Continental Resources (ticker: CLR) is a top 10 petroleum liquids producer in the United States and one of the largest leaseholders in the nation’s premier oil play, the Bakken of North Dakota and Montana. Based in Oklahoma City, the company also has a leading presence in the Anadarko Woodford play of Oklahoma and the Red River Units play of North Dakota, South Dakota and Montana.
Continental Resources announced on September 10, 2013, its operational and financial guidance plans for the year 2014. Highlights of the announcement include:
- $4.05 billion CAPEX (excluding acquisitions)
- An expected 26% to 32% increase in total production
- A 22% increase in net well completions compared to 2013 (329 to 400)
According to CLR’s press release, the company expects to increase total crude oil and natural gas production in a range of 26% to 32% in 2014, based on capital expenditures of $4.05 billion. The expected average daily production in 2014 will be in a range of 170,000 to 180,000 BOEPD, with an exit rate for December 2014 of approximately 200,000 BOEPD.
Total production for 2014 is expected to be 70% crude oil, in line with CLR’s mid-year 2013 results and the long-term commitment to tight oil resource plays.
Benefiting from recent reductions in well costs, Continental’s 2014 budget reflects 400 net well completions (1,090 gross), with 94% located in the company’s two key operating areas, the Bakken in North Dakota and Montana and the South Central Oklahoma Oil Province (SCOOP). The 2014 well count represents a 22% increase over current budgeted completions of 329 net wells in total for 2013.
The growth in production is in line with CLR’s announcement on October 8, 2012, to triple production and reserves as part of a five-year plan. The goal is to reach 300,000 BOEPD and total production of 108 MMBOE by the year 2017.
Continued Prominence in the Bakken, More Growth in SCOOP
Drilling-and-completion related activities account for $3.5 billion of the 2014 capital expenditures budget. Exploration drilling accounts for approximately $500 million of 2014 capital expenditures, a 16% increase over 2013’s exploratory drilling budget.
CLR has allocated 71% of its 2014 drilling capital expenditures budget to the Bakken play to run an average operated rig count of 21 rigs next year, one more than the current total. 17 rigs will run in the North Dakota portion of the play, and four in Montana. The company will complete or participate in completing 300 net wells (886 gross) in the Bakken in 2014.
CLR has allocated 25% of its 2014 drilling capital expenditure budget to its SCOOP operations and is planning to have an average of 18 operated rigs in the play in 2014, compared with the current count of 10 operated rigs. Based on increased rig count and continued improvements in drilling efficiency, the company expects to complete or participate in completing 74 net wells (167 gross) in SCOOP in 2014.
Activity in the play will focus on holding acreage by production and further de-risking the southern areas of the play. The company also plans to initiate a density drilling program where it has already de-risked the play.
Andrew Coleman, Managing Director for Raymond James, said: “Given (CLR’s) premium Bakken acreage, massive development inventory, and operational track record, we reiterate our Outperform rating and are raising our price target to $118. Management of the company is effectively the first in our coverage universe to give definitive 2014 plans – an idea that should underscore the confidence management has in their asset potential.”
Ryan Oatman, Research Analyst for SunTrust Robinson Humphrey, was surprised by CLR’s productivity. “We previously expected 2014 capital spending of $4.1 billion would drive production of 169 Mboepd,” said Oatman. “After improving our estimate of capital productivity by over 10%, our 2014 estimates move to $4.05 billion and 179 Mboepd. This is a very positive development in our view as the improved outlook for efficiency suggests higher debt-adjusted growth and a deeper inventory life.”
However, some other analysts are wary of CLR’s stock price in relation to current oil prices. Ethel McGlynn, Senior Vice President at Wunderlich Securities, maintained a Hold rating and set a $95 price target. “While constantly impressed by Continental’s growth, oil weighting and financial strength in the Williston it is clear that investors agree with this sentiment given the company’s trading multiples,” said McGlynn. “Continental currently trades at a 5.5x 2014E P/CFPS multiple versus peers at 4.5x, which in our view is a premium that makes some sense but causes us to look elsewhere for names with exposure in the Williston that could exhibit multiple expansion.”
Doug Leggate, Senior Analyst at Bank of America Merrill Lynch, shares a similar view point. Leggate said: “Versus other sector stocks we think CLR has staged a strong performance – but 2014 guidance does not provide any new news to materially bolster our fair value estimate beyond recent oil prices. Instead, we remain concerned over a strong share price / oil price correlation against a backdrop that we think leaves near term oil price risks skewed lower.
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