value of the remaining contracts was approximately $12.1 million and Item 7was recorded as a current asset, and an unrealized gain (net of this report for additional information regarding our derivative instruments.deferred income taxes) of $7.7 million was recorded in other comprehensive income (loss). At December 31, 2008, all of the contracts were completed.
Income Taxes
Deferred income taxes are computed using the liability method. Deferred income taxes are provided on all temporary differences between the financial basis and the tax basis of assets and liabilities. Valuation allowances are established to reduce deferred tax assets to an amount that more likely than not will be realized.
We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") an interpretation of FASB Statement No. 109 "Accounting for Income Taxes", on January 1, 2007. The interpretation clarifies the accounting for uncertainty in income taxes recognized in our financial statements and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 resulted in no impact to our consolidated financial statements and we have no unrecognized tax benefits that would impact our effective rate.
Contingencies
A provision for contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts for accrual is a complex estimation process that includes subjective judgment. In
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
many cases, this judgment is based on interpretation of laws and regulations, which can be interpreted differently by regulators and/or courts of law. We closely monitor known and potential legal, environmental, and other contingencies and periodically determine when we should record losses for these items based on information available to us.
AtIn January 2009, the Tulsa County District Court issued a judgment in the H.B. Krug, et al versus Helmerich & Payne, Inc. ("H&P") case. This lawsuit was originally filed in 1998 and addressed H&P's conduct pertaining to a 1989 take-or-pay settlement, along with potential drainage issues and other related matters. Damages of $6.9 million plus $119.5 million for disgorgement of H&P's estimated potential compounded profit since 1989, resulting from the noted damages, were awarded to plaintiff royalty owners, to a total of $126.4 million. This amount was subsequently adjusted by the court to a total of $119.6 million. Pursuant to the 2002 spin-off transaction to shareholders of H&P by which Cimarex became a publicly-traded entity, Cimarex assumed the assets and liabilities of H&P's exploration and production business. In September 2008, based on the available information at the time, we accrued an estimated litigation expense of $12 million for both damages and probable disgorgement. The higher disgorgement award could not be reasonably estimated until the final judgment in January 2009. We therefore accrued an additional $107.6 million, bringing the total accrued litigation expense for the year ended December 31, 2006, we had accrued $8.62008 to $119.6 million for mediated litigation settlements which were paidthis lawsuit. We have appealed the District Court's judgments.
As of December 31, 2008, in 2007 with associated interest. In the normal course of business, we have other various other litigation related matters and associated accruals,accruals. Though some of the related claims may be significant, the resolution of whichthem we believe, individually or in the aggregate, would not have a material adverse effect on our company.financial condition or results of operations.
Asset Retirement Obligations
The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Oil and gas producing companies incur this liability which includes costs related to the plugging of wells, the removal of facilities and equipment, and site restorations, upon acquiring or drilling a successful well. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. Capitalized costs are depleted as a component of the full cost pool.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Options
Effective January 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R,Share Based Payment on a modified prospective basis. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation to employees.
Earnings per Share
Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the impact of potentially dilutive securities on weighted average number of shares. No potential common shares are included in the diluted share computation when a loss from continuing operations exists.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
Comprehensive income is a term used to refer to net income plus other comprehensive income.income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under generally accepted accounting principles are reported as separate components of shareholders' equity instead of net income.
Theincome.The components of other comprehensive income (loss) are as follows (in 000's):
| | Net Unrealized Gain on Derivative Instruments(1) | Net Unrealized Gain (Loss) On Short-Term Investments and Other(1) | Accumulated Other Comprehensive Income | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2005 | $ | — | $ | 88 | $ | 88 | ||||||||||||||
| 2005 activity | — | (7 | ) | (7 | ) | |||||||||||||||
| Net Unrealized Gain on Derivative Instruments(1) | Net Unrealized Gain (or Loss) On Short-Term Investments and Other(1) | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||
| Balance at December 31, 2005 | — | 81 | 81 | |||||||||||||||||
Balance at January 1, 2006 | $ | — | $ | 81 | $ | 81 | ||||||||||||||
| 2006 activity | 30,954 | 46 | 31,000 | 30,954 | 46 | 31,000 | ||||||||||||||
| Balance at December 31, 2006 | 30,954 | 127 | 31,081 | 30,954 | 127 | 31,081 | ||||||||||||||
| 2007 activity | (23,302 | ) | (153 | ) | (23,455 | ) | (23,302 | ) | (153 | ) | (23,455 | ) | ||||||||
| Balance at December 31, 2007 | $ | 7,652 | $ | (26 | ) | $ | 7,626 | $ | 7,652 | $ | (26 | ) | $ | 7,626 | ||||||
2008 activity | (7,652 | ) | (929 | ) | (8,581 | ) | ||||||||||||||
Balance at December 31, 2008 | $ | — | $ | (955 | ) | $ | (955 | ) | ||||||||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The table below sets forth the changes in the Company's unrealized gains on derivative instruments included as a component of comprehensive income (loss) for the years ended December 31, 20072008 and 20062007 (in 000's):
| | 2007 | 2006 | 2008 | 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unrealized derivative gain in comprehensive income, at January 1 | $ | 49,009 | $ | — | $ | 12,088 | $ | 49,009 | ||||||
| Change in fair value | (9,043 | ) | 48,996 | (851 | ) | (9,043 | ) | |||||||
| Reclassification of net gains to income | (27,829 | ) | — | (11,272 | ) | (27,829 | ) | |||||||
| Net ineffectiveness | (49 | ) | 13 | 35 | (49 | ) | ||||||||
| 12,088 | 49,009 | — | 12,088 | |||||||||||
| Related income tax effect | (4,436 | ) | (18,055 | ) | — | (4,436 | ) | |||||||
| Unrealized derivative gain in comprehensive income at December 31 | $ | 7,652 | $ | 30,954 | ||||||||||
Unrealized derivative gain in comprehensive income (loss) at December 31 | $ | — | $ | 7,652 | ||||||||||
Segment Information
Cimarex has one reportable segment (exploration and production).
Recently Issued Accounting Standards
In December 2007,May, 2008, the Financial Accounting Standards Board ("FASB") issued twoa new Statements. FASB Statement 141R,Staff Position (No. APB 14-1),Business Combinations,Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at "full fair value". The Statement redefines various aspects related to the accounting for a business combination, by now applying the acquisition method of accounting (previously referred to as the purchase method). FASB Statement 160,Noncontrolling Interests in Consolidated Financial Statements, requires noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. We do not expect the adoption of either Statement to have a material impact on our financial statements.
5. FINANCIAL INSTRUMENTS
Derivatives
In connection with the Magnum Hunter merger, Cimarex acquired Magnum Hunter's existing commodity derivatives. These derivative instruments were not designated for hedge accounting treatment. During 2006, Cimarex recognized a net gain of $23.0 million. In 2005, we recorded a net loss of $67.8 million. Activity in both years included non-cash mark-to-market derivative gains and losses as well as cash settlements. Cash payments related to these contracts for 2006 totaled $19.0 million, and $83.4 million from the date of the merger through the fourth quarter of 2006. As of December 31, 2006, all derivative contracts assumed with the merger had expired.
In 2006, we entered into additional derivative contracts to mitigate a portion of our potential exposure to adverse market changes in an environment of volatile gas prices. Using zero-cost collars with
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FINANCIAL INSTRUMENTS3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mid-Continent weighted average floor(Including Partial Cash Settlement), that will impact the accounting for the components of convertible debt that can be settled wholly or partly in cash upon conversion. The new requirements apply not only to new instruments, but also would be applied retrospectively to previously issued convertible instruments. The debt and ceiling pricesequity components of $7.00the instruments are to $10.17be accounted for separately. The value assigned to the debt component is the estimated value of similar debt without a conversion feature as of the issuance date, with the remaining proceeds allocated to the equity component and recorded as additional paid-in capital. The debt component is recorded at a discount and is subsequently accreted to its par value, thereby reflecting an overall market rate of interest in the income statement. This Staff Position is effective for both new and previously issued instruments for current and comparative periods in fiscal years beginning after December 15, 2008, and interim periods within those years. We will adopt this in the first quarter of 2009. Upon adoption, without considering tax effects, we will retrospectively record a decrease in the book value of our Floating Rate Convertible Notes of approximately $30 million as of June 7, 2005, and a corresponding increase in additional paid-in-capital. In addition, we will record additional non-cash interest expense of approximately $1.9 million per year for 2008, 2007 and $7.002006.
In June, 2008, the FASB issued a new Staff Position (EITF 03-6-1),Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, which holds that unvested share-based payment awards that contain non forfeitable rights to $9.90dividends or dividend equivalents are "participating securities" (as defined by EITF 03-6 as securities that may participate in undistributed earnings with common stock, whether that participation is conditioned upon the occurrence of a specified event or not, regardless of the form of participation), and therefore should be included in computing earnings per share using the two-class earnings allocation method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. This Staff Position is effective for financial statements issued in fiscal years beginning after December 15, 2008, we hedged 29.2 million MMBtu and 14.6 million MMBtuinterim periods within those years. Once effective, the requirements will be applied by restating previously reported earnings per share data. We will adopt this in the first quarter of our anticipated Mid-Continent gas production2009.
4. FAIR VALUE MEASUREMENTS
Our short-term investments are reported at fair value in the accompanying balance sheets. SFAS No. 157,Fair Value Measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels. Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for 2007identical assets and 2008, respectively. Atliabilities. Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for an asset or liability. The following tables
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. FAIR VALUE MEASUREMENTS (Continued)
provide fair value measurement information for certain assets and liabilities as of December 31, 2007,2008 and 2007.
| | Carrying Amount | Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||
December 31, 2008: | ||||||||
Financial Assets (Liabilities): | ||||||||
Short-term investments | $ | 2,502 | $ | 2,502 | ||||
7.125% Notes due 2017 | $ | (350,000 | ) | $ | (267,750 | ) | ||
Bank debt | $ | (220,000 | ) | $ | (220,000 | ) | ||
Floating rate convertible notes due 2023 | $ | (21,223 | ) | $ | (19,450 | ) | ||
| | Carrying Amount | Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|
| | (In thousands) | |||||||
December 31, 2007: | ||||||||
Financial Assets (Liabilities): | ||||||||
Short-term investments | $ | 14,391 | $ | 14,391 | ||||
Derivative instruments | $ | 12,124 | $ | 12,124 | ||||
7.125% Notes due 2017 | $ | (350,000 | ) | $ | (346,504 | ) | ||
Floating rate convertible notes due 2023 | $ | (137,159 | ) | $ | (183,395 | ) | ||
Assessing the remaining contracts outstanding represented approximately 24%significance of our current anticipated Mid-Continent gas production for 2008.
Under the collar agreements, we receive the difference between an agreed upon index price and a floor price if the index price is below the floor price. We pay the difference between the agreed upon contracted ceiling price and the index price only if the index price is above the contracted ceiling price.
No amounts are paid or received if the index price is between the contracted floor and ceiling prices. These contracts have been designated for hedge accounting treatment as cash flow hedges.
Settlements received during the year ended December 31, 2007 equaled $27.8 million which were recorded in gas sales and increased the average realized price for the year by $0.23 per Mcf. During the periods ended December 31, 2007 and 2006, we recognized an unrealized gain of $49 thousand and an unrealized loss of $13 thousand, respectively, relatedparticular input to the ineffective portion of the derivative contracts.
