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Continental Resources, Inc. (NYSE:CLR)

Q4 FY07 Earnings Call

February 26, 2008, 9:00 AM ET


Mark E. Monroe - President and COO

Harold G. Hamm - CEO

Richard H. Straeter - President, Illinois Division

Jack Stark - Sr. VP, Exploration

Jeff Hume - Sr. VP, Operations



Good day, ladies and gentlemen, and welcome to the Quarter Four 2007 Continental Resources, Inc. Earnings Conference Call. My name is Nakeda, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions].

This conference call includes forward-looking information that is subject to a number of risks and uncertainties, many of which are beyond the company's control. All information other than historical facts included in this conference call, regarding the company's strategy, future operations, drilling plans, estimated reserves, future production, estimated capital expenditures, projected costs, the potential of drilling prospects, and other plans and objectives of management are forward-looking information.

All forward-looking statements speak only as of the date of this conference call. Although the company believes that the plans, intentions, and expectations reflected in or suggested by the forward-looking statements are reasonable, there is no assurance that these plans, intentions or expectations will be achieved. Actual results may differ materially from those anticipated due to many factors, including oil and natural gas prices, industry conditions, drilling results, uncertainties in estimating reserves, uncertainties in estimating future production from enhanced recovery operations, availability of drilling rigs and other services, availability of oil and natural gas transportation capacity, availability of capital resources and other factors listed in reports that the company has filed or may file with the Securities and Exchange Commission.

I would now like to turn the presentation over to your host for today's call, Mr. Mark Monroe, President and Chief Operating Officer. Please proceed, sir.

Mark E. Monroe - President and Chief Operating Officer

Thank you, Nakeda. I want to welcome everyone to Continental's fourth quarter and year-end 2007 conference call. Around the conference table today, we have Harold Hamm, Chairman and Chief Executive Officer; Jeff Hume, Senior Vice President of Operations; Jack Stark, Senior Vice President of drilling; John Hart, Chief Financial Officer; Richard Straeter, the President of our Eastern Division from our Mount Vernon, Illinois office; Gene Carlson, Vice President of Resource Development; Tom Luttrell, Senior Vice President of Land; and our newest employee, Warren Henry, who just joined the company as Vice President, Investor Relations.

At this time, I will turn the call over to Harold Hamm for some initial comments.

Harold G. Hamm - Chief Executive Officer

Good morning. As stated in the press release, 2007 was a very exciting year for our company. Last year, we completed public offering and celebrated four decades in this business. It's clear that 2007 was a record year from both a financial and operational standpoint, even though [inaudible] tax charge for conversion to subchapter C corporation distorts quarterly and annual comparisons. Some additional noise was due to our decision to defer some crude oil sales in the fourth quarter due to exceptionally wide price differentials. Though the decision was a difficult one, the fourth quarter is historically a lower consumption month in the Rockies and we are selling those stored barrels now at much higher prices during the first quarter of 2008. We’re looking forward to the exploration of our current fixed price swap on 10,000 barrels of oil per day at 72.90, so that we can fully realize the impact of higher crude oil prices in future results. We’ve a strong financial positi! on. We've seen no need to hedge oil and gas prices.

Earlier this month, we announced our year-end proved reserves of 135 million barrels equivalent with a PV-10 of 3.5 billion. This represents a volume increase of 14% and a value increase of almost $2 billion.

Gross reserve volume addition net of revisions were 27 million barrels or 16 million barrels net of production. The production replacement was impressive at just over 250%. I think there were many skeptics about the potential of our North Dakota Bakken project at the time of our IPO road show. With the announcement of significant wells by EOG, Whiting, and ourselves, the skepticism has turned to optimism. And while we have yet to announce a 1000-plus barrel oil per day IP rate in the North Dakota Bakken. Our Nesson Anticline position has delivered some very attractive and consistent production and reserve numbers, which Jack Stark will talk about later.

