Story by Loren Steffy of Forbes
Wildcatters may not be the gamblers they once were, but the Oil Patch hasn’t lost all of its swagger. Harold Hamm, who founded Continental Resources in 1967 and turned it into the biggest producer in North Dakota’s Bakken Shale, is making a big bet that oil prices won’t continue their swoon.
Hamm told investors the company has decided to eliminate essentially all of its oil hedges, basically betting the company on the belief that oil prices won’t sink much more than the 25 percent decline they’ve experienced since June. In a statement, he said:
We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand. Accordingly, we have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery.
Continental decided to take profits on more than 31 million barrels of U.S. and Brent crude hedges for 2015 and 2016, as well as 8 million barrels of outstanding positions for the remainder of this year, Reuters reported. The company said eliminating the hedges boosted fourth-quarter profit by $433 million.
The move caps a month in which Saudi Arabia declared it would not cut oil production to stabilize prices and other OPEC members also held firm on production. Many analysts saw the decision as a move by the Saudis to reassert their control over global oil markets by trying to grab market share at the expense of other OPEC members such as Iran, as well as Russia and U.S. shale producers like Continental.
He owns about 68 percent of Continental, but his outside investors may be less impressed with his decision. As Philip K. Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter, told Reuters:
My expectation is that Continental’s investors will rue this decision because it changes the firm’s business. Hedging provides an assured cash flow. By dropping the hedges the firm is gambling that prices go up. If they go down, Continental will go bust.
The question is how quickly Hamm expects prices to recover. While he may not think prices will go much lower, he also doesn’t appear to expect a quick rebound. He said Continental would maintain its current activity level for 2015 and won’t add any new rigs in the Bakken. The company had announced plans in late September to increase capital spending to $5.2 billion from $4.6 billion this year, but Hamm said it now intends to keep its spending flat, essentially cutting its capital budget by $600 million.
Earlier this week, wrote about big producers such as ConocoPhillips and Shell pulling back on exploration spending in the U.S. I also noted that for smaller independents, oil prices would probably have to fall farther before they started feeling the pinch. Yet some, like Continental, are beginning to slow their expansion plans.
For example, Rosetta Resources, a big producer in the Eagle Ford Shale of South Texas, said it will cut next year’s capital program to $950 million from the $1.2 billion it’s spending this year.
Across the U.S. oil industry, producers seem to be taking a collective pause while they figure out how persistent the price decline will be.
Hamm has placed his bet, but if prices keep falling, he may be revising those numbers yet again in the coming months.