At December 31, 2006, the fair value of $41.9 millionmeasurement requires judgment, considering factors specific to the asset or liability. The following methods and $7.1 million ofassumptions were used to estimate the contracts were recorded as current and long-term assets, respectively, and an unrealized gain (net of deferred income taxes) of $31 million was recorded in other comprehensive income.
At December 31, 2007, the fair value of the remaining contracts was approximately $12.1 million and was recorded as a current asset. An unrealized gain (net of deferred income taxes) of $7.7 million was recorded in other comprehensive income. Based on the estimated fair values of the derivative contracts at December 31, 2007, the amount of unrealized gain (net of deferred income taxes) to be reclassified from accumulated other comprehensive income to gas revenueassets and liabilities in the next twelve months would be approximately $7.7 million. We believe that we have sufficient production volumes such that the hedge contract transactions will occur as expected.table above.
Short-term Investments (Level 2)
In the fourth quarter of 2007, we invested $16 million in an asset-backed securities fund. The investments,fund, which are expectedwe expect to be liquidated in 2008,2009. The investments are classified as available-for-sale, and marked-to-market at the end of each period, throughchanges in the fair value of the investments are recorded in other comprehensive income.income (loss). The fair values of these investments are based on a net asset valuation provided by the fund manager. During 2008, we liquidated $10.4 million of the investments, with a realized loss of $395 thousand and an impairment charge of $801 thousand, both of which were included in earnings for the period. We also reflected an unrealized loss of $664 thousand in other comprehensive income (loss) as of December 31, 2008. As of December 31, 2007, we had liquidated $1.4 million of the investments with a realized loss of $17 thousand. We also recordedthousand, included in earnings for the period, and an unrealized loss of $183$184 thousand, recorded in other comprehensive income resulting in a(loss).
Bank Debt and Notes
Debt
The fair value attributableof our bank debt is estimated to the investments of $14.4 million.
Debt
Our revolving credit facility provides for $500 million of long-term committed credit. The carrying amount of the credit facility approximates the fair value because the interest rates on the credit facility are variable. At December 31, 2007, there were no outstanding borrowings under the credit facility. At December 31, 2006,approximate the carrying amount ofas the outstanding borrowings was $95 million.interest is a floating rate based on either the London Interbank Offered Rate ("LIBOR") or the JP Morgan Chase Bank prime rate and resets periodically.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. FINANCIAL INSTRUMENTS4. FAIR VALUE MEASUREMENTS (Continued)
Notes
The following table presents the carrying amounts and estimated fair values of our other debt instruments at December 31, 2007 and 2006.
| | 2007 | 2006 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||
| | (In thousands) | |||||||||||
| 7.125% Notes due 2017(1) | $ | 350,000 | $ | 346,504 | $ | — | $ | — | ||||
| 9.6% Notes due 2012 (face value $195,000)(1) | — | — | 210,746 | 205,238 | ||||||||
| Floating rate convertible notes due 2023 (face value $125,000) | 137,159 | 183,395 | 137,921 | 157,393 | ||||||||
The carrying amounts for the convertible notes do not reflect $49.6 million of Paid in Capital attributable to the fair value of our common stock at the time we acquired the convertible notes in the Magnum Hunter merger. There is not an observable market for theour convertible notes. At December 31, 2008, the fair value of the notes was estimated to approximate the face value of the notes, because the notes bear interest at LIBOR, and reset quarterly. The conversion rate of $28.59 attributable to the conversion feature at December 31, 2008 exceeded the $26.78 per share closing price of our common stock; therefore, no value was attributed to the conversion feature. At December 31, 2007, the closing price of our common stock was $42.53 per share and exceeded the $28.99 conversion ratio. Therefore, the fair valuesvalue of the convertible notes were based on theat December 31,st closing price per share for our common stock, which was $42.53 and $36.50 for 2007 and 2006, respectively. Therefore, the calculated fair value includesincluded value attributable to both the face amount of the notes and the conversion feature.
Derivative Instruments
At December 31, 2008, we had no derivative instruments outstanding. The fair value of our derivative instruments at December 31, 2007 was estimated using internal discounted cash flow calculations based on the stated contract prices and current and projected market prices at December 31, 2007.
Other Financial Instruments
The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities of these assets and liabilities. At December 31, 2008, the allowance for doubtful accounts for trade, oil and gas sales, and gas gathering, processing, and marketing receivables was $5.1 million, $0.7 million, and zero, respectively. At December 31, 2007, the allowance for doubtful accounts for trade, oil and gas sales, and gas gathering, processing, and marketing receivables was $5.6 million, $0.2 million, and zero, respectively. At December 31, 2006, the allowance for doubtful accounts for trade, oil and gas sales, and gas gathering, processing, and marketing receivables was $5.7 million, $0.3 million, and zero, respectively.
Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry. Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry.
6.5. ASSET RETIREMENT OBLIGATIONS
The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made, and the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Oil and gas producing companies incur this liability which includes costs related to the plugging of wells, the removal of facilities and equipment, and site restorations, upon acquiring or drilling a successful well. Subsequent to initial measurement, the asset retirement liability is required to be accreted each period. If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are depleted as a component of the full cost pool.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.5. ASSET RETIREMENT OBLIGATIONS (Continued)
The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the years ended December 31, 20072008 and 20062007 (in thousands):
| | | 2007 | 2006 | | 2008 | 2007 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset retirement obligation at January 1 | Asset retirement obligation at January 1 | $ | 129,141 | $ | 101,128 | Asset retirement obligation at January 1 | $ | 113,054 | $ | 129,141 | ||||||
| Liabilities incurred | 5,063 | 15,318 | Liabilities incurred | 6,095 | 5,063 | |||||||||||
| Liabilitiy settlements and disposals | (25,880 | ) | (4,337 | ) | Liability settlements and disposals | (8,882 | ) | (25,880 | ) | |||||||
| Accretion expense | 6,628 | 6,391 | Accretion expense | 6,663 | 6,628 | |||||||||||
| Revisions of estimated liabilities | (1,898 | ) | 10,641 | Revisions of estimated liabilities | 23,018 | (1,898 | ) | |||||||||
| Asset retirement obligation at December 31 | Asset retirement obligation at December 31 | 113,054 | 129,141 | Asset retirement obligation at December 31 | 139,948 | 113,054 | ||||||||||
| Less: Current asset retirement obligation | 7,270 | 4,320 | ||||||||||||||
Less current obligation | Less current obligation | 14,610 | 7,270 | |||||||||||||
| Long-term asset retirement obligation | Long-term asset retirement obligation | $ | 105,784 | $ | 124,821 | Long-term asset retirement obligation | $ | 125,338 | $ | 105,784 | ||||||
During 2008 we recognized a revision of $23 million to our asset retirement obligation. The net increase resulted primarily from an overall increase in abandonment cost estimates and changes in the productive lives of our wells.
7. LONG-TERM6. LONG TERM DEBT
Debt at December 31, 20072008 and 20062007 consisted of the following (in thousands):
| | 2007 | 2006 | 2008 | 2007 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Bank debt | $ | — | $ | 95,000 | $ | 220,000 | $ | — | |||||
| 9.6% Notes due 2012 (face value $195,000) | — | 210,746 | |||||||||||
| 7.125% Notes due 2017 | 350,000 | — | 350,000 | 350,000 | |||||||||
| Floating rate convertible notes due 2023 (face value $125,000) | 137,159 | 137,921 | |||||||||||
Floating rate convertible notes due 2023 (face value $19,450 and $125,000, respectively) | 21,223 | 137,159 | (1) | ||||||||||
| Total long-term debt | $ | 487,159 | $ | 443,667 | $ | 591,223 | $ | 487,159 | |||||
Bank Debt
OurWe have a $1.0 billion senior secured revolving credit facility provides for("credit facility") with a syndicate of banks that had a borrowing base of $1.0 billion as of December 31, 2008. At our option we set the banks' lending commitment under the credit facility at $500 millionmillion. The borrowing base is determined at the discretion of long-term committed credit.the lenders, based on the collateral value of our proved reserves and is subject to potential special and regular semi-annual redeterminations.
The credit facility is scheduled to maturematures on July 1, 2010 and is secured by mortgages on certain oil and gas properties and the stock of certain wholly-owned operating subsidiaries. Amounts outstanding bear interest at our election at either a floating LIBOR plus 1%-1.75% or at the JP Morgan Chase Bank prime rate plus 0%-0.5%. At December 31, 2007,2008, there were nowas $220 million of borrowings outstanding borrowings under the revolving credit facility.facility at a weighted average interest rate of approximately 1.66%. We also had letters of credit for approximately $2.7
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LONG TERM DEBT (Continued)
outstanding of $2.8 million posted against the borrowing base, leaving an unused borrowing amountavailability of approximately $497.3$277.2 million at December 31, 2007.2008.
The credit facility contains various covenants and restrictive provisions which may limit our ability to incur additional indebtedness, make investments or loans and create liens. The credit agreement contains bothrequires us to maintain a current ratio (current assets to current liabilities, as defined) greater than 1 to 1 and a leverage ratio (indebtedness to EBITDA, as defined) not to exceed 3.0 to 1. The current ratio, as defined by the credit agreement, at December 31, 2008, was 1.69 to 1 and our leverage ratio was 0.42 to 1. As of December 31, 2008 we were in compliance with all of the financial and non-financial covenants which we do not view as materially restrictive.covenants.
The 9.6% notes, which were assumed in the Magnum Hunter merger, were redeemed on May 18, 2007. The notes were redeemed at 104.8% of the principal amount plus accrued interest of $3.3 million through the redemption date, for a total of $207.6 million. At acquisition, the notes were recorded at a fair market value of $215.5 million. We recognized a gain on the early extinguishment of this debt of $5.1 million which is reflected on the income statement under Other income and expense.7.125% Notes due 2017
In May, 2007 we also soldissued $350 million of 7.125% senior unsecured notes that will mature May 1, 2017. The notes were sold to the public2017 at par. Net proceeds from the sale were used to redeem the 9.6% notes and reduce borrowings under our credit facility. Interest on the notes is payable May 1 and November 1 of each year. The first interest payment was made on November 1, 2007.notes are governed by an indenture containing covenants that could limit our ability to incur additional indebtedness; pay dividends or repurchase our common stock; make investments and other restricted payments; incur liens; enter into sale/leaseback transactions; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets.
The notes are redeemable at our option, in whole or in part, at any time on and after May 1, 2012 at the following
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. LONG-TERM DEBT (Continued)
redemption prices (expressed as percentages of the principal amount) plus accrued interest, if any, thereon to the date of redemption.
Year | Percentage | |||
|---|---|---|---|---|
2012 | 103.6 | % | ||
2013 | 102.4 | % | ||
2014 | 101.2 | % | ||
2015 and thereafter | 100.0 | % | ||
At any time prior to May 1, 2010, we may redeem up to 35% of the original principal amount of the notes with the proceeds of certain equity offerings of our shares of common stock at a redemption price of 107.125% of the principal amount of the notes, together with accrued and unpaid interest, if any, to the date of redemption.
Atredemption.At any time prior to May 1, 2012, we may also redeem all, but not part, of the notes at a price equal toof 100% of the principal amount of the notes plus accrued and unpaid interest plus a "make-whole" premium.
If a specified change of control occurs, subject to certain conditions, we must make an offer to purchase the notes at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to the date of the purchase.
