UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

CIMAREX ENERGY CO.

1700 Lincoln Street, Suite 1800

Denver, Colorado 80203-4518

(303) 295-3995

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý No 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 Cimarex Energy Co. common stock outstanding as of September 30, 2005 was 82,395,826.

CIMAREX ENERGY CO.

Table of Contents

In this report, we use terms to discuss oil and gas producing activities as defined in Rule 4-10(a) of Regulation S-X.  We express quantities of natural gas in terms of thousand cubic feet (Mcf), million cubic feet (MMcf) or billion cubic feet (Bcf). Oil is quantified in terms of barrels (Bbls), thousands of barrels (MBbls) and millions of barrels (MMBbls). Oil is compared to natural gas in terms of equivalent thousand cubic feet (Mcfe) or equivalent million cubic feet (MMcfe).  One barrel of oil is the energy equivalent of six Mcf of natural gas.  Information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross.

PART I

ITEM 1 - Financial Statements

CIMAREX ENERGY CO.

Consolidated Balance Sheets

(Unaudited)

See accompanying notes to consolidated financial statements.

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CIMAREX ENERGY CO.

Consolidated Statements of Operation

(Unaudited)

See accompanying notes to consolidated financial statements.

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CIMAREX ENERGY CO.

Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to consolidated financial statements.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2005

(Unaudited)

1.                                                  Basis of Presentation

The accompanying financial statements are unaudited and were prepared from the records of Cimarex Energy Co. (Cimarex or the Company).  We believe these financial statements include all adjustments necessary for a fair presentation of our financial position and results of operations.  We prepared these statements on a basis consistent with the annual audited statements and Regulation S-X. Regulation S-X allows us to omit some of the footnote and policy disclosures required by accounting principles generally accepted in the United States of America and normally included in annual reports on Form 10-K.  These interim financial statements should be read in conjunction with the financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2004.

Cimarex was formed in February 2002 as a wholly-owned subsidiary of Helmerich & Payne, Inc. (H&P).  As a result of a dividend declared and paid by H&P on September 30, 2002, in the form of Cimarex common stock, Cimarex was spun-off and became a stand-alone company.  Also on September 30, 2002, Cimarex acquired 100 percent of the outstanding common stock of Key Production Company, Inc. (Key) in a tax-free exchange.

In June 2005, Cimarex acquired Magnum Hunter Resources, Inc.  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 (excluding 2.5 million shares held in treasury).  At September 30, 2005, the combined company had 82.4 million shares outstanding. The merger was accounted for as a purchase of Magnum Hunter by Cimarex.

The accounts of Cimarex and its subsidiaries are presented in the accompanying consolidated financial statements.  All intercompany accounts and transactions were eliminated in consolidation.

We make certain estimates and assumptions to prepare our financial statements in conformity with accounting principles generally accepted in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period and in disclosures of commitments and contingencies.  Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

The more significant areas requiring the use of management’s estimates and judgments relate to the estimation of proved oil and gas reserves, the use of these oil and gas reserves in calculating depletion, depreciation and amortization, the use of the estimates of future net revenues in computing ceiling test limitations and estimates of future abandonment obligations used in recording asset retirement obligations.  Estimates and judgments are also required in determining reserves for bad debt, impairments of undeveloped properties, the purchase price allocation, assessment of goodwill and valuation of deferred tax assets.

Certain amounts in the accompanying consolidated financial statements for prior periods have been reclassified to conform to the current year presentation.

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2.                                      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 (excluding 2.5 million shares held in treasury).

We believe that the merger provides the opportunity to expand our existing core areas and to add new projects, without jeopardizing our strong financial position; a substantial footprint in the Permian Basin from which we can grow; complementary operations in the Mid-Continent and Gulf Coast areas; measured exposure to high potential projects in the Gulf of Mexico; and the ability to greatly expand our balanced-risk drilling program underpinned by a strong balance sheet.

The consolidated balance sheet at September 30, 2005, includes the estimated fair value of assets and liabilities of Magnum Hunter on June 7, 2005, as well as the adjustments required to record the acquisition in accordance with the purchase method of accounting.  The results of operations of Magnum Hunter are included in our consolidated statements of operations for the period since the acquisition on June 7, 2005.

