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Continental Resources: Looks Cheap, But There Are Issues


  • Continental Resources sees production growth come to a halt despite an elevated capital spending budget, with a substantial portion of the budget geared to long-term production.
  • I like the current earnings power in relation to the low share price as leverage seems reasonable.
  • Recognising that earnings could easily be cut in half this year and capital allocation budgets are sub-optimal, Continental should forego further production growth and buy back shares.
  • Looking for a helping hand in the market? Members of Value In Corporate Events get exclusive ideas and guidance to navigate any climate. Get started today »

Continental Resources (NYSE:CLR) has seen its share price come under a great deal of pressure again, as investors fear the impact of the coronavirus on oil prices. Shares hit a high of $80 during the 2014 peak to fall to levels in the teens in 2016. A big recovery pushed shares up to $70 late 2018 again, yet amidst a corona-inspired sell-off, shares fell to just $15 last week.

With the company reporting its 2019 results, this is a perfect opportunity to gauge how the company is performing in a challenging environment. So let's look at these numbers to see how the company is positioned and what the prospects look like for the shares.

The Numbers

If you look at the headline numbers reported for 2019, you wonder why shares are off about 80% from their recent peak, little over a year ago. After all, Continental reported 2019 GAAP earnings of $775 million and adjusted earnings of $839 million, with both earnings metric surpassing $2 per share. With shares ending the trading week at $19, that suggests that something is at hand.

With both earnings metrics being quite close to each other and minor impairments and hedge results explaining the discrepancy, we do not really have to focus on the numbers and can safely assume an $800 million number is about accurate.

Total production was up 14% in 2019 to more than 340,000 barrels of oil-equivalent per day, with oil production up 18% to nearly 198,000 barrels. So with the business trading at a single-digit earnings multiple, what are investors so concerned about?

For starters are concerns about pricing as the company realised about $52 per barrel for its oil and about $1.80 per Mcf in natural gas last year. After all, WTI pricing comes in at $45 per barrel at the moment as natural

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This article was written by

The Value Investor profile picture

The Value Investor has a Master of Science with specialization in financial markets and a decade of experience tracking companies via catalytic company events.

As the leader of the investing group Value In Corporate Events they provide members with opportunities to capitalize on IPOs, mergers & acquisitions, earnings reports and changes in corporate capital allocation. Coverage includes 10 major events a month with an eye towards finding the best opportunities. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CLR over 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.

Might initiate modest position through shares or long-term calls.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (17)

hammy called dump and dump will cut snap benefits to help hammy maintain his billions
Shale is a scam - a latter-day Ponzi scheme. I hope Russia can break the back of this phony industry that hasn't turned a profit in over 10 years and that is predicated on borrowing money that will never be repaid.
Why are they increasing production in such a bad environment? Seems crazy. Harold Hamm may drive this thing to 0. You'd think he'd be somewhat conservative.
Derek Teed profile picture
"With full-year EBITDAX of $3.45 billion, that makes for a modest 1.5 times leverage ratio,"

If a shale company requires huge capex spending to maintain its revenues and EBITDAX, then using EBITDAX in a leverage ratio is totally deceptive. To maintain flat production the company will maybe have $400mm in EBITDAX and the leverage ratio will be 10x.
Stock price keeps plunging.

Need to reduce capex, pay down debt, buy stock.

Anything but the current 'Drill Baby Drill'.
Alfred L. Angelici profile picture
OPEC’s proposal to cut oil production by up to 1 million barrels a day would be enough to balance the oil market and lift prices to $60 a barrel, Leonid Fedun, vice-president of Russian oil producer Lukoil, told Reuters.
Alfred L. Angelici profile picture
“Conoravirus ... is a short-lived factor which is affecting oil prices ... There will be an OPEC (and non-OPEC) meeting, compensatory measures will be taken which will take the excess oil off the market and the oil price will rebound,” - Leonid Fedun, VP Lukoil
Alfred L. Angelici profile picture
Russia Balking at OPEC Production Cut Proposal

Amid internal and external economic uncertainties, Russia keeps a conservative budgeting policy and has its 2019 budget break even at an Urals price of $49.20 a barrel, the lowest breakeven price in over a decade, Alexandra Suslina, a budget specialist at the Economic Expert Group, told Bloomberg news on Thursday.


