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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the Quarterly Period ended September 30, 2010

Commission File No. 001-31446

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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x.

The number of shares of Cimarex Energy Co. common stock outstanding as of September 30, 2010 was 84,700,678.

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CIMAREX ENERGY CO.

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GLOSSARY

Bbl/d—Barrels (of oil or Natural gas liquids) per day

Bbls—Barrels (of oil or Natural gas liquids)

Bcf—Billion cubic feet

Bcfe—Billion cubic feet equivalent

MBbls—Thousand barrels

Mcf—Thousand cubic feet (of natural gas)

Mcfe—Thousand cubic feet equivalent

MMBbls—Million barrels

MMBtu—Million British Thermal Units

MMcf—Million cubic feet

MMcf/d—Million cubic feet per day

MMcfe—Million cubic feet equivalent

MMcfe/d—Million cubic feet equivalent per day

Net Acres—Gross acreage multiplied by working interest percentage

Net Production—Gross production multiplied by net revenue interest

NGL—Natural gas liquids

Tcf—Trillion cubic feet

Tcfe—Trillion cubic feet equivalent

One barrel of oil or NGL is the energy equivalent of six Mcf of natural gas

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

Throughout this Form 10-Q, we make statements that may be deemed “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.  These forward-looking statements include, among others, statements concerning our outlook with regard to timing and amount of future production of oil and gas, price realizations, amounts, nature and timing of capital expenditures for exploration and development, plans for funding operations and capital expenditures, drilling of wells, operating costs and other expenses, marketing of oil and gas and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.  The forward-looking statements in this report are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by the statements.

These risks and uncertainties include, but are not limited to, fluctuations in the price we receive for our oil and gas production, reductions in the quantity of oil and gas sold due to decreased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated, and increased financing costs due to a significant increase in interest rates.  In addition, exploration and development opportunities that we pursue may not result in productive oil and gas properties.  There are also numerous uncertainties inherent in estimating quantities of proved reserves, projecting future rates of production and the timing of development expenditures.  These and other risks and uncertainties affecting us are discussed in greater detail in this report and in our other filings with the Securities and Exchange Commission.

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PART I

ITEM 1 - Financial Statements

CIMAREX ENERGY CO.

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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CIMAREX ENERGY CO.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to consolidated financial statements.

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CIMAREX ENERGY CO.

Condensed 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, 2010

(Unaudited)

1.              Basis of Presentation

The accompanying unaudited financial statements have been prepared by Cimarex Energy Co. pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in annual reports on Form 10-K  have been omitted.  Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our 2009 Annual Report on Form 10-K/A-1.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position, results of operations, and cash flows for the periods shown.  We have evaluated subsequent events after the balance sheet date of September 30, 2010, through the filing of this report.

Full Cost Accounting Method and Ceiling Limitation

We use the full cost method of accounting for our oil and gas operations.  All costs associated with property acquisition, exploration, and development activities are capitalized.  Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities, and other costs incurred for the purpose of finding oil and gas reserves.  Salaries and benefits paid to employees directly involved in the exploration and development of properties, as well as other internal costs that can be directly identified with acquisition, exploration, and development activities, are also capitalized.  Under the full cost method of accounting, no gain or loss is recognized upon the disposition of oil and gas properties unless such disposition would significantly alter the relationship between capitalized costs and proved reserves.

At the end of each quarter, we make a full cost ceiling limitation calculation, whereby net capitalized costs related to proved properties less associated deferred income taxes may not exceed the amount of the present value discounted at 10% of estimated future net revenues from proved reserves less estimated future production and development costs and related income tax expense.  Future net revenues used in the calculation of the full cost ceiling limitation have previously been determined based on current commodity prices adjusted for designated cash flow hedges.  Beginning in December 2009, new SEC rules were implemented requiring reserve calculations to be based on the unweighted average first-day-of-the-month prices for the prior twelve months.  Changes in proved reserve estimates (whether based upon quantity revisions or commodity prices) will cause corresponding changes to the full cost ceiling limitation.  If net capitalized costs subject to amortization exceed this limit, the excess would be charged to expense.  Any recorded impairment of oil and gas properties is not reversible at a later date.  In periods prior to year-end 2009 we used prices in effect at period end.