The purchase price of Magnum Hunter’s assets was based on the value of Cimarex common stock issued to the Magnum Hunter stockholders and the fair value of assumed liabilities.  The value of the common stock issued is based on the weighted average price of Cimarex’s common stock for the period beginning two days before and ending two days after the announcement of the merger, or $37.66 per share.  The purchase price also includes merger costs incurred, which include employee severance costs, investment banking expenses, legal and accounting fees, printing expenses and other related costs.

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The allocation of the purchase price to oil and gas properties utilized prevailing oil and gas prices at the time of negotiations and announcement of the merger.  The overall allocation of the purchase price is preliminary because certain items such as the determination of the final fair value of certain assets and liabilities as of the acquisition date have not been finalized. The goodwill amount related to the purchase as of September 30, 2005 has been adjusted to $671.9 million, as the finalization process continues.

Included in current assets on the acquisition date of June 7, 2005 were assets available for sale of approximately $8.4 million acquired in the Magnum Hunter merger.  These assets were sold in the third quarter for approximately $8.1 million.

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 periods presented.  The unaudited pro forma data is presented for illustrative purposes only, based on estimates and assumptions deemed appropriate by 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, 2004.  The pro forma information also should not be used as an indication of future results or trends.

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3.                                                  Derivatives

SFAS No.133, Accounting for Derivative Instruments and Hedging activities, requires that all derivatives be recorded on the balance sheet at fair value.  We generally determine the fair value of commodity futures and swap contracts based on the difference between the fixed contract price and the underlying market price at the determination date.  Realized and unrealized gains and losses on derivatives that are not designated as hedges are recorded as an expense. 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 have not been designated for hedge accounting treatment.  As a result, Cimarex recognized a net loss during the third quarter of $82 million.  The charge includes both non-cash mark-to-market derivative losses as well as cash settlements.  Cash payments related to these contracts that settled in the third quarter totaled $15.6 million.  The derivative liability at September 30, 2005 equals $106.5 million. Cimarex will continue to recognize gains and losses in future earnings as the remaining derivative instruments expire through December 31, 2006.  Actual gains and losses to be recognized may differ materially from current fair value estimates. The following is a summary of the company’s open derivative contracts as of September 30, 2005:

Of the $106.5 million of total derivative liabilities, $94.1 million is classified as current and $12.4 million is included in other long-term liabilities on our consolidated balance sheet at September 30, 2005.  The weighted average NYMEX prices at September 30 for fourth quarter 2005 approximate $14.09 per Mcf of gas and $66.33 per barrel of oil.  Weighted average NYMEX prices at September 30, 2005 for the year 2006 approximate $11.71 per Mcf of gas and $66.83 per barrel of oil.

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4.                                                  Stock Options

Cimarex’s 2002 Stock Incentive Plan reserves 12.7 million shares of common stock for issuance to directors and employees, including officers.  Options granted under the plan after December 5, 2002, expire ten years from the grant date and vest in one-fifth increments on each of the first five anniversaries of the grant date.  All grants are made at the average of the high and low prices of our common stock as reported on the New York Stock Exchange on the date of grant.

Upon the exercise of the options for shares of common stock, the employee is required to hold at least 50 percent of the profit shares, as defined in the plan, until the eighth anniversary of the grant date.  The incentive plan provides for accelerated vesting if there is a change in control (as defined in the plan).

For periods prior to January 1, 2005, we applied Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations to account for all stock option grants.  No compensation cost had been recognized for stock options granted, as the option prices were equal to the market price of the underlying common stock on the date of grant.

Effective January 1, 2005, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share Based Payment on a 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.  For the quarter and nine months ended September 30, 2005 amortization of compensation expense related to stock options was approximately $0.5 million and $1.9 million or $0.3 million and $1.2 million after tax ($.01 and $.02 per diluted share respectively).

As discussed more fully in the notes to the financial statements of our annual report on form 10-K for the year ended December 31, 2004, the merger with Magnum Hunter constituted a “change of control event” under the incentive plan.  As a result, all participants became entitled to acceleration of vesting of their options.  Cimarex obtained waivers of the accelerated vesting from certain option holders including the company’s CEO and other senior officers.  Option holders who were not requested to or did not choose to execute a waiver became fully vested in their options on June 7, 2005. Compensation expense related to the accelerated vesting of options was approximately $1.1 million or $.7 million after tax.

The fair value of each option award was estimated as of the date of grant using the Black-Scholes option-pricing model.  Expected volatilities were based on the historical volatility of our common stock.    The risk free interest rate is based on U.S. Treasury Securities at a constant five year fixed maturity in effect at the date of the grant.  Historical data was also used to estimate the probability of option exercise, expected years until exercise and employee termination within the valuation model.

