Company Quick10K Filing
Quick10K
Cimarex Energy
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$67.46 101 $6,840
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-11 Regulation FD
8-K 2019-05-28 Officers, Regulation FD, Exhibits
8-K 2019-05-08 Shareholder Vote, Other Events
8-K 2019-05-08 Earnings, Regulation FD, Exhibits
8-K 2019-03-25 Regulation FD
8-K 2019-03-06 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2019-02-20 Earnings, Regulation FD, Exhibits
8-K 2019-02-14 Other Events
8-K 2019-02-11 Other Events, Exhibits
8-K 2019-02-05 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-19 Regulation FD, Other Events, Exhibits
8-K 2018-11-18 Enter Agreement, Exhibits
8-K 2018-11-09 Regulation FD
8-K 2018-11-06 Earnings, Regulation FD, Exhibits
8-K 2018-08-31 M&A, Regulation FD, Exhibits
8-K 2018-08-07 Earnings, Regulation FD, Exhibits
8-K 2018-05-25 Regulation FD
8-K 2018-05-23 Enter Agreement, Regulation FD, Exhibits
8-K 2018-05-10 Shareholder Vote
8-K 2018-03-22 Regulation FD
8-K 2018-02-14 Earnings, Regulation FD, Exhibits
HD Home Depot 214,570
HTHT Huazhu Group 11,050
ELS Equity Lifestyle Properties 10,410
PSTG Pure Storage 6,130
EEI Ecology & Environment 51
NHLD National Holdings 41
PFTI Puradyn Filter Technologies 0
HCCC H/Cell Energy 0
CPWR Ocean Thermal Energy 0
LOGX Peerlogix 0
XEC 2019-03-31
Part I
Item 1. - Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 a20190331xecex-311.htm
EX-31.2 a20190331xecex-312.htm
EX-32.1 a20190331xecex-321.htm
EX-32.2 a20190331xecex-322.htm

Cimarex Energy Earnings 2019-03-31

XEC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a20190331xec10-qdoc.htm 10-Q Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
(Mark One)
ý   
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2019
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
 Commission File No. 001-31446
CIMAREX ENERGY CO.
(Exact name of registrant as specified in its charter)
Delaware
 
45-0466694
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1700 Lincoln Street, Suite 3700, Denver, Colorado
 
80203
(Address of principal executive offices)
 
(Zip Code)
(303) 295-3995
(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 
Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o  No ý
The number of shares of Cimarex Energy Co. common stock outstanding as of April 30, 2019 was 101,433,207.

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock ($0.01 par value)
 
XEC
 
New York Stock Exchange




CIMAREX ENERGY CO.
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




GLOSSARY

Bbls—Barrels
Bcf—Billion cubic feet
BOE—Barrels of oil equivalent
Gross Wells—The total wells in which a working interest is owned.
MBbls—Thousand barrels
MBOE—Thousand barrels of oil equivalent
Mcf—Thousand cubic feet
MMBtu—Million British thermal units
MMcf—Million cubic feet
Net Wells—The sum of the fractional working interest owned in gross wells expressed in whole numbers and fractions of whole numbers.
NGL or NGLs—Natural gas liquids

Energy equivalent is determined using the ratio of one barrel of crude oil, condensate, or NGL to six Mcf of natural gas.

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

Throughout this Form 10-Q, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended.  These forward-looking statements include, among others, statements concerning our outlook with regard to timing and amount of future production of oil and gas, price realizations, amounts, nature and timing of capital expenditures for exploration and development, plans for funding operations and capital expenditures, drilling of wells, operating costs and other expenses, marketing of oil, gas, and NGLs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.  The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements.

These risks and uncertainties include, but are not limited to, fluctuations in the price we receive for our oil and gas production, full cost ceiling test impairments to the carrying values of our oil and gas properties, reductions in the quantity of, and price received for, oil and gas sold due to decreased industry-wide demand and/or curtailments in production from specific properties or areas due to mechanical, transportation, marketing, weather or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated, increased financing costs due to a significant increase in interest rates, availability of financing, our ability to successfully integrate the business acquired from Resolute Energy Corporation, and the effectiveness of our internal control over financial reporting and our ability to remediate a material weakness in our internal control over financial reporting.  In addition, exploration and development opportunities that we pursue may not result in economic, productive oil and gas properties.  There are also numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and the timing of development expenditures.  These and other risks and uncertainties affecting us are discussed in greater detail in this report and in our other filings with the Securities and Exchange Commission.




3


PART I
ITEM 1. - Financial Statements
CIMAREX ENERGY CO.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share information)
(Unaudited)
 
 
March 31,
 
December 31,
 
 
2019
 
2018
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
20,930

 
$
800,666

Accounts receivable, net of allowance:
 
 

 
 

Trade
 
123,192

 
122,065

Oil and gas sales
 
329,661

 
315,063

Gas gathering, processing, and marketing
 
13,049

 
17,072

Oil and gas well equipment and supplies
 
62,600

 
55,553

Derivative instruments
 
35,830

 
101,939

Prepaid expenses
 
8,135

 
7,554

Other current assets
 
2,811

 
4,227

Total current assets
 
596,208

 
1,424,139

Oil and gas properties at cost, using the full cost method of accounting:
 
 

 
 

Proved properties
 
19,410,269

 
18,566,757

Unproved properties and properties under development, not being amortized
 
1,707,089

 
436,325

 
 
21,117,358

 
19,003,082

Less—accumulated depreciation, depletion, amortization, and impairment
 
(15,462,464
)
 
(15,287,752
)
Net oil and gas properties
 
5,654,894

 
3,715,330

Fixed assets, net of accumulated depreciation of $340,147 and $324,631, respectively
 
509,554

 
257,686

Goodwill
 
727,573

 
620,232

Derivative instruments
 
626

 
9,246

Other assets
 
68,337

 
35,451

 
 
$
7,557,192

 
$
6,062,084

Liabilities, Redeemable Preferred Stock, and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable:
 
 
 
 

Trade
 
$
65,664

 
$
76,927

Gas gathering, processing, and marketing
 
25,190

 
29,887

Accrued liabilities:
 
 

 
 

Exploration and development
 
183,940

 
124,674

Taxes other than income
 
32,084

 
33,622

Other
 
247,041

 
221,159

Derivative instruments
 
77,557

 
27,627

Revenue payable
 
215,613

 
194,811

Operating leases
 
62,825

 

