Identifying the key drivers
In this final part, we will study Cimarex Energy’s (XEC) stock price movement with respect to energy prices, the dollar index, and the broader market.
As seen in the above chart, XEC’s stock price was in an uptrend from June 2012 to July 2014 when NYMEX WTI crude oil prices were also in an uptrend. NYMEX WTI crude oil started its decline in June 2014, and after one month, even XEC’s stock price topped. Since then, both NYMEX WTI crude oil and XEC’s stock price have been in a downtrend.
Clearly, crude oil is a key driver behind movements in XEC’s stock price. Both XEC’s stock price and crude oil are showing a decline of ~40% and ~70%, respectively, since their peaks in June 2014.
Effect of a stronger dollar
As seen in the above chart, there is an inverse relationship between XEC’s stock price and dollar index movements. The stronger dollar weakens energy prices, which affects XEC’s earnings.
Comparison to broader market
In 2015, XEC underperformed the S&P 500 ETF (SPY). XEC has lost ~16%, whereas the S&P 500 was almost flat during the same period.
XEC has excellent quality oil and gas reserves with very low cost production capacity. Also, XEC has a very strong balance sheet. But XEC has less derivative coverage (or hedge positions) when compared with its total production volumes. So XEC is not immune to falling energy prices. Given all these factors, if energy prices move further down, XEC will be at further risk for falling earnings.