Energy Prospectus

Dan, a few days ago you made the following comment:
If you are bullish on oil prices, Continental Resources (CLR) should be a "Core Holding" for you. None of CLR's oil is hedged after May 2021, so it is set up for a RECORD Q3 2021 with operating cash flow that could top $1Billion for the quarter.

As you update forecasts using $65, $70 and $75 per barrel oil, which you consider conservative for this year and next, it would seem an overweight position in Continental would be warranted given that so many of the other Sweet 16 are hedged.

From what I understand of the inelastic demand for oil, and the rate that inventories are falling, a middle of the road estimate for oil next year of $80 to $90 seems reasonable. I understand the need to use conservative prices for estimates, totally necessary, however, treating hedged and unhedged Sweet 16 companies equally in this structural oil deficit also seems risky from an investment perspective.

Thoughts?

I agree with your comments and recently established a position in CLR

Before I saw your post, I updated my forecast/valuation model for CLR, one of the "Elite Eight" in the Sweet 16. I have followed and modeled CLR for over a decade, so I have a HIGH level of confidence in my model for this one.

CLR closed at $38.03 on June 30. I have increased by valuation by $3 to $51/share. Note that this is my "CURRENT" valuation. If WTI stays over $70/bbl, a reasonable 12-month price target is $65.

CLR's revenues are heavily weighted to oil, but they do produce over 900,000 Mcfepd of natural gas and NGLs, which they report on a combined basis. Thanks to the surge in propane prices, CLR's realized gas price in Q1 2021 was $5.68/mcfe.

To your question about what oil prices are appropriate for 2022 forecasting. Do this: Download my updated forecast model to Excel on your computer. Then you can put whatever oil & gas prices you think are reasonable for 2022 into the bottom of the model and the spreadsheet will automatically update revenues, net income, operating cash flow and the stock valuation. Keep in mind that differential in North Dakota are high, so take $5/bbl off.

I highly recommend that all EPG Members learn how to use the Excel forecast/valuation models housed on the EPG website. They are a valuable tool and quite easy to use if you have a basic understanding of Excel. They are all "macro driven", which means that they update automatically when you change any of the production or commodity price assumptions at the bottom.

All of my forecast/valuation models are based on what I believe to be reasonable oil, gas and NGL price assumptions, BUT we are now in "Post-Pandemic World" and oil prices could definitely go a lot higher in the near-future. I spoke on a webinar this afternoon and I presented the case for $100/bbl WTI before year-end. Unless we have "Covid-21", I see nothing that should bring down oil prices and a lot that can push it higher. For example, the situation with Iran can go from bad to worse quickly. IMO Biden's negotiators are idiots and if they do give Iran a clear path to weapons grade uranium Israel will have no choice but to attack Iran. There should be a lot more geopolitical risk to our oil supply than people realize.

In April CLR told me this: "This year we see $3.1 Billion Projected Full-Year 2021 Cash Flow from Operations & $1.7 Billion Projected Full-Year 2021 Free Cash Flow at $60 WTI & $2.75 HH gas." Based on my updated forecast based on $70 WTI in Q3 and $75 WTI in Q4 + realized gas prices $3.30 and $3.50, CLR should generate $3.6 Billion of cash flow from operations and $2.2 Billion of FCF this year. Plus, I expect them to raise their full year production guidance when they release Q2 results. Harold Hamm will not let the opportunity to sell his oil into a high price market get missed.

Thanks Dan!

I've been playing with the forecast/valuation spreadsheets for a while now, and find them relatively easy to use. However, it was unclear to me how to update the oil and gas prices to properly take into account hedges or regional differentials.

Kevin

Thanks, Dan..propane hit 1.07 today.

I predict the energy companies get flamed for reporting big profits in q3 and q4

KG:
For CLR I use an oil price differential of $5/bbl to be safe. It probably will end up being closer to $3/bbl.
Note that for 2022 I am only assuming a 5,000 BOPD increase in oil production from Q4, which is probably very conservative considering that CLR does have lots of low-risk / high-return drilling inventory in North Dakota and Oklahoma.
Harold's goal is to get debt under $3 Billion. After that, I expect them to accelerate the drilling program.

CLR will provide detailed guidance when they release Q2 results. I expect them to increase their production guidance.

Good to know, Thanks Dan!