Continental Resources (CLR) Upgrade by BofA - Aug 26
Posted: Thu Aug 26, 2021 1:49 pm
BofA Equity Research 8-26-2021
Raising CLR Price Target to $43 on improving capital efficiency
We believe the appropriate framework to define value for US E&Ps is inventory depth,
sustaining capital and the breakeven oil price. CLR has the asset depth, but continued
improvements in capital efficiency, of which management believes about 70% is structural
and is driving sustaining capital lower. At $1.3bn, CLR’s current view drops our est. of oil
breakeven to about $33/bbl; with a current FCF yield of 8% (2H21) and ongoing share
buybacks of above $600mm vs a free float of just 17.5%, we continue to believe CLR has the
structural support to close the gap with our revised PO, of $43 (from $38).
My valuation is $59/share. Higher natural gas and NGL prices will boost revenues above what BofA is forecasting. Keep in mind that CLR has a lot of undedicated natural gas, so they can take advantage of regional gas and NGL price spikes. For example their realized natural gas price (including NGLs) went from $2.21/mcfe in Q4 of 2020 to $5.68/mcfe in Q1 2021 thanks to Winter Storm Uri. - Dan
BofA's Full Report: Continental Resources (CLR): Reiterate Buy PO to $43
Jack Stark, President and COO
John Hart, SVP, CFO and Chief Strategy Officer
Pat Bent, SVP of Operations
Tony Barrett, VP of Exploration
We were very fortunate to be joined by a significant number of Continental Resources’
(CLR) management team. We continue to maintain a positive view on CLR given its
unhedged free cash flow outlook which provides it with greater optionality while it
works towards its $3bn debt target, which, by our estimates, may be achievable during
the first half of next year. Given this impressive free outlook as well as our more
constructive view on the oil macro, we reiterate our Buy rating on CLR. We also raise our
PO to $43 from $40 as we lower our estimate of sustaining capex in our ex-growth DCF;
expand FCF and present value. Highlights from our recent meeting with management
can be summarized as follows.
• Balance sheet. Even though the company has a 1x net debt to EBITDA ratio at
strip, it is still aiming to reduce absolute debt towards $3bn which primarily involves
taking out its 2023 and 2024 maturities.
• Return of capital to shareholders. Having reinstated its dividend earlier this year
in May and more recently raised it again during second quarter results by
approximately 36%, CLR continues to see that it still has a lot of optionality to
further improve return capital to shareholders while it works towards its $3bn debt
target. It recently reinstated it is share repurchase program and does not seem to
be too concerned about its free float (about 17.5%) potentially becoming too
limited, noting that it had a much more limited free float when it first went public in
2007.
• Maintenance and thoughts about growth. CLR continues to see maintenance
capex around $1.3bn. It could be lower than that for a few years if it wanted to.
However, at some point spending would have to pick up again. The most it would
expect to grow over the medium term is approximately in the mid-single digits.
• Inventory and exploration. CLR continues to improve upon its Bakken inventory
given its focus on driving down costs, its ability to optimally place the laterals and
its understanding of appropriate density. It sees approximately 70-80% of
improvements that it has made as structural and sustainable. It also continues to
see solid results out of Springboard projects in Oklahoma. As for exploration, while
the company cannot provide much color as of yet on what it may be looking at, it
remains a part of its DNA, and the company continues to look at opportunities that
look potentially compelling. We see this as saying “stay tuned.”
Raising CLR Price Target to $43 on improving capital efficiency
We believe the appropriate framework to define value for US E&Ps is inventory depth,
sustaining capital and the breakeven oil price. CLR has the asset depth, but continued
improvements in capital efficiency, of which management believes about 70% is structural
and is driving sustaining capital lower. At $1.3bn, CLR’s current view drops our est. of oil
breakeven to about $33/bbl; with a current FCF yield of 8% (2H21) and ongoing share
buybacks of above $600mm vs a free float of just 17.5%, we continue to believe CLR has the
structural support to close the gap with our revised PO, of $43 (from $38).
My valuation is $59/share. Higher natural gas and NGL prices will boost revenues above what BofA is forecasting. Keep in mind that CLR has a lot of undedicated natural gas, so they can take advantage of regional gas and NGL price spikes. For example their realized natural gas price (including NGLs) went from $2.21/mcfe in Q4 of 2020 to $5.68/mcfe in Q1 2021 thanks to Winter Storm Uri. - Dan
BofA's Full Report: Continental Resources (CLR): Reiterate Buy PO to $43
Jack Stark, President and COO
John Hart, SVP, CFO and Chief Strategy Officer
Pat Bent, SVP of Operations
Tony Barrett, VP of Exploration
We were very fortunate to be joined by a significant number of Continental Resources’
(CLR) management team. We continue to maintain a positive view on CLR given its
unhedged free cash flow outlook which provides it with greater optionality while it
works towards its $3bn debt target, which, by our estimates, may be achievable during
the first half of next year. Given this impressive free outlook as well as our more
constructive view on the oil macro, we reiterate our Buy rating on CLR. We also raise our
PO to $43 from $40 as we lower our estimate of sustaining capex in our ex-growth DCF;
expand FCF and present value. Highlights from our recent meeting with management
can be summarized as follows.
• Balance sheet. Even though the company has a 1x net debt to EBITDA ratio at
strip, it is still aiming to reduce absolute debt towards $3bn which primarily involves
taking out its 2023 and 2024 maturities.
• Return of capital to shareholders. Having reinstated its dividend earlier this year
in May and more recently raised it again during second quarter results by
approximately 36%, CLR continues to see that it still has a lot of optionality to
further improve return capital to shareholders while it works towards its $3bn debt
target. It recently reinstated it is share repurchase program and does not seem to
be too concerned about its free float (about 17.5%) potentially becoming too
limited, noting that it had a much more limited free float when it first went public in
2007.
• Maintenance and thoughts about growth. CLR continues to see maintenance
capex around $1.3bn. It could be lower than that for a few years if it wanted to.
However, at some point spending would have to pick up again. The most it would
expect to grow over the medium term is approximately in the mid-single digits.
• Inventory and exploration. CLR continues to improve upon its Bakken inventory
given its focus on driving down costs, its ability to optimally place the laterals and
its understanding of appropriate density. It sees approximately 70-80% of
improvements that it has made as structural and sustainable. It also continues to
see solid results out of Springboard projects in Oklahoma. As for exploration, while
the company cannot provide much color as of yet on what it may be looking at, it
remains a part of its DNA, and the company continues to look at opportunities that
look potentially compelling. We see this as saying “stay tuned.”