ITEM 1.    BUSINESS

General

        Cimarex Energy Co. is an independent oil and gas exploration and production company. Our operations are mainly located in Texas, Oklahoma, New Mexico, Kansas, Louisiana and Wyoming. Proved oil and gas reserves as of year-end 2008 totaled 1.3 Tcfe, consisting of 1.1 Tcf of gas and 45.2 million barrels of oil and natural gas liquids. Of total proved reserves, 80 percent are gas and 82 percent are classified as proved developed. Our 2008 production averaged 485.8 MMcfe per day, comprised of 348.2 MMcf of gas per day and 22,937 barrels of oil per day. We operate the wells that account for 83 percent of our total proved reserves and approximately 81 percent of production.

        Our corporate headquarters are located at 1700 Lincoln Street, Suite 1800, Denver, Colorado 80203 and our main telephone number at that location is (303) 295-3995. Cimarex is a Delaware corporation.

        Our Web site address is www.cimarex.com . There you will find our news releases, annual reports, proxy statements, 10-Ks, 10-Qs, 8-Ks, insider (Section 16) filings and all other SEC filings. We have also posted our Code of Ethics, Code of Business Conduct, Corporate Governance Guidelines, Audit Committee Charter and Governance Committee Charter. Copies of these documents are also available in print upon a written or telephone request to our Corporate Secretary. Throughout this Form 10-K we use the terms "Cimarex," "Company," "we," "our," and "us" to refer to Cimarex Energy Co. and its subsidiaries.

History

        Cimarex was formed in February 2002 as a wholly owned subsidiary of Tulsa-based Helmerich & Payne, Inc. On September 30, 2002, Cimarex was completely spun off to Helmerich and Payne shareholders and simultaneously merged with Denver-based Key Production Company, Inc. Our common stock began trading on the New York Stock Exchange on October 1, 2002 under the symbol XEC.

        On June 7, 2005, we acquired Dallas-based Magnum Hunter Resources, Inc. in a $1.5 billion stock-for-stock merger including assumption of liabilities. That transaction effectively tripled our proved reserves and doubled our production. Since 2005, we have principally focused on exploration and development drilling and have funded these investments with cash flow provided by operating activities.

Market Conditions

        During the fourth quarter of 2008, severe disruptions in the credit markets and reductions in global economic activity caused significant decreases in oil and gas prices. Oil prices fell from a mid-year 2008 peak of $130 per barrel to $37 per barrel at year-end. Gas prices fell from $12.00 per Mcf in mid 2008 to $4.50 per Mcf in the fourth quarter 2008. The large decrease in prices had a significant adverse impact on the amount of cash flow available to invest in exploration and development drilling, the present value of our proved reserves, our stock price and total market capitalization.

        The continued credit crisis and related turmoil in the global financial system may have further impact on our business and our financial position. A further decrease in oil and gas prices would have a negative impact on our earnings, cash flow available for reinvestment, and future growth in proved reserves and production. Our ability to access the capital markets to fund our growth may also be restricted. Further, the economic situation could have an impact on our lenders and customers, causing them to fail to meet their obligations to us.

        As a result of lower commodity prices we have sharply reduced our drilling activity. Our exploration and development capital investment is expected to decrease from $1.4 billion in 2008 to $400-$600 million in 2009, depending on prices and corresponding cash flow.

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2008 Summary

        During 2008 we accomplished the following positive highlights:

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Oil and gas sales increased 38 percent to a record $1.9 billion.



•

Cash flow from operating activities increased 37 percent to an all-time high of $1,367.5 million.



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Production averaged 485.8 MMcfe per day in 2008, increasing throughout the year to a fourth quarter peak of 493.7 MMcfe per day.



•

Added 215 Bcfe of proved reserves from extensions, discoveries and improved recovery, replacing 121 percent of production.



•

Increased our western Oklahoma, Anadarko-Woodford position to 98,000 net acres, including a $180.9 million purchase of 38,000 net acres.



•

Ended the year with a debt to total capitalization ratio of 20 percent.

        However, largely as a result of the collapse in oil and gas prices we also experienced the following negative consequences:

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$1.4 billion after-tax, non-cash full-cost ceiling test write-down of oil and gas properties.



•

Negative price-related revisions to proved reserves of 157 Bcfe, resulting in an overall 9% decrease in our proved reserves to 1.3 Tcfe.

