Continental Resources (CLR) Q3 Results

[dan_s]

Highlights:
> $314.2 Million in GAAP Net Income, or $0.84 per Diluted Share
> $337.0 Million Adjusted Net Income, or $0.90 per Diluted Share (Non-GAAP) < This compares to my forecast of $273.1 Million Net Income, or $0.73/share.

> 296,900 Boepd Average Daily 3Q18 Production; Beats 3Q18 Guidance & Consensus < This compares to my forecast of 295,000 Boepd.
> 164,605 Bopd Average Daily 3Q18 Oil Production; up 5% over 2Q18 and up 17% over 3Q17 < This compares to my oil production forecast of 165,000 Boepd.
> Oil as Percent of Production Rising: Approximately 57% in September

Bakken: 167,643 Boepd Average Daily 3Q18 Production; up 23% over 3Q17
- Significant 4Q18 Ramp with up to 70 Gross Operated Wells to be Completed by YE18 (Compared to 42 Gross Operated Wells Completed in 3Q18)

STACK: 3 Meramec Units Flow at Combined Initial Rate of 74,260 Boepd (24-Hr. IP)
- 18 Wells in the Over-Pressured Window with 6 Equivalent 2-Mile Wells in Each Unit:
- Jalou Unit Avg. 24-Hour IP per Well: 2,470 Bopd and 10,587 Mcfpd (4,234 Boepd)
- Homsey Unit Avg. 24-Hr IP per Well: 2,071 Bopd and 8,701 Mcfpd (3,521 Boepd)
- Simba Unit Avg. 24-Hr IP per Well: 621 Bopd and 24,001 Mcfpd (4,622 Boepd)

SCOOP: Project SpringBoard Proceeding on Schedule with 14 Rigs Drilling
- 9 Springer Wells Begin Flow-Back

[dan_s]

CLR's Cash Flow gets a boost in October: $215 Million in Proceeds Received in October from Minerals Venture Closing

On October 23, 2018, the Company closed its strategic minerals agreement with Franco-Nevada. The Company received approximately $215 million in net proceeds at closing, which offset previously incurred Capex for acquired minerals. Moving forward, the minerals relationship will capitalize on the Company's land and exploration expertise and will focus predominantly on acquiring minerals under the Company's drill plan. To grow the minerals portfolio, Franco-Nevada has committed up to $300 million over the next three years, while the Company has committed up to $75 million (or 20% of the total investment) over the next three years, subject to achieving agreed upon development thresholds. With a carry structure in place, the Company will earn 25-50% of total revenue from the minerals venture, based on achieving certain predetermined targets.

[dan_s]

I have updated my forecast model for CLR and I am raising my valuation by $4 to $94.00/share.

A few observations:
> CLR reports natural gas and NGL production on a combined basis. SCOOP & STACK wells produce a lot of NGLs.
> On a combined basis, net of cash settlement on their ngas hedges that settled in Q3, CLR sold their "wet gas" for $3.77/mcfe. < This compares to $3.41/mcfe in Q2.
> Their realized crude oil price in Q3 was $65.78/bbl, compared to $63.35/bbl in Q4.
> Higher realized oil, gas and NGL prices plus slightly higher productions is the primary reason that CLR beat my forecast.
> CLR is now generating lots of FREE CASH FLOW FROM OPERATIONS that is being used to lower debt.
> CLR uses the Successful Efforts method of accounting, which is more conservative than the Full Cost method of accounting.

Dow Jones Wireservice: Continental Profit Rises, Helped by Stronger Oil Production
4:56 PM ET 10/29/18 | Dow Jones

By Patrick Thomas

Continental Resources Inc. (CLR) reported a rise in third-quarter profit and revenue as it benefited from gains in oil production.

The Oklahoma City-based petroleum and natural gas producer reported a profit of $314.2 million, or 84 cents a share, compared with $10.6 million, or 3 cents a share, a year ago.

The company reported adjusted earnings of 90 cents a share. Analysts polled by FactSet were expecting earnings of 82 cents a share on an adjusted basis.

Revenue rose to $1.28 billion from $726.7 million a year earlier. Analysts had expected revenue of $1.22 billion for the quarter.

Third-quarter production of barrels of oil equivalent increased 22% from a year earlier.

[jb2257]

That is a great report and should help the price of the stock if oil prices don't fall off the cliff. Thanks Dan.

[dan_s]

CLR's Q3 realized prices
> Natural gas + NGLs = $3.77/mcfe
> Crude oil = $65.78/bbl

My valuation of CLR is based on the following realized prices for 2019
> Natural gas + NGLs = $3.40
> Crude oil = $63.00/bbl
BTW at the oil & gas prices above, CLR should generate over $4 Billion of Cash Flow From Operations in 2019.

The CLR forecast/valuation model and all of the forecast models on the EPG spreadsheet are macro driven Excel spreadsheets. You can download the model to Excel and change the production and commodity price assumptions used in future periods to see how it impacts Revenues, EPS, CFPS and stock price valuations.

[ChuckGeb]

And they plan on completing 70 gross wells in Q4 vs 42 in Q3. Awesome.

[dan_s]

CLR is a "Screaming Buy" up to $70/share unless you believe WTI is going back to $50/bbl. I am expecting a lot of analysts to upgrade it after tomorrow's CC.

[jb2257]

With the stock trading at 49.46 this morning I hope the conference call will be positive. What a hated sector!

[dan_s]

Since none of CLR's oil is hedged it is somewhat logical that the share price moves up and down with the price of oil. However, I would need to take WTI under $50/bbl to justify today's share price. The company's operating results are fantastic.

Wall Street tends to forget each year that demand for oil is seasonal. September & October is the low point for demand as refiners slow down a bit for maintenance projects and the make adjustments to produce more winter grade gasoline and home heating oil. Refinery utilization rate should go up in November.

[dan_s]

I just listened to the replay of CLR's conference call.

There is SIGNIFICANT UPSIDE to my valuation of $94/share:
> I now think Q4 production will exceed what I used in the forecast
> I now think their 2018 exit rate will exceed 320,000 Boepd
> I now think the percentage of their production that is oil will be over 60% in 2019 + NGLs of 15% of production.
> If CLR announces production guidance of over 20% YOY growth in 2019, my valuation will jump over $100/share.

RISK is that oil prices pull back, but I think that risk is quite low. If WTI averages $65/bbl in 2019, CLR should generate over $4 Billion of cash flow from operations next year.

FREE CASH FLOW will continue to pay down debt until they get debt under $5 Billion, then I expect CLR to start paying dividends.

[ChuckGeb]

Continental is in a class with EOG. Entire 2017 Bakken drilling program paid out in third quarter of 2018. That leaves a bunch of excess cash. Quite a buy at today’s price!

[dan_s]

I worked at Hess Corp. for 18 years and we NEVER had an entire year's D&C capex program payout by Q3 of the next quarter. Our "hope" was that capex projects would payout in 3 to 4 years.
CLR is a "Screaming Buy" at today's share price.