Continental Resources, Inc. (CLR) was formed in 1967 to explore for oil and gas in Oklahoma; it extended its reach to other states starting in 1989. As of December 31, 2011, 71% of its proved reserves of 508 million barrels of oil equivalent (boe) were in its Northern vicinities, consisting of holdings in the North Dakota and Montana Bakken shale regions; the Red River of the North; and the Niobrara play in Colorado and Wyoming. The rest of its assets are mostly in Oklahoma, with leases in the Arkoma and Anadarko Woodford; the company also has some acreage in Illinois and Michigan. About 70% of Continental’s production is oil.
In the third quarter of 2012, Continental produced 102,964 boe per day, up 55% from the prior-year period. Seventy percent of its output was oil, with most of the balance coming from natural gas. After hedging, Continental averaged $82.87 per barrel of oil and $4.00 per thousand cubic feet of gas. Despite slightly lower oil prices and a 27% drop in realized gas quotes, adjusted operating profits, before exploration costs, soared 46%, year to year. Adjusted earnings per share increased 26%, to $0.87, before impairments and unrealized profits and losses on derivatives. The main reason for Continental’s lower realized oil prices was a $3.18 increase in the discount it realized from the benchmark West Texas Intermediate crude price (WTI), to $9.45 a barrel, as output in the Bakken jumped. But as more transport capacity from the region has come on stream, the September discount from WTI was down to $5.19 a barrel. In the now-ended fourth quarter of 2012, output probably rose, and the company has hedged most of its December-period production. We look for share net of around $0.95 in the year’s final period.
Excluding acquisitions, Continental’s capital outlays will be around $3.0 billion in 2012, and the company will drill about 280 wells; for 2013, it forecasts outlays of around $3.4 billion and 300 wells. That should generate an output gain of 30%-35%, based solely on developing currently owned leases, which would lift production to about 48 million boe, from 36 million in 2012. Including a purchase of 120,000 acres set to close in the fourth quarter of 2012, Continental will have about 984,000 net acres under lease in the Bakken shale formation and 200,000 net acres elsewhere. CLR has about 13% of the Bakken’s production, 10% of the working rigs, and 10% of the acreage. Moreover, most of Continental’s Bakken leases are “held by production”, meaning that they remain in effect as long as the company produces oil or gas from them; these leases do not require additional expensive exploratory drilling.
Continental’s drilling costs per well have decreased this year. Multi-well pad drilling has meant that rigs have to move less often, raising the proportion of their time spent at work and lifting the number of wells drilled per rig per month by one third since the first quarter of 2012. Better techniques and equipment have reduced the number of “trips” per well—the times the drill string must be totally removed from the well – a long and costly process. And some input costs for such things as sand and ceramics are down, too. These trends should continue through 2013. Moreover, more rigs and crews are available in the Bakken play than a year ago, which should also help drilling costs.
To date, most of the oil produced in North Dakota has been from the Bakken shale. But a series of deeper shale deposits below the Bakken, the Three Forks, also has great potential. And the company believes that more dense drilling also will add to reserves and production. Continental thinks its Bakken holdings could yield up to 2.8 billion boe at 320 acres per well or 4.4 billion boe with 160-acre spacing. Total reserves on present properties could range as high as 7.0 billion boe.
While Continental’s goals for the end of 2017—tripling output from the 2012 third-quarter figure and tripling reserves from the December 31, 2011 amount—seem very ambitious, we think the company has a good chance of accomplishing them. Doing so would put the company squarely in the league of the largest “independent” producers: Anadarko (APC), Apache (APA), Devon Energy (DVN), and Noble Energy (NBL). Drilling costs per well and more transport capacity out of the Bakken should both help. Risks to the picture include another recession, which could batter the price of oil; peace with Iran, which could hurt as Iranian oil returns to international markets; and new production from prolific offshore oilfields. Also, Continental has used up a lot of its borrowing power with its large capital program and acquisitions in 2012. Still we like the story and recommend CLR to accounts that can bear some risk.
At the time of this article’s writing, the author did not have positions in any stocks mentioned.