Business Strategy

        Our principal business objective is to profitably grow our proved reserves and production for the long-term benefit of our investors. Our strategy centers on maximizing cash flow from our producing properties and profitably reinvesting that cash flow in exploration and development.

        A cornerstone to our approach is a detailed evaluation of each drilling decision based on its risk-adjusted discounted cash flow rate of return on investment. Our analysis includes estimates and assessments of potential reserve size, geologic and mechanical risks, expected costs, future production profiles and future oil and gas prices.

        During 2008, our cash flow from operating activities totaled approximately $1.4 billion. Our 2008 investment in ongoing exploration and development activity also approximated $1.4 billion.

        Our integrated teams of geoscientists, landmen and petroleum engineers continually generate new prospects to maintain a rolling portfolio of drilling opportunities in different basins with varying geologic characteristics. We have a centralized exploration management system that measures actual results and provides feedback to the originating exploration team in order to help them improve and refine future investment decisions. We believe that our detailed technical analysis and disciplined risk assessment is a competitive advantage and best positions us to continue to achieve attractive rates of return and consistent increases in proved reserves and production.

        While our primary focus is drilling, we occasionally consider acquisition and merger opportunities that allow us to either enhance our competitive position in existing core areas or to add new areas. The 2005 Magnum Hunter acquisition significantly increased our presence in the Permian Basin and enhanced our Mid-Continent operations in the Texas Panhandle. In 2008, we acquired 38,000 net acres in our Western Oklahoma Woodford Shale core area. The cost of that acquisition was $180.9 million.

        Conservative use of leverage has long been a part of our financial strategy. We believe that maintaining a strong balance sheet enables us to withstand low prices and challenging capital markets. At year-end 2008 we had $591 million of long-term debt and our debt to total capitalization ratio was 20 percent.

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Business Segments

        Cimarex has one reportable segment (exploration and production).

Exploration and Development Activity Overview

        Our operations are currently focused in the Mid-Continent region which consists of Oklahoma, the Texas Panhandle and southwest Kansas; the Permian Basin region of west Texas and southeast New Mexico; and the Gulf Coast areas of Texas, south Louisiana, and offshore Louisiana. We also have operations in Michigan and Wyoming.

        A summary of our 2008 exploration and development (E&D) activity by region is as follows.

        Company-wide, we participated in drilling 450 gross wells during 2008, with an overall completion rate of 94 percent. On a net basis, 253 of 277 total wells drilled during 2008 were completed as producers.

        Our 2008 E&D investment totaled $1,438 million and resulted in 215 Bcfe of proved reserve additions. Of total expenditures, 45 percent were invested in projects located in the Mid-Continent area; 38 percent in the Permian Basin; and 15 percent in the Gulf Coast.

Mid-Continent

        Our Mid-Continent region encompasses operations in Oklahoma, southwest Kansas and the Texas Panhandle. We drilled 256 gross (138 net) Mid-Continent wells during 2008, completing 96 percent as producers. The bulk of this drilling activity is directed at gas-bearing geological formations in the Anadarko Basin of western Oklahoma and Texas Panhandle. Full-year 2008 investment in this area was $648 million, or 45 percent of total E&D capital.

        We drilled 82 gross (22 net) Anadarko Basin wells, of which 95 percent were completed as producers. Our drilling activity mainly targets the Woodford Shale, Red Fork and Clinton Lake/Atoka formations at depths ranging from 11,000-15,000 feet. Our largest investment in this area is the Anadarko-Woodford Shale play. Our activities began in this area in 2007, and our early success in drilling led to leasing a significant land position. We have approximately 98,000 net acres in the play, which includes the purchase of 38,000 net acres in the fourth quarter of 2008 for $180.9 million.

        The Woodford formation is a shale interval that varies in thickness from 120-280 feet at depths of 12,000-16,000 feet throughout our acreage. During 2008, we drilled 22 (10 net) horizontal Anadarko-Woodford wells. At year-end 2008 our production was over 50 MMcfe per day gross. Our acreage position developed on 160-acre well spacing has multiple years of drilling opportunity.

        In the Texas Panhandle, we drilled 118 gross (84 net) wells with 96 percent being completed as producers. Most of these wells targeted the Granite Wash formation in Roberts and Hemphill counties at depths ranging from 11,000-14,000 feet.

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Permian Basin

        Our Permian Basin operations cover both west Texas and southeast New Mexico. In total, we drilled 164 gross (117 net) wells in this area during 2008 completing 160 gross (114 net) as producers. Full-year 2008 investment in this area totaled $549 million, or 38 percent of total E&D capital. Our 2008 drilling focused on horizontal oil plays.

