Continental Resources Sees Higher Prices in First Half of 2016, Cuts Costs, Boosts Production as it Waits for Higher Oil Prices

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--A growing number of investors are betting against independent oil & gas producer Continental Resources Corporation (NYSE:CLR) (Oklahoma City, Oklahoma), despite the company's success in lowering costs and increasing production. About 25 million of Continental's 340 million shares of common stock were sold short as of November 30, according to data from NASDAQ that was cited in an article in Forbes. Investors who sell a stock short are betting its price will fall, allowing them to purchase shares at a cheaper price in the future to cover their bets.

Continental and its colorful chief executive, Harold Hamm, have drawn more than their share of doubters over the years. On December 21, Hamm told CNBC news he believed crude-oil prices would rise to $40-$50 per barrel in the first half of 2016. West Texas Intermediate (WTI) was selling for about $35 per barrel when Hamm was interviewed, and it rose slightly in the days immediately after his remarks.

"We've seen tremendous growth in the market for our supply," Hamm said on the CNBC program "Squawk Box". "[Crude oil demand] is up about 3% on an annual basis, so it's quickly correcting," he said. "2016 will be the year for correction, and we estimate the first half." A continued pickup in demand will push prices higher, Hamm predicted, adding that efficiency gains and technological advances have made U.S. producers in unconventional fields more competitive. No longer is $100 per barrel oil needed to drill profitably in shale formations, he said.

Time will tell who bet correctly. Low crude oil prices have been punishing the share prices of all companies in the Oil Patch. Some of Continental's short-sellers also may have been motivated by articles circulating on the Internet asking questions about the company's accounting.

But it is known for certain is that Continental's production of oil & gas rose 25% in the third quarter compared to production in the comparable year-earlier quarter. A surge of production from the South Central Oklahoma Oil Province (SCOOP) added to production gains in the company's flagship Bakken and Three Forks properties in North Dakota and Montana. And Continental continues to take steps to de-risk another promising play in Oklahoma, called STACK. For more on the SCOOP and STACK plays, see the December 4, 2013, article--SCOOP and STACK are Hot New Plays for Oklahoma Oil & Gas Drilling.

"This was another solid quarter's performance," Hamm said November 4 in releasing third-quarter results. "As expected, we continue to deliver on cost controls and operating efficiencies, while maintaining our exploration focus. We continued in the third quarter to improve across the board in the key metrics we control--faster drill times, lower completed well costs and strong well results from enhanced completions. On the financial side, we remain focused on balancing capital expenditures with cash flow."

Continental's capital budget this year is about $2.7 billion, but the company said it expects to spend about $300 million less than that. Continental is one of several oil producers trying to align capital spending with free cash flow.

In Continental's North region, which includes assets in North Dakota and Montana, production rose to about 149,000 barrels of oil equivalent per day (BOE/d) in the third quarter, a 10% gain over the 136,000 BOE/d it produced there in the comparable year-earlier quarter. Continental is one of several companies that have experienced success in drilling in the Three Forks formation, which lies underneath the Bakken Shale. For more on that issue, see Jun 9, 2014, article--Continental Resources Goes Beyond Bakken Shale to Explore Three Forks Potential.

In the company's South region, which includes the SCOOP and STACK plays in Oklahoma, production surged to about 80,000 BOE/d in the recently completed quarter, a 74% gain over the 46,000 BOE/d production there in the third quarter of 2014.

"We are very pleased with the performance of our two recent completions in STACK," Jack Stark, Continental's president and chief operating officer, said in the third-quarter earnings release. "Based on early results and our geologic model, we expect STACK will add significant value to the Company and to our shareholders."

Continental's drilling and completion costs for most operated wells have declined on average approximately 25% since year-end 2014, due to lower service costs and operational efficiency gains, the company said. In the Bakken formation, the current estimated drilling and completion cost has decreased to $7 million per operated well, compared with $9.6 million per operated well at year-end 2014. In one of its Oklahoma plays, the current estimated drilling and completion cost has decreased to $9.6 million per operated well, compared with $12.2 million per operated well at year-end 2014. Continental estimated that shortened drilling times in the Bakken have lowered the company's operating costs by about $40 million on an annualized basis.

"Continental and others continue to successfully expand the productive footprint of STACK west into Blaine, Dewey and Custer counties, where the reservoirs are thicker, over-pressured, and are delivering superior production rates," Stark said November 4. "More than 95% of our acreage lies in these counties, and approximately 60% is held by production."

Some in the oil industry have made a career out of second-guessing Continental and its highly quotable CEO. Hamm was the first to recognize the potential of the Bakken, which is why the company is the leading operator there. The company also was one of the first to spot the potential of the SCOOP and STACK plays in Oklahoma. Continental is not always right, of course. Late last year, it bet wrong on oil prices, allowing its oil hedges to expire, which cost the company hundreds of millions of dollars of revenue.

That revenue would have come in handy in the third quarter, where Continental reported a net loss of $82.4 million on revenue of $682.7 million. For the year-earlier quarter, when oil prices averaged $85 per barrel, the company earned $533.5 million on revenue of $1.645 billion.

In Continental's November earnings call with investors, company officials raised their full-year production guidance for the third time in a year: Hamm said production for all of 2015 will be between 24% and 26% higher than full-year 2014 production. In December 2014, company officials estimated 2015 production would increase 16% to 20% over 2014 production. Then, in August 2015, they upped that gain to 19% to 23%.

"Companies like Continental are iconic oil wildcatters," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "They are willing to make big bets when they see value others overlook. Everyone's bleeding in the oil patch, but it would be a mistake to think Harold Hamm would ever submit to Saudi Arabia and the other members of OPEC."

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