Due to decreases in period end commodity prices at March 31, 2009, our ceiling limitation calculation resulted in excess capitalized costs of $791 million ($502 million, net of tax), for which we recorded a non-cash impairment of oil and gas properties.  No further impairments have been recorded since the first quarter of 2009.  Our quarterly and annual ceiling tests are primarily impacted by commodity prices, reserve quantities added and produced, overall exploration and development costs and depletion expense.  Holding all factors constant other than commodity prices, a 10% decline in prices as of September 30, 2010 would not have resulted in a ceiling test impairment.  Decreases in commodity prices can also impact our goodwill impairment analyses.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

Depletion of proved oil and gas properties is computed on the units-of-production method, whereby capitalized costs, as adjusted for future development costs and asset retirement obligations, are amortized over the total estimated proved reserves.  The costs of wells in progress and certain unevaluated properties are not being amortized.  On a quarterly basis, we evaluate such costs for inclusion in the costs to be amortized resulting from the determination of proved reserves, impairments, or reductions in value.  To the extent that the evaluation indicates these properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.  Expenditures for maintenance and repairs are charged to production expense in the period incurred.

Goodwill

At September 30, 2010, we had $691.4 million of goodwill recorded in conjunction with past business combinations.  Goodwill is subject to annual reviews for impairment, but we continuously monitor the economic environment throughout the year to determine if additional impairment assessments are necessary.  These assessments are based on a two-step accounting test.  The first step is to compare the estimated fair value of the Company with the recorded net book value (including goodwill), after giving effect to any period impairment of oil and gas properties resulting from the ceiling limitation calculation.  If the estimated fair value is higher than the recorded net book value, no impairment is deemed to exist and no further testing is done.

Disruptions continue in the credit markets and global economic activity which impact stock markets and commodity prices.  Management must apply judgment in determining the estimated fair value of the Company for purposes of assessing goodwill impairment.  As of September 30, 2010, the market price per share of our common stock was greater than the book value by $37 per share.  Due to volatility in the stock markets, management does not consider the market value of our shares to be an accurate reflection of the fair value of our net assets for impairment purposes.

To estimate the fair value of the Company, we use all available information, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets.  This estimated fair value differs significantly from the valuation used in the ceiling limitation calculation which requires that prices and costs be held constant over the life of the wells and are discounted at 10%.  The ceiling calculation is not intended to be indicative of fair value.  Should lower prices or quantities result in the future, or higher discount rates are necessary, the carrying value of our net assets may exceed the estimated fair value, resulting in an impairment of goodwill.

Use of Estimates

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, liabilities, revenues, and expenses during the reporting period and in disclosures of commitments and contingencies.  We analyze our estimates, including those related to oil and gas revenues, reserves and properties, as well as goodwill and contingencies, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

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

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

obligations, and the assessment of goodwill.  Estimates and judgments are also required in determining reserves for bad debt, impairments of undeveloped properties and other assets, purchase price allocation, valuation of deferred tax assets, fair value measurements and commitments and contingencies.

Accounting Changes

Certain amounts in prior years’ financial statements have been reclassified to conform to the 2010 financial statement presentation.

Recently Issued Accounting Standards

There have been no significant accounting standards applicable to Cimarex issued during the quarter ended September 30, 2010.

2.              Derivative Instruments/Hedging

We periodically enter into derivative instruments to mitigate a portion of our potential exposure to a decline in commodity prices and the corresponding negative impact on cash flow available for reinvestment.   While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes.

At September 30, 2010, we had the following outstanding contracts relative to our future production.  We have elected not to account for these derivatives as cash flow hedges.

Natural Gas Contracts

Oil Contracts

(1)          PEPL refers to Panhandle Eastern Pipe Line Company price and HSC refers to Houston Ship Channel price, both as quoted in Platt’s Inside FERC on the first business day of each month.  WTI refers to West Texas Intermediate price as quoted on the New York Mercantile Exchange.

The combined gas and oil contracts that expire in 2010 represent approximately 37% of our equivalent oil and gas production for the remainder of 2010.  For 2011, management has been authorized to hedge up to 50% of our anticipated equivalent oil and gas production.  Through the first nine months of 2010 we have entered into oil and gas contracts relative to our 2011 production as noted in the above table.  Subsequent to September 30, 2010 we entered into additional oil collars, bringing our total 2011 oil contracts to 12,000 barrels per day.  The combined 2011 gas and oil contract volumes equate to approximately 15% of our actual third quarter equivalent oil and gas production.

Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our current hedging positions.

Under a collar agreement, we receive the difference between the published index price and a floor price if the index price is below the floor.  We pay the difference between the ceiling price and the index price only if the index price is above the contracted ceiling price.  No amounts are paid or received if the

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

index price is between the floor and ceiling prices.  Under a floor contract, if the settlement price for a settlement period is below the floor price, we receive the difference between the settlement price and the floor price.  We are not required to make any payments in connection with the settlement of a floor contract.  For a swap contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is less than the swap price.  We are required to make a payment to the counterparty if the settlement price for the settlement period is greater than the swap price.

Our derivative contracts are carried at their fair value on our balance sheet.  We estimate the fair value using internal risk adjusted discounted cash flow calculations.  Cash flows are based on published forward commodity price curves for the underlying commodity as of the date of the estimate.  For collars, we estimate the option value of the contract floors and ceilings using an option pricing model which takes into account market volatility, market prices and contract terms.  The fair values of our derivative instruments in an asset position include a measure of counterparty credit risk, and the fair values of instruments in a liability position include a measure of our own nonperformance risk.  These credit risks are based on current published credit default swap rates.  Due to the volatility of commodity prices, the estimated fair values of our derivative instruments are subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price.  The following tables present the estimated fair values of our derivative assets and liabilities as of September 30, 2010 and December 31, 2009.

Because we have elected not to account for our current derivative contracts as cash flow hedges, we recognize all realized and unrealized changes in fair value in earnings.  Cash settlements of our derivative contracts are included in cash flows from operating activities in our statements of cash flows.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

The following table summarizes the realized and unrealized gains and losses from cash settlements and changes in fair value of our derivative contracts as presented in our accompanying financial statements.

We are exposed to financial risks associated with these contracts from non-performance by our counterparties.  Counterparty risk is also a component of our estimated fair value calculations.  We have mitigated our exposure to any single counterparty by contracting with eight financial institutions, each of which has a high credit rating and is a member of our bank credit facility.  Our member banks have a secured interest in our oil and gas properties, and therefore do not require us to post collateral for our hedge liability positions.

3.              Fair Value Measurements

The Financial Accounting Standards Board (“FASB”) has established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.  This hierarchy consists of three broad levels.  Level 1 inputs are the highest priority and consist of unadjusted quoted prices in active markets for identical assets and liabilities.  Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs for an asset or liability.

The following tables provide fair value measurement information for certain assets and liabilities as of September 30, 2010 and December 31, 2009.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

Assessing the significance of a particular input to the fair value measurement requires judgment, considering factors specific to the asset or liability.  The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the table above.

Bank Debt and Notes

Debt

We had no bank debt at September 30, 2010.  The fair value of our bank debt at December 31, 2009 was estimated to approximate the carrying amount because the floating rate interest rate paid on such debt was set for periods of three months or less.

Notes

The fair values for our 7.125% fixed rate notes were based on their last traded value before period end.

On July 1, 2010, the convertible notes were tendered and payout was made in July 2010.  Please see Note 6 for further information on the payout of our convertible notes.

There was not an observable market for our convertible notes.  At December 31, 2009, the closing price of our common stock (as defined by the indenture) exceeded the conversion rate of $28.59 attributable to the conversion feature; therefore, the fair value of the convertible notes at December 31, 2009 included value attributable to both the face amount of the notes and the conversion feature.  The fair value of the face amount of the notes was estimated to approximate the face value of the notes because the notes bear interest at the London Interbank Offered Rate, and reset quarterly.  The fair value of the conversion feature was calculated using the conversion formula for the notes, based on the closing price per share for our common stock at December 31, 2009.

Derivative Instruments (Level 2)

The fair values of our derivative instruments were estimated using internal discounted cash flow calculations.  Cash flows are based on the stated contract prices and current and published forward commodity price curves, adjusted for volatility.  The cash flows are risk adjusted relative to non-performance for both our counterparties and our liability positions.  Please see Note 2 for further information on the fair values of our derivative instruments.

Other Financial Instruments

The carrying amounts of our cash, cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short-term maturities of these assets and liabilities.  At September 30, 2010 and December 31, 2009, the aggregate allowance for doubtful

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

accounts for trade, oil and gas sales, and gas gathering, processing, and marketing receivables was $6.8 million and $6.9 million, respectively.

Most of our accounts receivable balances are uncollateralized and result from transactions with other companies in the oil and gas industry.  Concentration of customers may impact our overall credit risk because our customers may be similarly affected by changes in economic or other conditions within the industry.

4.     Capital Stock

A summary of our common stock activity for the nine months ended September 30, 2010 follows:

Stock-based Compensation

Our 2002 Stock Incentive Plan was approved by stockholders in May 2003 and is effective until October 1, 2012.  The plan provides for grants of stock options, restricted stock and restricted stock units to non-employee directors, officers and other eligible employees.  A total of 12.7 million shares of common stock may be issued under the Plan.

Restricted Stock and Units

During the nine months ended September 30, 2010, we issued a total of 624,224 restricted shares to non-employee directors, officers, and other employees.  Included in that amount are 396,000 shares issued to certain executives that are subject to market condition-based vesting determined by our stock price performance relative to a defined peer group’s stock price performance.  After three years of continued service, an executive will be entitled to vest in 50% to 100% of the award.  The material terms of performance goals applicable to these awards were approved by the stockholders in May 2006 and May 2010.  The other shares granted in 2010 have service-based vesting schedules of five years.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

The following table presents restricted stock as of September 30, 2010, and changes during the year:

The following table presents restricted units as of September 30, 2010 and changes during the year:

Vesting of restricted stock and units granted in years before 2006 is exclusively related to continued service of the grantee for one to five years.  In certain cases, a three-year required holding period following vesting is also required.  A restricted unit represents a right to an unrestricted share of common stock upon completion of defined vesting and holding periods.  The restricted stock and stock unit agreements provide that grantees are entitled to receive dividends on unvested shares.

Compensation expense for service-based vesting restricted shares or units is based upon amortization of the grant-date market value of the award.  The fair value of the market condition-based restricted stock awards is based on the grant-date market value of the award utilizing a Monte Carlo simulation model to estimate the percentage of awards that will vest at the end of a three-year period.  Compensation expense related to the restricted stock and unit awards is recognized ratably over the applicable vesting period.  Compensation expense (including capitalized amounts) for the quarters ended September 30, 2010 and 2009 was $4.8 million and $3.7 million, respectively.  For the nine months ended September 30, 2010 and 2009, compensation expense (including capitalized amounts) totaled $13.0 million and $9.6 million, respectively.

Unamortized compensation costs related to unvested restricted shares and units at September 30, 2010 and 2009 was $43.9 million and $30.3 million, respectively.

Stock Options

Options granted under our plan expire ten years from the grant date and have service-based vesting schedules of three to five years.  The plan provides that all grants have an exercise price of the average of the high and low prices of our common stock as reported by the New York Stock Exchange on the date of grant.

There were 93,000 stock options granted to employees during the nine months ended September 30, 2010.  There were 228,175 stock options granted to employees during the nine months ended September 30, 2009.

Information about outstanding stock options is summarized below:

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

There were 400,496 and 105,970 stock options exercised during the nine months ended September 30, 2010 and September 30, 2009, respectively.  Cash received from option exercises during the nine months ended September 30, 2010 and September 30, 2009 was $10.1 million and $1.7 million, respectively.  The related tax benefits realized from option exercises totaled $6.3 million and $918 thousand, respectively, and were recorded to paid-in capital.  The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2010 was $1.1 million and $17.2 million, respectively.  The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2009 was $2.4 and $2.5 million, respectively.

We estimate the fair value of options as of the date of grant using the Black-Scholes option-pricing model.  Expected volatilities are based on the historical volatility of our common stock.  We also use historical data to estimate the probability of option exercise, expected years until exercise and potential forfeitures.  The risk-free interest rate we use is the five-year U.S. Treasury bond in effect at the date of the grant.

The following summary reflects the status of non-vested stock options as of September 30, 2010 and changes during the year:

We recognize compensation cost related to stock options ratably over the vesting period.  Historical amounts may not be representative of future amounts as additional options may be granted.  Compensation cost (including capitalized amounts) for the three months ended September 30, 2010 and 2009 totaled $989 thousand and $988 thousand, respectively.  For the nine months ended September 30, 2010 and 2009, compensation cost (including capitalized amounts) totaled $2.8 million and $2.4 million, respectively.

As of September 30, 2010, there was $6.2 million of unrecognized compensation cost related to non-vested stock options granted under our stock incentive plan.  We expect to recognize that cost pro rata over a weighted-average period of 1.7 years.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

Stockholder Rights Plan

We have a stockholder rights plan.  The plan is designed to improve the ability of our board to protect the interests of our stockholders in the event of an unsolicited takeover attempt.  For every outstanding share of Cimarex common stock, there exists one purchase right (the Right).  Each Right represents a right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock at a purchase price of $60.00 per share subject to adjustment in certain cases to prevent dilution.  The Rights will become exercisable only in the event a person or group acquires beneficial ownership of 15% or more of our common stock, or a person or group commences a tender offer or exchange offer that, if successfully consummated, would result in such person or group beneficially owning 15% or more of our common stock.  In general, in either of these events, each holder of a right, other than the person or group initiating the acquisition or tender offer, will have the rights to receive Cimarex common stock with a value equal to two times the exercise price of the rights.

We generally will be entitled to redeem the Rights under certain circumstances at $0.01 per Right at any time before the close of business on the tenth business day after there has been a public announcement of the acquisition of beneficial ownership by any person or group of 15% or more of our common stock.  The Rights may not be exercised until our Board’s right to redeem the stock has expired.  Unless redeemed earlier, the Rights expire on February 23, 2012.

Dividends and Stock Repurchases

In September 2010, the Board of Directors declared a cash dividend of $0.08 per share on our common stock.  The dividend is payable December 1, 2010 to stockholders of record on November 15, 2010.  Future dividend payments will depend on the Company’s level of earnings, financial requirements, and other factors considered relevant by the Board of Directors.

In December 2005, the Board of Directors authorized the repurchase of up to four million shares of our common stock.  The authorization is currently set to expire on December 31, 2011.  Through December 31, 2007, we had repurchased and cancelled a total of 1,364,300 shares at an overall average price of $39.05.  Purchases may be made in both the open market and through negotiated transactions, and purchases may be increased, decreased or discontinued at any time without prior notice.  There were no shares repurchased in the third quarter of 2010, or since the quarter ended September 30, 2007.

Issuer Purchases of Equity Securities for the Quarter Ended September 30, 2010

5.              Asset Retirement Obligations

We recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred, if a reasonable estimate of fair value can be made, and the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  Oil and gas producing companies incur this liability which includes costs related to the plugging of wells, the removal of facilities and equipment, and site restorations, upon acquiring or drilling a successful well.  Subsequent to initial

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

measurement, the asset retirement liability is required to be accreted each period.  If the fair value of a recorded asset retirement obligation changes, a revision is recorded to both the asset retirement obligation and the asset retirement capitalized cost.  Capitalized costs are depleted as a component of the full cost pool.

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, 2010 (in thousands):

6.              Long-Term Debt

Debt at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):

Bank Debt

We have a three-year senior secured revolving credit facility (“credit facility”).  The credit facility provides for bank commitments of $800 million, with a borrowing base of $1 billion.  The credit facility is provided by a syndicate of banks led by JP Morgan Chase Bank, N.A., matures on April 14, 2012 and is secured by mortgages on certain of our oil and gas properties and the stock of certain wholly-owned operating subsidiaries.