We have also had some significant positive results during the first few months at [inaudible] Oklahoma Woodford. We continued to accumulate acreage in two other emerging plays in the Mid-Continent region and now have an aggregate position of over 30,000 net acres. At this time, we are not prepared to discuss all the details of the two plays. However, industry activity is picking up in both areas and I expect that we'll be able to discuss one or both in full detail at our first quarter conference call.

During the May IPO road show, we didn't mention our Trenton/Black River 3D seismic project that we've been working on for 2.5 years in Michigan. Our initial well in Michigan was an exploration success in September and we were cautiously optimistic about the significance of the play at that time. Now, after the results for second and third successful confirmation wells, we are confident in our 3D seismic interpretation techniques and have the President of our Eastern Division, Richard Straeter, with us today to discuss this play in further detail.

I'll turn the call over Richard Straeter for an update on our Trenton/Black River Project.

Richard H. Straeter - President, Illinois Division

Thank you, Harold. Good morning, ladies and gentlemen. As Harold mentioned, we have successfully completed three wells in the Trenton/Black River formation in Hillsdale County, Michigan. These wells are quite prolific and are capable of following well in excess of 100 barrels of oil per hour. McArthur, Anspaugh and Wessel wells were drilled to 4000 feet and are flowing at their state allowable testing rate for 310, 200 and 200 barrels of oil per day respectively. We have identified up to 10 additional locations and our permitting five wells in the area. This discovery extends the southern end of the Albion-Scipio and Stony Point fields, which produced a 190 million boe. Continental drilled three consecutive, very successful wells in this site-specific play. We attribute this success to technology and our ability to properly process and interpret this 3D seismic. To date, we have shot 3D seismic on 2 of our 12 prospect areas or 4300 net acres of our 30,000-plus net acre posi! tion. Obviously, this drilling success will drive our future plans in Michigan.

Now, I would like to turn the call over to Jack Stark to discuss our other operation highlights.

Jack Stark - Senior Vice President, Exploration

Okay. Thank you, Richard, and good morning, everyone. I'll begin by touching briefly on the Red River units, and as most of you know, presently half of the company's proved reserves and production come from these Red River units located in the southern portion of Williston Basin. Infield drilling and expansion of our facilities within these units continues on schedule and is expected to be completed by mid-year '09. Our proved reserve report as production from the Red River units peeking at approximately 19,000 barrels equivalent per day in 2009, with most of this growth occurring in the second half of '08 and early '09 due to response from additional infield injection. We currently have five rigs drilling in the units.

And on a side note, I might also mention that we will be moving a new rig into the Haley project in the next ten days. And for those of you who are not familiar with the Haley project, it's a horizontal Red River project located southeast of our units in the Harding County, South Dakota where we have approximately 60,000 net acres.

Next, I will discuss the Montana Bakken Field where 2007 proved to be a pivotal year for us. On… our 2007 drilling results demonstrated that 320-acre infield development of the field is warranted, and tri-laterals are effective in extending the limits of the field. And as a result, substantial drilling remains to be done in the field. You may recall, we drilled and completed two wells during the year to evaluate the economics of down spacing the field from the 640 to 320-acre spacing. These two wells have been online for approximately six months now. They have been assigned average reserves of 468,000 gross barrels of oil, exceeding our economic model of 300,000 gross barrels per well. So given these results, development of the field on 320-acre spacing is underway. We currently have one well drilling and one well waiting on completion and have identified over 60 other potential infield drilling locations.

During the year, we also drilled and completed eight 640-acre tri-lateral wells that test the use of this technique to expand the economics and limits of the field. These eight wells have been assigned average estimated recoverable reserves of 245,000 gross barrels equivalent, which is right on track with our economic model of 250,000 barrels gross per well. Given these results, we will continue to drill strategically located tri-lateral step-outs to expand the field limits as warranted onto our 60,000 net undeveloped acres located north of the field. We plan to keep two to three rigs active in the field during 2008, which is quite significant given that a year ago it was conceivable that drilling in the field could have been completed by year-end 2007.

Next, we'll talk about our North Dakota project. And we are the largest single owner of acreage in the North Dakota Bakken play with approximately 325,000 net acres under lease and over 800 potential locations. We've been pleased with our drilling results in the central and northern portions of our acreage located along the Nesson Anticline, and in these areas we completed 27 Bakken shale wells during 2007, which have been assigned average estimated recoverable reserves of 335,000 gross barrels equivalent per well, exceeding our economic limit of 315,000 gross barrels equivalent per well. These wells include a mixture of 1280 and 640-acre dual-leg and single lateral wells that have been completed open hole and more recently completed using uncemented liners and mechanically-dewatered fracs. As most of you probably are aware, wells completed using these mechanically- dewatered fracs appear to be delivering better results. A good example is our McGinnity 1-15, which is 1280-a! cre well that was single lateral that was drilled recently here, and it was completed flowing at an average 7-day initial rate of 580 barrels of oil equivalent per day, which is the best completion we have had in the northern most portion of our acreage to date. We will be increasing the pace of our development of the northern and central areas in the first half of '08 by adding three to five rigs, bringing our rig count in North Dakota to nine and possibly 11 rigs by mid-year including three operated by ConocoPhillips under AMI.

We plan to continue to use mechanically-dewatered fractures on our operated wells and expect a majority of our non-operated wells will also be completed this way, given that most of the operators are embracing this technique.

In our southern most acreage position, we recently participated in the completion of the Basaraba 44X-27, which flowed at a 7-day average initial rate of 463 barrels of oil equivalent per day from an unstimulated 1280-acre tri-lateral well bore. This is best [ph] completion in our southern block to date and is very encouraging. Of significance, this well was selected based on [inaudible] analysis of 3D seismic, which with further confirmation may provide a method to select higher potential locations in this area. We are currently reprocessing and evaluating approximately 108 square miles of data in the immediate area and are contemplating additional 3D seismic acquisition during the year.

Of added significance for the entire North Dakota Bakken play is the emerging potential of the Three Forks-Sanish formation found immediately below the lower Bakken Shale. The thought is that the Three Forks-Sanish may prove to be a separate reservoir adding significant reserves to the North Dakota Bakken play. We’ve been encouraged by the recent Three Forks-Sanish completion [inaudible] find it interesting that the well with the highest cumulative production to date to Petro-Hunt USA, 2D, 3-1H, which has cumulative production of over 350,000 barrels with a Three Forks-Sanish completion on the Nesson Anticline. We plan to spud our first Three Forks-Sanish test in the next 30 days to begin our evaluation and we'll be participating in two non-operated Three Forks-Sanish tests schedule for late first quarter and second quarters.

And as a closing comment, regarding the North Dakota Bakken, our crude oil prices remained strong. We expect to seek an increase in our North Dakota drilling and leasing budget for 2008.

I'm moving on to the Oklahoma Woodford play. Our drilling activity in the play increased significantly in 2007. For the year, we drilled and participated in the completion of a 110 gross and 15 net wells. In our Salt Creek area, which is the 6 North 10 East area, production rates have been less than anticipated and less than the wells drilled in our Ashland area to the South. During the second half of the year, we focused much of our Woodford Shale drilling in the Salt Creek area to cover leases that would have otherwise expired. In 2008, we plan to monitor production in the Salt Creek area, while we acquire 18 square miles of 3D data to further evaluate the area. Seismic permitting is underway and we expect that acquisition and processing should be completed in the second quarter.

Now, outside of the Salt Creek area we recently completed four strategic wells including the Wilson 2-14, the Tucker 2-26, the Kimberley 1-11 and the Mary 1-6, which I felt were really worth mentioning here. The Wilson located in our Ashland project had an impressive seven-day average initial flow rate of 6.4 million a day and has produced approximately 300 million in its first 55 days. The Wilson is our first 320-acre increased density test and demonstrates the potential for down spacing in the play.

The Tucker and Kimberly wells had seven-day average initial rates of 2.1 and 2.9 million cubic feet per day respectively. These two wells are particularly significant since they provide justification for extending the development of our… of the northern and western extents of our Ashland project. The Mary had a seven-day average initial rate of 1.7 million a day and is of significance because it was an exploratory test located in the center of our 12,000 net acres in our East McAlester project located in the 15 East and 16 East areas.

In 2008, we plan to focus our drilling primarily on the development and step-out opportunities in the Ashland area. As part of our development plan, we are preparing to conduct a simul-frac of four wells currently being drilled on a 160-acre spacing within the Ashland project. The Ashland's simul-frac, as we call it, is designed to simultaneously fracture stimulate these four wells, which are drilled approximately 1,320 feet apart to better contain the stimulation, more effectively fracture the reservoir, and the improve flow rates and recoveries. We expect to complete the simul-frac in the second quarter. At this time, we're still using 3 Bcf as our economic model. Those of you who follow Newfield are aware that their most reserve estimates are 4.5 Bcf wells drilled along the laterals. We haven't seen enough production history to move our reserve numbers up to 4.5 Bcf at this time, but I will say that we've participated in 45 Newfield operated wells during the past year an! d all of Continental's operated wells have been drilled as long laterals where we were not limited by fault identified by seismic.

So with that, I will turn it back to Mark.

Mark E. Monroe - President and Chief Operating Officer

Thanks, Jack. That completes our remarks here today. And Nakeda, I think we will just open it up to questions at this time.

Question and Answer


[Operator Instructions]. And your first question comes from the line of Rony Eastman [ph] of JPMorgan. Please proceed, sir.

Unidentified Analyst - JPMorgan

Hi. Good morning, guys.

Mark E. Monroe - President and Chief Operating Officer

Good morning, Rony.

Unidentified Analyst - JPMorgan

I just had a couple of questions regarding costs. What are you seeing in terms of overall cost in each of your areas in drilling and completion?

Mark E. Monroe - President and Chief Operating Officer

I'll turn that over to Jeff Hume.

Jeff Hume - Senior Vice President, Operations

Yes, we are seeing in the cost a slight increase. Most of the services are fairly flat, but steel is on the rise right now and it is kind of in a flux, if you will, but we are seeing a slight increase in steel stimulation and drilling rigs are actually coming down slightly just due to more services and equipment being available. Competition is picking up in those areas. So overall, I'd say a slight increase in cost is what we should perceive for the rest of the year.

Harold G. Hamm - Chief Executive Officer

I think we saw kind of at the end of the year sort of some notice that steel prices were going up and then they seemed to hold off a little bit, but I guess at this point in time they are starting to pass it on. I guess we're continuing to see notes from the different suppliers and steel mills that the price is going to be coming up.

Unidentified Analyst - JPMorgan

Okay. And on specific wells, how much does it cost to [inaudible] complete the Basaraba and Bakken and the Mary well in the Woodford?

Jack Stark - Senior Vice President, Exploration

Rony, I think we may have to get back with you on that because we don't have the exact cost sitting in front of us.

Unidentified Analyst - JPMorgan


Jack Stark - Senior Vice President, Exploration

I think it would be in line with our sort of numbers that we've historically given of about 5… $4.75 million to $5 million for the North Dakota and Woodford Shale, but we'll be back to you on that.

Unidentified Analyst - JPMorgan

Okay, great. Thank you. That's all I had.


[Operator Instructions]. It appears there are no further questions at this time. I will now turn the call back over for closing remarks.

Harold G. Hamm - Chief Executive Officer

I guess sleepy crowd this morning or else we did a good job going through the material to begin with. I gave a presentation a couple of weeks ago in Naples and there were quite a bit... quite a few questions from the audience and I think at that time I wondered whether I'd given a very confusing presentation. This time I think maybe we answered the questions upfront.

I appreciate everybody's participation today. Just to remind you that the company will be presenting at the Raymond James Energy Conference in Orlando this next Monday, March 3, at 1:05 p.m. I look forward to seeing some of you out there, and appreciate you participating in today's call.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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