Floating rate convertible notes due 2023
The floating rate convertible senior notes were assumed in the Magnum Hunter merger and mature on December 15, 2023. At acquisition, the notes were recorded at a fair market value of $144.7 million, with an additional $49.6 million attributable to the conversion feature of the notes recorded in Paid in Capital. The notes are senior unsecured obligations and bear interest at an annual rate equal to three-monthof three month LIBOR, reset quarterly. On December 31, 2007,2008, the interest rate equaled 4.99%was 2.0%.
HoldersThe holders as of December 15, 2008, had the right to require us to repurchase all or a portion of the notes at 100% of the principal amount (plus accrued interest). As of December 15, 2008, holders with principal of $105.550 million submitted their notes for repurchase leaving $19.450 million still outstanding.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. LONG TERM DEBT (Continued)
We repurchased the $105.550 million in notes with borrowings under our credit facility. The remaining notes have future repurchase dates as of December 15, 2013, and 2018. We have the right at any time to redeem some or all of the notes still outstanding at a redemption price of 100% of the principal amount (plus accrued interest).
In addition to the repurchase rights, holders of the convertible notes may surrender their notes for conversion into a combination of cash and shares of our common stock upon the occurrence of certain circumstances, including if the price of our common stock has been trading above the fixed conversion price of $28.99$28.59 per share. On December 31, 2007,2008, the closing price of our common stock traded on the New York Stock Exchange was $42.53. To date, no holders have surrendered their notes for conversion. In addition$26.78.
If a specified change of control occurs, subject to the holders' rightcertain conditions, we must make an offer to redeem the notes if our common stock price is above the conversion price, the holders also have the right to require Cimarex to repurchase all or a portion ofpurchase the notes at a repurchasepurchase price equal to 100%of 101% of the principal amount (plus accrued interest) on December 15, 2008, 2013, and 2018. The indentureagreement also provides Cimarex with an option to redeem some or all of the notes, at a redemption price equalplus accrued and unpaid interest to 100%the date of the principal amount (plus accrued interest) anytime after December 22, 2008.purchase.
8.7. INCOME TAXES
Federal income tax expense (benefit) for the years ended December 31, 2008, 2007, 2006, and 20052006 differ from the amounts that would be provided by applying the U.S. Federal income tax rate, due to the effect of state
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. INCOME TAXES (Continued)
income taxes, and the Domestic Production Activities deduction. The components of the provision for income taxes are as follows (in thousands):
| | | Years Ended December 31, | | Years Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | |||||||||||||
| Current taxes: | Current taxes: | Current taxes: | |||||||||||||||||||
| Federal | $ | 26,993 | $ | (20,672 | ) | $ | 66,994 | Federal | $ | 65,323 | $ | 26,993 | $ | (20,672 | ) | ||||||
| State | 3,656 | (1,262 | ) | 8,246 | State | 866 | 3,656 | (1,262 | ) | ||||||||||||
| 30,649 | (21,934 | ) | 75,240 | 66,189 | 30,649 | (21,934 | ) | ||||||||||||||
| Deferred taxes: | Deferred taxes: | Deferred taxes: | |||||||||||||||||||
| Federal | 162,122 | 211,534 | 108,487 | Federal | (569,243 | ) | 162,122 | 211,534 | |||||||||||||
| State | 5,385 | 9,005 | 4,403 | State | (25,559 | ) | 5,385 | 9,005 | |||||||||||||
| 167,507 | 220,539 | 112,890 | (594,802 | ) | 167,507 | 220,539 | |||||||||||||||
| $ | 198,156 | $ | 198,605 | $ | 188,130 | $ | (528,613 | ) | $ | 198,156 | $ | 198,605 | |||||||||
Reconciliations of the income tax (benefit) expense calculated at the federal statutory rate of 35% to the total income tax (benefit) expense are as follows (in thousands):
| | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | ||||||||||||||
| Provision at statutory rate | $ | 190,619 | $ | 190,513 | $ | 180,759 | $ | (500,588 | ) | $ | 190,619 | $ | 190,513 | |||||||
| Effect of state taxes | 9,041 | 7,564 | 9,301 | (26,118 | ) | 9,041 | 7,564 | |||||||||||||
| Domestic Production Activities deduction | (1,723 | ) | — | (2,095 | ) | (2,208 | ) | (1,723 | ) | — | ||||||||||
| Other | 219 | 528 | 165 | 301 | 219 | 528 | ||||||||||||||
| Income tax expense | $ | 198,156 | $ | 198,605 | $ | 188,130 | ||||||||||||||
Income tax (benefit) expense | $ | (528,613 | ) | $ | 198,156 | $ | 198,605 | |||||||||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.7. INCOME TAXES (BENEFIT) (Continued)
The components of Cimarex's net deferred tax liabilities are as follows (in thousands):
| | | December 31, | | December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | | 2008 | 2007 | ||||||||||||
| Long-term: | Long-term: | Long-term: | ||||||||||||||||
| Assets: | ||||||||||||||||||
| Net operating loss carryforwards | $ | — | $ | 24,176 | ||||||||||||||
| Credit carryforwards | 3,587 | 1,627 | Assets: | |||||||||||||||
| Merger related accruals | — | 25,762 | Credit carryforwards | $ | — | $ | 3,587 | |||||||||||
| Other | 1,474 | 23,723 | Other | 38,058 | 1,474 | |||||||||||||
| 5,061 | 75,288 | 38,058 | 5,061 | |||||||||||||||
| Liabilities: | Liabilities: | |||||||||||||||||
| Property, plant and equipment | (1,081,284 | ) | (996,953 | ) | Property, plant and equipment | (537,692 | ) | (1,081,284 | ) | |||||||||
| Net, long-term deferred tax liability | (1,076,223 | ) | (921,665 | ) | Net, long-term deferred tax liability | (499,634 | ) | (1,076,223 | ) | |||||||||
| Current: | Current: | Current: | ||||||||||||||||
| Assets: | Assets: | |||||||||||||||||
| Derivative instruments | 4,445 | — | Derivative instruments | — | 4,445 | |||||||||||||
| Other | 1,252 | 1,498 | Other | 2,435 | 1,252 | |||||||||||||
| 5,697 | 1,498 | 2,435 | 5,697 | |||||||||||||||
| Net deferred tax liabilities | Net deferred tax liabilities | $ | (1,070,526 | ) | $ | (920,167 | ) | Net deferred tax liabilities | $ | (497,199 | ) | $ | (1,070,526 | ) | ||||
We have recorded deferred tax assets of $10.8$40.5 million the realization of which $3.6 million is attributable to the alternative minimum credit carryforward which does not expire. The realization is dependent on generating sufficient taxable income in the future.
We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN 48") an interpretation of FASB Statement No. 109 "Accounting for Income Taxes", on January 1, 2007. The interpretation clarifies the accounting for uncertainty in income taxes recognized in our financial statements and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 resulted in no impact to our consolidated financial statements and we have no unrecognized tax benefits that would impact our effective rate.
As of December 31, 2007,2008, we made no provisions for interest or penalties related to uncertain tax positions. The tax years 20042005 - 20062007 remain open to examination by the Internal Revenue Service of the United States. We file tax returns with various state taxing authorities which remain open for tax years 20032004 - 20062007 for examination.
9.8. CAPITAL STOCK
Stock-based Compensation
Our 2002 Stock Incentive Plan was approved by stockholders in May 2003 and is effective until October 1, 2012. The plan provides for grants of stock options, restricted stock and restricted stock units to non-employee directors, officers and other eligible employees. A total of 12.7 million shares of common stock may be issued under the Plan.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.8. CAPITAL STOCK (Continued)
Restricted Stock and Units
During 20072008 we issued a total of 572,009464,620 restricted shares and 5,2743,790 restricted units to non-employee directors, officers, and other employees. Included in that amount are 228,000244,000 shares issued to certain executives that are subject to market condition-based vesting determined by our stock price performance relative to a defined peer group's stock price performance. After three years of continued service, thean executive will be entitled to vest in 50% to 100% of the award. The material terms of performance goals applicable to these awards were approved by stockholders in May 2006. The remaining shares and units granted in 20072008 have requisite service-based vesting schedules ranging from oneof three to five years.
The following table presents restricted stock activity during the last three years:
| | | Years Ended December 31, | | Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | |||||||||||
| Outstanding beginning of period | Outstanding beginning of period | 792,779 | 249,905 | 14,145 | Outstanding beginning of period | 1,289,695 | 792,779 | 249,905 | |||||||||||
| Vested | (13,693 | ) | (7,915 | ) | (11,248 | ) | Vested | (28,470 | ) | (13,693 | ) | (7,915 | ) | ||||||
| Granted | 572,009 | 600,589 | 249,008 | Granted | 464,620 | 572,009 | 600,589 | ||||||||||||
| Canceled | (61,400 | ) | (49,800 | ) | (2,000 | ) | Canceled | (53,600 | ) | (61,400 | ) | (49,800 | ) | ||||||
| Outstanding end of period | Outstanding end of period | 1,289,695 | 792,779 | 249,905 | Outstanding end of period | 1,672,245 | 1,289,695 | 792,779 | |||||||||||
The following table presents restricted unit activity during the last three years:
| | | Years Ended December 31, | | Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | |||||||||||
| Outstanding beginning of period | Outstanding beginning of period | 696,641 | 697,937 | 780,787 | Outstanding beginning of period | 701,915 | 696,641 | 697,937 | |||||||||||
| Converted to Stock | — | — | (154,600 | ) | Converted to Stock | (45,500 | ) | — | — | ||||||||||
| Granted | 5,274 | 4,954 | 71,750 | Granted | 3,790 | 5,274 | 4,954 | ||||||||||||
| Canceled | — | (6,250 | ) | — | Canceled | (5,000 | ) | — | (6,250 | ) | |||||||||
| Outstanding end of period | Outstanding end of period | 701,915 | 696,641 | 697,937 | Outstanding end of period | 655,205 | 701,915 | 696,641 | |||||||||||
| Vested included in outstanding | Vested included in outstanding | 559,839 | 172,617 | 128,550 | Vested included in outstanding | 596,247 | 559,839 | 172,617 | |||||||||||
Vesting of restricted stock and units granted in years before 2006 is exclusively related to continued service of the grantee for one to five years. In certain cases, a three year required holding period following vesting also applies. A restricted unit represents a right to an unrestricted share of common stock upon completion of defined vesting and holding periods. The restricted stock and stock unit agreements provide that grantees are entitled to receive dividends on unvested shares.
Compensation expense for service-based vesting restricted shares or units is based upon amortization of the grant-date market value of the award. The fair value of the market condition-based restricted stock is based on the grant-date market value of the award utilizing a Monte Carlo simulation model to estimate the percentage of awards that will vest at the end of the three-year period. Compensation expense related
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.8. CAPITAL STOCK (Continued)
to the restricted stock and unit awards is recognized ratably over the applicable vesting period. We recorded compensation costs related to the restricted stock and units as follows (in thousands):
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | |||||||
| Compensation costs: | ||||||||||
| Recorded as expense | $ | 8,875 | $ | 5,913 | $ | 5,177 | ||||
| Capitalized to oil and gas properties | $ | 3,863 | $ | 3,320 | $ | 1,725 | ||||
| | Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | ||||||||
Compensation costs: | |||||||||||
Recorded as expense | $ | 9,363 | $ | 8,875 | $ | 5,913 | |||||
Capitalized to oil and gas properties | $ | 6,128 | $ | 3,863 | $ | 3,320 | |||||
Unamortized compensation costs related to unvested restricted shares and units at December 31, 2008, 2007, and 2006 and 2005 was $33.6 million, $31.7 million, $30.6 million, and $39.8$30.6 million, respectively.
