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Summary

  • Continental Resources was recently supplanted as the biggest oil producer in the Bakken by the combination of KOG and WLL.
  • CLR is growing faster than the combined companies of KOG and WLL by drilling alone. Plus, it is already the bigger overall producer, including other areas such as the SCOOP.
  • In addition, CLR is testing new well density drilling strategies and new well completion techniques that will lead to much more production and proved reserves.
  • Read the article for more details. They make CLR look like a huge buy.

It used to be that Continental Resources Inc. (NYSE:CLR) was the biggest producer in the Bakken. Not long ago, Whiting Petroleum Corp. (NYSE:WLL) decided to buy out Kodiak Oil & Gas Corp. (NYSE:KOG). This buyout is expected to close in Q4 2014. The buyout meant that the combined company had production of roughly 140,000 Boe/d for Q1 2014. From the Williston (Bakken) alone, that figure was approximately 112,325 Boe/d for Q1 2014.

The Q2 2014 results for WLL were 109,760 Boe/d total and 80,195 Boe/d from the Bakken/Three Forks. For KOG, the Q2 2014 results were total production of 38,271 Boe/d. It is hard to separate out the non-Bakken part, as this separation does not appear in KOG's Q2 2014 report. However, KOG's production is almost all from the Bakken. Therefore, I will use that entire number as Bakken production. This means the combined company had Bakken production of 118,466 Boe/d. This only beats CLR's Bakken production of 108,573 Boe/d by a bit; and CLR's Q2 2014 total production of 167,953 Boe/d beats the combined Q2 2014 production results of WLL and KOG of 148,031 Boe/d by more. Hence, CLR is still the bigger producer of the two, even if all of it is not in the Bakken.

For FY2014 CLR has guided for 26% to 32% production growth (29% as a midpoint) over FY2013 production of 135,919 Boe/d. KOG guided for 33.6% to 43.8% growth from FY2013 production of 29,200 Boe/d (midpoint of 38.7%). WLL guided for a midpoint of 20%+ production growth in FY2014 over the FY2013 production of 94,090 Boe/d). The blended growth rate of KOG and WLL is then approximately 24.43%. This is below the midpoint growth rate of CLR of 29%. Plus, CLR had FY2013 production of 135,919 Boe/d, compared to the WLL-KOG combined company's 123,290 Boe/d. This should lead to CLR pulling ahead over time, although it is possible that KOG's technical expertise might help WLL speed up its development. Further, CLR does have more acreage in the Bakken (about 1.2 million net acres to 0.85 million net acres for WLL-KOG) and more acreage overall. CLR is still the big dog in the room; and it seemingly is growing faster too.

The above is all very impressive, but more impressive than the above are the tests CLR has been doing lately. It has been experimenting with different completion techniques (specifically fracking techniques) and different well density programs. These will likely impact both production and proved reserves immensely. Production was 167,953 Boe/d for Q2 2014. Proved reserves were 1.2 BBoe at Q2E 2014. These were up 11% over Q4E 2013 and 31% year-over-year for Q2 2014. That was a great result, but look how that could change if the current test programs prove out as expected.

First, CLR is trying out two different well density programs. Both are more dense than previous programs. One is a 1,320-foot program, and one is a 660-foot program. The 660-foot density test has roughly double the number of wells in the same space as the 1320-foot density test. Both of these tests have more wells in a given area than previous development schemes. The tests are in the Bakken. They utilize the middle Bakken, the Three Forks 1, the Three Forks 2, and the Three Forks 3. It is possible that still more benches (play zones) will be used in future tests and future development. The Hawkinson pilot program (1320-foot spacing) is a strong producer, with all of the 14 wells trending 50% above CLR's average EUR (expected ultimate recovery) of 603,000 Boe after 190 to 250 producing days. These wells were completed with about 100,000 lbs. of proppant per stage, with 30 stages.

