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Continental Resources: A Great Stock For Oil Bulls

Sarfaraz A. Khan profile picture
Sarfaraz A. Khan


  • Continental Resources will benefit from the increase in oil prices and improvement in Bakken oil’s differential to WTI.
  • Continental Resources posted less than 4% increase in oil and gas volumes in 9M-2017 but it has ramped up activity in the Bakken formation, which was evident from Q3-2017 results.
  • In 2018, the company will likely post more than 20% increase in total production as compared to 2017. This growth rate may be the strongest among large-cap E&Ps.
  • Continental Resources will likely swung to positive free cash flows in 2018 from negative free cash flows of $97M in 9M-2017.

If you’re bullish on oil, then Continental Resources (NYSE:CLR) is the stock for you. I believe the company will likely significantly grow its earnings in 2018 due to higher realized prices and around 20% production growth. Meanwhile the company, which burned cash flows in 2017, will likely report strong levels of free cash flows in 2018. That should fuel its stock’s outperformance.

Image courtesy of Pixabay.

The oil prices have improved substantially since the start of Q4-2017. The price of the US benchmark WTI crude has gained 20% since then to more than $60 a barrel – its highest level in 2.5 years. The strength has been driven in large part by the efforts of Organization of the Petroleum Exporting Countries and its allies, including Russia, who have agreed to extend their production freeze agreement through entire 2018. The decline in inventory levels in OECD nations, including the US where commercial crude oil stocks have fallen by 20% from the historic highs seen in March 2016, has also helped push oil prices higher.

At the same time, the Bakken-focused oil producers, such as Continental Resources, have benefited from the improvement in regional prices. In a recent presentation, Continental Resources said that the Bakken oil’s differential to WTI gradually shrunk from -$8.26 a barrel in 2016 to -$5.54 a barrel in Q3-2017. I believe this is largely driven by the deployment of additional takeaway capacity in the region, particularly the 470,000 barrels per day Dakota Access Pipeline which came online earlier this year and has gradually ramped up. Continental Resources has said that this differential will drop to -$4.98 per barrel in Q4-2017 and will head lower in 2018. That should lift the company’s realized prices.

Remember, Continental Resources has no hedges in place. This means that unlike some of its peers, such as

This article was written by

Sarfaraz A. Khan profile picture
Hey there, I'm Sarfaraz A. Khan - a seasoned financial writer and investor with a passion for uncovering hidden gems. I have a deep understanding of fundamental analysis and I specialize in writing about mid-cap and small-cap companies that are poised for significant growth. My investment philosophy is heavily influenced by the strategies of legendary investors like Warren Buffett and Benjamin Graham. I look for investment opportunities in companies that have strong fundamentals and can grow substantially over the long-term. I'm not afraid to venture into other areas of the market either. While I primarily write about mid and small-cap stocks, I also delve into ETFs and economic trends occasionally. I always aim to provide a balanced view and discuss risk factors in my articles so investors can make better decisions. Although I've been away from Seeking Alpha for a while, I'm excited to get back to writing and sharing my expertise with the community. Moving forward, you can expect to see two to three articles a week from me. When I'm not analyzing stocks or writing about finance, I enjoy reading about history, religion, science, economy, and following the latest developments in the energy and technology sectors.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (10)

I've been analyzing oil producers from a technical perspective, looking at 6 month to 10 year perspectives. CLR is great at holding a trend and going up and down faster than other companies. I am deciding between March versus LEAP calls.
1Horse profile picture
Is there a scenario where these guys make say, a $2 Bn free cash flow to equity ( a 10% cf yield)? Or is this company going to ride oil all the way up and then down having not cumulatively produced much in the way of free cash flow to equity?
I guess, the real question on this shale business model is - can they hold production flat and pay equity holders at some point? Or is capx going to always suck up all the cash flow - even to just run in place?
1Horse profile picture
So - they produce their DUCs for a few months and generate a small amount of fcf. Then what?
Service costs are inflating double digits and they need to keep up huge capx just to stay flat. So new drilling outside of the sweet spots with increasing drilling costs - not a good recipe.
And we do know that oil is cyclical. If they cant produce prodigious cash flows with oil at $65-70, when are they going to do so?
Pretty standard profile in this article. Couple question areas I have on the company:

1. What is the outlook for their Bakken production? They did a huge amount of DUCs (eschewed a lot of completions). Now they are aggressively completing them. But how many until this is done? And how are they doing at getting more than normal frack crews (more than just covering their drilling)--I hear having difficulties getting enough services. Also, their wells seem a lot better lately, but how much of that is high grading. [Not negative or positive, just a lot of questions.]

2. What is up with the STACK? At first they were great about showing all the wells and their % gas versus time. But they have stopped sharing that. MAkes me think oil decline is a problem more than they thought. Don't know, but worry. These guys tend to share good information and not the opposite. And it isn't confidentiality as they were sharing the info initially.
Sarfaraz A. Khan profile picture
21793061, thanks for the comment.
Bakken will drive the production growth. DUCs will likely drop to normalized levels in 2018. Management has hinted that this could be around 60s, down from 2017 exit rate of 150.
Good question on STACK. I think its not as oily as they initially thought. Also, CLR seems to have recognized that Bakken will drive the crude oil growth in the foreseeable future while STACK oil won't (can't?) play a meaningful role.
Thanks. Good response on DUCs. Hope I did not come off as expecting all the answers from you. Just sharing my question areas.

I guess one more area to watch is OK Springer completions, which are oily. Not sure what price is needed to ramp those up. I personally think 60s won't last through the year, but we could be in upper 50s for a couple years.

It is interesting, perhaps not even by exact design, how they have some optionality to shift between OK gassy and Bakken oily.

It will be interesting to hear their 2018 strategy.

It's years out, but I could see DAPL and other pipes from Bakken getting too full soon (Bakken nears records even now) and then train differentials slowing ND growth again. May sur need for Keystone. Although major issues remain with NE as the "approval" shifted the route from what had been planned/negotiated for years.
Trading Alpha profile picture
Great company and energy pioneer but the market has already substantially brought it back into favor.The stock is already up 200% from its lows and is at 68% of its 2014 high water mark of $80. I'm playing the more leveraged E&P companies that are less than 10% of their last high water mark. LGCY and NOG for example
TopDoggie profile picture
I am with you trading. If oil keeps climbing a lot of companies will triple, quad or more. Mean while this is 50 to a 100%. Big difference in returns if you're a bull. On the flip side if oil stays range bound this has a little more safety.
Harold Hamm, no hedges, and over $60/WTI... = MASSIVE PROFITS. CLR should double in stock price to $100/share.
Calculus profile picture
they're alive and politically connected...2 not so minor things indeed. think I'd wait for some stability in production and management. first but truly one of the great success stories in the energy patch.
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