Stock Options
Options granted under our plan expire ten years from the grant date and vest in one-fifth increments on eachhave service-based vesting schedules of the firstthree to five anniversaries of the grant date.years. The plan provides that all grants have an exercise price equal toof the average of the high and low prices of our common stock as reported by the New York Stock Exchange on the date of grant. Upon the exercise of certain stock options granted after October 1, 2002, grantees are required to hold at least 50% of the profit shares, as defined in the plan, until the eighth anniversary of the grant date.
There were no483,500 stock options granted during 2007.2008. Information about outstanding stock options is summarized below:
| | Shares | Weighted Average Exercise Price | Weighted Average Remaining Term | Aggregate Intrinsic Value (000) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding as of January 1, 2007 | 1,913,529 | $ | 16.23 | ||||||||
| Exercised | (454,263 | ) | 12.90 | ||||||||
| Granted | — | — | |||||||||
| Canceled | (1 | ) | 7.91 | ||||||||
| Outstanding as of December 31, 2007 | 1,459,265 | $ | 17.26 | 4.5 Years | $ | 36,919 | |||||
| Exercisable as of December 31, 2007 | 1,387,805 | $ | 16.29 | 4.3 Years | $ | 36,430 | |||||
| | Shares | Weighted Average Exercise Price | Weighted Average Remaining Term | Aggregate Intrinsic Value (000) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding as of January 1, 2008 | 1,489,565 | $ | 17.73 | ||||||||||
Exercised | (414,449 | ) | 15.51 | ||||||||||
Granted | 483,500 | 56.70 | |||||||||||
Canceled | (26,600 | ) | 56.74 | ||||||||||
Outstanding as of December 31, 2008 | 1,532,016 | $ | 29.95 | 5.6 Years | $ | 10,219 | |||||||
Exercisable as of December 31, 2008 | 1,002,396 | $ | 17.17 | 3.6 Years | $ | 10,219 | |||||||
The total intrinsic value of stock options exercised during 2008, 2007 and 2006 was $18.9 million, $11.0 million. In 2006million and 2005 the intrinsic value of stock options exercised was $4.4 million, and $17.7 million, respectively.
During 2007 compensation expense related to stock options was approximately $1.9 million. In 2006 and 2005 compensation expense was $2.3 million and $3.4 million, respectively. Compensation cost for stock options is determined pursuant to SFAS No. 123R. Historical amounts may not be representative of future amounts as additional options may be granted. We recognize compensation cost ratably over the vesting period. During 2008, 2007 and 2006, compensation cost (including capitalized amounts) were $1.7 million, $1.9 million and $2.3 million, respectively.
The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2008, 2007 and 2006 was $19.44, $15.62 and 2005 was $15.75, and $17.20, respectively. The fair value of options is estimated as of the date of grant using the Black-Scholes option-pricing model. Expected volatilities are based on the historical volatility of our common stock. Historical data is also used to estimate the probability of option
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. CAPITAL STOCK (Continued)
exercise, expected years until exercise and potential forfeitures. The risk-free interest rate used is the five-year U.S. Treasury bond in effect at the date of the grant.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. CAPITAL STOCK (Continued)
The following summarizes the assumptions used to determine the fair market value of options issued during the last three years:
| | Years Ended December 31, | Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||
| Expected years until exercise | N/A | 7.5 | 7.5 | 5.5 | 7.5 | 7.5 | |||||||||||
| Expected stock volatility | N/A | 32.2 | % | 25.5 | % | 32.4 | % | 32.3 | % | 32.2 | % | ||||||
| Dividend yield | N/A | 0.1 | % | 0.0 | % | 0.6 | % | 0.6 | % | 0.1 | % | ||||||
| Risk-free interest rate | N/A | 4.8 | % | 4.1 | % | 3.5 | % | 3.3 | % | 4.8 | % | ||||||
Cash received from option exercises during the years ended December 31, 2008, 2007, 2006, and 20052006 was approximately $6.4 million, $5.9 million, $2.7 million, and $9.3$2.7 million, respectively. The related tax benefits realized from option exercises totaled approximately $6.7 million, $4.0 million, $1.6 million, and $6.4$1.6 million, respectively, and were recorded to paid-in capital.
The following summary reflects the status of non-vested stock options granted to employees and directors as of December 31, 20072008 and changes during the year:
| | Shares | Weighted Average Grant Date Fair Value | ||||
|---|---|---|---|---|---|---|
| Non-vested as of January 1, 2007 | 300,220 | $ | 10.41 | |||
| Vested | (228,760 | ) | 8.80 | |||
| Granted | — | — | ||||
| Forfeited | — | — | ||||
| Non-vested as of December 31, 2007 | 71,460 | $ | 15.57 | |||
| | Shares | Weighted Average Grant Date Fair Value | ||||||
|---|---|---|---|---|---|---|---|---|
Non-vested as of January 1, 2008 | 101,760 | $ | 15.59 | |||||
Vested | (29,040 | ) | 14.68 | |||||
Granted | 483,500 | 19.44 | ||||||
Forfeited | (26,600 | ) | 19.43 | |||||
Non-vested as of December 31, 2008 | 529,620 | $ | 18.96 | |||||
As of December 31, 20072008 there was $1.0$8.7 million of unrecognized compensation cost related to non-vested stock options granted under our stock incentive plan. We expect to recognize that cost pro rata over a weighted-average period of 3.52.6 years. The weighted average exercise price of the non-vested stock options is $36.09.$54.15.
The total grant-date fair value of options that vested during 2008, 2007 and 2006 was $0.4 million, $2.0 million. The grant-date fair value of options that vested in 2006 and 2005 was $1.8 million and $3.6$1.8 million, respectively.
Stockholder Rights Plan
We have a stockholder rights plan. The plan is designed to improve the ability of our board to protect the interests of our stockholders in the event of an unsolicited takeover attempt. For every outstanding share of Cimarex common stock, there exists one purchase right (the Right). Each Right represents a right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock.Stock, at a purchase price of $60.00 per share, subject to adjustment in certain cases, to prevent dilution. The Rights will become exercisable only in the event a person or group acquires beneficial ownership of 15% or more of our common stock, or a person or group commences a tender offer or exchange offer that, if successfully consummated, would result in such person or group beneficially owning 15% or more of our common stock. In general, in either of these events, each holder of a right, other than the person or group initiating
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.8. CAPITAL STOCK (Continued)
stock. The purchase price for each one one-hundredth ofthe acquisition or tender offer, will have the right to receive Cimarex common stock with a share of Preferred Stock pursuantvalue equal to two times the exercise price of a Right is $60.00, subject to adjustment in certain cases to prevent dilution.the right.
We generally will be entitled to redeem the Rights under certain circumstances at $0.01 per Right at any time before the close of business on the tenth business day after there has been a public announcement of the acquisition of beneficial ownership by any person or group of 15% or more of our common stock. The Rights may not be exercised until our Board's right to redeem the stock has expired. Unless redeemed earlier, the Rights expire on February 23, 2012.
Dividends and Stock Repurchases
In December 2005, the Board of Directors declared our first quarterly cash dividend of $0.04 per share. A $0.04 per share cash dividend was also declared to shareholders inhas been authorized every quarter through third quarter 2007.since then. In December 2007, the dividend was increased to $0.06 per share. Future dividend payments will depend on the Company's level of earnings, financial requirements and other factors considered relevant by the Board of Directors.
In December 2005, the Board of Directors authorized the repurchase of up to four million shares of our common stock. The authorization is currently set to expire on December 31, 2009. Through December 31, 2007, we havehad repurchased and canceledcancelled a total of 1,364,300 shares at an overall average price of $39.05. ThePurchases may be made in both the open market and through negotiated transactions, and purchases may be increased, decreased or discontinued at any time without prior notice. There were no shares were acquired as follows:repurchased in the fourth quarter of 2008, or since the quarter ended September 30, 2007.
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2008
| Period | Total Number of Shares Purchased | Average Price Paid per Share | |||
|---|---|---|---|---|---|
| Year ended December 31, 2005 | 68,000 | $ | 43.03 | ||
| Year ended December 31, 2006 | 182,100 | $ | 44.43 | ||
| Year ended December 31, 2007 | 1,114,200 | $ | 37.93 | ||
| 1,364,300 | $ | 39.05 | |||
| Total Number of Shares purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of shares that may yet be Purchased Under the Plans or Programs | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
October, 2008 | None | NA | None | 2,635,700 | ||||||
November, 2008 | None | NA | None | 2,635,700 | ||||||
December, 2008 | None | NA | None | 2,635,700 | ||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.8. CAPITAL STOCK (Continued)
A summary of the Company's Common Stock activity follows:
| | Number of Shares (in thousands) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Issued | Treasury | Outstanding | ||||||||||||||||
| December 31, 2004 | 41,729 | — | 41,729 | ||||||||||||||||
| Shares issued for Magnum Hunter acquisition | 42,185 | (2,476 | ) | 39,709 | |||||||||||||||
| Shares issued under compensation plans, net of cancellations | 401 | — | 401 | ||||||||||||||||
| Option exercises, net of cancellations | 606 | — | 606 | ||||||||||||||||
| Treasury shares purchased | — | (68 | ) | (68 | ) | ||||||||||||||
| Treasury shares cancelled | (1,397 | ) | 1,397 | — | | Number of Shares (in thousands) | |||||||||||||
| | Issued | Treasury | Outstanding | ||||||||||||||||
| December 31, 2005 | December 31, 2005 | 83,524 | (1,147 | ) | 82,377 | December 31, 2005 | 83,524 | (1,147 | ) | 82,377 | |||||||||
| Shares issued under compensation plans, net of cancellations | 546 | — | 546 | Shares issued under compensation plans, net of cancellations | 546 | — | 546 | ||||||||||||
| Option exercises, net of cancellations | 142 | — | 142 | Option exercises, net of cancellations | 142 | — | 142 | ||||||||||||
| Treasury shares purchased | — | (182 | ) | (182 | ) | Treasury shares purchased | — | (182 | ) | (182 | ) | ||||||||
| Treasury shares cancelled | (250 | ) | 250 | — | Treasury shares cancelled | (250 | ) | 250 | — | ||||||||||
| December 31, 2006 | December 31, 2006 | 83,962 | (1,079 | ) | 82,883 | December 31, 2006 | 83,962 | (1,079 | ) | 82,883 | |||||||||
| Shares issued under compensation plans, net of cancellations | 511 | — | 511 | Shares issued under compensation plans, net of cancellations | 511 | — | 511 | ||||||||||||
| Option exercises, net of cancellations | 262 | — | 262 | Option exercises, net of cancellations | 262 | — | 262 | ||||||||||||
| Treasury shares purchased | — | (1,114 | ) | (1,114 | ) | Treasury shares purchased | — | (1,114 | ) | (1,114 | ) | ||||||||
| Treasury shares cancelled | (1,114 | ) | 1,114 | — | Treasury shares cancelled | (1,114 | ) | 1,114 | — | ||||||||||
| December 31, 2007 | December 31, 2007 | 83,621 | (1,079 | ) | 82,542 | December 31, 2007 | 83,621 | (1,079 | ) | 82,542 | |||||||||
Shares issued under compensation plans, net of cancellations | 441 | — | 441 | ||||||||||||||||
Option exercises, net of cancellations | 276 | — | 276 | ||||||||||||||||
Treasury shares purchased | — | — | — | ||||||||||||||||
Treasury shares cancelled | (194 | ) | 194 | — | |||||||||||||||
December 31, 2008 | December 31, 2008 | 84,144 | (885 | ) | 83,259 | ||||||||||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.9. EARNINGS (LOSS) PER SHARE
The calculations of basic and diluted net earnings (loss) per common share for the years ended December 31, 2008, 2007, 2006, and 20052006 are presented in the table below (in thousands, except per share data):
| | 2007 | 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Basic earnings per share: | ||||||||||
| Income available to common stockholders | $ | 346,469 | $ | 345,719 | $ | 328,325 | ||||
| Weighted average basic shares outstanding | 81,819 | 82,066 | 64,761 | |||||||
| Basic earnings per share | $ | 4.23 | $ | 4.21 | $ | 5.07 | ||||
| Diluted earnings per share: | ||||||||||
| Income available to common stockholders | $ | 346,469 | $ | 345,719 | $ | 328,325 | ||||
| Weighted average basic shares outstanding | 81,819 | 82,066 | 64,761 | |||||||
| Incremental shares assuming the exercise of stock options and the vesting of restricted stock and units | 1,438 | 1,274 | 1,388 | |||||||
| Incremental shares assuming the conversion of the floating rate convertible notes | 1,375 | 750 | 851 | |||||||
| Weighted average diluted shares outstanding | 84,632 | 84,090 | 67,000 | |||||||
| Diluted earnings per share | $ | 4.09 | $ | 4.11 | $ | 4.90 | ||||
| | 2008 | 2007 | 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Basic earnings (loss) per share: | |||||||||||
Income (loss) available to common stockholders | $ | (901,685 | ) | $ | 346,469 | $ | 345,719 | ||||
Weighted average basic shares outstanding | 81,478 | 81,819 | 82,066 | ||||||||
Basic earnings (loss) per share | $ | (11.07 | ) | $ | 4.23 | $ | 4.21 | ||||
Diluted earnings (loss) per share: | |||||||||||
Income (loss) available to common stockholders | $ | (901,685 | ) | $ | 346,469 | $ | 345,719 | ||||
Weighted average basic shares outstanding | 81,478 | 81,819 | 82,066 | ||||||||
Incremental shares from assumed exercise of stock options and the vesting of restricted stock and units | — | (1) | 1,438 | 1,274 | |||||||
Incremental shares from assumed conversion of the convertible senior notes | — | (1) | 1,375 | 750 | |||||||
Weighted average diluted shares outstanding | 81,478 | 84,632 | 84,090 | ||||||||
Diluted earnings (loss) per share | $ | (11.07 | ) | $ | 4.09 | $ | 4.11 | ||||
The following table presents the amounts of outstanding stock options, restricted stock and units.
