Continental Resources Expects 19% To 24% Exit Rate Growth In 2017

| About: Continental Resources, (CLR)
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Summary

Continental indicates that it expects to reach 250,000 BOEPD to 260,000 BOEPD exit rate production for 2017.

2017 average production is expected to be up slightly from 2016, with most of the growth occurring in the second half of the year.

A challenging and weather impacted Q4 2016 appears to have resulted in Continental's oil production and total production coming in below expectations, affecting the start to 2017 as well.

Continental could reach over 400,000 BOEPD in 2020 with $60 to $65 oil. I estimate that around 340,000 BOEPD may be the target with $55 oil instead.

Continental's oil breakeven point appears to be around $40 to $45 going forward as its base decline rate may increase a bit from current levels.

Continental Resources (NYSE:CLR) issued guidance for 2017 recently as well as providing an outlook on its potential growth from 2018 to 2020 and an update for its Q4 2016 production. It appears that I was a bit optimistic about its production growth for 2017 as Q4 2016's oil percentage and total production were lower than expected, leading to a slower start to 2017. Continental plans to ramp up activity during 2017, which will result in strong second half production growth, carrying over into 2018. It appears that 10% to 15% growth can be expected in future years with $55 oil, increasing to over 20% growth with $60 to $65 oil.

A Challenging Q4 2016

It appears that Continental had a challenging end to 2016 as it indicated that severe weather in North Dakota hampered production. As a result, its Q4 2016 production was approximately 210,000 BOEPD, compared to its implied Q4 2016 guidance midpoint of approximately 212,200 BOEPD. As well, Continental indicated that oil only made up approximately 55% of its Q4 2016, compared to expectations for 60+% oil production during the quarter.

The lower production and the lower oil percentage for Q4 2016 results in a spillover effect into 2017. For example, Continental previously indicated that its oil percentage would be over 60% in 2017, but now expects it to rise from 55% in Q4 2016 to 59% at 2017 year end.

2017 Guidance

Continental has released guidance for 2017, including the expectation for 220,000 BOEPD to 230,000 BOEPD average production during the year and a 250,000 BOEPD to 260,000 BOEPD exit rate, while being cash neutral at $55 WTI oil. This is lower than I had previously expected, partially because the oil percentage is starting the year at a lower level than Continental had mentioned before. The lower oil percentage translates into lower operational cash flow, which affects the amount available for capital expenditures when developing a cash neutral budget. As well, it appears that production growth is weighted towards the second half of the year, with production in the first half of the year barely above 2016's exit rate, while production in the second half of the year averages closer to 15% above 2016's exit rate.

At $55 WTI oil and $3.25 Henry Hub natural gas, Continental Resources is expected to generate around $2.892 billion in revenue, inclusive of slightly negative hedge value. This is based on 225,000 BOEPD average production during 2017, with a 56.5% oil split.

Units

Price Per Unit

Revenue ($ Million)

Oil (Barrels)

46,400,625

$48.00

$2,227

Natural Gas (MMBtu)

214,346,250

$3.10

$664

Net Service Operations

$10

Hedge Value

-$9

Total

$2,892

With a capital expenditure budget of $1.95 billion, Continental should be roughly cash flow neutral in this situation. The capital expenditures make up the majority of Continental's cash outlay since its operating costs are quite low at $3.75 per BOE.

$ Million

Operating Costs

$308

Production Tax

$202

Cash SG&A

$144

Cash Interest

$265

Capital Expenditures

$1,950

Cash Income Tax

$10

Total Expenditures

$2,879

Beyond 2017

Continental mentions that it expects a 2018 exit rate of around 290,000 BOEPD to 310,000 BOEPD with a cash neutral budget and $60 to $65 WTI oil. That oil price would also allow over 20% production growth year-over-year from 2018 to 2020, resulting in estimated production of 400,000+ BOEPD in 2020. As well, Continental expects oil production to become a larger proportion of production, reaching the 60% to 65% range in the next few years.

If oil averages around $55 instead, I estimate that Continental could deliver around 10% to 15% production growth per year while remaining cash neutral, which would result in around 340,000 BOEPD in production by 2020.

Conclusion

Continental's production guidance for 2017 was lower than I expected, partially due to lower production (both oil and total) exiting 2016. While its production growth should pick up in the second half of the year, Continental is around four or five months behind what I previously anticipated (it expects to reach 250,000 BOEPD production by late 2017, while I had thought that mid-2017 was possible). Continental should still be able to reach 400,000 BOEPD average production in 2020 at $60 to $65 oil between 2018 and 2020 though, and around 340,000 BOEPD average production in 2020 at $55 oil between 2018 and 2020.

A positive for Continental is that oil is expected to make up a larger proportion of its production going forward. This should keep its estimated breakeven point (the oil price required for Continental to maintain flat production growth) to around $40 to $45 going forward despite expectations for an increased base decline rate after its production growth in the second of 2017.

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Disclosure: I am/we are long CLR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.