Seeking Alpha
Recommended for you:
Long only, newsletter provider, oil & gas, small-cap
Profile| Send Message|
( followers)  

The unconventional oil boom that is happening in the United States is an incredible story. A story that was barely on the radar five years ago. From being written off as being in permanent decline United States oil production is now growing faster than anywhere else in the world.

If the unconventional oil boom is an incredible story then that means that Continental Resources is an incredible story too. Because Continental Resources has been at the front and centre of the unconventional oil boom right from the beginning.

Continental Resources is an inspiring story. Continental was founded in 1967 by Harold Hamm, the youngest of 13 children and the son of a sharecropper. Hamm got Continental into the North Dakota Bakken oil play early and in a big way. Doing so wasn't a no-brainer in the beginning, there was plenty of risk as the economics of the play were unknown and the techniques involved new.

Taking that risk has paid off in a big way for Hamm and Continental shareholders. In 2010 Continental set an extremely ambitious goal of growing production from 37,300 barrels per day to 112,000 barrels per day in 2014. A triple in 3 years, a 25% increase per year.

(click to enlarge)

As of today, Continental believes that it will reach that goal 18 months ahead of schedule meaning that production has grown at a rate of 37% per annum.

(click to enlarge)

As these uncoventional plays are drilled up, reserves growth tends to follow production growth. For Continental that has meant that proved reserves have gone from 257 million barrels 2009 to over 610 million barrels as of June 2012.

Those are impressive numbers to be sure, but they don't mean anything without considering both the number of shares and debt outstanding at each point in time. After all, it is per share growth and value that investors are interested in.

If I assume that each barrel of proved reserves is worth $25 per barrel the value per Continental share looks like this:

2009

2012

Proved Reserves

257,000,000

610,000,000

Value Per Barrel

$25

$25

Estimate of Value

$6,425,000,000

$15,250,000,000

Less Debt

($523,000,000)

($2,943,000,000)

Value for Shareholders

$5,902,000,000

$12,307,000,000

Shares Outstanding

169,000,000

185,000,000

Value Per Share

$34.92

$66.52

Continental isn't just growing rapidly, it is doing so in a manner that is accretive to shareholders on a per share basis.

Continental is hardly off the radar though, the incredible growth story is very well known. Perhaps buying shares today is not a great idea as a lot of future growth is likely priced in.

A couple of recent transactions made by Continental itself can help shed some light on this.

On November 7, Continental announced that it had both sold and purchased some Bakken assets as follows:

Continental Resources, Inc. (NYSE: CLR) announced today it has entered into an agreement to acquire certain Bakken producing and undeveloped properties for $650 million. The property includes leasehold of approximately 120,000 net acres, primarily in Divide and Williamscounties, North Dakota, and production of approximately 6,500 barrels of oil equivalent per day (Boepd).

Continental is currently the largest leaseholder in the Bakken, with 984,040 net acres as of September 30, 2012. If completed, the proposed acquisition will increase this total to 1.1 million net acres.

In addition, Continental announced it has entered into an agreement to sell its producing crude oil and natural gas properties and supporting assets in its East Region for cash proceeds of $125 million. The East Region primarily includes properties east of the Mississippi River, including the Illinois Basin and the state of Michigan, among other areas. Production from the properties included in the sale agreement averaged approximately 1,100 Boepd for the three month period ended September 30, 2012.

"We are divesting non-core, conventional assets and re-investing the proceeds in an attractive acquisition that further builds our strategic, core position in the Bakken," saidHarold Hamm, Chairman and Chief Executive Officer. "Continental operates a large portion of the acreage that we are acquiring, and more than half of it is held by production."

The acquisition made by Continental involved spending $650 million for 6,500 barrels of oil equivalent per day of production. That equates to a nice round $100,000 per flowing barrel.

The disposition was for proceeds of $125 million and involved 1,100 barrels of oil equivalent per day of production. That is a sales price of $113,000 per flowing barrel.

If we apply those valuations of production metrics to the entirety of Continental the valuation of the entire company looks like this:

$113,000 / flowing

$100,000 / flowing

Current Production

105,874

105,874

Per Flowing Barrel

$113,000

$100,000

Estimate of Value

$11,963,762,000

$10,587,400,000

Less Debt

($2,943,000,000)

($2,943,000,000)

Value for Shareholders

$9,020,762,000

$7,644,400,000

Shares Outstanding

185,000,000

185,000,000

Value Per Share

$48.76

$41.32

Current Share Price

$72.33

$72.33

Based on the prices involved in those two transactions Continental doesn't look cheap at all right now. My estimates are for between $41 per share and $48 per share which is quite a bit lower than the current share price.

If I reverse engineer the numbers I find that Continental is trading at $155,000 per flowing barrel.

$113,000 / flowing

Current Production

105,874

Per Flowing Barrel

$155,000

Estimate of Value

$16,410,470,000

Less Debt

($2,943,000,000)

Value for Shareholders

$13,467,470,000

Shares Outstanding

185,000,000

Value Per Share

$72.80

Current Share Price

$72.33

In my opinion that is likely a pretty fair if not slightly rich valuation for Continental. This is a great company, with fantastic future growth prospects, but for me at this price it is a pass as an investment.

Source: Continental Resources Recent Asset Sales Suggest The Company Is Not Undervalued