| | 2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Stock options | 1,532,016 | 1,489,565 | 1,913,529 | |||||||
Restricted stock | 1,672,245 | 1,289,695 | 792,779 | |||||||
Restricted stock units | 655,205 | 701,915 | 696,641 | |||||||
All stock options and restricted units and shares and the convertible notes were considered potentially dilutive securities for each of the periods presented except for 30,300 options outstanding for eachthose determined to be anti-dilutive as follows:
| | 2008 | 2007 | 2006 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Stock options | 1,532,016 | 90,900 | 43,582 | |||||||
Restricted stock | 1,672,245 | 142,081 | 205,628 | |||||||
Restricted stock units | 655,205 | 1,517 | 3,454 | |||||||
Convertible notes | — | — | — | |||||||
| 3,859,466 | 234,498 | 252,664 | ||||||||
11.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. EMPLOYEE BENEFIT PLANS
We maintain and sponsor a contributory 401(k) plan for our employees. Costs related to the plan were $5.2 million, $3.2$5.2 million, and $1.9$3.2 million in the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively.
12.11. RELATED PARTY TRANSACTIONS
Helmerich & Payne, Inc. provides contract drilling services to Cimarex. Drilling costs of approximately $40.2 million, $21.5 million, $20.5 million, and $15.4$20.5 million were incurred by Cimarex related to such services for the years ended December 31, 2008, 2007, and 2006, and 2005, respectively. At December 31, 2008, we have minimum expenditure commitments of $26.2 million to secure the use of Helmerich & Payne, Inc.'s drilling rigs. We had no such commitments at December 31, 2007 or 2006. Hans Helmerich, a director of Cimarex, is President and Chief Executive Officer of Helmerich & Payne, Inc. Glenn A. Cox, a director of Cimarex, is also a director of Helmerich & Payne, Inc.
Certain subsidiaries of Newpark Resources, Inc. have provided various drilling services to Cimarex. Costs of such services were $24.3 million, $15.6 million, $19.0 million, and $16.0$19.0 million for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively. Jerry Box, a director of Cimarex is a director and Chairman of the Board of Newpark Resources, Inc.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.12. MAJOR CUSTOMERS
No individual purchasers represented more than 10% of our revenues for the years ended December 31, 20072008 and 2005.2007. During 2006, sales to one purchaser represented approximately 11% of our revenues.
14.13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands)
| | | For the Years Ended December 31, | | For the Years Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | |||||||||||||
| Cash paid during the period for: | Cash paid during the period for: | Cash paid during the period for: | |||||||||||||||||||
| Interest (net of amounts capitalized) | $ | 19,006 | $ | 5,268 | $ | 2,367 | Interest (net of amounts capitalized) | $ | 8,902 | $ | 19,006 | $ | 5,268 | ||||||||
| Income taxes | $ | 2,408 | $ | 37,774 | $ | 50,515 | Interest capitalized | $ | 22,108 | $ | 19,680 | $ | 24,248 | ||||||||
| Cash received during the period for: | |||||||||||||||||||||
| Income taxes | $ | 46,518 | $ | 1,007 | $ | 691 | Income taxes | $ | 128,861 | $ | 2,408 | $ | 37,774 | ||||||||
Cash received for income taxes | Cash received for income taxes | $ | 4,251 | $ | 46,518 | $ | 1,007 | ||||||||||||||
15.14. COMMITMENTS AND CONTINGENCIES
Shown below are the five year debt maturities and five year lease commitments as of December 31, 2007:2008:
| | Payments Due by Period | Payments Due by Period | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||||||||||||
| | (In thousands) | (In thousands) | |||||||||||||||||||||||||||||
| Long term debt (face value) | $ | 475,000 | $ | — | $ | — | $ | — | $ | 475,000 | $ | 589,450 | $ | 220,000 | $ | — | $ | — | $ | 369,450 | |||||||||||
| Operating leases | $ | 32,491 | $ | 5,855 | $ | 10,778 | $ | 9,585 | $ | 6,273 | $ | 28,233 | $ | 5,681 | $ | 10,814 | $ | 9,632 | $ | 2,106 | |||||||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
As In January 2009, the Tulsa County District Court issued a judgment in the H.B. Krug, et al versus Helmerich & Payne, Inc. ("H&P") case. This lawsuit was originally filed in 1998 and addressed H&P's conduct pertaining to a 1989 take-or-pay settlement, along with potential drainage issues and other related matters. Damages of $6.9 million plus $119.5 million for disgorgement of H&P's estimated potential compounded profit since 1989, resulting from the noted damages, were awarded to plaintiff royalty owners, for a total of $126.4 million. This amount was subsequently adjusted by the court to a total of $119.6 million. Pursuant to the 2002 spin-off transaction to shareholders of H&P by which Cimarex became a publicly-traded entity, Cimarex assumed the assets and liabilities of H&P's exploration and production business. We periodically assess the probability of estimable amounts related to litigation matters, as required by Financial Accounting Standard No. 5 (Accounting for Contingencies) and adjust our accruals accordingly. In September 2008, based on the available information at the time, we accrued an estimated litigation expense of $12 million for both damages and probable disgorgement. The higher disgorgement award could not be reasonably estimated until the final judgment in January 2009. We therefore accrued an additional $107.6 million, bringing the total accrued litigation expense for the year ended December 31, 2007, in2008 to $119.6 million for this lawsuit. We have appealed the District Court's judgments.
In the normal course of business, we have other various litigation related matters and associated accruals. Though some of the related claims may be significant, the resolution of them we believe, individually or in the aggregate, would not have a material adverse effect on our company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. COMMITMENTS AND CONTINGENCIES (Continued)financial condition or results of operations.
Other
We have a large development project in Sublette County, Wyoming where we are developing the deep Madison gas formation and constructing a gas processing plant. At December 31, 2007,2008, we had commitments of $102.8$176.8 million relating to construction of athe gas processing facility adjacentplant of which $108.6 million is subject to our Riley Ridge gas field in Sublette County, Wyoming.a construction contract. The total cost of the project will approximate $362 million. Pursuant to the terms of our operating agreement with our partners in this project, we will be reimbursed by them for approximately 43%421/2% of the construction costs, which will effectively reduce our net cash commitment to $59.1 million.costs.
We have drilling commitments of approximately $98.2$101.7 million consisting of contractual commitments relatedobligations to ourcomplete drilling obligationswells in progress at December 31, 2007.2008. We also have minimum expenditure commitments of $85.7 million to secure the use of drilling rigs. Hurricanes Gustav and Ike occurred during the third quarter of 2008. We are currently evaluating damages to our wells and platforms. It is not presently determinable what our share of the total damages will be after insurance proceeds.
At December 31, 2007,2008, we had aoutstanding purchase order commitments of $81.9 million for tubular inventory. Subsequent to year-end we have been able to cancel approximately $17.1 million of those commitments, and efforts continue to further reduce our inventory commitments.
At December 31, 2008, we had firm sales contractcontracts to deliver approximately one8.5 Bcf of natural gas over the next threetwelve months. If this gas is not delivered, our financial commitment would be approximately $2.9$40 million. This commitment will fluctuate due to price volatility and actual volumes delivered. However, we believe no financial commitment will be due based on our reserves and current production levels.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. COMMITMENTS AND CONTINGENCIES (Continued)
In connection with a gas gathering and processing agreement, we have commitments to deliver 59.4 Bcf of gas over the next five years. If no gas was delivered, the maximum amount that would be payable under these commitments would be approximately $45.1 million.
We have other various delivery commitments in the normal course of business, none of which are individually material. In aggregate these commitments have a maximum amount that would be payable, if no gas is delivered, of approximately $3.1$5.9 million.
We have non-cancelable operating leases for office and parking space in Denver, Tulsa, Dallas, and for small district and field offices. Rental expense for the operating leases totaled $6.4 million, $5.9 million, $5.2 million, and $3.5$5.2 million for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively.
All of the noted commitments were routine and were made in the normal course of our business.
16.15. PROPERTY SALES
Various interests in oil and gas properties were sold during 20072008 and 2006,2007, with net consideration equaling $176.7totaling $38.1 million and $4.5$176.7 million, respectively. Proceeds from the sales were recorded as a reduction to oil and gas properties, as prescribed under the full cost method of accounting.
In September 2006, our limited partnership affiliates, Teal Hunter L.P. and Mallard Hunter L.P., sold all of their interests in oil and gas properties. Our investments in these partnerships had been reflected in other assets, net. The net consideration received to date via distributions from the partnerships equaled $62.7is $62.9 million. Distributions in excess of the carrying amount of our investments of $3 million in 2007 and $19.8 million in 2006 have been recorded in other income.
