Continental Resources (CLR) Update - Jan 30

[dan_s]

From Wells Fargo Equity Research: Note that their price target of $64/share is based on much lower oil and gas prices than we have today.

Chesapeake (CHK) announced a deal to sell its Powder River Basin assets to CLR for $450mm in cash. Although, CLR has not formally commented on the deal, we believe there are some incremental positives for the stock. Overall, we see the transaction adding ~$2/sh to our NAV-based price target despite slightly higher gas mix for CHK's PRB assets compared to CLR. We believe the deal and upcoming initial results in the basin could open the door for more capital flexibility across assets. While peers are focusing on variable dividends and share repurchases, CLR is more limited in those options, not because of lower FCF generation, but given its float and ownership structure. Acquiring valuable asset at accretive prices and no stock dilution adds to the narrative, and thus, we reiterate our Overweight rating on the stock.

Key deal positives. We estimate the PRB assets had a PDP value of ~$565mm based on 19 mboe/d of production for 4Q21 (~45% oil) and our long-term commodity price outlook of $62/bbl WTI and $3.25/mcf gas. Thus, CLR is acquiring these assets for 'below' PDP, which is accretive to NAV and earnings. Furthermore, we expect the company to provide results from its initial wells in the basin (acreage acquired in 4Q20) with 4Q21earnings. Doubling down in the basin could indicate confidence in the asset. CHK's PRB position had an ~80% working interest and was ~90% held by production.

Key deal negatives. CLR had noted ~80% oil mix on its current PRB position, with initial production (IP) rates for top wells showing ~88% oil mix. As shown in Exhibits 2 & 3, although CHK wells seem to have similar absolute and relative production profiles (i.e., similar EUR and decline prole), they have an average 24-mo cumulative oil mix of ~60% compared to the legacy CLR position. We have adjusted our type curve assumptions for this lower oil mix. Incremental capital allocation to the newly acquired PRB assets could modestly lower the aggregate oil mix for the company.

Updating estimates. Our 2022 EBITDA / FCF / Capex estimates move to $4,990mm /$2,492mm / $2,131 vs. $4,866mm / $2,368mm / $2,131mm prior. As noted above, we are not changing our capital spending estimates at this time, given no formal guidance from CLR. We also note that our YE22 Net Debt/EBITDA moves to ~1.0x vs ~0.8x prior.