Had compensation cost for the plan been determined based on the fair value at the grant dates for awards to employees under the plan, consistent with the methodology of SFAS No. 123R for the quarter and nine months ended September 30, 2004, such compensation expense would have been approximately $0.9 million and $2.6 million, respectively.  Pro forma net income for the quarter and nine months ended September 30, 2004 would have been as indicated below:

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There were no stock options granted to employees during the three months and nine months ended September 30, 2005.  The weighted-average grant-date fair value of options granted during the three months and nine months ended September 30, 2004 was $12.24.

The following summary reflects the status of stock options granted to employees and directors as of September 30, 2005, and changes during the period:

The total intrinsic value of options exercised during the three months ended September 30, 2005 and 2004 was $8.6 million and $3.3 million, respectively.  The total intrinsic value of options exercised during the nine months ended September 30, 2005 and 2004 was $16.4 million and $8.8 million, respectively.

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The following summary reflects the status of non-vested stock options granted to employees and directors as of September 30, 2005 and changes during the period:

As of September 30, 2005 there was $4.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our incentive plan.  That cost is expected to be recognized pro rata over a weighted-average period of 7.2 years.  Generally, options vest on the anniversary of the grant date.  However, as noted above, the merger with Magnum Hunter resulted in certain option holders becoming fully vested in their options as of June 7, 2005.  The fair value attributable to such vested shares was approximately $1.1 million.

Cash received from option exercises during the nine months ended September 30, 2005 and 2004 was approximately $8.5 million and $7.4 million, respectively.  The tax benefit realized for the tax deductions from option exercises totaled approximately $6.1 million and $3.3 million, for the nine months ended September 30, 2005 and 2004, respectively.

5.                                                  Asset Retirement Obligations

On January 1, 2003, we adopted SFAS No. 143, Accounting for Asset Retirement Obligations.  This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  The Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made, and that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset.  Oil and gas producing companies incur this liability upon acquiring or drilling a well.

The following table reflects the components of the change in the carrying amount of the asset retirement obligation for the nine months ended September 30, 2005 (in thousands):

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6.                                                  Long-Term Debt

Prior to the Magnum Hunter merger, Cimarex had no debt.  In connection with the Magnum Hunter merger on June 7, 2005, Cimarex assumed the following debt (in thousands):

Debt at September 30, 2005 consisted of the following (in thousands):

(1)     Paid in its entirety in August 2005.

(2)     Fair market value at June 7, 2005.

(3)     Fair market value at June 7, 2005. Reflected in Paid-in-Capital is $49.6 million related to the fair value of common stock associated with the convertible debt.

(4)     Fair market value at date of acquisition less amortization of the premium of fair market value over face value.

We have the capability to borrow on a Senior Secured Revolving Credit Facility.  On June 13, 2005, Cimarex entered into a new Revolving Credit Facility that provides for $500 million of long-term committed credit.  The new facility is scheduled to mature on July 1, 2010 and is secured by mortgages on certain oil and gas properties and the stock of certain wholly-owned operating subsidiaries.

The Credit Facility agreement contains both financial and non-financial covenants, including limitations on share repurchases, dividends and other restricted payments.  The financial covenants require Cimarex to maintain a minimum ratio of funded indebtedness to trailing twelve-month EBITDA (earnings before interest, taxes and DD&A adjusted for non-cash items associated with mark-to-market accounting, stock-based compensation and impairment of goodwill) of less than three times and a ratio of current assets plus unused commitments to current liabilities of greater than one.  Cimarex continues to comply with these covenants and does not view them as materially restrictive.

At the Company’s option, advances under the Credit Facility bear interest based upon a Base rate or a Eurodollar rate.  The Base rate means the greater of (a) the JP Morgan Chase Bank prime rate or (b) the federal funds rate plus one-half of one percent.   The Eurodollar rate means the applicable British Bankers’ Association London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.00-1.75 percent and depending on borrowing base usage.  The interest rate at September 30, 2005 equaled 4.46 percent. Unused

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commitments under the agreement are subject to a commitment fee ranging from 0.225-0.375 percent, also depending on borrowing base usage.  At September 30, 2005 Cimarex’s borrowing base was $825 million.  Effective November 1, 2005 Cimarex’s borrowing base, as determined by its lenders in accordance with certain provisions under the credit agreement, was increased to $1 billion.