17.16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES
Oil and Gas Operations—The following tables contain direct revenue and cost information relating to our oil and gas exploration and production activities for the periods indicated. We have no long-term supply or purchase agreements with governments or authorities in which we act as producer. Income taxestax
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
expense (benefit) related to our oil and gas operations are computed using the effective tax rate for the period (in thousands):
| | | Years Ended December 31 | | Years Ended December 31 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | 2007 | 2006 | 2005 | | 2008 | 2007 | 2006 | |||||||||||||
| Oil and gas revenues from production | Oil and gas revenues from production | $ | 1,364,622 | $ | 1,215,411 | $ | 1,072,422 | Oil and gas revenues from production | $ | 1,880,891 | $ | 1,364,622 | $ | 1,215,411 | |||||||
| Less operating costs and income taxes: | Less operating costs and income taxes: | Less operating costs and income taxes: | |||||||||||||||||||
| Depletion | 444,546 | 379,640 | 248,017 | Impairment of oil and gas properties | 2,242,921 | — | — | ||||||||||||||
| Asset retirement obligation | 8,937 | 7,018 | 3,819 | Depletion | 527,813 | 444,546 | 379,640 | ||||||||||||||
| Production | 201,512 | 176,833 | 104,067 | Asset retirement obligation | 8,796 | 8,937 | 7,018 | ||||||||||||||
| Transportation | 26,361 | 21,157 | 15,338 | Production | 218,736 | 201,512 | 176,833 | ||||||||||||||
| Taxes other than income | 93,630 | 91,066 | 73,360 | Transportation | 38,107 | 26,361 | 21,157 | ||||||||||||||
| Income taxes | 214,510 | 196,935 | 228,527 | Taxes other than income | 130,490 | 93,630 | 91,066 | ||||||||||||||
Income tax expense (benefit) | (475,295 | ) | 214,510 | 196,935 | |||||||||||||||||
| 989,496 | 872,649 | 673,128 | |||||||||||||||||||
| 2,691,568 | 989,496 | 872,649 | |||||||||||||||||||
| Results of operations from oil and gas producing activities | Results of operations from oil and gas producing activities | $ | 375,126 | $ | 342,762 | $ | 399,294 | Results of operations from oil and gas producing activities | $ | (810,677 | ) | $ | 375,126 | $ | 342,762 | ||||||
| Amortization rate per Mcfe | Amortization rate per Mcfe | $ | 2.70 | $ | 2.32 | $ | 1.92 | Amortization rate per Mcfe | $ | 2.97 | $ | 2.70 | $ | 2.32 | |||||||
Costs Incurred—The following table sets forth the capitalized costs incurred in our oil and gas production, exploration, and development activities (in thousands):
| | Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | |||||||||
| Costs incurred during the year: | ||||||||||||
| Acquisition of properties | ||||||||||||
| Proved | $ | 17,334 | $ | 25,970 | $ | 1,523,356 | ||||||
| Unproved | 102,572 | 64,421 | 338,557 | |||||||||
| Exploration | 236,866 | 292,336 | 225,297 | |||||||||
| Development | 666,662 | 691,946 | 375,616 | |||||||||
| Oil and gas expenditures | 1,023,434 | 1,074,673 | 2,462,826 | |||||||||
| Property sales | (176,659 | ) | (4,459 | ) | (149,262 | ) | ||||||
| 846,775 | 1,070,214 | 2,313,564 | ||||||||||
| Asset retirement obligation, net | (18,207 | ) | 20,177 | 9,118 | ||||||||
| $ | 828,568 | $ | 1,090,391 | $ | 2,322,682 | |||||||
| | Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2008 | 2007 | 2006 | |||||||||
Costs incurred during the year: | ||||||||||||
Acquisition of properties | ||||||||||||
Proved | $ | 6,618 | $ | 17,334 | $ | 25,970 | ||||||
Unproved | 310,666 | 102,572 | 64,421 | |||||||||
Exploration | 268,052 | 236,866 | 292,336 | |||||||||
Development | 1,035,442 | 666,662 | 691,946 | |||||||||
Oil and gas expenditures | 1,620,778 | 1,023,434 | 1,074,673 | |||||||||
Property sales | (38,093 | ) | (176,659 | ) | (4,459 | ) | ||||||
| 1,582,685 | 846,775 | 1,070,214 | ||||||||||
Asset retirement obligation, net | 24,822 | (18,207 | ) | 20,177 | ||||||||
| $ | 1,607,507 | $ | 828,568 | $ | 1,090,391 | |||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
Aggregate Capitalized Costs—The table below reflects the aggregate capitalized costs relating to our oil and gas producing activities at December 31, 20072008 (in thousands):
| Proved properties | $ | 5,545,977 | $ | 7,052,464 | ||||
| Unproved properties and properties under development, not being amortized | 364,618 | 465,638 | ||||||
| 5,910,595 | 7,518,102 | |||||||
| Less-accumulated depreciation, depletion and amortization | (1,938,863 | ) | (4,709,597 | ) | ||||
| Net oil and gas properties | $ | 3,971,732 | $ | 2,808,505 | ||||
Costs Not Being Amortized—The following table summarizes oil and gas property costs not being amortized at December 31, 2007,2008, by year that the costs were incurred (in thousands):
2008 | $ | 425,317 | |||||
| 2007 | $ | 181,999 | 36,855 | ||||
| 2006 | 40,696 | 3,453 | |||||
| 2005 | 141,435 | ||||||
| 2004 and prior | 488 | ||||||
2005 and prior | 13 | ||||||
| $ | 364,618 | $ | 465,638 | ||||
Costs not being amortized include the costs of wells in progress and certain unevaluated properties. On a quarterly basis, such costs are evaluated for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments, or reductions in value. To the extent that the evaluation indicates these properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. Abandonments of unproved properties are accounted for as an adjustment to capitalized costs related to proved oil and gas properties, with no losses recognized.
Oil and Gas Reserve Information—Proved oil and gas reserve quantities are based on estimates prepared by Cimarex in accordance with guidelines established by the Securities and Exchange Commission (SEC). DeGolyer and MacNaughton, independent petroleum engineers, reviewed the proved reserve estimates associated with at least 80% of the discounted future net cash flows before income taxes for the years ended December 31, 2008, 2007 and 2006. Ryder Scott Company, L.P., independent petroleum engineers, and DeGolyer and MacNaughton collectively reviewed the proved reserve estimates associated with at least 80% of the discounted future net cash flows before income taxes for the year ended December 31, 2005.
Proved reserves are estimated quantities of crude oil, natural gas, and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those that are expected to be recovered through existing wells with existing equipment and operating methods. There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and the timing of development expenditures. The following reserve data at December 31, 2008, 2007 and 2006 represents estimates only with relevant prices in effect at year
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
data at December 31, 2007, 2006 and 2005 represents estimates onlyend, and should not be construed as being exact. All of our reserves are located in the continental United States or the Gulf of Mexico.
| | | December 31, 2007 | December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Gas | Oil | Gas | Oil | Gas | Oil | | December 31, 2008 | December 31, 2007 | December 31, 2006 | |||||||||||||||||||||||
| | | (MMcf) | (MBbl) | (MMcf) | (MBbl) | (MMcf) | (MBbl) | | Gas | Oil | Gas | Oil | Gas | Oil | ||||||||||||||||||||
| Total proved reserves—Developed and undeveloped Beginning of year | 1,090,362 | 59,797 | 1,004,482 | 64,710 | 364,641 | 14,063 | ||||||||||||||||||||||||||||
| | | (MMcf) | (MBbl) | (MMcf) | (MBbl) | (MMcf) | (MBbl) | |||||||||||||||||||||||||||
Total proved reserves | Total proved reserves | |||||||||||||||||||||||||||||||||
Beginning of year | 1,122,694 | 58,250 | 1,090,362 | 59,797 | 1,004,482 | 64,710 | ||||||||||||||||||||||||||||
| Revisions of previous estimates | 50,027 | 1,251 | (14,498 | ) | (3,684 | ) | 9,534 | 270 | Revisions of previous estimates | (57,989 | ) | (16,465 | ) | 50,027 | 1,251 | (14,498 | ) | (3,684 | ) | |||||||||||||||
| Extensions, discoveries & improved recovery | 162,136 | 13,361 | 170,933 | 5,018 | 209,758 | 4,477 | Extensions, discoveries & improved recovery | 143,570 | 11,884 | 162,136 | 13,361 | 170,933 | 5,018 | |||||||||||||||||||||
| Purchases of reserves | 10,571 | 99 | 55,046 | 551 | 531,862 | 59,288 | Purchases of reserves | 2,483 | 55 | 10,571 | 99 | 55,046 | 551 | |||||||||||||||||||||
| Production | (119,937 | ) | (8,812 | ) | (124,733 | ) | (6,529 | ) | (100,272 | ) | (4,804 | ) | Production | (127,444 | ) | (8,395 | ) | (119,937 | ) | (7,446 | ) | (124,733 | ) | (6,529 | ) | |||||||||
| Sales of properties | (70,465 | ) | (7,446 | ) | (868 | ) | (269 | ) | (11,041 | ) | (8,584 | ) | Sales of properties | (15,981 | ) | (127 | ) | (70,465 | ) | (8,812 | ) | (868 | ) | (269 | ) | |||||||||
| End of year | 1,122,694 | 58,250 | 1,090,362 | 59,797 | 1,004,482 | 64,710 | End of year | 1,067,333 | 45,202 | 1,122,694 | 58,250 | 1,090,362 | 59,797 | |||||||||||||||||||||
| Proved developed reserves | Proved developed reserves | 848,001 | 51,497 | 851,213 | 50,202 | 820,244 | 51,521 | Proved developed reserves | 834,517 | 44,520 | 848,001 | 51,497 | 851,213 | 50,202 | ||||||||||||||||||||
Standardized Measure of Future Net Cash Flows—The "Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves" (Standardized Measure) is a disclosure requirement under FASB Statement No. 69,Disclosures About Oil and Gas Producing Activities. The Standardized Measure does not purport, nor should it be interpreted, to present the fair value of a company's proved oil and gas reserves. Fair value would require, among other things, consideration of expected future economic and operating conditions, a discount factor more representative of the time value of money, and risks inherent in reserve estimates.