        In West Texas, a total of 82 gross (59 net) wells were drilled, of which 100 percent were successful. Geologic targets include the Bone Spring, Devonian and Ellenburger formations. In Ward and Reeves Counties drilling totaled 30 gross (25 net) horizontal Third Bone Spring oil wells.

        Southeast New Mexico drilling totaled 82 gross (58 net) wells with 95 percent being completed as producers. The primary formations we target in this area are the Abo/Wolfcamp, Morrow, Atoka and Strawn at depths ranging from 9,000-14,000 feet. Our largest investment was in drilling 33 gross (24 net) horizontal Abo/Wolfcamp oil wells during 2008.

Gulf Coast

        Our onshore Gulf Coast focus area generally encompasses coastal Texas, south Louisiana and Mississippi. This effort is generally characterized by a greater reliance on three-dimensional (3-D) seismic information for prospect generation, larger potential reserves per well, greater drilling depths and lower success rates.

        We also own interests in offshore Louisiana on the Gulf of Mexico shelf (water depth less than 300 feet). We obtained all of our offshore position through the Magnum Hunter acquisition. Our 2008 activity in this area consisted primarily of workovers and recompletions.

        Full-year 2008 investment in the Gulf Coast area was $210 million, or 15 percent of total E&D capital. During 2008 we drilled 28 gross (21 net) Gulf Coast wells, realizing a 54 percent success rate. A significant portion of the drilling occurred in Liberty and Hardin Counties, Texas. Targeting the Yegua and Cook Mountain formations at approximately 10,500 feet, we drilled 18 gross (15 net) wells with a success rate of 50 percent.

Other

        We have a large development project in Sublette County, Wyoming where we are developing the deep Madison gas formation and constructing a gas processing plant. During 2008 we invested a total of $23.9 million in this project and our cumulative investment in this project is $32.4 million. We presently expect that we will initiate gas sales from this project in 2010. Our total investment, including planned expansion, will approximate $208 million.

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        Total 2008 oil and gas production grew eight percent averaging 485.8 MMcfe per day as compared to 451.0 MMcfe per day in 2007. Gas production in 2008 increased six percent to 348.2 MMcf per day and oil production grew 12 percent to 22,937 barrels per day. The gas volume growth resulted primarily from Texas Panhandle and Anadarko-Woodford shale drilling. The growing oil volume was principally a result of successful horizontal Third Bone Spring and Abo/Wolfcamp drilling in the Permian Basin.

        We sold our 2008 gas at an average price of $8.43 per Mcf, which was 20 percent higher than the $7.05 per Mcf we received in 2007. We had natural gas collars for calendar year 2008 covering 40,000 MMBtu per day. The collars increased our 2008 average realized gas price by $0.09 per Mcf. For a discussion of derivatives, see Note 3 of Notes to Consolidated Financial Statements contained herein. Our annual average realized oil price during 2008 increased 38 percent to $96.03 per barrel from $69.71 per barrel in 2007.

        Strong global demand and overall tight commodity market conditions for oil, natural gas and natural gas liquids for the first nine months of 2008 resulted in overall higher average realized price in 2008 compared to 2007. During the fourth quarter of 2008, reductions in global economic activity and energy demands caused significant decreases in oil and gas prices. Year-end 2008 oil and gas prices fell 50-70% from their mid-year peak. Our overall average fourth quarter equivalent price realization was approximately 50% below our average third quarter equivalent price.

        The following table summarizes Cimarex's daily production by region for 2008 and 2007.

        Our largest producing area is the Mid-Continent region. During 2008 our Mid-Continent production averaged 223.9 MMcfe per day, or 46 percent of our total 2008 production. Successful drilling programs in the Texas Panhandle and the Anadarko Basin helped boost our Mid-Continent production by 16 percent in

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2008. The Permian Basin contributed 166.2 MMcfe per day in 2008, which was 34 percent of our total production for this period. Production increased 15 percent as a result of successful horizontal oil drilling in the Abo/Wolfcamp formations in southeast New Mexico and in the West Texas Third Bone Spring formation. Gulf Coast production averaged 91.3 MMcfe per day during 2008, or 19 percent of total production. Gulf Coast volumes decreased in 2008 as a result of natural production declines and no new drilling in the Gulf of Mexico.

