Value Line has initiated coverage of Continental Resources, Inc. (CLR) in its flagship product, The Value Line Investment Survey. The company, based in Oklahoma City, is focused on the exploration and production of onshore oil-prone plays and is a leading independent oil producer in the United States with roughly 750 employees. Its initial public offering was completed in 2007, and shares of CLR trade on the New York Stock Exchange.
Continental Resources was originally formed in 1967 to explore for, develop, and produce crude oil and natural gas properties. Before 1989, its activities and growth remained focused primarily in Oklahoma. However, recognizing opportunity elsewhere, it expanded activities into the North region (consists of properties north of Kansas and west of the Mississippi River and includes North Dakota Bakken, Montana Bakken and the Red River units). It currently has properties in the North, South (includes Kansas and all properties south of Kansas and west of the Mississippi River including the South Central Oklahoma Oil Province (SCOOP), Northwest Cana, and Arkoma Woodford plays in Oklahoma), and East (comprised of undeveloped leasehold acreage east of the Mississippi River) regions.
Despite properties in many regions, operations are geographically concentrated in the North, with that area comprising about 77% of Continental’s crude oil and natural gas production and roughly 87% of its crude oil and natural gas revenues for the six months ended June 30, 2013. Overall, oil accounts for approximately 71% of the company’s total production and about 88% of its crude oil and natural gas revenues.
Continental’s main goal is to increase shareholder value by finding and developing crude oil and natural gas reserves at costs that provide an attractive rate of return on its investment. Even though it does pursue natural gas opportunities, such as those found in the SCOOP, the company believes the black gold will be more attractive for the foreseeable future. Consequently, a substantial portion of annual capital expenditures will be invested in drilling projects and acreage acquisitions. Along these lines, the company will target attractive undeveloped acreage at a relatively lower cost, rather than a more costly, but certain, developing play.
In the past, Continental has been successful in targeting large repeatable resource plays where horizontal drilling, advanced fracture stimulation, and enhanced recovery technologies allow it to economically develop and produce crude oil and natural gas reserves from unconventional formations. Indeed, the company has grown substantially through the drill bit, adding 649.0 million barrels of crude oil equivalent (Boe) and natural gas reserves through extensions and discoveries over the five-year period ending December, 2012, compared to 86.7 million Boe added through proved reserve acquisitions. Consequently, in October 2012, the company announced a new five-year growth plan to triple its production and proved reserves from year-end 2012 to year-end 2017. While early, the company has done a good job, and through the first six months of 2013, crude oil and natural gas production averaged 128,655 Boe per day, a 43% increase over average daily production of 90,189 Boe per day for the comparable 2012 period.
Due to the nature of the business, the price it receives for crude oil and natural gas production heavily influences the top line, profitability, access to capital, and future rate of growth. Thus, growth in revenues and operating income will primarily depend on commodity prices and Continental’s ability to increase its crude oil and natural gas production. In recent months and years, there has been significant volatility in crude oil and natural gas prices due to a variety of unpredictable factors, including political and economic events, weather conditions, and competition from other energy sources. Since unstable prices are expected in the future, investors should be aware of these fluctuations.
Altogether, the future financial condition and results of operations will depend on the success of Continental’s exploration, development, and production activities. That said, crude oil and natural gas exploration and production activities are subject to numerous risks beyond the company’s control, including the risk that drilling will not result in commercially viable crude oil or natural gas production.
For a more thorough look at Continental Resources, and the particular investment merits of its stock, subscribers should examine our full-page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.