Probably worried by the effect of the sanctions on Russia and anemic economic growth, Russian President Vladimir Putin continues to keep a tight financial policy, Danske Bank strategist Vladimir Miklashevsky told Bloomberg.


However, since Feb 26th, the price of Ural’s oil has fallen below $49/brl And currently remains below $49/bro. oilprice.com/...

The hard fall in oil prices does not bode well for the Russia. In fact, for Russia, oil & natural gas sales, makes up as much as 40% of the country’s national budget revenues.

So while Russia may be playing hardball with OPEC’s desire for a production reduction of ~1.2 Million barrels per day, Russia is likely negotiating from a weak hand as they cannot survive sub-$49/brl oil for very long. IMO, Russia is simply holding out for A smaller share of the proposed production cut.
Alfred L. Angelici profile picture
Russia walked out of the OPEC+ negotiations that were seeking a greater reduction in oil output by ~1.2 BILLION barrels per day. ~500,000 barrels of that reduced production was earmarked for Russia.

Today Ural oil price has dropped to ~$44.50/brl.

It appears that Russia has decided that cheap oil will crush shale drillers in the US and reduce global competition (in Russia’s favor). Russia built up a large account surplus when the price of oil was higher and may now attempt to use this to crush competition.

Sound familiar? This is what Saudi Arabia attempt to do several years ago to great failure. Russia seems destined to repeat history trying it again. As a whole, Shale drillers have been the world’s low-cost producer of oil & gas. The well run share drillers will out last Russia and the Impending Russian economic collapse that will surely follow should Russia go this route.

In the meantime, CLR should focus on reducing DEBT (and in turn improving Cash Flow by eliminating debt service on the debt reduced).

The 10K shows CLR had Federal NOL carry forwards of $1.9 billion and State NOL carry forwards of $3.3 billion, with $2.3 billion being in the State of Oklahoma. Another $872 million in North Dakota. The discrepancy is likely the result of assets sales in other states over the years.

CLR deducts the bulk of its intangible drilling costs in the year incurred. It doesn’t pay Federal or State income taxes because, for income tax purposes, it posts losses every year.

This is not unusual in shale, most independents have substantial NOL carryforwards because to date they have spent way more $$ on D & C costs than they have returned to date.

The concern with earnings is whether DD & A is accurate. Unit cost depletion can be understated if well productivity is overstated. This is why earnings are not usually a good metric to use with upstream E & P.

In the end, most of these pure shale play companies are more or less a royalty trust. There are no new shale basins to be discovered. Well productivity is not improving. The companies are going to drill their remaining well locations and then begin winding down.
Alfred L. Angelici profile picture
When looking at your numbers, I think you are presenting a ‘worst case’ scenario. You are suggesting that crude prices will stay at $45/brl for the entire year. It may be over done already? Personally, I do not see the scenario you present here being the most probable situation. COVID-19 is not going to wipe out the human race; not even close to it based on currently reported data. The death rate appears to be 2%-4%. So while this virus is highly contagious and transmittable while a patient is still asymptomatic, the vast majority of people recover. And they will go back to work and be productive. How long until people go back to work? How long until the engines of business and trade return to normal? Seems to me that the second half of the year we will see a significant improvement in industry activity, trade and energy demand (prices up).
Alfred L. Angelici profile picture
While I agree with much of your overall assessment, I disagree that share buybacks are the best route. I believe that CLR should focus first on Debt Reduction. First it reduces leverage risk. Second it eliminates the debt burden (interest payments), thus freeing up cash for other purposes.
johnny..cage profile picture
Future WLL stay out of this or short next rise in oil. Should be very concerned Harold flew the coop onto the board. Bakken drills out tier 1 this year folks but impacts will be felt hard in 21.
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