Acquisitions and Divestitures

        Cimarex acquired Magnum Hunter Resources, Inc, on June 7, 2005. Magnum Hunter was an independent oil and gas exploration and production company with operations concentrated in the Permian Basin and the Gulf of Mexico. Magnum's oil and gas properties were valued at $1.8 billion and resulted in the addition of 886.7 Bcfe of proved reserves (60 percent gas and 73 percent proved developed).

        During 2007 we sold various interests in oil and gas properties located in West Texas, California and Gulf of Mexico. In total we sold 123 Bcfe of proved reserves for $177 million. During 2008 we sold various interests in oil and gas properties located in South Texas. In total we sold 17 Bcfe of proved reserves for $38.1 million.

        During 2007 we purchased $40.9 million of assets, with the largest acquisition being in the Texas Panhandle Area. During 2008 we purchased 38,000 acres in western Oklahoma, Anadarko Basin Woodford Shale play for $180.9 million. In total we have approximately 98,000 net acres in the play.

Marketing

        Our oil and gas production is sold under various short-term arrangements at market-responsive prices. We sell our oil at various prices directly or indirectly tied to field postings and monthly futures contract prices on the New York Mercantile Exchange (NYMEX). Our gas is sold under pricing mechanisms related to either monthly index prices on pipelines where we deliver our gas or the daily spot market.

        We sell our oil and gas to a broad portfolio of customers. Our largest customer accounted for ten percent of 2008 revenues. Because over 95 percent of our gas production is from wells in Kansas, Oklahoma, Texas and Louisiana, most of our customers are either from those states or nearby end-user market centers. We regularly monitor the credit worthiness of all our customers and may require parental guarantees, letters of credit or prepayments when we deem such security is necessary.

Employees

        We employed 831 people on December 31, 2008. None of our employees are subject to collective bargaining agreements.

Competition

        The oil and gas industry is highly competitive. Competition is particularly intense for prospective undeveloped leases and purchases of proved oil and gas reserves. There is also competition for rigs and related equipment we use to drill for and produce oil and gas. Our competitive position is also highly dependent on our ability to recruit and retain geological, geophysical and engineering expertise. We compete for prospects, proved reserves, oil-field services and qualified oil and gas professionals with major and diversified energy companies and other independent operators that have larger financial, human and technological resources than we do.

        We compete with integrated, independent and other energy companies for the sale and transportation of oil and gas to marketing companies and end users. The oil and gas industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these

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competitors have greater financial and human resources. The effect of these competitive factors cannot be predicted.

Title to Oil and Gas Properties

        We undertake title examination and perform curative work at the time we lease undeveloped acreage, prepare for the drilling of a prospect or acquire proved properties. We believe that the titles to our properties are good and defensible, and are in accordance with industry standards. Nevertheless, we are involved in title disputes from time to time which result in litigation. Our oil and gas properties are subject to customary royalty interests, liens incidental to operating agreements, tax liens and other burdens and minor encumbrances, easements and restrictions.

Government Regulation

        Oil and gas production and transportation is subject to extensive federal, state and local laws and regulations. Compliance with existing laws often is difficult and costly, but has not had a significantly adverse effect upon our operations or financial condition. In recent years, we have been most directly affected by federal and state environmental regulations and energy conservation rules. We are also indirectly affected by federal and state regulation of pipelines and other oil and gas transportation systems.

        The states in which we conduct operations establish requirements for drilling permits, the method of developing new fields, the size of well spacing units, drilling density within productive formations and the unitization or pooling of properties. In addition, state conservation laws include requirements for waste prevention, establish limits on the maximum rate of production from wells, generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability of production. The effect of these regulations is to limit the amounts of oil and natural gas that we can produce from our wells and to limit the number of wells or locations at which we can drill.

        Environmental Regulation.     Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, directly impact oil and gas exploration, development and production operations, and consequently may impact our operations and costs. These laws and regulations govern, among other things, emissions to the atmosphere, discharges of pollutants into waters, underground injection of waste water, the generation, storage, transportation and disposal of waste materials, and protection of public health, natural resources and wildlife. These laws and regulations may impose substantial liabilities for noncompliance and for any contamination resulting from our operations and may require the suspension or cessation of operations in affected areas.

        We are committed to environmental protection and believe we are in substantial compliance with applicable environmental laws and regulations. We routinely obtain permits for our facilities and operations in accordance with the applicable laws and regulations. There are no known issues that have a significant adverse effect on the permitting process or permit compliance status of any of our facilities or operations. We have made, and will continue to make, expenditures in our efforts to comply with environmental regulations and requirements. These costs are considered a normal, recurring cost of our ongoing operations and not an extraordinary cost of compliance with government regulations.