In another test study, CLR has been evaluating new completion techniques. The two main trials are for slickwater fracking completions and "large proppant volume and cross-link gel" fracking completions. For the Madison 2-28H well, after 279 days, slickwater fracking led to 35% higher production than the 603 Mboe well type curve and 50% higher production than the average neighboring wells. For the Sacramento 2-10H, after 192 days, slickwater fracking led to 50% higher production than the 603 Mboe type curve and 60% higher production that the average of the neighboring wells. Another three-well test of the Middle Bakken yielded production that was 35% higher than the 603 Mboe type curve and 25% higher than the average of the neighboring wells.

In the large proppant volume test with cross-link gel, a three-well average of Middle Bakken wells yielded 39% higher production than the 603 Mboe type curve and 30% higher production than the average of the neighboring wells.

Both of the above test types seem to have been successful and economical. The added costs were approximately $1.5 million to $2 million per well. However, for a 25% to 50% improvement in production and EURs (expected ultimate recoveries), this is still very economical for CLR. Plus, it will increase the speed of production and the proved reserves, if the production curves continue at their so far much higher rates over the longer term.

For the big picture, these tests essentially mean that CLR should be able to ramp up production much more quickly than it has been able to. Plus, they mean that the proved reserves will effectively double from their current level through: 1) more acreage proved every year, 2) denser well development yielding just as high results per well as less dense development, and (3) better completion techniques leading to higher yields. These test results should also mean that the company should be able to save a lot of money with denser pad drilling and maintenance.

The company will almost certainly not state the above for a goodly amount of time yet, but these tests indicate that CLR's recoverable proved reserves are more in the area of 2.4 Bboe than in the area of the Q2E 2014 specified 1.2 Bboe. The test results should also mean that CLR will be able to increase the roughly 30% production growth by about one-third as the new fracking techniques are used more widely. This will mean roughly 40% production growth, where the previous guidance had been for roughly 30%. I doubt this will be reached in 2014. The techniques will not be used in many cases, and they have not been pervasive in 1H 2014. The techniques also have to be adapted to the SCOOP. Still by 2015, CLR should be ready to apply enhanced techniques to all of the Bakken at least. Plus, CLR should get some better-than-guided for results in 2H 2014. This should lead to CLR beating and guiding higher at the end of the year.

CLR has had essentially no insider selling in the last six months. It has a lofty 32.77 PE and a not-as-lofty 18.46 FPE. It has a next 5 years' EPS growth estimate per annum of 25.38%; and this is before CLR has released any projections based on the new test data to analysts. Without such guidance from the company, the brokerage analysts usually do not raise their estimates. This allows some savvy investors to pad their positions in CLR before this happens. If investors figure the next five years' EPS growth estimate per annum should be closer to 33% based on these new tests, that makes CLR a much better buy at the current price. The likely 2.0+ Bboe in proved reserves to be declared within the next year or two also make CLR a better buy. Some might tend to disbelieve what I am saying. However, those people should remember that the current recovery rate is only about 3% to 5% of the actual oil in place in the Bakken. Doubling the amount that is recoverable through technological advancements would still only result in a recovery rate under 10%. That seems very believable. CLR is a buy.

The two-year chart of CLR provides some technical direction for a trade.

(click to enlarge)

The slow stochastic sub-chart shows that CLR is near overbought levels. The main chart shows that CLR is still in an uptrend, although it has weakened lately. If oil prices stabilize at the current level, CLR should be able to resume its climb upward. Since it is still significantly below its recent high, it is still a buy. It should eventually exceed its current high. How high it goes in the near term will likely be dependent on world economic and US economic performance. If such performances are good, CLR should do exceedingly well. If they are not as good, CLR stock may grow much more slowly. However, it is great to be able to know that both production and reserves will grow quickly. Plus, the new techniques should allow CLR to save money through greater efficiencies, such as having a greater number of wells on one pad.

CLR is also planning a two-for-one stock split for September 10, 2014. Stock splits generally give a stock a bit more upward momentum, as the stock becomes cheaper to buy. This is a likely outcome for top performer CLR. CLR is a buy.

NOTE: Some of the fundamental fiscal data above is from Yahoo Finance.

Good Luck Trading.

Source: Continental Resources Is Set To Take Back Its Crown And To Double Its Reserves