Under the Standardized Measure, future cash inflows are estimated by applying year-end prices to the forecast of future production of year-end proved reserves. Future cash inflows are then reduced by estimated future production and development costs to determine net pre-tax cash flow. Future income taxes are computed by applying the statutory tax rate to the excess of pre-tax cash flow over our tax basis in the associated oil and gas properties. Tax credits and permanent differences are also considered in the future income tax calculation. Future net cash flow after income taxes is discounted using a ten percent annual discount rate to arrive at the Standardized Measure.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17.16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
The following summary sets forth the Company's Standardized Measure (in thousands):
| | December 31, | December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | ||||||||||||||
| Cash inflows | $ | 12,674,941 | $ | 9,397,265 | $ | 11,502,690 | $ | 7,314,200 | $ | 12,674,941 | $ | 9,397,265 | ||||||||
| Production costs | (3,673,259 | ) | (2,760,771 | ) | (2,957,911 | ) | (2,681,510 | ) | (3,673,259 | ) | (2,760,771 | ) | ||||||||
| Development costs | (540,555 | ) | (581,855 | ) | (504,686 | ) | (229,546 | ) | (540,555 | ) | (581,855 | ) | ||||||||
| Income tax expense | (2,689,836 | ) | (1,943,773 | ) | (2,682,075 | ) | (1,173,658 | ) | (2,689,836 | ) | (1,943,773 | ) | ||||||||
| Net cash flow | 5,771,291 | 4,110,866 | 5,358,018 | 3,229,486 | 5,771,291 | 4,110,866 | ||||||||||||||
| 10% annual discount rate | (2,873,660 | ) | (1,909,977 | ) | (2,329,918 | ) | (1,505,233 | ) | (2,873,660 | ) | (1,909,977 | ) | ||||||||
| Standardized measure of discounted future net cash flow | $ | 2,897,631 | $ | 2,200,889 | $ | 3,028,100 | $ | 1,724,253 | $ | 2,897,631 | $ | 2,200,889 | ||||||||
The following are the principal sources of change in the Standardized Measure (in thousands):
| | December 31, | December 31, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | ||||||||||||||
| Standardized measure, beginning of period | $ | 2,200,889 | $ | 3,028,100 | $ | 798,033 | $ | 2,897,631 | $ | 2,200,889 | $ | 3,028,100 | ||||||||
| Sales, net of production costs | (1,043,121 | ) | (929,638 | ) | (879,657 | ) | (1,493,558 | ) | (1,043,121 | ) | (929,638 | ) | ||||||||
| Net change in sales prices, net of production costs | 976,912 | (1,168,787 | ) | 629,462 | (1,683,984 | ) | 976,912 | (1,168,787 | ) | |||||||||||
| Extensions, discoveries and improved recovery, net of future production and development costs | 858,632 | 468,854 | 988,001 | 742,889 | 858,632 | 468,854 | ||||||||||||||
| Net change in future development costs | 136,413 | 193,280 | 17,777 | 334,565 | 136,413 | 193,280 | ||||||||||||||
| Revision of quantity estimates | 168,877 | (88,023 | ) | 45,895 | (243,985 | ) | 168,877 | (88,023 | ) | |||||||||||
| Accretion of discount | 308,660 | 435,888 | 117,223 | 424,312 | 308,660 | 435,888 | ||||||||||||||
| Change in income taxes | (459,777 | ) | 445,073 | (956,585 | ) | 741,834 | (459,777 | ) | 445,073 | |||||||||||
| Purchases of reserves in place | 31,278 | 64,538 | 2,379,099 | 6,956 | 31,278 | 64,538 | ||||||||||||||
| Sales of properties | (123,268 | ) | (7,216 | ) | (136,102 | ) | (29,986 | ) | (123,268 | ) | (7,216 | ) | ||||||||
| Change in production rates and other | (157,864 | ) | (241,180 | ) | 24,954 | 27,579 | (157,864 | ) | (241,180 | ) | ||||||||||
| Standardized measure, end of period | $ | 2,897,631 | $ | 2,200,889 | $ | 3,028,100 | $ | 1,724,253 | $ | 2,897,631 | $ | 2,200,889 | ||||||||
Impact of Pricing—The estimates of cash flows and reserve quantities shown above are based on year-end oil and gas prices, except in those cases where future gas sales are covered by contracts at specified prices. Fluctuations in prices are due to supply and demand and are beyond our control.
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
The following average prices were used in determining the Standardized Measure as of:
| | December 31, | December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2007 | 2006 | 2005 | 2008 | 2007 | 2006 | |||||||||||||
| Price per Mcf | $ | 6.51 | $ | 5.54 | $ | 7.89 | $ | 5.33 | $ | 6.51 | $ | 5.54 | |||||||
| Price per Bbl | $ | 93.66 | $ | 56.91 | $ | 57.65 | $ | 36.34 | $ | 93.66 | $ | 56.91 | |||||||
CIMAREX ENERGY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. UNAUDITED SUPPLEMENTAL OIL AND GAS DISCLOSURES (Continued)
Under SEC rules, companies that follow full cost accounting methods are required to make quarterly "ceiling test" calculations. Under this test, capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, may not exceed the present value of estimated future net revenues from proved reserves, discounted at ten percent, plus the lower of cost or fair market value of unproved properties, as adjusted for related tax effects. We calculate the projected income tax effect using the "year-by-year" method for purposes of the supplemental oil and gas disclosures and use the "short-cut" method for the ceiling test calculation. Application of these rules during periods of relatively low oil and gas prices, even if of short-term duration, may result in write-downs.
18.17. UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA
| 2007 | First | Second | Third | Fourth | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | 2008 | First | Second | Third | Fourth | ||||||||||||||||||||||
| | | (In thousands, except for per share data) | | (In thousands, except for per share data) | |||||||||||||||||||||||
| Revenues | Revenues | $ | 306,875 | $ | 342,084 | $ | 343,753 | $ | 438,454 | Revenues | $ | 477,210 | $ | 617,043 | $ | 577,258 | $ | 298,836 | |||||||||
| Expenses, net | Expenses, net | 242,247 | 263,377 | 270,597 | 308,476 | Expenses, net | 327,375 | 387,735 | 809,387 | 1,347,535 | |||||||||||||||||
| Net income | $ | 64,628 | $ | 78,707 | $ | 73,156 | $ | 129,978 | Net income (loss) | $ | 149,835 | $ | 229,308 | $ | (232,129 | ) | $ | (1,048,699 | ) | ||||||||
| Earnings per common share: | |||||||||||||||||||||||||||
Earnings (loss) per common share: | Earnings (loss) per common share: | ||||||||||||||||||||||||||
| Basic | $ | 0.79 | $ | 0.96 | $ | 0.90 | $ | 1.60 | Basic | $ | 1.84 | $ | 2.81 | $ | (2.85 | ) | $ | (12.86 | ) | ||||||||
| Diluted | $ | 0.77 | $ | 0.93 | $ | 0.87 | $ | 1.54 | Diluted | $ | 1.76 | $ | 2.68 | $ | (2.85 | ) | $ | (12.86 | ) | ||||||||
| 2006 | First | Second | Third | Fourth | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2007 | 2007 | First | Second | Third | Fourth | ||||||||||||||||||||||
| | | (In thousands, except for per share data) | | (In thousands, except for per share data) | |||||||||||||||||||||||
| Revenues | Revenues | $ | 335,250 | $ | 313,381 | $ | 322,882 | $ | 295,631 | Revenues | $ | 306,627 | $ | 341,771 | $ | 343,432 | $ | 438,683 | |||||||||
| Expenses, net | Expenses, net | 225,099 | 230,515 | 228,925 | 236,886 | Expenses, net | 241,999 | 263,064 | 270,276 | 308,705 | |||||||||||||||||
| Net income | $ | 110,151 | $ | 82,866 | $ | 93,957 | $ | 58,745 | Net income | $ | 64,628 | $ | 78,707 | $ | 73,156 | $ | 129,978 | ||||||||||
| Earnings per common share: | Earnings per common share: | Earnings per common share: | |||||||||||||||||||||||||
| Basic | $ | 1.33 | $ | 1.01 | $ | 1.15 | $ | 0.72 | Basic | $ | 0.79 | $ | 0.96 | $ | 0.90 | $ | 1.60 | ||||||||||
Diluted | $ | 0.77 | $ | 0.93 | $ | 0.87 | $ | 1.54 | |||||||||||||||||||
| Diluted | $ | 1.29 | $ | 0.98 | $ | 1.11 | $ | 0.70 | |||||||||||||||||||
The sum of the individual quarterly net income per common share amounts may not agree with year-to-date net income per common share because each period's computation is based on the weighted average number of shares outstanding during that period.
ITEM 9. CHANGES IN AND None. ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Cimarex's management, with the participation of the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), have evaluated the effectiveness of Cimarex's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) as of December 31, CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Cimarex Energy Co. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company's internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Because of the inherent limitations of internal control over financial reporting, misstatements may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, The Board of Directors and Stockholders We have audited Cimarex Energy Co. and subsidiaries (the Company's) internal control over financial reporting as of December 31, We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, KPMG LLP Denver, Colorado None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CIMAREX Information concerning the directors of Cimarex is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May ITEM 11. EXECUTIVE COMPENSATION Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required under this item is incorporated by reference from the Cimarex Energy Co. definitive Proxy Statement for the May ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following financial statements are included in Item 8 to this 10-K: Consolidated balance sheets as of December 31, Consolidated statements of operations for the years ended December 31, 2008, 2007, Consolidated statements of cash flows for the years ended December 31, 2008, 2007, Consolidated statements of stockholders' equity and comprehensive income (loss) for the years ended December 31, 2008, 2007, Notes to consolidated financial Financial statement schedules—None Exhibits: Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated by reference to a prior SEC filing as indicated. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.CIMAREX ENERGY CO.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Table of Contents18. UNAUDITED SUPPLEMENTAL QUARTERLY FINANCIAL DATA (Continued)DISAGREEMENTDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE20072008 and concluded that the disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow such persons to make timely decisions regarding required disclosures.2007,2008, management assessed the effectiveness of the Company's internal control over financial reporting based on the criteria established in "Internal Control—Integrated Framework", issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, the Company maintained effective internal control over financial reporting as of December 31, 2007.2008.
Report of Independent Registered Public Accounting Firm
Cimarex Energy Co:2007,2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Cimarex Energy's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.the CompanyCimarex Energy Co. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.20072008 and 2006,2007, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007,2008, and our report dated February 28, 200827, 2009 expressed an unqualified opinion on those consolidated financial statements.
February 28, 200827, 200921, 200820, 2009 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 2008.30, 2009. Information concerning the executive officers of Cimarex is set forth under Item 4A in Part I of this report.21, 200820, 2009 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 2008.30, 2009.21, 200820, 2009 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 2008.30, 2009.21, 200820, 2009 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 2008.30, 2009.21, 200820, 2009 Annual Meeting of Stockholders. The Proxy Statement will be filed with the Securities and Exchange Commission no later than April 29, 2008.30, 2009. Page (1) 20072008 and 20062007. 4650 2006, and 20052006. 4751 2006, and 20052006. 4852 2006, and 20052006. 4953 statementsstatements. 5054 (2) (3) 2.1 Agreement and Plan of Merger, dated as of February 23, 2002, among Helmerich & Payne, Inc., Cimarex Energy Co., Mountain Acquisition Co. , and Key Production Company, Inc. (filed as Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).
2.2
Agreement and Plan of Merger, dated as of January 25, 2005, among Cimarex Energy Co., Cimarex Nevada Acquisition Co., and Magnum Hunter Resources, Inc. (attached as Annex A to the joint proxy statement/prospectus which forms a part of the Registration Statement on Form S-4 dated February 25, 2005 (Registration No. 333-123019) and incorporated herein by reference).
2.3
Amendment No. 1 to Agreement and Plan of Merger, dated as of February 18, 2005, among Cimarex Energy Co., Cimarex Nevada Acquisition Sub and Magnum Hunter Resources, Inc. (attached as Annex A to the joint proxy statement/prospectus which forms a part of the Registration Statement on Form S-4 dated February 25, 2005 (Registration No. 333-123019) and incorporated herein by reference).
2.4
Amendment No. 2 to Agreement and Plan of Merger, dated as of April 20, 2005, among Cimarex Energy Co., Cimarex Nevada Acquisition Sub and Magnum Hunter Resources, Inc. (attached as Annex A to the joint proxy statement/prospectus which forms a part of this registration statement and incorporated herein by reference).
3.1
Amended and Restated Certificate of Incorporation of Cimarex Energy Co. (filed as Exhibit 3.1 to Registrant's Form 8-K (file no. 001-31446) dated June 7, 2005 and incorporated herein by reference).
3.2
Amended and Restated By-laws of Cimarex Energy Co. (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated September 20, 2007 and incorporated herein by reference).