Cimarex currently has a letter of credit posted against its borrowing base of $2.5 million that reduces funds available under the Credit Facility.  The letter of credit is un-drawn and was posted to cover future plugging and abandonment costs and potential environmental remediation costs associated with a certain producing property located in New Mexico.

The 9.6% notes assumed in the Magnum Hunter merger have a face value of $195 million and are due March 15, 2012.  The notes are unsecured and are redeemable, as a whole or in part, at Cimarex’s option, on and after March 15, 2007 at the following redemption prices (expressed as percentages of the principal amount), plus accrued interest, if any, thereon to the date of redemption.

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-month LIBOR, reset quarterly.  On September 30, 2005, the interest rate was reset to 3.87%.

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 per share.  On September 30, 2005, the closing price of our common stock traded on the New York Stock Exchange was $45.33.

If any holders of the notes elect to tender their notes for conversion, they are entitled to receive a conversion value approximately equal to the ten-day average closing value of our common stock times 34.5.  We would then deliver the conversion value as follows:   (1) an amount of cash equal to the lesser of (a) the conversion value or (b) the principal amount of the notes and (2) an amount of common shares equal in value to the conversion value less the principal amount of the notes (net shares).  At September 30, 2005, the maximum total net shares that the holders would be entitled to if they all elected to tender their notes was 1.25 million.  At September 30, 2005 the conversion value equaled $177.4 million (or $1,419 per bond) and the fair value of the notes equaled $183.8 million (or $1,470 per bond).

In addition 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 Cimarex to repurchase all or a portion of the notes at a repurchase price equal to 100% of the principal amount (plus accrued interest) on December 15, 2008, 2013 and 2018.   The indenture agreement also provides Cimarex with an option to redeem some or all of the notes at a redemption price equal to 100% of the principal amount (plus accrued interest) anytime after December 22, 2008.

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All long-term debt is guaranteed by Cimarex and all of its subsidiaries, except Canvasback.  Total assets held by Canvasback equal $1.6 million.

On February 18, 2005, Magnum Hunter’s 40% owned subsidiary, Apple Tree Holdings, LLC (“Apple Tree”), entered into a $20.6 million construction loan agreement (“Construction Loan”).  The Construction Loan provides financing for the construction of a processing plant, natural gas lateral, carbon dioxide line and related infrastructure in Huerfano County, Colorado.  The Construction Loan bears interest at LIBOR plus 2.25% or a base rate plus 1.25%, and will mature no later than July 31, 2006.  Total borrowings under this loan at September 30, 2005 were $14.3 million, of which our share was $5.7 million.  Magnum Hunter also provided a guarantee to the lender for 100% of the loan.  In return for the guarantee, Magnum Hunter received an up-front fee and the rights to receive 55% of distributable cash flows from Apple Tree until certain financial tests are met.  In the merger, Cimarex assumed Magnum Hunter’s obligation.  In the event that the Construction Loan goes into default and we have to perform under the guarantee, we will have recourse against the project and related subsidiaries.  We have included $162 thousand in other liabilities on our condensed consolidated balance sheet to represent the fair value of our guarantee for the Construction Loan.

7.                                                  Income Taxes

Federal income tax expense for the periods ended September 30, 2005 and 2004 differ from the amounts that would be provided by applying the U.S. Federal income tax rate due to the effect of state income taxes and other deductible costs.

The components of our provision for income taxes are as follows (in thousands):

Current taxes include a $22.6 million charge resulting from the sale of various interests in oil and gas properties.

8.                                                  Supplemental Disclosure of Cash Flow Information (in thousands):

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9.                                                  Earnings Per Share

The calculations of basic and diluted net earnings per common share are presented below:

There were stock options outstanding for 2,041,892 and 2,802,122 shares of Cimarex common stock at September 30, 2005 and 2004, respectively.  All stock options were considered potentially dilutive securities for each of the periods presented.

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10.                                           Segment Information

We have two reportable segments.  The Exploration and Production segment is engaged in exploratory and developmental drilling, production and sale of crude oil, condensate, and natural gas, and acquisitions.  The Gas Gathering, Marketing, and Processing segment is engaged in the gathering and compression of natural gas from the wellhead, the purchase and resale of natural gas that it gathers, and the processing of natural gas liquids. The accounting policies of the segments are the same as those for the company as a whole.

Summarized financial information of Cimarex’s reportable segments for the three and nine months ended September 30, 2005 and 2004 is shown in the following tables: