Continental Resources, Inc. Q4 2007 Earnings Call Transcript

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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 QuarterFour 2007 Continental Resources, Inc. Earnings Conference Call. My nameis Nakeda, and I will be your coordinator for today. At this time, allparticipants are in listen-only mode. We will be facilitating aquestion-and-answer session towards the end of this conference.[Operator Instructions].

This conference call includes forward-looking information thatis subject to a number of risks and uncertainties, many of which arebeyond the company's control. All information other than historicalfacts included in this conference call, regarding the company'sstrategy, future operations, drilling plans, estimated reserves, futureproduction, estimated capital expenditures, projected costs, thepotential of drilling prospects, and other plans and objectives ofmanagement are forward-looking information.

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

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

Mark E. Monroe - President and Chief Operating Officer

Thank you, Nakeda. I want to welcome everyone to Continental'sfourth quarter and year-end 2007 conference call. Around the conferencetable today, we have Harold Hamm, Chairman and Chief Executive Officer;Jeff Hume, Senior Vice President of Operations; Jack Stark, Senior VicePresident of drilling; John Hart, Chief Financial Officer; RichardStraeter, 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, InvestorRelations.

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 veryexciting year for our company. Last year, we completed public offeringand celebrated four decades in this business. It's clear that 2007 wasa record year from both a financial and operational standpoint, eventhough [inaudible] tax charge for conversion to subchapter Ccorporation distorts quarterly and annual comparisons. Some additionalnoise was due to our decision to defer some crude oil sales in thefourth quarter due to exceptionally wide price differentials. Thoughthe decision was a difficult one, the fourth quarter is historically alower consumption month in the Rockies and we are selling those storedbarrels now at much higher prices during the first quarter of 2008.We’re looking forward to the exploration of our current fixed priceswap on 10,000 barrels of oil per day at 72.90, so that we can fullyrealize the impact of higher crude oil prices in future results. We’vea strong financial positi!on. We've seen no need to hedge oil and gas prices.

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

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

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

During the May IPO road show, we didn't mention ourTrenton/Black River 3D seismic project that we've been working on for2.5 years in Michigan. Our initial well in Michigan was an explorationsuccess in September and we were cautiously optimistic about thesignificance of the play at that time. Now, after the results forsecond and third successful confirmation wells, we are confident in our3D seismic interpretation techniques and have the President of ourEastern Division, Richard Straeter, with us today to discuss this playin 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. AsHarold mentioned, we have successfully completed three wells in theTrenton/Black River formation in Hillsdale County, Michigan. Thesewells are quite prolific and are capable of following well in excess of100 barrels of oil per hour. McArthur, Anspaugh and Wessel wells weredrilled to 4000 feet and are flowing at their state allowable testingrate for 310, 200 and 200 barrels of oil per day respectively. We haveidentified up to 10 additional locations and our permitting five wellsin the area. This discovery extends the southern end of theAlbion-Scipio and Stony Point fields, which produced a 190 million boe.Continental drilled three consecutive, very successful wells in thissite-specific play. We attribute this success to technology and ourability to properly process and interpret this 3D seismic. To date, wehave shot 3D seismic on 2 of our 12 prospect areas or 4300 net acres ofour 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'llbegin by touching briefly on the Red River units, and as most of youknow, presently half of the company's proved reserves and productioncome from these Red River units located in the southern portion ofWilliston Basin. Infield drilling and expansion of our facilitieswithin these units continues on schedule and is expected to becompleted by mid-year '09. Our proved reserve report as production fromthe Red River units peeking at approximately 19,000 barrels equivalentper day in 2009, with most of this growth occurring in the second halfof '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 bemoving a new rig into the Haley project in the next ten days. And forthose of you who are not familiar with the Haley project, it's ahorizontal Red River project located southeast of our units in theHarding County, South Dakota where we have approximately 60,000 netacres.

Next, I will discuss the Montana Bakken Field where 2007proved to be a pivotal year for us. On… our 2007 drilling resultsdemonstrated that 320-acre infield development of the field iswarranted, and tri-laterals are effective in extending the limits ofthe field. And as a result, substantial drilling remains to be done inthe field. You may recall, we drilled and completed two wells duringthe year to evaluate the economics of down spacing the field from the640 to 320-acre spacing. These two wells have been online forapproximately six months now. They have been assigned average reservesof 468,000 gross barrels of oil, exceeding our economic model of300,000 gross barrels per well. So given these results, development ofthe field on 320-acre spacing is underway. We currently have one welldrilling and one well waiting on completion and have identified over 60other potential infield drilling locations.

During the year, we also drilled and completed eight 640-acretri-lateral wells that test the use of this technique to expand theeconomics and limits of the field. These eight wells have been assignedaverage estimated recoverable reserves of 245,000 gross barrelsequivalent, which is right on track with our economic model of 250,000barrels gross per well. Given these results, we will continue to drillstrategically located tri-lateral step-outs to expand the field limitsas warranted onto our 60,000 net undeveloped acres located north of thefield. We plan to keep two to three rigs active in the field during2008, which is quite significant given that a year ago it wasconceivable that drilling in the field could have been completed byyear-end 2007.

Next, we'll talk about our North Dakota project. And we arethe largest single owner of acreage in the North Dakota Bakken playwith approximately 325,000 net acres under lease and over 800 potentiallocations. We've been pleased with our drilling results in the centraland northern portions of our acreage located along the NessonAnticline, and in these areas we completed 27 Bakken shale wells during2007, which have been assigned average estimated recoverable reservesof 335,000 gross barrels equivalent per well, exceeding our economiclimit of 315,000 gross barrels equivalent per well. These wells includea mixture of 1280 and 640-acre dual-leg and single lateral wells thathave been completed open hole and more recently completed usinguncemented liners and mechanically-dewatered fracs. As most of youprobably are aware, wells completed using these mechanically- dewateredfracs appear to be delivering better results. A good example is ourMcGinnity 1-15, which is 1280-a!cre well that was single lateral that was drilled recently here, and itwas completed flowing at an average 7-day initial rate of 580 barrelsof oil equivalent per day, which is the best completion we have had inthe northern most portion of our acreage to date. We will be increasingthe pace of our development of the northern and central areas in thefirst half of '08 by adding three to five rigs, bringing our rig countin North Dakota to nine and possibly 11 rigs by mid-year includingthree operated by ConocoPhillips under AMI.

We plan to continue to use mechanically-dewatered fractures onour operated wells and expect a majority of our non-operated wells willalso be completed this way, given that most of the operators areembracing this technique.

In our southern most acreage position, we recentlyparticipated in the completion of the Basaraba 44X-27, which flowed ata 7-day average initial rate of 463 barrels of oil equivalent per dayfrom an unstimulated 1280-acre tri-lateral well bore. This is best [ph]completion in our southern block to date and is very encouraging. Ofsignificance, this well was selected based on [inaudible] analysis of3D seismic, which with further confirmation may provide a method toselect higher potential locations in this area. We are currentlyreprocessing and evaluating approximately 108 square miles of data inthe immediate area and are contemplating additional 3D seismicacquisition during the year.

Of added significance for the entire North Dakota Bakken playis the emerging potential of the Three Forks-Sanish formation foundimmediately below the lower Bakken Shale. The thought is that the ThreeForks-Sanish may prove to be a separate reservoir adding significantreserves to the North Dakota Bakken play. We’ve been encouraged by therecent Three Forks-Sanish completion [inaudible] find it interestingthat the well with the highest cumulative production to date toPetro-Hunt USA, 2D, 3-1H, which has cumulative production of over350,000 barrels with a Three Forks-Sanish completion on the NessonAnticline. We plan to spud our first Three Forks-Sanish test in thenext 30 days to begin our evaluation and we'll be participating in twonon-operated Three Forks-Sanish tests schedule for late first quarterand second quarters.

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

I'm moving on to the Oklahoma Woodford play. Our drillingactivity in the play increased significantly in 2007. For the year, wedrilled and participated in the completion of a 110 gross and 15 netwells. In our Salt Creek area, which is the 6 North 10 East area,production rates have been less than anticipated and less than thewells drilled in our Ashland area to the South. During the second halfof the year, we focused much of our Woodford Shale drilling in the SaltCreek area to cover leases that would have otherwise expired. In 2008,we plan to monitor production in the Salt Creek area, while we acquire18 square miles of 3D data to further evaluate the area. Seismicpermitting is underway and we expect that acquisition and processingshould be completed in the second quarter.

Now, outside of the Salt Creek area we recently completed fourstrategic wells including the Wilson 2-14, the Tucker 2-26, theKimberley 1-11 and the Mary 1-6, which I felt were really worthmentioning here. The Wilson located in our Ashland project had animpressive seven-day average initial flow rate of 6.4 million a day andhas produced approximately 300 million in its first 55 days. The Wilsonis our first 320-acre increased density test and demonstrates thepotential for down spacing in the play.

The Tucker and Kimberly wells had seven-day average initialrates of 2.1 and 2.9 million cubic feet per day respectively. These twowells are particularly significant since they provide justification forextending the development of our… of the northern and western extentsof our Ashland project. The Mary had a seven-day average initial rateof 1.7 million a day and is of significance because it was anexploratory test located in the center of our 12,000 net acres in ourEast McAlester project located in the 15 East and 16 Eastareas.

In 2008, we plan to focus our drilling primarily on thedevelopment and step-out opportunities in the Ashland area. As part ofour development plan, we are preparing to conduct a simul-frac of fourwells currently being drilled on a 160-acre spacing within the Ashlandproject. The Ashland's simul-frac, as we call it, is designed tosimultaneously fracture stimulate these four wells, which are drilledapproximately 1,320 feet apart to better contain the stimulation, moreeffectively fracture the reservoir, and the improve flow rates andrecoveries. 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 ofyou who follow Newfield are aware that their most reserve estimates are4.5 Bcf wells drilled along the laterals. We haven't seen enoughproduction history to move our reserve numbers up to 4.5 Bcf at thistime, but I will say that we've participated in 45 Newfield operatedwells during the past year an!d all of Continental's operated wells have been drilled as longlaterals where we were not limited by fault identified byseismic.

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. AndNakeda, I think we will just open it up to questions at thistime.

Question and Answer


[Operator Instructions]. And your first question comes fromthe 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 youseeing in terms of overall cost in each of your areas in drilling andcompletion?

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 theservices are fairly flat, but steel is on the rise right now and it iskind of in a flux, if you will, but we are seeing a slight increase insteel stimulation and drilling rigs are actually coming down slightlyjust due to more services and equipment being available. Competition ispicking up in those areas. So overall, I'd say a slight increase incost 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 somenotice that steel prices were going up and then they seemed to hold offa little bit, but I guess at this point in time they are starting topass it on. I guess we're continuing to see notes from the differentsuppliers and steel mills that the price is going to be comingup.

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 theWoodford?

Jack Stark - Senior Vice President, Exploration

Rony, I think we may have to get back with you on that becausewe 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 thatwe've historically given of about 5… $4.75 million to $5 million forthe North Dakota and Woodford Shale, but we'll be back to you onthat.

Unidentified Analyst - JPMorgan

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


[Operator Instructions]. It appears there are no furtherquestions at this time. I will now turn the call back over for closingremarks.

Harold G. Hamm - Chief Executive Officer

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

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


Thank you for your participation in today's conference. Thisconcludes the presentation. You may now disconnect. Have a greatday.

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