In September 1992, Mick Merelli found himself at the helm of a small E&P company, Key Production, that had just been spun out of parent Apache Corp. From the beginning, Key had small, nonoperated working interests in western Oklahoma from which Merelli set about creating a bonafide E&P operating company. Significant growth came in 2002, when Key merged with the E&P division of Helmerich & Payne, and Cimarex Energy Co. was born from the combination. Working with an initial market cap of $700 million and core areas of western Oklahoma and the onshore Gulf Coast, Merelli continued to do what he did best-grow the company through the drillbit. In the meantime, Cimarex's market cap doubled to $1.5 billion, and the Denver company's reserves have grown to 449 billion cubic feet of gas equivalent, all onshore the U.S. Its current plan to acquire Irving, Texas-based Magnum Hunter Resources Inc. places Cimarex in unfamiliar territory. The $2.1-billion purchase, which is to close in June, would effectively double its production and triple its proved reserves to total 1.3 trillion cubic feet of gas equivalent. Magnum also brings higher-risk offshore Gulf of Mexico assets, a large inventory of proved undeveloped reserves (PUDs) and a large amount of debt-$645 million-that change the face of low-risk, lightly leveraged Cimarex. But these are welcomed challenges for Merelli, who is at Cimarex to do what he likes to do: build a company. Investor - What was your vision when you took over Key Production? Merelli - We always planned to grow through the drillbit; the way we're geared and the things we like to do are built around drilling. So, I tried to find the best exploration talent I could without stealing from Apache. We knew from the very beginning that we wanted to have a high-volume drilling program, so we were trying to develop that with a balanced-risk program. We wanted to do some high-risk exploration and try to blend that in with moderate risk. We always wanted a geographically diverse drilling program and to be high-volume drillers. We wanted consistent results from year-to-year. So, we've always had drilling programs scattered in different areas, but the anchor for it all has always been western Oklahoma, because it is moderate-risk. With that, we blend in higher risk because we get higher returns. Investor Why buy Magnum Hunter? Merelli - We saw a nice base of potential drilling in the Permian Basin; it looked like we could expand our moderate-risk drilling there. That is the main reason. It also had interesting properties in the Texas Panhandle and western Oklahoma. Magnum Hunter is an acquisition-oriented company-they were very busily buying things, not intensely focusing on drilling opportunities, though in the Permian, they had a growing drilling group that was very successful. In the Gulf of Mexico, they have a joint venture with Remington Oil and Gas Corp. and a very small group working on interests in approximately 240 blocks. I always felt like we've wanted some activity in the Gulf of Mexico. We won't just jump in there, but this gives us a nice ticket to the dance. Investor - What are Cimarex's core areas after closing the merger? Merelli - The Permian, western Oklahoma, the Gulf of Mexico and the onshore Upper Gulf Coast areas of Texas and Louisiana. The Midcontinent is where the bulk of Cimarex's existing low- to moderate-risk activity is. Our higher-risk activity is the onshore Gulf Coast; that was Cimarex's blend. Magnum Hunter gives us a greatly expanded low- to moderate-risk program in the Permian Basin because of what they already have out there. As for higher-risk, higher-reward projects, Magnum Hunter had the Gulf of Mexico. So, post-merger, we'll have two low- to moderate risk-areas-the Permian Basin and the Midcontinent-and two higher-risk areas-onshore Gulf Coast and the continuation of Magnum Hunter's Gulf of Mexico program. Investor - Have you had Gulf of Mexico experience? Merelli - I was involved with Apache in the Gulf of Mexico. We had good results there. I'm not an expert, and it's easily the most competitive place for domestic E&P. We'll ease into it and eventually it will become a meaningful core area for us. Investor - Will you expand outside your new focus areas? Merelli - We are continuously looking for our next core area. Right now we have a program in California and in the Mississippi Salt Basin. We're also experimenting in Michigan. We just spud our first well out there, though this is not a core area for us at this point. We like diversity. To the extent that something catches on, we put people out there to look after that area. We want to achieve consistent growth, so we have a portfolio approach to growth. Cimarex has always been a company that generates most of its own drilling. Now we've acquired another company that has a bunch of drilling to do and this has given us a chance to build a footprint in the Permian. Investor - Was Cimarex looking for acquisitions? Merelli - We're always open to unique opportunities. We perceived Magnum Hunter as just that-another opportunity to expand our drilling program. Investor - Traditionally, Cimarex is a company that does not like to book PUDs and has very low debt. Doesn't this acquisition give Cimarex PUDs? How about debt? Merelli - We will have PUDs now because of Magnum Hunter. The majority of companies that have PUDs bought them. This is the biggest reason we never had PUDs, because weenerate our own drilling opportunities. We have high cash flow and low operating costs. Everything about us makes us look like we have a lot of new wells. We'll drill through these PUDs and move them to the proved producing category. Because Magnum Hunter was an acquisition company, they have debt. By most standards, our merged company will be low-debt, but we'll lower it further. We like to drill through the cycles and we don't want to be dragging debt through low commodity-price cycles. We have to stay active. I don't want to be pulling throttles. Investor - Cimarex is also known as a company that doesn't hedge. Why? Merelli - The reason why we don't hedge is because we never have a lot of debt. If we don't have debt, we won't worry about hedging. To us, hedging is just insurance. If you don't have high debt, why buy insurance? Investor - How do you plan to lower your debt? Merelli - We might divest some assets and we're going to cash flow a lot. We've set our combined drilling budget at $600 million. If prices stay high, we could spend $600 million and still have money to pay down debt. Investor - What will Cimarex look like a year from now? Merelli - We are doubling our size, and it will take some effort to get everything moving in the right direction, so we've really got our work cut out for us. A year from now, I want to see us starting to take advantage of the combination of the two companies. This year, we're just trying to keep everything on track. I'm optimistic about this year, but in another year, we should make significant progress. Investor - What does Wall Street understand and not understand about the U.S.-focused independent oil and gas producer? Merelli - The market seems to do a pretty good job of figuring this stuff out. The truth is our business is driven by commodity prices. If the commodity price stays up, companies' stock goes up. If the commodity price goes down, it doesn't make a difference how good the company is, the stock will most likely go down too. We just want to be good at the business, because we know we are not clairvoyant and don't have a bit of influence on the commodity price. Investor - Are there more acquisitions in the near future? Merelli - If something came along next year that we really liked, we'd probably have to look at it, but I kind of hope it doesn't. I feel like we wouldn't really be taking advantage of these assets if we did something else right away. But, we're not on a timetable, so if the right opportunity comes around, we'll take it. We're entirely rate-of-return driven and that's what we like about drilling-we can control our own destiny and get good rates of return. There is more value added for us in drilling than with acquisitions.