4.1
Specimen Certificate of Cimarex Energy Co. common stock (filed as Exhibit 4.1 to Amendment No. 1 to Registration Statement on Form S-4 dated July 2, 2002 (Registration No. 333-87948) and incorporated herein by reference).
4.2
Rights Agreement, dated as of February 23, 2002, between Cimarex Energy Co. and UMB Bank, N.A. (filed as Exhibit 4.2 to the Registration Statement on Form S-4 (Registration No. 333-87948) and incorporated herein by reference).4.3Indenture, dated March 15, 2002, among Magnum Hunter Resources, Inc., the subsidiary guarantors named therein, and Bankers Trust Company, as Trustee (incorporated by reference to Magnum Hunter's Form 10-K for the year ended December 31, 2001).4.4Form of 9.6% Senior Notes due 2012 (included in Exhibit 4.3).
4.5
Indenture dated December 15, 2003 between Magnum Hunter Resources, Inc., the subsidiary guarantors named therein and Deutsche Bank Trust Company Americas, as Trustee (incorporated by reference to Magnum Hunter's Form 10-K for the year ended December 31, 2003).
4.6
Form of Floating rate Convertible Senior Notes due 2023 (included in Exhibit 4.5).
4.7
First Supplemental Indenture dated as of June 13, 2005, among Cimarex Energy Co., the Subsidiary Guarantors party thereto and Deutsche Bank Trust Company Americas, (filed as Exhibit 4.1 to Registrant's Form 8-K (file no. 001-31446) dated June 17, 2005 and incorporated herein by reference).
4.8
Second Supplemental Indenture dated as of June 7, 2005, among Cimarex Energy Co., Magnum Hunter Resources, Inc., the Subsidiary Guarantors party thereto and Deutsche Bank Trust Company Americas (filed as Exhibit 4.1 to Registrant's Form 8-K (file no. 001-31446) dated June 7, 2005 and incorporated herein by reference).
4.9
Third Supplemental Indenture dated as of June 13, 2005, among Cimarex Energy Co., the Subsidiary Guarantors party thereto and Deutsche Bank Trust Company Americas (filed as Exhibit 4.1 to Registrant's Form 8-K (file no. 001-31446) dated June 17, 2005, and incorporated herein by reference).
4.10
Registration Rights Agreement dated as of December 17, 2003, among Magnum Hunter Resources, Inc., the subsidiary guarantors named therein and Deutsche Bank Securities Inc., and Banc of America Securities LLC, as representatives of the initial purchasers (filed as Exhibit 4.10 to Registrant's Form S-3 Registration Statement (file no. 333-125235) dated May 25, 2005 and incorporated herein by reference).
4.11
Joinder to Registration Rights Agreement dated as of June 13, 2005, among Cimarex Texas LLC, Cimarex Texas L.P., Cimarex California Pipeline LLC, Cimarex Energy Services, Inc., Key Production Company, Inc., Key Texas LLC, Key Production Texas L.P., Brock Gas Systems & Equipment, Inc., Columbus Energy Corp., Columbus Texas, Inc., Columbus Energy L.P., and Columbus Gas Services, Inc. (filed as Exhibit 4.3 to Registrant's Form 8-K (file no. 001-31446) dated June 17, 2005 and incorporated herein by reference).
4.12
Senior Indenture dated as of May 1, 2007, by and among Cimarex Energy Co., the Subsidiary Guarantors party thereto and U.S. Bank National Association, as trustee, filed on May 2, 2007 as Exhibit 4.1 to the Registrant's Current Report on Form 8-K and incorporated herein by reference.
4.13
Form of Senior Notes due 2017 included in Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on May 2, 2007 and incorporated herein by reference.
10.1
Amended and Restated Credit Agreement dated as of June 13, 2005, among Cimarex Energy Co., the Lenders listed on the signature pages thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, U.S. Bank National Association, as Co-Syndication Agent, Bank of America, N.A., as Co-Syndication Agent, Wells Fargo Bank, N.A., as Documentation Agent and J.P. Morgan Securities Inc., as Lead Arranger and SoleBook Runner (filed as Exhibit 10.1 to Registrant's Form 8-K (file no. 001-31446) dated June 17, 2005 and incorporated herein by reference).
10.2
First Amendment to Amended and Restated Credit Agreement effective December 15, 2005, among Cimarex Energy Co., the Lenders and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Registrant's Form 10-K. for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).
10.3
Distribution Agreement, dated as of February 23, 2002, by and between Helmerich & Payne, Inc. and Cimarex Energy Co. (filed as Exhibit 10.1 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).
10.4
Employee Benefits Agreement, dated as of February 23, 2002, by and between Helmerich & Payne, Inc. and Cimarex Energy Co. (filed as Exhibit 10.3 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).
10.5
First Amendment to Employee Benefits Agreement, dated August 2, 2002, by and among Helmerich & Payne, Inc., Cimarex Energy Co., and Key Production Company, Inc. (filed as Exhibit 10.3.1 to Amendment No. 2 to the Registration Statement on Form S-4 dated August 2, 2002 (Registration No. 333-87948) and incorporated herein by reference).
10.6
Employment Agreement dated September 1, 1992 between Key Production Company, Inc. and F.H. Merelli (filed as Exhibit 10.5 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).
10.7
Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and F. H. Merelli.*
10.8
Employment Agreement, dated September 7, 1999, by and between Paul Korus and Key Production Company, Inc. (filed as Exhibit 10.6 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).10.810.9
Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Paul Korus.*
10.10
Employment Agreement, dated October 25, 1993, by and between Thomas E. Jorden and Key Production Company, Inc. (filed as Exhibit 10.7 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).10.910.11
Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Thomas E. Jorden.*
10.12
Employment Agreement, dated February 2, 1994, by and between Stephen P. Bell and Key Production Company, Inc. (filed as Exhibit 10.8 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).10.1010.13
Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Stephen P. Bell.*
10.14
Employment Agreement, dated March 11, 1994, by and between Joseph R. Albi and Key Production Company, Inc. (filed as Exhibit 10.9 to the Registration Statement on Form S-4 dated May 9, 2002 (Registration No. 333-87948) and incorporated herein by reference).10.1110.15
Amendment to Employment Agreement effective January 1, 2009 between Cimarex Energy Co. and Joseph R. Albi*.
10.16
Amended and Restated 2002 Stock Incentive Plan of Cimarex Energy Co. (filed as Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 2002, file no. 001-31446, and incorporated herein by reference).effective January 1, 2009.*10.1210.17
Amendment No. 2 to 2002 Stock Incentive Plan of Cimarex Energy Co., dated March 10, 2005 (filed as Exhibit 10.13 to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).10.13Amendment No. 3 to 2002 Stock Incentive Plan of Cimarex Energy Co., effective June 6, 2005 (filed as Exhibit 10.14 to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).10.14
Form of Performance Award Agreement dated January 4, 2006 (filed as Exhibit 10.1 to Registration's Form 8-K dated January 4, 2006 (File no. 001-31446) and incorporated herein by reference).10.1510.18
Deferred Compensation Plan for Non-Employee Directors effective May 19, 2004 (filed as Exhibit 10.16 to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).10.16Amendment to Deferred Compensation Plan for Nonemployee Directors adopted May 19, 2004, as amended and restated effective June 6, 2005 (filed as Exhibit 10.17 to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).January 1, 2009.*10.1710.19
Amendment to Deferred Compensation Plan for Nonemployee Directors, effective January 1, 2005 (filed as Exhibit 10.18 to the Registrant's Form 10-K for the fiscal year ended December 31, 2005, file no. 001-31446, and incorporated herein by reference).10.18
Cimarex Energy Co. Supplemental Savings Plan (amended and restated, effective March 3, 2003), (filed as Exhibit 10.15 to the Registrant's Form 10-K for the fiscal year ended December 31, 2002, file no. 001-31446, and incorporated herein by reference)January 1, 2009).*10.1910.20
Cimarex Energy Co. Change in Control Severance Plan dated effective April 1, 2005 (filed as Exhibit 10.13 to Amendment No.2005. amended and restated effective January 1, to Registration Statement on Form S-4 dated April 8, 2005 (Registration No. 333-123019) and incorporated herein by reference).2009.*10.21 Indemnification Agreement effective December 5, 2008 with Jerry Box.* 14.110.22
Indemnification Agreement effective December 5, 2008 with Hans Helmerich.*
10.23
Indemnification Agreement effective December 5, 2008 with David A. Hentschel.*
10.24
Indemnification Agreement effective December 5, 2008 with Paul D. Holleman.*
10.25
Indemnification Agreement effective December 5, 2008 with F.H. Merelli.*
10.26
Indemnification Agreement effective December 5, 2008 with Monroe W. Robertson.*
10.27
Indemnification Agreement effective December 5, 2008 with Michael J. Sullivan.*
10.28
Indemnification Agreement effective December 5, 2008 with L. Paul Teague.*
10.29
Indemnification Agreement effective February 26, 2009 with Gary R. Abbott.*
10.30
Indemnification Agreement effective February 26, 2009 with Joseph R. Albi.*
10.31
Indemnification Agreement effective February 26, 2009 with Stephen P. Bell.*
10.32
Indemnification Agreement effective February 26, 2009 with Richard S. Dinkins.*
10.33
Indemnification Agreement effective February 26, 2009 with Thomas A. Jorden.*
10.34
Indemnification Agreement effective February 26, 2009 with Paul Korus.*
10.35
Indemnification Agreement effective February 26, 2009 with James H. Shonsey.*
14.1
Code of Ethics for Chief Executive Officer and Senior Financial Officers (filed as Exhibit 14.1 to the Annual Report on Form 10-K for the year ended December 31, 2003, file no. 001-31446, and incorporated herein by reference).
21.1
Subsidiaries of the Registrant.*
23.1
Consent of KPMG LLP.*
23.2
Consent of DeGolyer and MacNaughton *MacNaughton*
24.1
Power of Attorney of directors of the Registrant. *
31.1
Certification of F.H. Merelli, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Paul Korus, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of F.H. Merelli, Chief Executive Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Paul Korus, Chief Financial Officer of Cimarex Energy Co., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*Date: February 28, 2008Date: February 27, 2009 CIMAREX ENERGY CO.
By:
/s/ F.H. MERELLI
F.H. Merelli
Chairman, President and Chief Executive Officer
/s/ F.H. MERELLI
F.H. Merelli Director, Chairman, President and
Chief Executive Officer (Principal
Executive Officer) February 28, 200827, 2009
/s/ PAUL KORUS
Paul Korus
Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer)
February 28, 200827, 2009
/s/ JAMES H. SHONSEY
James H. Shonsey
Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-Fact
Jerry Box
DirectorFebruary 28, 2008/s/ F.H. MERELLI Attorney-in-FactGlenn A. Cox
Director
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-FactCortlandt S. DietlerDirectorFebruary 28, 2008/s/ F.H. MERELLI Attorney-in-Fact
Hans Helmerich
Director
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-Fact
David A. Hentschel
Director
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-Fact
Paul D. Holleman
Director
February 28, 200827, 2009* /s/ F.H. MERELLI Attorney-in-Fact
Monroe W. Robertson
Director
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-Fact
Michael J. Sullivan
Director
February 28, 200827, 2009
*/s/ F.H. MERELLI Attorney-in-Fact
L. Paul Teague
Director
February 28, 200827, 2009*By: /s/ F.H. MERELLI
F.H. Merelli
Attorney-in- FactFebruary 27, 2009