        We do not anticipate that we will be required under current environmental laws and regulations to expend amounts that will have a material adverse effect on our financial position or operations. However, due to continuing changes in these laws and regulations, we are unable to predict with any reasonable degree of certainty any potential delays in development plans that could arise, or our future costs of complying with these governmental requirements. We do maintain levels of insurance customary in the industry to limit our financial exposure in the event of a substantial environmental claim resulting from sudden, unanticipated and accidental discharges of oil, produced water or other substances.

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        Gas Gathering and Transportation.     The Federal Energy Regulatory Commission (FERC) requires interstate gas pipelines to provide open access transportation. FERC also enforces the prohibition of market manipulation by any entity, and the facilitation of the sale or transportation of natural gas in interstate commerce. Interstate pipelines have implemented these requirements, providing us with additional market access and more fairly applied transportation services and rates. FERC continues to review and modify its open access and other regulations applicable to interstate pipelines.

        Under the Natural Gas Policy Act (NGPA), natural gas gathering facilities are expressly exempt from FERC jurisdiction. What constitutes "gathering" under the NGPA has evolved through FERC decisions and judicial review of such decisions. We believe that our gathering systems meet the test for non-jurisdictional "gathering" systems under the NGPA and that our facilities are not subject to federal regulations. Although exempt from FERC oversight, our natural gas gathering systems and services may receive regulatory scrutiny by state and Federal agencies regarding the safety and operating aspects of the transportation and storage activities of these facilities.

        In addition to using our own gathering facilities, we may use third-party gathering services or interstate transmission facilities (owned and operated by interstate pipelines) to ship our gas to markets.

        Additional proposals and proceedings that might affect the oil and gas industry are pending before the U.S. Congress, FERC, state legislatures, state agencies and the courts. We cannot predict when or whether any such proposals may become effective and what effect they will have on our operations. We do not anticipate that compliance with existing federal, state and local laws, rules or regulations will have a material adverse effect upon our capital expenditures, earnings or competitive position.

Federal and State Income and Other Local Taxation

        Cimarex and the petroleum industry in general are affected by both federal and state income tax laws, as well as other local tax regulations involving ad valorem, personal property, franchise, severance and other excise taxes. We have considered the effects of these provisions on our operations and do not anticipate that there will be any undisclosed impact on our capital expenditures, earnings or competitive position.

Certain Risks

        The following risks and uncertainties, together with other information set forth in this Form 10-K, should be carefully considered by current and future investors in our securities. If any of the following risks and uncertainties develop into actual events, this could have a material adverse affect on our business, financial condition or results of operations and could negatively impact the value of our common stock.

Oil and gas prices fluctuate due to a number of uncontrollable factors, creating a component of uncertainty in our development plans and overall operations. Continued declines in prices adversely affect our financial results and rate of growth in proved reserves and production.

        The oil and gas markets are very volatile, and we cannot predict future oil and natural gas prices. The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. The prices we receive for our production depend on numerous factors beyond our control. These factors include, but are not limited to, changes in global supply and demand for oil and gas, the actions of the Organization of Petroleum Exporting Countries, the level of global oil and gas exploration and production activity, weather conditions, technological advances affecting energy consumption, domestic and foreign governmental regulations, proximity and capacity of oil and gas pipelines and other transportation facilities and the price and technological advancement of alternative fuels.

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        During the fourth quarter of 2008, severe disruptions in the credit markets and reductions in global economic activity caused significant decreases in oil and gas prices. Oil and gas prices fell 50-70% from the mid-year 2008 peak to the end of the year and 30-60% from the third to the fourth-quarter 2008.            The dramatic decrease in prices significantly decreased the amount available to invest in exploration and development drilling, the present value of our proved reserves and our stock price and corresponding market capitalization. As a result of the drop in commodity prices in 2008, we recorded $1.4 billion after-tax, full-cost ceiling test write-down of proved properties book-value.

        Our proved oil and gas reserves and production volumes decrease in quantity unless we successfully replace the reserves we produce with new discoveries or acquisitions. For the foreseeable future, we expect to make substantial capital investments for the exploration and development of new oil and gas reserves to replace the reserves we produce and to increase our total proved reserves. Historically, we have paid for these types of capital expenditures with cash flow provided by our production operations. Low prices also reduce the amount of oil and gas that we can economically produce and may cause us to curtail, delay or defer certain exploration and development projects. Moreover, our ability to borrow under our bank credit facility and to raise additional debt or equity capital to fund acquisitions would also be impacted.

If oil and natural gas prices decrease further, we may be required to take additional write-downs of the carrying values of our oil and gas properties and/or our goodwill.

        Accounting rules require that we review the carrying value of our oil and gas properties and goodwill for possible impairment at the end of each reporting period. If prices fall further, we may incur additional impairment charges in the future, which could have a material adverse effect on our results of operations in the period taken.

The global financial crisis may have impacts on our business and financial condition that we currently cannot predict.

        The continued credit crisis and related turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise financing, which could have an impact on our flexibility to react to changing economic and business conditions. The economic situation could have an impact on our lenders or customers, causing them to fail to meet their obligations to us.

Failure of our exploration and development program to find commercial quantities of new oil and gas reserves could negatively affect our financial results and future rate of growth.

        Most of our wells produce from reservoirs characterized by high initial production rates which decline rapidly and stabilize within three to five years. In order to replace the reserves depleted by production and to maintain or grow our total proved reserves and overall production levels, we must locate and develop new oil and gas reserves or acquire producing properties from others. While we may from time to time seek to acquire proved reserves, our main business strategy is to grow through drilling. Without successful exploration and development, our reserves, production and revenues could decline rapidly, which would negatively impact our results of operations.

        Exploration and development involves numerous risks, including the risk that no commercially productive oil or gas reservoirs will be discovered. Exploration and development can also be unprofitable, not only from dry wells, but from productive wells that do not produce sufficient reserves to return a profit.

        Our drilling operations may be curtailed, delayed or canceled as a result of several factors, including unforeseen poor drilling conditions, title problems, unexpected pressure or irregularities in formations, equipment failures, accidents, adverse weather conditions, compliance with environmental and other

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governmental requirements, and the cost of, or shortages or delays in the availability of, drilling rigs and related equipment.

The high-rate production characteristics of our properties subject us to high reserve replacement needs and require significant capital expenditures to replace our reserves.

        Unless we conduct successful development activities or acquire properties containing proved reserves, our proved reserves will decline as they are produced. Producing natural gas and oil reservoirs are generally characterized by declining production rates that vary depending on reservoir characteristics and other factors. Because of the high-rate production profiles of our properties, replacing produced reserves is more difficult for us than for companies whose reserves have longer-life production profiles. This imposes greater reinvestment risk for our company as we may not be able to continue to economically replace our reserves.

Our proved reserve estimates may be inaccurate and future net cash flows are uncertain.

        Estimates of total proved oil and gas reserves (consisting of proved developed and proved undeveloped reserves) and associated future net cash flow depend on a number of variables and assumptions. Among others, changes in any of the following factors may cause estimates to vary considerably from actual results:

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production rates, reservoir pressure, and other subsurface information;



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future oil and gas prices;



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assumed effects of governmental regulation;



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future operating costs;



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future property, severance, excise and other taxes incidental to oil and gas operations;



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capital expenditures;



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workover and remedial costs; and



•

Federal and state income taxes.

        The estimation of the category of proved undeveloped reserves can be subject to an even greater possibility of revision. At December 31, 2008, 18 percent of our total proved reserves are categorized as proved undeveloped. Of these proved undeveloped reserves, 89 percent are related to a project in Wyoming.

        Our proved oil and gas reserve estimates are prepared by Cimarex engineers in accordance with guidelines established by the Securities and Exchange Commission (SEC). DeGolyer and MacNaughton, independent petroleum engineers, reviewed our reserve estimates for properties that comprised at least 80 percent of the discounted future net cash flows before income taxes, using a 10 percent discount rate, as of December 31, 2008.

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        The values referred to in this report should not be construed as the current market value of our proved reserves. In accordance with SEC guidelines, the estimated discounted net cash flow from proved reserves is based on prices and costs as of the date of the estimate, whereas actual future prices and costs may be materially different.

We have been an early entrant into new or emerging plays; as a result, our drilling results in these areas are uncertain, and the value of our undeveloped acreage will decline and we may incur impairment charges if drilling results are unsuccessful.

        New or emerging plays have limited or no production history. Consequently, we are unable to use past drilling results in those areas to help predict our future drilling results. Therefore, our cost of drilling, completing and operating wells in these areas may be higher than initially expected, and the value of our undeveloped acreage will decline if drilling results are unsuccessful. Furthermore, if drilling results are unsuccessful, we may be required to write down the carrying value of our undeveloped acreage in new or emerging plays.

Our business depends on oil and natural gas transportation facilities, most of which are owned by others.

        The marketability of our oil and natural gas production depends in large part on the availability, proximity and capacity of pipeline systems owned by third parties. The lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or discontinuance of drilling plans for properties. The lack of availability of these facilities for an extended period of time could negatively affect our revenues. Federal and state regulation of oil and natural gas production and transportation, tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic conditions could adversely affect our ability to produce, gather and transport oil and natural gas.

The differential between the NYMEX or other benchmark price of oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.

        The prices that we receive for our oil and natural gas production generally trade at a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating hedge positions. The difference between the benchmark price and the price we receive is called a differential. We cannot accurately predict oil and natural gas differentials. Increases in the differential between the benchmark price for oil and natural gas and the wellhead price we receive could have a material adverse effect on our results of operations, financial condition and cash flows.

Competition in our industry is intense and many of our competitors have greater financial and technological resources.

        We operate in the competitive area of oil and gas exploration and production. Many of our competitors are large, well-established companies that have larger operating staffs and greater capital resources than we do. These companies may be able to pay more for exploratory prospects and productive oil and gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit.

We are subject to complex laws and regulations that can adversely affect the cost, manner or feasibility of doing business.

        Exploration, development, production and sale of oil and gas are subject to extensive Federal, state and local laws and regulations, including complex environmental laws. We may be required to make large expenditures to comply with environmental and other governmental regulations. Failure to comply with these laws and regulations may result in the suspension or termination of our operations and subject us to

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administrative, civil and criminal penalties. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, spacing of wells, unitization and pooling of properties, environmental protection, and taxation. Our operations create the risk of environmental liabilities to the government or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil or water. In the event of environmental violations, we may be charged with remedial costs. Pollution and similar environmental risks generally are not fully insurable. Such liabilities and costs could have a material adverse effect on our financial condition and results of operations.

Our limited ability to influence operations and associated costs on properties not operated by us could result in economic losses that are partially beyond our control.

        Other companies operate approximately 19 percent of our net production. Our success in properties operated by others depends upon a number of factors outside of our control, including timing and amount of capital expenditures, the operator's expertise and financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental standards. Our dependence on the operator and other working interest owners for these projects could prevent the realization of our targeted returns on capital in drilling or acquisition activities.

Our business involves many operating risks that may result in substantial losses for which insurance may be unavailable or inadequate.

        Our operations are subject to hazards and risks inherent in drilling for oil and gas, such as fires, natural disasters, explosions, formations with abnormal pressures, casing collapses, uncontrollable flows of underground gas, blowouts, surface cratering, pipeline ruptures or cement failures, and environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases. Any of these risks can cause substantial losses resulting from injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution and other environmental damages, regulatory investigations and penalties, suspension of our operations and repair and remediation costs. In addition, our liability for environmental hazards may include conditions created by the previous owners of properties that we purchase or lease.

        We maintain insurance coverage against some, but not all, potential losses. We do not believe that insurance coverage for all environmental damages that could occur is available at a reasonable cost. Losses could occur for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could harm our financial condition and results of operation.

We may not be able to generate enough cash flow to meet our debt obligations.

        At December 31, 2008, we had total long-term debt of $591.2 million, consisting of $220 million of bank debt, $350 million of unsecured 7.125% Senior Notes and $21.2 million of Convertible Notes ($19.45 million face value). Subject to the limits contained in the agreements governing our senior revolving credit facility, we would have been able to incur up to $1 billion of debt as of December 31, 2008, only $500 million of which is currently committed. We have demands on our cash resources in addition to interest expense and principal on our long-term debt, including, among others, operating expenses and capital expenditures.

        Our ability to pay the principal and interest on our long-term debt and to satisfy our other liabilities will depend upon our future performance and our ability to repay or refinance our debt as it becomes due. Our future operating performance and ability to refinance will be affected by economic and capital market conditions, our financial condition, results of operations and prospects and other factors, many of which are beyond our control. Our ability to meet our debt service obligations may also be affected by changes in

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prevailing interest rates, as borrowing under our existing senior revolving credit facility and our Convertible Notes bear interest at floating rates.