Total current liabilities
 
909,914

 
708,707

Senior notes principal
 
2,000,000

 
1,500,000

Less—senior notes unamortized debt issuance costs and discounts
 
(16,273
)
 
(11,446
)
Senior notes, net
 
1,983,727

 
1,488,554

Deferred income taxes
 
405,294

 
334,473

Asset retirement obligation
 
165,529

 
152,758

Derivative instruments
 
756

 
2,267

Operating leases
 
186,356

 

Other liabilities
 
62,634

 
45,539

Total liabilities
 
3,714,210

 
2,732,298

Commitments and contingencies (Note 10)
 


 


Redeemable preferred stock - 8.125% Series A Cumulative Perpetual Convertible Preferred Stock, $0.01 par value, 62,500 shares authorized and issued and no shares authorized and issued, respectively (Note 5)
 
81,620

 

Stockholders’ equity:
 
 

 
 

Common stock, $0.01 par value, 200,000,000 shares authorized, 101,407,583 and 95,755,797 shares issued, respectively
 
1,014

 
958

Additional paid-in capital
 
3,210,818

 
2,785,188

Retained earnings
 
547,626

 
542,885

Accumulated other comprehensive income
 
1,904

 
755

Total stockholders’ equity
 
3,761,362

 
3,329,786

 
 
$
7,557,192

 
$
6,062,084

See accompanying Notes to Condensed Consolidated Financial Statements.


4



CIMAREX ENERGY CO.
Condensed Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share information)
(Unaudited)
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Revenues:
 
 

 
 

Oil sales
 
$
349,306

 
$
351,723

Gas and NGL sales
 
217,915

 
203,718

Gas gathering and other
 
10,262

 
11,452

Gas marketing
 
(526
)
 
241

 
 
576,957

 
567,134

Costs and expenses:
 
 

 
 

Depreciation, depletion, and amortization
 
190,417

 
132,859

Asset retirement obligation
 
2,049

 
1,060

Production
 
77,233

 
71,271

Transportation, processing, and other operating
 
53,608

 
45,165

Gas gathering and other
 
12,320

 
9,823

Taxes other than income
 
33,694

 
30,188

General and administrative
 
29,084

 
23,321

Stock compensation
 
6,713

 
6,730

Loss (gain) on derivative instruments, net
 
115,452

 
(4,159
)
Other operating expense, net
 
8,326

 
203

 
 
528,896

 
316,461

Operating income
 
48,061

 
250,673

Other (income) and expense:
 
 

 
 

Interest expense
 
20,405

 
16,783

Capitalized interest
 
(8,742
)
 
(4,810
)
Loss on early extinguishment of debt
 
4,250

 

Other, net
 
(2,241
)
 
(4,567
)
Income before income tax
 
34,389

 
243,267

Income tax expense
 
8,073

 
56,949

Net income
 
$
26,316

 
$
186,318

 
 
 
 
 
Earnings per share to common stockholders:
 
 

 
 

Basic
 
$
0.26

 
$
1.96

Diluted
 
$
0.26

 
$
1.96

 
 
 
 
 
Comprehensive income:
 
 

 
 

Net income
 
$
26,316

 
$
186,318

Other comprehensive income:
 
 

 
 

Change in fair value of investments, net of tax of $339 and ($56), respectively
 
1,149

 
(190
)
Total comprehensive income
 
$
27,465

 
$
186,128

 





See accompanying Notes to Condensed Consolidated Financial Statements.


5



CIMAREX ENERGY CO.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net income
 
$
26,316

 
$
186,318

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation, depletion, and amortization
 
190,417

 
132,859

Asset retirement obligation
 
2,049

 
1,060

Deferred income taxes
 
8,073

 
56,949

Stock compensation
 
6,713

 
6,730

Loss (gain) on derivative instruments, net
 
115,452

 
(4,159
)
Settlements on derivative instruments
 
(9,051
)
 
(12,389
)
Loss on early extinguishment of debt
 
4,250

 

Amortization of debt issuance costs and discounts
 
719

 
729

Changes in non-current assets and liabilities
 
2,148

 
(900
)
Other, net
 
3,976

 
37

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
33,976

 
44,722

Other current assets
 
350

 
1,603

Accounts payable and other current liabilities
 
(135,297
)
 
(30,466
)
Net cash provided by operating activities
 
250,091

 
383,093

Cash flows from investing activities:
 
 

 
 

Acquisition of Resolute Energy, net of cash acquired (Note 13)
 
(284,441
)
 

Oil and gas capital expenditures
 
(332,742
)
 
(323,455
)
Other capital expenditures
 
(17,828
)
 
(19,056
)
Sales of oil and gas assets
 
5,000

 
29,824

Sales of other assets
 
200

 
432

Net cash used by investing activities
 
(629,811
)
 
(312,255
)
Cash flows from financing activities:
 
 

 
 

Borrowings of long-term debt
 
1,182,310

 

Repayments of long-term debt
 
(1,553,000
)
 

Financing, underwriting, and debt redemption fees
 
(10,938
)
 

Finance lease payments
 
(635
)
 

Dividends paid
 
(17,179
)
 
(7,602
)
Employee withholding taxes paid upon the net settlement of equity-classified stock awards
 
(654
)
 
(305
)
Proceeds from exercise of stock options
 
80

 
345

Net cash used by financing activities
 
(400,016
)
 
(7,562
)
Net change in cash and cash equivalents
 
(779,736
)
 
63,276

Cash and cash equivalents at beginning of period
 
800,666

 
400,534

Cash and cash equivalents at end of period
 
$
20,930

 
$
463,810

  




See accompanying Notes to Condensed Consolidated Financial Statements.


6



CIMAREX ENERGY CO.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)

 
 
 
 
 
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Common Stock
 
Shares
 
Amount
Balance, December 31, 2018
 
95,756

 
$
958

 
$
2,785,188

 
$
542,885

 
$
755

 
$
3,329,786

Dividends paid on stock awards subsequently forfeited
 

 

 

 
2

 

 
2

Dividends declared on common stock ($0.20 per share)
 

 

 

 
(20,308
)
 

 
(20,308
)
Dividends declared on redeemable preferred stock ($20.31 per share)
 

 

 

 
(1,269
)
 

 
(1,269
)
Net income
 

 

 

 
26,316

 

 
26,316

Issuance of stock for Resolute Energy acquisition (Note 13)
 
5,652

 
56

 
412,959

 

 

 
413,015

Unrealized change in fair value of investments, net of tax
 

 

 

 

 
1,149

 
1,149

Issuance of restricted stock awards
 
11

 

 

 

 

 

Common stock reacquired and retired
 
(10
)
 

 
(654
)
 

 

 
(654
)
Restricted stock forfeited and retired
 
(4
)
 

 

 

 

 

Exercise of stock options
 
3

 

 
80

 

 

 
80

Stock-based compensation
 

 

 
13,245

 

 

 
13,245

Balance, March 31, 2019
 
101,408

 
$
1,014

 
$
3,210,818

 
$
547,626

 
$
1,904

 
$
3,761,362


 
 
 
 
 
 
Additional Paid-in Capital
 
Retained
Earnings
(Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
 
Common Stock
 
Shares
 
Amount
Balance, December 31, 2017
 
95,437

 
$
954

 
$
2,764,384

 
$
(199,259
)
 
$
2,199

 
$
2,568,278

Dividends paid on stock awards subsequently forfeited
 

 

 
3

 
4

 

 
7

Dividends declared on common stock ($0.16 per share)
 

 

 
(15,271
)
 

 

 
(15,271
)
Net income
 

 

 

 
186,318

 

 
186,318

Unrealized change in fair value of investments, net of tax
 

 

 

 

 
(190
)
 
(190
)
Issuance of restricted stock awards
 
2

 

 

 

 

 

Common stock reacquired and retired
 
(3
)
 

 
(305
)
 

 

 
(305
)
Restricted stock forfeited and retired
 
(7
)
 

 

 

 

 

Exercise of stock options
 
4

 

 
345

 

 

 
345

Stock-based compensation
 

 

 
12,411

 

 

 
12,411

Balance, March 31, 2018
 
95,433

 
$
954

 
$
2,761,567

 
$
(12,937
)
 
$
2,009

 
$
2,751,593







See accompanying Notes to Condensed Consolidated Financial Statements.


7


CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)



1.
BASIS OF PRESENTATION

Cimarex Energy Co. (“Cimarex,” “we,” or “us”), a Delaware corporation, is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, and New Mexico. The accompanying unaudited financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2018.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary to fairly present our financial position, results of operations, and cash flows for the periods and as of the dates shown. The accounts of Cimarex and its subsidiaries are presented in the accompanying financial statements, with intercompany balances and transactions eliminated in consolidation. Certain amounts in the prior year financial statements have been reclassified to conform to the 2019 financial statement presentation.

On March 1, 2019, we acquired Resolute Energy Corporation (“Resolute”) in a cash and stock transaction. The results of Resolute’s operations have been included in our consolidated financial statements since the March 1, 2019 acquisition date. See Note 13 for more information on this transaction.

Use of Estimates

Areas of significance requiring the use of management’s judgments include the estimation of proved oil and gas reserves used in calculating depletion, the estimation of future net revenues used in computing ceiling test limitations, the estimation of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments also are required in determining allowances for doubtful accounts, impairments of unproved properties and other assets, valuation of deferred tax assets, fair value measurements, and contingencies.

Oil and Gas Well Equipment and Supplies

Our oil and gas well equipment and supplies are valued at the lower of cost and net realizable value, where net realizable value is estimated selling prices in the ordinary course of business, less reasonably predictable costs of disposal and transportation. Declines in the price of oil and gas well equipment and supplies in future periods could cause us to recognize impairments on these assets. An impairment would not affect cash flow from operating activities, but would adversely affect our net income and stockholders’ equity.

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. Under the full cost method of accounting, we are required to perform a quarterly ceiling test calculation to test our oil and gas properties for possible impairment. If the net capitalized cost of our oil and gas properties, as adjusted for income taxes, exceeds the ceiling limitation, the excess is charged to expense. The ceiling limitation is equal to the sum of: (i) the present value discounted at 10% of estimated future net revenues from proved reserves, (ii) the cost of properties not being amortized, and (iii) the lower of cost or estimated fair value of unproven properties included in the costs being amortized, as adjusted for income taxes. We currently do not have any unproven properties that are being amortized. Estimated future net revenues are determined based on trailing twelve-month average commodity prices and estimated proved reserve quantities, operating costs, and capital expenditures. The calculated ceiling limitation is not intended to be indicative of the fair market value of our proved reserves or future results.




8

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


We did not recognize a ceiling test impairment during the three months ended March 31, 2019 and 2018 because the net capitalized cost of our oil and gas properties, as adjusted for income taxes, did not exceed the ceiling limitation. If pricing conditions deteriorate, including the further widening of local market basis differentials, or if there is a negative impact on one or more of the other components of the calculation, we may incur full cost ceiling test impairments in future quarters. Impairment charges do not affect cash flow from operating activities, but do adversely affect our net income and various components of our balance sheet. Any impairment of oil and gas properties is not reversible at a later date.

Revenue Recognition

Oil, Gas, and NGL Sales

Revenue is recognized from the sales of oil, gas, and NGLs when the customer obtains control of the product, when we have no further obligations to perform related to the sale, and when collectability is probable. All of our sales of oil, gas, and NGLs are made under contracts with customers, which typically include variable consideration based on monthly pricing tied to local indices and monthly volumes delivered. The nature of our contracts with customers does not require us to constrain that variable consideration or to estimate the amount of transaction price attributable to future performance obligations for accounting purposes. As of March 31, 2019, we had open contracts with customers with terms of one month to multiple years, as well as “evergreen” contracts that renew on a periodic basis if not canceled by us or the customer. Performance obligations under our contracts with customers are typically satisfied at a point-in-time through monthly delivery of oil, gas, and/or NGLs. Our contracts with customers typically require payment within one month of delivery.

Our gas and NGLs are sold under a limited number of contract structure types common in our industry. Under these contracts the gas and its components, including NGLs, may be sold to a single purchaser or the residue gas and NGLs may be sold to separate purchasers. Regardless of the contract structure type, the terms of these contracts compensate us for the value of the residue gas and NGLs at current market prices for each product. Our oil typically is sold at specific delivery points under contract terms that also are common in our industry.

Gas Gathering

When we transport and/or process third-party gas associated with our equity gas, we recognize revenue for the fees charged to third-parties for such services.

Gas Marketing

When we market and sell gas for working interest owners, we act as agent under short-term sales and supply agreements and may earn a fee for such services. Revenues from such services are recognized as gas is delivered.

Gas Imbalances

Revenue from the sale of gas is recorded on the basis of gas actually sold by us. If our aggregate sales volumes for a well are greater (or less) than our proportionate share of production from the well, a liability (or receivable) is established to the extent there are insufficient proved reserves available to make-up the overproduced (or underproduced) imbalance. Imbalances have not been significant in the periods presented.

Lease Accounting

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”).  The FASB subsequently issued various ASUs which provided additional implementation guidance. Topic 842 requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for a period of time. The



9

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


scope of Topic 842 excludes leases to explore for or use minerals, oil, natural gas, and similar nonregenerative resources. We adopted Topic 842 effective January 1, 2019, using the modified retrospective method applied to all leases that existed on that date, which resulted in the recognition of lease liabilities of $276.9 million and right-of-use assets of $265.0 million. In connection with adoption we made use of the following practical expedients, which are provided in Topic 842:

a package of practical expedients to not reassess: 1) whether expired or existing contracts are or contain a lease, 2) lease classification for expired or existing leases, and 3) initial direct costs for existing leases;
an election not to apply the recognition requirements in Topic 842 to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise);
a practical expedient that permits combining lease and nonlease components in a contract and accounting for the combination as a lease (elected by asset class); and
a practical expedient to not reassess certain land easements in existence prior to January 1, 2019.


2.
LONG-TERM DEBT

Long-term debt at March 31, 2019 and December 31, 2018 consisted of the following:
 
 
March 31, 2019
 
December 31, 2018
(in thousands)
 
Principal
 
Unamortized Debt
Issuance Costs
and Discounts (1)
 
Long-term
Debt, net
 
Principal
 
Unamortized Debt
Issuance Costs
and Discount (1)
 
Long-term
Debt, net
4.375% Notes due 2024
 
$
750,000

 
$
(4,209
)
 
$
745,791

 
$
750,000

 
$
(4,439
)
 
$
745,561

3.90% Notes due 2027
 
750,000

 
(6,831
)
 
743,169

 
750,000

 
(7,007
)
 
742,993

4.375% Notes due 2029
 
500,000

 
(5,233
)
 
494,767

 

 

 

 
 
$
2,000,000

 
$
(16,273
)
 
$
1,983,727

 
$
1,500,000

 
$
(11,446
)
 
$
1,488,554

________________________________________
(1)
At March 31, 2019, the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were $5.3 million and $1.6 million, respectively. At December 31, 2018, the unamortized debt issuance costs and discount related to the 3.90% Notes due 2027 were $5.4 million and $1.6 million, respectively. At March 31, 2019, the unamortized debt issuance costs and discount related to the 4.375% Notes due 2029 were $4.5 million and $0.7 million, respectively. The 4.375% Notes due 2024 were issued at par.

Bank Debt

On February 5, 2019, we entered into an Amended and Restated Credit Agreement for our senior unsecured revolving credit facility (“Credit Facility”). Among other things, the amended and restated credit facility increased the aggregate commitments to $1.25 billion with an option for us to increase the aggregate commitments to $1.5 billion, and extended the maturity date to February 5, 2024. As of March 31, 2019, we had no bank borrowings outstanding under the Credit Facility, leaving an unused borrowing availability of $1.25 billion.

At our option, borrowings under the Credit Facility may bear interest at either (a) LIBOR plus 1.1252.0% based on the credit rating for our senior unsecured long-term debt, or (b) a base rate (as defined in the credit agreement) plus 0.1251.0%, based on the credit rating for our senior unsecured long-term debt. Unused borrowings are subject to a commitment fee of 0.1250.35%, based on the credit rating for our senior unsecured long-term debt.




10

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


The Credit Facility contains representations, warranties, covenants, and events of default that are customary for investment grade, senior unsecured bank credit agreements, including a financial covenant for the maintenance of a defined total debt-to-capital ratio of no greater than 65%. As of March 31, 2019, we were in compliance with all of the financial covenants.

At March 31, 2019 and December 31, 2018, we had $4.9 million and $2.2 million, respectively, of unamortized debt issuance costs associated with our Credit Facility, which were recorded as assets and included in Other assets on our Condensed Consolidated Balance Sheets. These costs are being amortized to interest expense ratably over the life of the Credit Facility. We incurred $3.0 million in additional debt issuance costs in amending our Credit Facility.

Senior Notes

On March 8, 2019, we issued $500 million aggregate principal amount of 4.375% senior unsecured notes due March 15, 2029 at 99.862% of par to yield 4.392% per annum.  We received $494.7 million in net cash proceeds, after deducting underwriters’ fees, discount, and debt issuance costs.  The notes bear an annual interest rate of 4.375% and interest is payable semiannually on March 15 and September 15, with the first payment occurring September 15, 2019.  We used the net proceeds to repay borrowings that were outstanding under our Credit Facility that were used to help fund the Resolute acquisition on March 1, 2019. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.50%.

In April 2017, we issued $750 million aggregate principal amount of 3.90% senior unsecured notes at 99.748% of par to yield 3.93% per annum. These notes are due May 15, 2027 and interest is payable semiannually on May 15 and November 15. The effective interest rate on these notes, including the amortization of debt issuance costs and discount, is 4.01%.

In June 2014, we issued $750 million aggregate principal amount of 4.375% senior unsecured notes at par. These notes are due June 1, 2024 and interest is payable semiannually on June 1 and December 1. The effective interest rate on these notes, including the amortization of debt issuance costs, is 4.50%.

Our senior unsecured notes are governed by indentures containing certain covenants, events of default, and other restrictive provisions with which we were in compliance as of March 31, 2019.





11

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


3.
DERIVATIVE INSTRUMENTS

We periodically use derivative instruments to mitigate volatility in commodity prices.  While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes.  Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. 

As of March 31, 2019, we have entered into oil and gas collars, oil basis swaps, oil and gas fixed price swaps, and sold oil calls. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price plus or minus a fixed differential, as applicable, and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. Under our fixed price swaps, we receive the difference between the fixed price and the published index price if the published index price is below the fixed price and we pay the difference between the fixed price and the published index price if the published index price is above the fixed price. Under our sold oil calls, we pay the difference between the fixed price and the published index price if the published index price is above the fixed price. The following tables summarize our outstanding derivative contracts as of March 31, 2019:
 Oil Collars
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 

WTI (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 

 
3,094,000

 
2,944,000

 
2,208,000

 
8,246,000

Weighted Avg Price - Floor
 
$

 
$
53.68

 
$
54.81

 
$
56.42

 
$
54.82

Weighted Avg Price - Ceiling
 
$

 
$
66.57

 
$
68.60

 
$
69.40

 
$
68.05

2020:
 
 
 
 
 
 
 
 
 
 

WTI (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 
1,456,000

 
728,000

 

 

 
2,184,000

Weighted Avg Price - Floor
 
$
56.13

 
$
52.25

 
$

 
$

 
$
54.83

Weighted Avg Price - Ceiling
 
$
70.08

 
$
64.31

 
$

 
$

 
$
68.15

________________________________________
(1)
The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”).



12

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


 Gas Collars
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 
PEPL (1)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 

 
13,650,000

 
11,040,000

 
8,280,000

 
32,970,000

Weighted Avg Price - Floor
 
$

 
$
2.03

 
$
1.94

 
$
1.94

 
$
1.98

Weighted Avg Price - Ceiling
 
$

 
$
2.39

 
$
2.32

 
$
2.37

 
$
2.36

Perm EP (2)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 

 
8,190,000

 
6,440,000

 
3,680,000

 
18,310,000

Weighted Avg Price - Floor
 
$

 
$
1.67

 
$
1.49

 
$
1.40

 
$
1.55

Weighted Avg Price - Ceiling
 
$

 
$
1.95

 
$
1.79

 
$
1.73

 
$
1.85

Waha (3)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 

 
3,640,000

 
5,520,000

 
5,520,000

 
14,680,000

Weighted Avg Price - Floor
 
$

 
$
1.41

 
$
1.48

 
$
1.48

 
$
1.46

Weighted Avg Price - Ceiling
 
$

 
$
1.73

 
$
1.82

 
$
1.82

 
$
1.80

2020:
 
 
 
 
 
 
 
 
 
 
PEPL (1)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 
5,460,000

 
2,730,000

 

 

 
8,190,000

Weighted Avg Price - Floor
 
$
1.96

 
$
1.95

 
$

 
$

 
$
1.96

Weighted Avg Price - Ceiling
 
$
2.38

 
$
2.26

 
$

 
$

 
$
2.34

Perm EP (2)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 
1,820,000

 
910,000

 

 

 
2,730,000

Weighted Avg Price - Floor
 
$
1.45

 
$
1.50

 
$

 
$

 
$
1.47

Weighted Avg Price - Ceiling
 
$
1.92

 
$
2.13

 
$

 
$

 
$
1.99

Waha (3)
 
 
 
 
 
 
 
 
 
 
Volume (MMBtu)
 
4,550,000

 
2,730,000

 

 

 
7,280,000

Weighted Avg Price - Floor
 
$
1.50

 
$
1.57

 
$

 
$

 
$
1.53

Weighted Avg Price - Ceiling
 
$
1.87

 
$
1.97

 
$

 
$

 
$
1.91

________________________________________
(1)
The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC.
(2)
The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC.
(3)
The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC.



13

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


 Oil Basis Swaps
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 

WTI Midland (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 

 
3,685,500

 
3,266,000

 
2,530,000

 
9,481,500

Weighted Avg Differential (2)
 
$

 
$
(6.51
)
 
$
(7.36
)
 
$
(8.36
)
 
$
(7.30
)
2020:
 
 
 
 
 
 
 
 
 
 

WTI Midland (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 
1,001,000

 
637,000

 

 

 
1,638,000

Weighted Avg Differential (2)
 
$
(0.16
)
 
$
(0.40
)
 
$

 
$

 
$
(0.26
)
________________________________________
(1)
The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude.
(2)
The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table.

Oil Swaps
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 

WTI (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 

 
455,000

 
460,000

 
460,000

 
1,375,000

Weighted Avg Price
 
$

 
$
64.54

 
$
64.54

 
$
64.54

 
$
64.54

________________________________________
(1)
The fixed price on these swaps is NYMEX WTI.

Gas Swaps
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 

Henry Hub (1)
 
 
 
 
 
 
 
 
 
 

Volume (MMBtu)
 

 
3,185,000

 
3,220,000

 
3,220,000

 
9,625,000

Weighted Avg Price
 
$

 
$
3.00

 
$
3.00

 
$
3.00

 
$
3.00

________________________________________
(1)
The fixed price on these swaps is NYMEX Henry Hub.

Sold Oil Calls
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2019:
 
 
 
 
 
 
 
 
 
 

WTI (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 

 
333,970

 
337,640

 
337,640

 
1,009,250

Weighted Avg Call Price
 
$

 
$
64.36

 
$
64.36

 
$
64.36

 
$
64.36

________________________________________
(1)
The index on these sold calls is NYMEX WTI.




14

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


The following table summarizes our derivative contracts entered into subsequent to March 31, 2019 through May 7, 2019:
 Oil Basis Swaps
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth Quarter
 
Total
2020:
 
 
 
 
 
 
 
 
 
 

WTI Midland (1)
 
 
 
 
 
 
 
 
 
 

Volume (Bbls)
 
364,000

 

 

 

 
364,000

Weighted Avg Differential (2)
 
$
(0.03
)
 
$

 
$

 
$

 
$
(0.03
)
________________________________________
(1)
The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude.
(2)
The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table.

Derivative Gains and Losses

Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of Loss (gain) on derivative instruments, net for the periods indicated.
 
 
Three Months Ended
March 31,
(in thousands)
 
2019
 
2018
Decrease (increase) in fair value of derivative instruments, net:
 
 

 
 

Gas contracts
 
$
(9,846
)
 
$
(11,789
)
Oil contracts
 
116,247

 
(4,759
)
 
 
106,401

 
(16,548
)
Cash (receipts) payments on derivative instruments, net:
 
 

 
 

Gas contracts
 
3,764

 
(5,119
)
Oil contracts
 
5,287

 
17,508

 
 
9,051

 
12,389

Loss (gain) on derivative instruments, net
 
$
115,452

 
$
(4,159
)

Derivative Fair Value

Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets.



15

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


The following tables present the amounts and classifications of our derivative assets and liabilities as of March 31, 2019 and December 31, 2018, as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts.
 
 
 
 
March 31, 2019
(in thousands)
 
Balance Sheet Location
 
Asset
 
Liability
Oil contracts
 
Current assets — Derivative instruments
 
$
19,328

 
$

Gas contracts
 
Current assets — Derivative instruments
 
16,502

 

Oil contracts
 
Non-current assets — Derivative instruments
 
222

 

Gas contracts
 
Non-current assets — Derivative instruments
 
404

 

Oil contracts
 
Current liabilities — Derivative instruments
 

 
73,517

Gas contracts
 
Current liabilities — Derivative instruments
 

 
4,040

Oil contracts
 
Non-current liabilities — Derivative instruments
 

 
749

Gas contracts
 
Non-current liabilities — Derivative instruments
 

 
7

Total gross amounts presented in the balance sheet
 
36,456

 
78,313

Less: gross amounts not offset in the balance sheet
 
(26,283
)
 
(26,283
)
Net amount
 
$
10,173

 
$
52,030

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(in thousands)
 
Balance Sheet Location
 
Asset
 
Liability
Oil contracts
 
Current assets — Derivative instruments
 
$
94,240

 
$

Gas contracts
 
Current assets — Derivative instruments
 
7,699

 

Oil contracts
 
Non-current assets — Derivative instruments
 
9,246

 

Oil contracts
 
Current liabilities — Derivative instruments
 

 
23,378

Gas contracts
 
Current liabilities — Derivative instruments
 

 
4,249

Oil contracts
 
Non-current liabilities — Derivative instruments
 

 
311

Gas contracts
 
Non-current liabilities — Derivative instruments
 

 
1,956

Total gross amounts presented in the balance sheet
 
111,185

 
29,894

Less: gross amounts not offset in the balance sheet
 
(29,894
)
 
(29,894
)
Net amount
 
$
81,291

 
$


We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which has a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions, nor do we require our counterparties to post collateral for our benefit. In the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk.

4.
FAIR VALUE MEASUREMENTS

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The FASB has established 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 identical assets and liabilities. Level 2 are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 are unobservable inputs for an asset or liability.




16

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


The following table provides fair value measurement information for certain assets and liabilities as of March 31, 2019 and December 31, 2018:
 
 
March 31, 2019
 
December 31, 2018
(in thousands)
 
Book
Value
 
Fair
Value
 
Book
Value
 
Fair
Value
Financial Assets (Liabilities):
 
 

 
 
 
 
 
 

4.375% Notes due 2024
 
$
(750,000
)
 
$
(779,340
)
 
$
(750,000
)
 
$
(744,578
)
3.90% Notes due 2027
 
$
(750,000
)
 
$
(748,620
)
 
$
(750,000
)
 
$
(701,273
)
4.375% Notes due 2029
 
$
(500,000
)
 
$
(514,380
)
 
$

 
$

Derivative instruments — assets
 
$
36,456

 
$
36,456

 
$
111,185

 
$
111,185

Derivative instruments — liabilities
 
$
(78,313
)
 
$
(78,313
)
 
$
(29,894
)
 
$
(29,894
)

Assessing the significance of a particular input to the fair value measurement requires judgment, including the consideration of factors specific to the asset or liability. The fair value (Level 1) of our fixed rate notes was based on their last traded value before period end. The fair value of our derivative instruments (Level 2) was estimated using option pricing models. These models use certain variables including forward price and volatility curves and the strike prices for the instruments. The fair value estimates are adjusted relative to non-performance risk as appropriate. See Note 3 for further information on the fair value of our derivative instruments.

Other Financial Instruments

The carrying amounts of our cash, cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities and/or liquid nature of these assets and liabilities. Included in “Accrued liabilities — Other” at March 31, 2019 were accrued operating expenses of approximately $84.0 million. Included in “Accrued liabilities — Other” at December 31, 2018 were: (i) accrued operating expenses of approximately $69.1 million, (ii) accrued general and administrative, primarily payroll-related, costs of approximately $47.4 million, and (iii) an accrual of approximately $35.8 million representing the amount by which checks issued, but not yet presented to our banks, exceeded balances in applicable bank accounts.

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.

We conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent company guarantees, letters of credit, or prepayments when deemed necessary.

We routinely assess the recoverability of all material accounts receivable to determine their collectability. We accrue a reserve to the allowance for doubtful accounts when it is probable that a receivable will not be collected and the amount of the reserve may be reasonably estimated. At March 31, 2019 and December 31, 2018, the allowance for doubtful accounts was $2.7 million and $2.7 million, respectively.

5.
CAPITAL STOCK

Authorized capital stock consists of 200 million shares of common stock and 15 million shares of preferred stock. At March 31, 2019, there were 101.4 million shares of common stock outstanding.

From the 15 million shares of preferred stock authorized, our Board of Directors created a series of preferred stock designated as 8.125% Series A Cumulative Perpetual Convertible Preferred Stock and authorized 62.5 thousand shares. In March 2019, in conjunction with the Resolute acquisition (see Note 13), we issued 62.5 thousand shares of 8.125% Series A Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share (the “Convertible



17

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


Preferred Stock”). Holders of the Convertible Preferred Stock are entitled to receive, when, as, and if declared by the Board out of funds of Cimarex legally available for payment, cumulative cash dividends at the annual rate of 8.125% of each share’s liquidation preference of $1,000. Dividends on the preferred stock will be payable quarterly in arrears and shall accumulate from the most recent date as to which dividends have been paid. In the event of any liquidation, winding up, or dissolution of Cimarex, whether voluntary or involuntary, each holder will be entitled to receive in respect of its shares and to be paid out of the assets of Cimarex legally available for distribution to its stockholders, after satisfaction of liabilities to Cimarex’s creditors and any senior stock (of which there is currently none) and before any payment or distribution is made to holders of junior stock (including common stock), the liquidation preference of $1,000 per share, with the total liquidation preference being $62.5 million in the aggregate. Each holder has the right at any time, at its option, to convert any or all of such holder’s shares of Convertible Preferred Stock at an initial conversion rate of 8.0421 shares of fully paid and nonassessable shares of our common stock and $471.40 in cash per share of Convertible Preferred Stock. Additionally, at any time on or after October 15, 2021, we shall have the right, at our option, if the closing sale price of our common stock meets certain criteria, to elect to cause all, and not part, of the outstanding shares of Convertible Preferred Stock to be automatically converted into that number of shares of Cimarex common stock for each share of Convertible Preferred Stock equal to the conversion rate in effect on the mandatory conversion date as such terms are defined in the Certificate of Designations for the Convertible Preferred Stock and $471.40 in cash per share of Convertible Preferred Stock. As a result of the cash redemption features included in the Convertible Preferred Stock conversion option, with such conversion not solely within our control, the instruments are classified as Redeemable preferred stock in temporary equity on the Condensed Consolidated Balance Sheet.

Dividends

Common Stock

In February 2019, our Board of Directors declared a cash dividend of $0.20 per share of common stock. The dividend is payable on or before May 31, 2019 to stockholders of record on May 15, 2019. Dividends declared are recorded as a reduction of retained earnings to the extent retained earnings are available at the close of the period prior to the date of the declared dividend. Dividends in excess of retained earnings are recorded as a reduction of additional paid-in capital. The $20.3 million dividend declared during the first quarter 2019 was recorded as a reduction of retained earnings and is included as a payable in “Accrued liabilities — Other” on the Condensed Consolidated Balance Sheet. Nonforfeitable dividends paid on stock awards that subsequently forfeit are reclassified out of retained earnings or additional paid-in capital, as applicable, to stock compensation expense in the period in which the forfeitures occur. Future dividend payments will depend on our level of earnings, financial requirements, and other factors considered relevant by our Board of Directors.

Preferred Stock

In March 2019, our Board of Directors declared a cash dividend of $20.31 per share of Convertible Preferred Stock. The dividend was paid in April to stockholders of record on April 1, 2019. The $1.3 million dividend declared during the first quarter 2019 was recorded as a reduction of retained earnings and is included as a payable in “Accrued liabilities — Other” on the Condensed Consolidated Balance Sheet.




18

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


6.
STOCK-BASED COMPENSATION

We have recognized stock-based compensation cost as shown below for the periods indicated.
 
 
Three Months Ended
March 31,
(in thousands)
 
2019
 
2018
Restricted stock awards:
 
 
 
 
Performance stock awards
 
$
5,394

 
$
6,729

Service-based stock awards
 
7,231

 
5,072

 
 
12,625

 
11,801

Stock option awards
 
622

 
617

Total stock compensation cost
 
13,247

 
12,418

Less amounts capitalized to oil and gas properties
 
(6,534
)
 
(5,688
)
Stock compensation expense
 
$
6,713

 
$
6,730


Periodic stock compensation expense will fluctuate based on the grant-date fair value of awards, the number of awards, the requisite service period of the awards, employee forfeitures, and the timing of the awards. Our accounting policy is to account for forfeitures in compensation cost when they occur.

7.
ASSET RETIREMENT OBLIGATIONS

We recognize the present value of the fair value of liabilities for retirement obligations associated with tangible long-lived assets in the period in which there is a legal obligation associated with the retirement of such assets and the amount can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This liability includes costs related to the plugging and abandonment of wells, the removal of facilities and equipment, and site restorations. Subsequent to initial measurement, the asset retirement liability is accreted each period. If there is a change in the estimated cost or timing of retirement, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost. Capitalized costs are included as a component of the depreciation and depletion calculations.

The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the three months ended March 31, 2019:
(in thousands)
 
Three Months Ended
March 31, 2019
Asset retirement obligation at January 1, 2019
 
$
166,904

Liabilities incurred
 
10,009

Liability settlements and disposals
 
(1,361
)
Accretion expense
 
1,793

Revisions of estimated liabilities
 
1,912

Asset retirement obligation at March 31, 2019
 
179,257

Less current obligation
 
(13,728
)
Long-term asset retirement obligation
 
$
165,529


For the three months ended March 31, 2019, liabilities incurred included $9.4 million for the Resolute acquisition.




19

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


8.
EARNINGS PER SHARE

The calculations of basic and diluted net earnings per common share under the two-class method are presented below for the periods indicated:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
(in thousands, except per share information)
 
Income (Numerator)
 
Shares (Denominator)
 
Per-Share Amount
 
Income (Numerator)
 
Shares (Denominator)
 
Per-Share Amount
Net income
 
$
26,316

 
 

 
 
 
$
186,318

 
 
 
 
Less: net income attributable to participating securities
 
(445
)
 
 
 
 
 
(2,666
)
 
 
 
 
Less: preferred stock dividends
 
(1,269
)
 
 
 
 
 

 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders
 
24,602

 
95,922

 
$
0.26

 
183,652

 
93,699

 
$
1.96

Effects of dilutive securities (1)
 
 
 
 
 
 
 
 
 
 
 
 
Options
 

 
10

 
 
 

 
38

 
 
Diluted earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
Income available to common stockholders and assumed conversions
 
$
24,602

 
95,932

 
$
0.26

 
$
183,652

 
93,737

 
$
1.96

________________________________________
(1)
Inclusion of certain potential common shares would have an anti-dilutive effect, therefore, these shares were excluded from the calculations of diluted earnings per share. Excluded from the March 31, 2019 calculation were 388.6 thousand potential common shares from the assumed exercise of employee stock options and 502.6 thousand potential common shares from the assumed conversion of the Convertible Preferred Stock. Excluded from the March 31, 2018 calculation were 295.6 thousand potential common shares from the assumed exercise of employee stock options.

9.
INCOME TAXES

The components of our provision for income taxes and our combined federal and state effective income tax rates were as follows:

 
 
Three Months Ended
March 31,
(in thousands)
 
2019
 
2018
Deferred tax expense
 
$
8,073

 
$
56,949

 
 
 
 
 
Combined federal and state effective income tax rate
 
23.5
%
 
23.4
%

At December 31, 2018, we had a U.S. net tax operating loss carryforward of approximately $1.16 billion, which will expire in tax years 2032 through 2037. We believe that the carryforward will be utilized before it expires. We also had enhanced oil recovery and marginal well credits of $3.5 million at December 31, 2018.

On March 1, 2019, the Company completed its acquisition of Resolute. For federal income tax purposes, the acquisition was a tax-free merger whereby the Company acquired carryover tax basis in Resolute’s assets and liabilities. As of March 1, 2019, the Company recorded a net deferred tax liability of $62.4 million associated with the acquired



20

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


assets. The net deferred tax liability includes certain deferred tax assets net of valuation allowances. The acquired tax attributes include federal net operating loss, capital loss, and enhanced oil recovery tax credit carryforwards. The carryforwards are subject to an annual limitation under Internal Revenue Code Section 382.

At March 31, 2019, we had no unrecognized tax benefits that would impact our effective tax rate and have made no provisions for interest or penalties related to uncertain tax positions. The tax years 2016 through 2018 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 to examination for tax years 2015 through 2018.

Our combined federal and state effective income tax rates differ from the U.S. federal statutory rate of 21% primarily due to state income taxes and non-deductible expenses.

10.
COMMITMENTS AND CONTINGENCIES

Lease Commitments

Effective January 1, 2019, we began accounting for leases in accordance with Topic 842, which requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for contracts that provide lessees with the right to control the use of identified assets for periods of greater than 12 months. Prior to January 1, 2019, we accounted for leases in accordance with ASC Topic 840, Leases, under which operating leases were not recorded on the balance sheet.

Real Estate Leases

We have operating leases for office space in various locations that provide us the right to control the use of the specified office space over the term of the contract. These leases require us to make monthly “base rent” payments, as well as “additional payments” for our share of operating expenses and taxes incurred by the landlord. At our option, the terms of these leases can be renewed for varying periods, and in some cases may be terminated early at our option. As of March 31, 2019, these leases had remaining lease terms ranging from 5.2 to 7.4 years. These leases do not contain residual value guarantees, options to purchase the underlying office space, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of office space.

Lease liabilities associated with our real estate leases were recorded at the present value of the future lease payments, after considering the following:

“Base rent” payments are considered fixed lease payments, while “additional payments” are considered variable lease payments.
At commencement of each real estate lease we were not reasonably certain to exercise the option to renew or terminate such lease.
The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve.
As an accounting policy we have elected not to separate nonlease components from lease components for our real estate class of assets.
Where applicable, we determined that the effect of accounting for the right to use land separately from other lease components would be insignificant.

Production-Related Leases

We have operating leases for equipment used in connection with our oil and gas production operations, including well-head compressors, pipeline compressors, and artificial lift mechanisms. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. These leases



21

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


often include an “evergreen” provision that allows the contract term to continue on a month-to-month basis following expiration of the initial term stated in the contract. As of March 31, 2019, these leases had remaining lease terms ranging from one month to 11.3 years. These leases require us to make monthly payments of fixed amounts, which cover the cost of renting the equipment and, in some cases, the cost of maintaining the leased equipment. These leases do not typically require us to make variable lease payments. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of production-related equipment.

We have one finance lease, which results from a gathering agreement (the “Gathering Agreement”) on a gathering system. Under terms of the Gathering Agreement, we have the option to acquire a portion of the underlying gathering system upon termination of the Gathering Agreement. We make monthly payments under the Gathering Agreement based on the volume of oil gathered and a gathering rate per barrel, which is adjusted periodically. As of March 31, 2019, this lease had a remaining term of 6.4 years.

Lease liabilities associated with our production-related operating leases were recorded at the present value of the future lease payments, after considering the following:

For leases with an evergreen provision, the term of the lease was determined to be the noncancellable period in the contract plus the period beyond the noncancellable period that we believe it is reasonably certain we will need the equipment for operational purposes, limited to the point in time at which both we and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty.
The discount rate used to calculate each lease liability was based on our incremental borrowing rate, which was estimated utilizing trading metrics for our senior unsecured notes as adjusted using relevant market factors to develop a synthetic secured yield curve.
As an accounting policy we have elected not to separate nonlease components from lease components for our production-related class of assets.

Exploration and Development-Related Leases

We have operating leases for equipment used in connection with our exploration and development activities, including drilling rigs, pressure pumping equipment, directional drilling tools, well-control devices, and various pieces of support equipment. These leases provide us the right to control the use of explicitly or implicitly identified equipment during the term of the contract. As of March 31, 2019, these leases had remaining lease terms of 12 months or less. These leases typically require us to make payments in amounts based on the usage of the underlying equipment. These leases do not contain residual value guarantees, options to purchase the underlying equipment, or terms or covenants that impose restrictions on our ability to pay dividends, incur debt, or enter into additional leases. We have no subleases of exploration and development-related equipment.

As an accounting policy we have elected not to apply the recognition requirements of Topic 842 to our exploration and development-related class of assets with lease terms at commencement of 12 months or less. As such, we have not recorded any lease liabilities associated with our exploration and development-related leases. In addition, as an accounting policy we have elected not to separate nonlease components from lease components for our exploration and development-related class of assets.




22

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


Balance Sheet Presentation

The following tables present the amounts and classifications of our right-of-use assets and lease liabilities as of March 31, 2019:
(in thousands)
 
Balance Sheet Location
 
March 31, 2019
Operating lease right-of-use assets
 
Non-current assets — Fixed assets, net
 
$
233,644

Finance lease right-of-use assets
 
Non-current assets — Other assets
 
28,138

Total right-of-use assets
 
$
261,782


(in thousands)
 
Balance Sheet Location
 
March 31, 2019
Operating lease liabilities — current
 
Current liabilities — Operating leases
 
$
62,825

Operating lease liabilities — non-current
 
Non-current liabilities — Operating leases
 
186,356

Finance lease liability — current
 
Current liabilities — Accrued liabilities-Other
 
5,936

Finance lease liability — non-current
 
Non-current liabilities — Other liabilities
 
23,500

Total lease liabilities
 
$
278,617


Lease Cost and Cash Flows

The following table summarizes total lease cost, which includes amounts recognized in income and amounts capitalized for the indicated period:
(in thousands)
 
Three Months Ended March 31, 2019
Finance lease cost:
 
 
Amortization of right-of-use asset
 
$
1,096

Interest on lease liability
 
486

Operating lease cost: (1)
 
 
Production expense
 
3,834

Gas gathering and other expense
 
6,164

General and administrative expense
 
2,299

Short-term lease cost (2)
 
154,710

Total lease cost
 
$
168,589

________________________________________
(1)
Operating lease cost in the table above is composed of costs incurred under real estate and production-related leases. These costs are included in the indicated captions on the Condensed Consolidated Statements of Operations.
(2)
Short-term lease cost in the table above is composed of costs incurred under leases with terms of 12 months or less for right-of-use assets used in exploration and development activities. Payments under such leases are typically based on usage of the underlying right-of-use asset and, therefore, are also variable lease payments. These costs are capitalized as part of proved properties on the Condensed Consolidated Balance Sheet.




23

CIMAREX ENERGY CO.
Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)


The following table summarizes cash paid for our leases for the indicated period:
(in thousands)
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Financing cash outflows from finance lease
 
$
635

Operating cash outflows from operating leases
 
$
12,493

 
 
 
Cash paid for short-term leases and variable lease payments:
 
 
Investing cash outflows from operating leases
 
$
139,473


During the three months ended March 31, 2019, we recognized $16.2 million in right-of-use assets in connection with new operating leases entered into during the period.

Lease Liability Maturity Analysis

The following table presents the weighted-average remaining lease terms and discount rates of our leases as of the indicated date:
 
 
March 31, 2019
Weighted-average remaining lease term (in years):
 
 
Finance lease
 
6.4

Operating leases
 
4.7

 
 
 
Weighted-average discount rate:
 
 
Finance lease
 
6.7
%
Operating leases
 
4.1
%

The following table reflects the undiscounted future cash flows utilized in the calculation of the lease liabilities recorded at March 31, 2019: