CLR Profile 8-7-2016 - energyprospectus.com · 8/7/2016 · August 7, 2016 Continental Resources,...

Our newsletters, company profiles and the information contained herein are strictly the opinion of the publishers (Energy Prospectus Group, a Division of DMS Publishing, LLC) and is intended for informational purposes only. Readers are encouraged to do their own research and due diligence before making any investment decisions. The publishers will not be held liable for any actions taken by the reader. Although the information in the newsletters and company profiles has been obtained from resources that the publishers believe to reliable, DMS Publishing, LLC dba Energy Prospectus Group does not guarantee its accuracy. Please note that the publishers may take positions in companies profiled.

Continental Resources

August 7, 2016

EPG Commentary by Dan Steffens

Continental Resources (CLR) is one of the “Elite Eight” in our Sweet 16 Growth Portfolio. The share price is up more than 94% YTD and my valuation continues to increase, primarily because of the results they are getting in Oklahoma. This should be one of your Core Holdings. Their SCOOP play in Oklahoma keeps looking better each quarter and the

STACK play now looks like another billion barrel oilfield for Continental.

Continental increased production by 27% year-over-year in 2015, but production is expected to decline by 2% to 5% in 2016. The company’s capital expenditure budget of $920 million is well below my forecast cash flow from operation of $1,466 million for 2016. It should be noted that Continental has a large inventory of DUC wells (drilled but uncompleted). If oil prices rebound to $60/bbl, which I expect to happen within six months, Continental is likely to ramp up completions. Harold Hamm decided to cash out all of their oil hedges in November, 2014 for cash of $433 million, but the move did expose the company to the big drop in oil prices. CLR now has more than enough cash flow from operations and liquidity to withstand an extended period of low oil prices. This is a world class oil company that holds several billion boe of recoverable reserves. Since none of CLR’s oil is hedged, I expect the share price to move in lock step with oil prices. Keep in mind that approximately 39% of the company’s production is natural gas and NGLs. Natural gas and NGL prices are moving higher, regardless of what oil prices do.

Management

Harold Hamm, Chairman & CEO Jack Stark, President & COO Jeff Hume, Vice Chairman Strategic Growth John Hart, SVP, CFO & Treasurer

www.clr.com



August 7, 2016

Although CLR is still drilling wells in the Bakken, they are not completing most of their new Bakken wells. If oil gets back to $60/bbl, CLR will be well positioned to ramp up production in 2017 with an aggressive completion program. The big story for CLR is what’s happening in Oklahoma. The company has large acreage positions in both the SCOOP and STACK plays. They now estimate that their extended reach horizontal wells in SCOOP will recover over 2,000,000 barrels of oil equivalent (“boe”). These wells generate solid economic returns, even at today’s low oil prices. My valuation of CLR is based on the following prices for West Texas Intermediate (WTI). I am using these prices in all of my

forecasts, but they are much more important for the companies that have very little of their production hedged. CLR is in that camp. I am assuming natural gas prices (Henry Hub) ramp up from $2.00/mmbtu in the first half of 2016 to $3.00/mmbtu by year-end. The U.S. natural gas market will be 4-6 Bcf per day tighter by the beginning of next winter and the NYMEX strip price for Q1 2017 is already over $3.30/mmbtu.

• $28.60/bbl actual realized oil price for Q1 2016 • $38.38/bbl actual realized oil price for Q2 2016 • $45/bbl for Q3 2016 (compares to Raymond James forecast of $60/bbl) • $55/bbl for Q4 2016 (compares to Raymond James forecast of $65/bbl) • $60/bbl for 2017 (compares to Raymond James forecast of $80/bbl)

I am also assuming that Continental’s production comes in close to the top end of their revised guidance (210,000 to 220,000 boepd) in my forecast. The company regularly beats guidance and I am assuming they start completing some DUC wells in Q4 when oil prices increase. Note that well results in both SCOOP and STACK are producing well above type curves. CLR has done a great job reducing D&C costs and operating expenses. They’ve gotten lease operating expenses under $3.75/boe, which is way below the Sweet 16 average.

Continental’s growth over the last five years is truly an American success story. The balance sheet is in good shape with more than enough liquidity to execute their growth plans.

They are getting much better results in their horizontal wells by using more sand, longer laterals and better spacing of frac stages. Recent density tests (placing laterals closer together) are promising and should increase the recoverable reserves per acre in both North Dakota and Oklahoma. The news just keeps getting better on their SCOOP play in Central Oklahoma. For

more on what is happening in Oklahoma (SCOOP and STACK), see our profiles on Cimarex Exploration (XEC), Devon

Energy (DVN), and Newfield Exploration (NFX). Central Oklahoma is rapidly becoming the “Next Big Thing” in North

America. If oil prices continue to move higher, there is significant upside to my valuation for CLR.

My Fair Value Estimate for CLR is $53.50/share Compared to First Call’s Price Target of $49.61

Disclosure: I have a long position in CLR but I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article.



August 7, 2016

Continental Resources, Inc. (NYSE: CLR) is an independent exploration and production company engaged in the exploration, development and production of crude oil and natural gas. The company’s operations are primarily focused on exploration and development activities in the Bakken field of North Dakota and Montana and the SCOOP and STACK plays in Oklahoma. Second Quarter 2016 Highlights

• Continental Resources reported a net loss of $119.4 million, or $0.32 per diluted share, for the quarter ended June 30,

2016. Adjusted net loss for the second quarter of 2016 was $65.9 million, or $0.18 per diluted share. • EBITDAX for second quarter 2016 was $528.1 million. • Cash flow from operations was $218.8 million.



August 7, 2016

"We started 2016 with record quarterly production, lower operating costs and excellent results in

STACK. The resilience of our production has allowed us to increase our production guidance for

2016 without increasing capex. This reflects the quality of our assets and the success of our

enhanced completion technology. Our new production guidance includes curtailing production

approximately 10,000 Boe per day from early April through July. The majority of the reduced

production is in STACK and SCOOP. We are managing production volumes for higher oil and

natural gas prices that we expect in second half 2016.”

– Harold Hamm, Continental's Chairman and Chief Executive Officer.

2016 Outlook Building on 2015 Achievements

• 2016 priorities o Cash flow neutrality o Debt reduction o STACK delineation o Completed well cost reductions



August 7, 2016

o Operational efficiencies

• 2016 budget o Capex of $920 million to maintain average production of 210,000 to 220,000 Boe per day (updated from

205,000-215,000 Boe per day) o Cash flow neutral at ~$37 WTI; cash flow positive at current WTI strip prices and capital budget o $150 to $200 million annualized cash flow impact from ±$5 move in WTI o 19 operated drilling rigs (32% reduction from 2015 average) o 2.5 completion crews in Oklahoma; 0 to 1 in Bakken

• 2016 play drivers o Over pressured window in STACK shows ~3x production uplift compared to normally pressured wells o Enhanced completions in SCOOP Woodford are generating 40% increase in initial 180 day production rates o Bakken DUCs (drilled and uncompleted wells) provide catalyst for high cost forward ROR with $3.5 million

incremental completion cost; projected YE 2016 DUC EUR average of 850 MBoe per well As you can see in the charts below, Continental can generate decent return on investment in their Top Tier areas, even at today’s low oil & gas prices.



August 7, 2016

Second Quarter 2016 Production

• Second quarter 2016 net production totaled approximately 20.0 million Boe (MMBoe), or 219,300 Boe per day, down 5% from first quarter 2016 and 3% lower than second quarter 2015. The second quarter 2016 production decline, as expected, was concentrated in the Bakken play, where the Company continues to increase its drilled but uncompleted (DUC) well inventory.

• Total net production for second quarter 2016 included approximately 133,000 Bo per day (61% of total production) and approximately 518 million cubic feet (MMcf) of natural gas per day (39% of total production).



August 7, 2016

STACK STACK/Northwest Cana production increased 31% to 14,610 Boe per day in second quarter 2016, compared to first quarter 2016. The Company reported five new Meramec completions in Blaine County. Initial 24-hour production test rates and flowing casing pressures (in pounds per square inch, or psi) for these wells were as follows:

• Madeline 1-9-4XH flowed 2,513 Bo and 6.1 MMcf of natural gas (3,538 Boe) per day at 4,500 psi flowing casing pressure

• Frankie Jo 1-25-24XH flowed 1,484 Bo and 6.9 MMcf of natural gas (2,627 Boe) per day at 4,320 psi • Gillilan 1-35-26XH flowed 1,703 Bo and 4.4 MMcf of natural gas (2,439 Boe) per day at 2,030 psi • Oppel 1-25-26XH flowed 998 Bo and 1.9 MMcf of natural gas (1,308 Boe) per day at 1,670 psi • Yocum 1-35-26XH flowed 14.0 MMcf of natural gas and 17 Bo (2,355 Boe) per day at 4,810 psi

All five new wells were drilled with extended laterals, ranging from approximately 7,100 to 9,900 feet. The company added approximately 15,000 net acres to its over-pressured STACK leasehold in first quarter 2016, increasing its leasehold position to approximately 171,000 net acres primarily in Blaine, Dewey and Custer counties. Over 95% of the leasehold is located in the over-pressured STACK and approximately 70% of this leasehold is expected to be held by production at year-end 2016.



August 7, 2016

"Results of the Madeline and Frankie Jo wells are outstanding. These two wells extend the known productive footprint of the over-pressured Meramec oil window 17 miles west of the Verona well we reported in May. The Madeline actually set a new record for Continental operated wells in STACK, flowing at an initial 24-hour rate of 3,538 Boe per day, with 71% of production being crude oil."

– Jack Stark, President and COO SCOOP Woodford In second quarter 2016, total SCOOP net production averaged 64,669 Boe per day, slightly above first quarter 2016 and 3% higher than second quarter 2015. SCOOP production represented 29% of the Company’s total production in second quarter 2016. SCOOP Woodford net production averaged 56,511 Boe per day in second quarter 2016, compared with SCOOP Springer net production of 8,158 Boe per day. Continental completed 6 net (24 gross) operated and non-operated wells in SCOOP in second quarter 2016, while operating an average of four rigs in the play. This includes 5.4 net (23 gross) wells targeting the Woodford formation and 0.3 net (1 gross) wells targeting the Springer formation.



August 7, 2016

The Company announced it has increased the EUR for 2-mile horizontal wells drilled in the SCOOP Woodford oil window by approximately 30% to 1.3 MMBoe per well, with 62% of production being crude oil. The increase in EUR was based on the results of 22 enhanced completions conducted over the past two years in the SCOOP Woodford oil window and assumes an average 9,800-foot lateral per well. Results show that 180-day production rates are on average 25%-to-30% higher than offsetting legacy wells. At a targeted completed well cost of $9.8 million per well, a 1.3 MMBoe EUR SCOOP Woodford oil well should yield a 32% rate of return at $45 per barrel WTI and $2.50 per Mcf of gas. The most recent enhanced completion well in the SCOOP Woodford oil window was the RK Morris 1-29- 17XH in eastern Grady County, which had an initial 24-hour production test rate of 1,003 Bo and 1.8 MMcf (1,297 Boe) from an 11,500-foot lateral, with flowing casing pressure of 690 psi. Along with solid initial production, the well is exhibiting a low decline rate, with an average 30-day production of 903 Bo and 1.6 MMcf per day at 560 psi. SCOOP Non-Strategic Asset Sale

Continental announced that it has signed a definitive purchase and sale agreement with an undisclosed buyer to sell approximately 29,500 net acres of non-strategic leasehold in the SCOOP play in Oklahoma for $281 million. The agreement provides for customary closing conditions and adjustments. Located primarily on the eastern side of SCOOP, the leasehold represents approximately 550 Boe per day of net production. After this transaction, the Company will retain approximately 384,000 net acres of leasehold in SCOOP.



August 7, 2016

"Enhanced completions once again are having a profound impact on production rates and EURs, this time in the oil window of SCOOP Woodford, just as we’ve experienced in the SCOOP condensate window. We estimate that at least 50,000 net acres in our Woodford oil window leasehold can be upgraded to the new 1.3 MMBoe EUR type curve, so the new approach obviously increases the value of this asset in a significant way"

– Gary Gould, SVP of Production and Resource Development

Bakken Development

Continental’s Bakken production averaged 125,028 Boe per day in second quarter 2016, a decrease of 10% from first quarter 2016. Continental completed 3 net (25 gross) operated and non-operated wells in Bakken in second quarter 2016, while operating an average of four drilling rigs in the play. Note that CLR is completing wells where they have a smaller working interest. This program keeps their completion crews busy, but leaves the wells where they hold a larger working interest to be completed when oil prices improve.



August 7, 2016

Enhanced slickwater and hybrid completions continue to improve Bakken well performance. Continental now has 118 30-stage, 2-mile enhanced-completion wells in Williams and McKenzie counties with at least 180 days of production history. These wells are showing 45%-to-60% higher 180-day production rates and 35%-to-45% higher EURs when compared to direct offsets with historical standard designs. These initial production uplifts and higher EURs are superior to previously announced gains. The Company’s total completed well cost for a 2-mile lateral Bakken well is approximately $6.2 million, down from $6.8 million at year-end 2015. Continental expects to achieve an operated completed well cost of $6.0 million by year-end 2016. The Company recently elected to complete eight additional operated Bakken wells in the second half of 2016 to further test enhanced completion concepts including stage spacing, proppant volumes per stage, proppant size and diverter technology. Two stimulation crews were recently deployed in the field to execute these plans, and the Company anticipates first production for new wells in this program during third and fourth quarters 2016. Continental’s current Bakken DUC inventory has grown to approximately 165 gross operated DUCs, with expectations to end 2016 with approximately 190 gross operated DUCs. This represents a high-graded inventory with an average EUR of approximately 850,000 Boe per DUC well. The Company estimates a current average cost of between $3.0 million to $3.5 million per well to complete these wells. At $45 per barrel WTI and $2.50 per Mcf of gas, the cost-forward rate of return on this incremental capital expenditure is over 100%.



August 7, 2016

Wyoming Asset Sale

Continental also announced it closed the sale in late April of approximately 132,000 net acres of leasehold in the Washakie Basin in Wyoming for $110 million. The leasehold was non-core, non-producing, undeveloped acreage in Sweetwater and Carbon counties and included no proved reserves. After this transaction, the Company retained non-operated production and approximately 40,000 net acres in the basin. The Company used the proceeds from the sale to reduce outstanding debt and noted that it has other opportunities for non-core asset sales.

Second Quarter 2016 Financial Update

In second quarter 2016, Continental’s average realized sales price, excluding the effects of derivative positions, was $38.38 per Bo and $1.31 per Mcf of gas, or $26.36 per Boe. Based on realizations without the effect of derivatives, the Company’s second quarter 2016 oil differential was $7.21 per barrel below the NYMEX daily average for the period. The second quarter 2016 realized wellhead natural gas price, without the effect of derivatives, was on average $0.65 per Mcf below the average NYMEX Henry Hub benchmark price. Production expense per Boe was $3.72 for second quarter 2016, a decrease of $0.67 per Boe from second quarter 2015. Other select operating costs and expenses for second quarter 2016 included production taxes of 7.4% of oil and natural gas sales; DD&A of $22.15 per Boe; and G&A (cash and noncash) of $1.82 per Boe.



August 7, 2016

Liquidity

As of June 30, 2016, Continental’s balance sheet included $16.6 million in cash and cash equivalents and $885 million of borrowings against the Company’s revolving credit facility, compared to the balance of $940 million at March 31, 2016. As of July 31, 2016, borrowings against the revolving credit facility had declined to $820 million. Continental had approximately $1.86 billion in available borrowing capacity under its revolving credit facility as of June

30, 2016, and approximately $1.93 billion was available as of July 31, 2016.

Capital expenditures for second quarter 2016 were $219.3 million, including $9.9 million for acquisitions. Non-acquisition capital expenditures for second quarter 2016 included $179.6 million in exploration and development drilling, $18.8 million in leasehold and seismic, and $11.0 million in workovers, recompletions and other. Year-to-date non-acquisition capital expenditures were consistent with the Company’s spending plan under its budget of $920 million for 2016. Based on our forecast (attached below), cash flow from operations will fund more than 100% of CLR’s capex program.



August 7, 2016


Net Income and Cash Flow Forecast


August 7, 2016

CLR Profile 8-7-2016 - energyprospectus.com · 8/7/2016 · August 7, 2016 Continental Resources,...

Documents

Transcript of CLR Profile 8-7-2016 - energyprospectus.com · 8/7/2016 · August 7, 2016 Continental Resources,...