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Summary

  • CEO Hamm continues to deliver impressive results.
  • Production and reserves are expected to triple in just three years.
  • Yet after significant momentum, I will only buy on significant dips.

Investors in Continental Resources (NYSE:CLR) continue to enjoy significant momentum so far in 2014 after shares of the company led by its iconic CEO Hamm continue to deliver huge returns to investors.

Continued strong production growth which results in even stronger earnings growth is driving returns for investors. I like the company, yet after significant momentum I will only be a buyer on significant dips.

First Quarter Earnings

Continental Resources released its first quarter results over the past week. Reported revenues of $972.5 million came in 38.4% higher than last year.

The company managed to show nice operating leverage on this sales growth with operating earnings increasing by nearly 56% towards $421.3 million. Reported GAAP earnings came in at $226.2 million resulting in earnings of $1.22 per share.

Aggressive Growth Player

Continental Resources aims to show rapid growth in the coming years, aiming to triple its production and proved reserves in the coming three years.

For 2014, Continental foresees production growth between 26 and 32%, aided by a massive $4.05 billion capital expenditure budget. The company has leading assets in the Bakken and SCOOP areas, while it is the number 1 oil producer in the Rockies.

To illustrate the potential and pace of current growth; first quarter production came in at 152,500 barrels of oil-equivalent, up 25% on the year before. Of this production some 70% was being produced in oil.

With year-end reserves of 1.08 billion barrels of oil-equivalent Continental Resources has roughly 20 year's worth of reserves at current production levels. Total reserves were up by 38% compared to the year before.

Valuation

Continental Resources hardly holds any cash at hand, yet the company has access to liquidity through credit facilities with a total size of $1.5 billion.

The company holds little over $5 billion in debt, yet the vast majority of indebtedness only matures between 2019 and 2023, creating very little liquidity risks in the short term.

Given the strong production outlook for 2014, Continental might be on track to report revenues of $4.5 billion as earnings could come in around a billion.

At $132 per share, the company is valued at $24.5 billion. This values equity in the growing player at roughly 5.5 times revenues and 25 times earnings.

Implications For (Potential) Investors

Continental has shown an impressive pace of growth after reporting its 16th straight quarter of record production, a trend expected to continue in the coming years. With production and reserves expected to triple towards 2017, Continental is in the sweet spot. At this pace, annual revenues of around $10 billion are foreseen for 2016-2017 if all goes well, as earnings could continue to increase towards $2-$3 billion.

The driver behind this growth and success is Harold Hamm, which still owns a roughly 70% stake in the company. His bets on the Bakken and the SCOOP are paying off greatly in terms of production, although reserves might increase even faster. A nice profile of Hamm can be found in a recent Forbes article.

Shares of the company have been on a tear in recent years. While leverage is considerable, it is not a major worry given the maturity term profile and the rapidly growing production and asset base. The valuation at 25 times earnings is steep for an energy play. Yet based on 2016-2017 estimates shares might be much more appealing.

While I believe the long term prospects are great, so has momentum in energy names been so far this year. I am a buyer on significant dips, if they might arise.

Source: Continental Resources - Impressive Growth Prospects, Yet Limited Short-Term Appeal After Strong Momentum