The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of our proved reserves, and is subject to potential special and regular semi-annual redeterminations.  The borrowing base of $1 billion and bank commitments of $800 million were reaffirmed in October 2010.

The credit facility contains covenants and restrictive provisions which may limit our ability to incur additional indebtedness, make investments or loans and create liens.  The credit agreement requires us to maintain a current ratio (defined to include undrawn borrowings) greater than 1 to 1 and a leverage ratio not to exceed 3.5 to 1.  As of September 30, 2010, we were in compliance with all of the financial and non-financial covenants.

At Cimarex’s option, borrowings under the credit facility may bear interest at either (a) a London Interbank Offered Rate (“LIBOR”) plus 2% to 3%, based on borrowing base usage, or (b) the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) adjusted LIBOR, in each case plus an additional 1.125% to 2.125% based on borrowing base usage.

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

At September 30, 2010, there were no outstanding borrowings under the credit facility.  We had letters of credit outstanding of $7.5 million leaving an unused borrowing availability of $792.5 million.

7.125% Notes due 2017

In May 2007, we issued $350 million of 7.125% senior unsecured notes that mature May 1, 2017 at par.  Interest on the notes is payable May 1 and November 1 of each year.  The notes are governed by an indenture containing covenants that could limit our ability to incur additional indebtedness; pay dividends or repurchase our common stock; make investments and other restricted payments; incur liens; enter into sale/leaseback transactions; engage in transactions with affiliates; sell assets; and consolidate, merge or transfer assets.

The notes are redeemable at our option, in whole or in part, at any time on and after May 1, 2012 at the following redemption prices (expressed as percentages of the principal amount) plus accrued interest, if any, thereon to the date of redemption.

At any time prior to May 1, 2012, we may redeem all, but not part, of the notes at a price of 100% of the principal amount of the notes plus accrued and unpaid interest plus a “make-whole” premium.

If a specified change of control occurs, subject to certain conditions, we must make an offer to purchase the notes at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to the date of the purchase.

Floating rate convertible notes due 2023

The floating rate convertible senior notes were set to mature on December 15, 2023.  The notes were senior unsecured obligations and the interest was at the three month LIBOR, reset quarterly.

On July 1, 2010, all remaining holders elected to convert their notes for cash and shares.  In July 2010 the holders received $20.5 million (principal of $19.5 million and $1.0 million for fractional shares) and 408,450 shares of common stock.  We recorded a gain of $3.8 million on the settlement of the notes.

The debt and equity components of the instruments were accounted for separately.  The value assigned to the debt component was the estimated value of similar debt without a conversion feature as of the issuance date, with the remaining proceeds allocated to the equity component and recorded as additional paid-in capital.  The debt component was recorded at a discount and was subsequently accreted, thereby reflecting an overall market rate of interest in the income statement.  The effective interest rate for the quarters ended September 30, 2010 and 2009 was 0.3% and 1.5%, respectively.  The effective interest rate for the nine months ended September 30, 2010 and 2009 was 0.9% and 2.3%, respectively.

7.     Income Taxes

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

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CIMAREX ENERGY CO.

Notes to Consolidated Financial Statements

September 30, 2010

(Unaudited)

We account for uncertainty in our income tax provisions in accordance with rules promulgated by the FASB.  At September 30, 2010 we have no unrecognized tax benefits that would impact our effective rate and we have made no provisions for interest or penalties related to uncertain tax positions.  The tax years 2005 — 2009 remain open to examination by the Internal Revenue Service of the United States.  We file tax returns with various state taxing authorities which remain open for tax years 2005 — 2009 for examination.

Our provision for income taxes differed from the U.S. statutory rate of 35% primarily due to state income taxes, non-deductible expenses, and special deductions.  The effective income tax rates for the nine months ended September 30, 2010 and September 30, 2009 were 36.7% and 36.2%, respectively.

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