CLR Update - May 5

[dan_s]

I will update my forecast/valuation model for Continental Resources late today. Below are notes from their conference call.

Management commented that while production was flat sequentially in Q1 and will be in Q2, volumes will ramp aggressively in 2H:18 as larger Bakken pads come online and as needle-moving infill projects in the STACK debut.
Oil production is also biased higher going forward as CLR is reallocating three rigs to the oily STACK from the gassier portion of the basin – in total 11 more gross oil wells are now planned, while four gross gas wells are taken off the books.
In total management feels very comfortable with both capex and production guidance for 2018 and reiterated its comfort with FY19 expectations of 15%-20% growth from a $2.5B-$2.8B budget, which is expected to generate FCF at a clip similar to the $1B expected in FY18.
The SCOOP’s Springboard project got a lot of attention on the call – further color beyond the press release states that the project will utilize five rigs to “mow the grass” across four rows of wells, with the rows being up to nine miles wide. Multi-well pads are expected to come online every 60 days. The Springer formation will be targeted first, where returns are currently pegged at 180% IRRs. This oil manufacturing play is expected to reduce drilling times 19 days per well and generate $1MM/well of savings.
Management notes it has another area in the SCOOP were it could employ a similarly sized additional project.
In the Bakken the last 164 wells drilled confirmed CLR 1.1 MMboe type curve, and management noted it sees upside to this figure. Returns are now pegged at 140% IRRs on the asset.
On the balance sheet front, management expects to continue to retire debt in an effort to get its absolute debt figure down to $5B.
Management noted that it is still working on asset sales and expects to have something to report soon.

None of CLR' oil is hedged, so of the Sweet 16 companies it has the most exposure to rising oil prices.

[dan_s]

My valuation will be going way up on CLR because of higher oil prices and OUTSTANDING well results.

Continental Resources Reports First Quarter 2018 Results

$233.9 Million in Net Income or $0.63 per Diluted Share
- $255.1 Million Adjusted Net Income or $0.68 per Diluted Share (Non-GAAP)

287,410 Boe per Day Avg. Production, up 34% over 1Q17, Midpoint of Guidance
- Oil Production up 37% over 1Q17
- Production Would Have Exceeded Guidance without 5,000 Boe per Day Weather Impact

$886 Million in Cash Flow from Operations
- $207 Million in Free Cash Flow (Non-GAAP) Used for Debt Reduction and Cash Build

45% Improvement in Corporate Crude Oil Differential from 1Q17

Bakken: Continues to Deliver Record Results
- Three of the Company's Top Five All-Time 30-Day Rate Bakken Wells Completed in 1Q18, Averaging 2,305 Boe per Day (80% Oil)
- 31 Operated Wells Completed Flowing at an Average 24-Hour IP of 2,079 Boe per Day

SCOOP: Project SpringBoard Announced; Springer Row Development Underway
- Four-Well Triple H Unit Flows at Combined 24-Hour IP of 6,065 Boe per Day (88% Oil)

SCOOP Woodford Oil: Updated Design Lowers Drilling Costs $1 Million per Well

STACK: Shifting Rigs to Accelerate Development of Oil and Liquids-Rich Assets

Project Wildcat: 400 MMcfd of Firm Transportation from SCOOP and STACK
- Provides Additional Access to New Premium Markets; First Flow Starting in June 2018

Fitch Assigned Investment Grade Rating on 04/30/18; S&P Upgrade on 02/12/18

[dan_s]

I have updated my forecast/valuation model for CLR. It will be posted to the EPG website late today.

CLR is one of the Elite Eight in our Sweet 16, but despite it's size it is one of the easiest companies to forecast. That's because they give detailed guidance and I have been modeling it for over ten year. They are a "Successful Efforts" company, which makes earnings per share forecasting a bit more difficult. However, my focus is (and your focus should be) on cash flow from operations. NONE OF CLR's OIL IS HEDGED.

Note that CLR does not break out NGL from natural gas. Therefore, the gas prices used in the forecast model might seem a bit high to you ($3.72/mcf actual in Q1).

My valuation increases by $7.00/share to $85.00/share. CLR closed on May 4 at $64.40. < If you believe the WTI oil price will stay over $65/bbl then this is one you should add to your portfolio.

My valuation is 10X operating CFPS. That is a rather low multiple for a company that has over a decade of low-risk high-rate drilling inventory and they have over 20% YOY production growth locked in. All of which is now funded entirely by cash flow from operations.
CLR is #1 in SCOOP/STACK where well results are every bit as good as they are in the best parts of the Permian Basin.

Based on my forecast, CLR will generate over $1.2 Billion of FREE CASH FLOW FROM OPERATIONS this year. They are using it to pay down debt. Once they get total debt below $5.0 Billion, I think they will announce a stock repurchase program. When that happens (probably within 12 months), then a more reasonable valuation would be 12X operating CFPS.

We will be publishing a detailed profile on CLR late this month.