        Our business may not generate sufficient cash flow from operations, nor could there be adequate future sources of capital to enable us to service our indebtedness, or to fund our other liquidity needs. If we are unable to service our indebtedness and fund our operating costs, we will be forced to adopt alternative strategies that may include:

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reducing or delaying capital expenditures;



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seeking additional debt financing or equity capital;



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selling assets; or



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restructuring or refinancing debt.

        We may be unable to complete any such strategies on satisfactory terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations.

The instruments governing our indebtedness contain various covenants limiting the discretion of our management in operating our business.

        The indentures governing our senior subordinated notes and credit agreement contain various restrictive covenants that may potentially limit our management's discretion in certain respects. In particular, these agreements will limit our and our subsidiaries' ability to, among other things:

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pay dividends on, redeem or repurchase our capital stock or redeem or repurchase our subordinated debt;



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make loans to others;



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make investments;



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incur additional indebtedness or issue preferred stock;



•

create certain liens;



•

sell assets;



•

enter into agreements that restrict dividends or other payments from our restricted subsidiaries to us;



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consolidate, merge or transfer all or substantially all of the assets of us and our restricted subsidiaries taken as a whole;



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engage in transactions with affiliates;



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enter into hedging contracts;



•

create unrestricted subsidiaries; and



•

enter into sale and leaseback transactions.

        In addition, our revolving credit agreement requires us to maintain a debt to EBITDA ratio (as defined in the credit agreement) of less than 3.0 to 1 and a working capital ratio of greater than 1 to 1. Also, the indentures under which we issued our senior unsecured notes restrict us from incurring additional indebtedness, subject to certain exceptions, unless our fixed charge coverage ratio (as defined in the indentures) is at least 2.25 to 1. If we were in violation of this covenant, then we may not incur

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additional indebtedness above our $1.0 billion revolving credit facility. See Note 6, Long-term Debt, in Notes to Consolidated Financial Statements for further information.

        If we fail to comply with the restrictions in the indentures governing our senior notes or credit facility or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well as any other indebtedness to which a cross-acceleration or cross-default provision applies. In addition, lenders may be able to terminate any commitments they had made to make available further funds.

Our acquisition activities may not be successful, which may hinder our replacement of reserves and adversely affect our results of operations.

        We evaluate opportunities and engage in bidding and negotiating for acquisitions, some of which are substantial. Under certain circumstances, we may pursue acquisitions of businesses that complement or expand our current business and acquisition and development of new exploration prospects that complement or expand our prospect inventory. We may not be successful in identifying or acquiring any material property interests, which could hinder us in replacing our reserves and adversely affect our financial results and rate of growth. Even if we do identify attractive opportunities, there is no assurance that we will be able to complete the acquisition of the business or prospect on commercially acceptable terms. If we do complete an acquisition, we must anticipate difficulties in integrating its operations, systems, technology, management and other personnel with our own. These difficulties may disrupt our ongoing operations, distract our management and employees and increase our expenses.

Competition for experienced, technical personnel may negatively impact our operations.

        Our exploratory and development drilling success depends, in part, on our ability to attract and retain experienced professional personnel. The loss of any key executives or other key personnel could have a material adverse effect on our operations. In particular, our Chairman and Chief Executive Officer, F.H. Merelli, has over 48 years of oil and gas experience and is well known in the industry. The loss of his services for any reason could adversely affect our business, revenues and results of operations. As we continue to grow our asset base and the scope of our operations, our future profitability will depend on our ability to attract and retain qualified personnel, particularly individuals with a strong background in geology, geophysics, engineering and operations.

There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.

        While we have taken actions designed to address compliance with the internal control, disclosure control and other requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated by the SEC implementing these requirements, there are inherent limitations in its ability to control all circumstances. See Item 9A of this report for a complete discussion of controls and procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all

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potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

The Cimarex certificate of incorporation, by-laws and stockholders' rights plan include provisions that could discourage an unsolicited corporate takeover and could prevent stockholders from realizing a premium on their investment.

        The certificate of incorporation and by-laws of Cimarex provide for a classified board of directors with staggered terms, restrict the ability of stockholders to take action by written consent and prevent stockholders from calling a meeting of the stockholders. In addition, Delaware General Corporation Law imposes restrictions on business combinations with interested parties. Cimarex also has adopted a stockholders' rights plan. The stockholders' rights plan, the certificate of incorporation and the by-laws may have the effect of delaying, deferring or preventing a change in control of Cimarex, even if the change in control might be beneficial to Cimarex stockholders.