Cimarex Energy (XEC) Senior Unsecured Notes Rating Raised to 'Baa3' at Moody's

Moody's Investors Service upgraded Cimarex Energy's (NYSE: XEC) (Cimarex) senior unsecured note ratings to Baa3 from Ba1. Moody's withdrew the Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating, and SGL-2 Speculative Grade Liquidity Rating. The rating outlook is stable.

"The upgrade to investment grade reflects Cimarex's successful track record in growing production and reserves at competitive costs, while maintaining conservative financial policies," commented Gretchen French, Moody's Vice President. "While Cimarex remains smaller than its investment grade peers, the management team exhibits a high level of capital discipline and has a track record of conservatively managing the company through commodity price cycles."

Debt List: Cimarex Energy Co.

Senior unsecured notes: upgraded to Baa3 from Ba1, LGD4

Senior unsecured shelf: upgraded to (P)Baa3 from (P)Ba1

Outlook: Stable from Positive

Corporate Family Rating: Withdrawn

...Probability of Default Rating: Withdrawn

...Speculative Grade Liquidity Rating: Withdrawn

RATINGS RATIONALE

Cimarex's Baa3 senior unsecured rating is supported by the company's successful track record in growing production and reserves at competitive costs, while maintaining highly conservative financial policies. In addition, the rating reflects the company's disciplined drilling strategy, high level of financial flexibility, strong management team, good liquidity, and historically conservative reserve booking policy.

The company's ratings remain restrained by moderate size and limited basin and geographic diversification, the high capital spending needs for the development of its Permian Basin and Woodford-Cana plays and exposure to a low realized pricing on its production. A weak commodity price outlook will pressure the company's cash flow-based leverage metrics in 2015, but with a recovery expected by Moody's in 2016.

Cimarex has very low leverage in terms of debt/production and debt/proved developed reserves, and Moody's expects the company to maintain current debt levels through 2016, as cash flow outspending is funded with cash on the balance sheet and equity proceeds. Still, with lower commodity prices, Cimarex' retained cash flow(RCF)/debt will decline to around 30% in 2015 from 98% in 2014, but remain in line with expectations of several of its Baa3 peers. Moody's expects that Cimarex's RCF/debt will recover to between 45-50% in 2016, both with growing production volumes and the benefit of modestly higher commodity pricing.

Cimarex has a good liquidity profile, with a high degree of flexibility in its capital program, with a high level of operational control of its properties, limited long term contractual commitments, and manageable leasehold expirations. Liquidity is constrained by Cimarex's volatile cash flow, with relatively limited use of hedges, the risk of negative borrowing base re-determinations, albeit there is currently significant headroom, and the general material adverse change (MAC) clause in its revolver.

We expect Cimarex to outspend operating cash flow by around $450 million in 2015, which the company will fund with cash on the balance sheet ($122 million at March 31, 2015) and equity proceeds estimated at roughly $650 million (about $730 million with underwriter overallotment). The company also has an undrawn, unsecured $1 billion bank credit facility due July 2018 (borrowing base of $2.5 billion as of April 2014). The next borrowing base redetermination is scheduled for April 2016. Drawings under the bank credit facility are subject to a general MAC clause, and financial covenants under the facility include a maximum total debt/EBITDA ratio of 3.5x and minimum current ratio of 1.0x. We expect that Cimarex will remain well within compliance with its covenants, supported by the company's conservative leverage profile.

The stable rating outlook reflects expected continued growth in production and reserves at competitive costs, while maintaining relatively conservative financial leverage.

Cimarex's ratings could be downgraded if the company exhibits poor capital productivity from its drilling program. In addition, the ratings could be pressured by a sizable increase in financial leverage (RCF/debt sustained below 25%).

A ratings upgrade is unlikely through 2016 because of Cimarex's smaller scale and limited diversification. In order to be upgraded to Baa2, Cimarex would need to have greater production scale (production approaching 250 thousand Boe per day) while maintaining relatively low financial leverage.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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