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Edited Transcript of CLR earnings conference call or presentation 19-Feb-19 5:00pm GMT

Q4 2018 Continental Resources Inc Earnings Call

ENID Feb 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Continental Resources Inc earnings conference call or presentation Tuesday, February 19, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary E. Gould

Continental Resources, Inc. - SVP of Production & Resource Development

* Harold G. Hamm

Continental Resources, Inc. - Executive Chairman & CEO

* Jack H. Stark

Continental Resources, Inc. - President

* John D. Hart

Continental Resources, Inc. - Senior VP, CFO & Treasurer

* Patrick W. Bent

Continental Resources, Inc. - SVP of Drilling

* Rory R. Sabino

Continental Resources, Inc. - VP of IR

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Conference Call Participants

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* Andrew Elliot Venker

Morgan Stanley, Research Division - VP and Lead Analyst for the Mid-Cap Oil & Gas Exploration & Production

* Andrew Jay Lipke

Stephens Inc., Research Division - Exploration and Production Analyst

* Bradley Barrett Heffern

RBC Capital Markets, LLC, Research Division - Associate

* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst

* Derrick Lee Whitfield

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst

* Douglas George Blyth Leggate

BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research

* Jeanine Wai

Barclays Bank PLC, Research Division - Research Analyst

* John W. Aschenbeck

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Leo Paul Mariani

KeyBanc Capital Markets Inc., Research Division - Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Paul Benedict Sankey

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Robert S Morris

Citigroup Inc, Research Division - MD and Senior U.S. Oil and Gas Exploration and Production Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Continental Resources Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the call over to Rory Sabino, Vice President of Investor Relations. You may begin.

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Rory R. Sabino, Continental Resources, Inc. - VP of IR [2]

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Good morning, and thank you for joining us. I would like to welcome you to today's earnings call. We'll start today's call with remarks from Harold Hamm, Chairman and Chief Executive Officer; Jack Stark, President; and John Hart, Chief Financial Officer.

Also on the call and available for Q&A later will be Jeff Hume, Vice Chairman of Strategic Growth Initiatives; Pat Bent, Senior Vice President, Drilling; Gary Gould, Senior Vice President, Production and Resource Development; Steve Owen, Senior Vice President, Land; Ramiro Rangel, Senior Vice President, Marketing; Tony Barrett, Vice President, Exploration; Josh Baskett, Vice President, Oil and Gas Marketing; and Adam Longson, Director of Commodity Research.

Today's call will contain forward-looking statements that address projections, assumptions and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call.

Also this morning, we will refer to initial production levels for new wells, which, unless otherwise stated, are maximum 24-hour initial test rates. We will also reference rates of return, which, unless otherwise stated, are based on $55 per barrel WTI and $3 per Mcf natural gas. Finally, on the call, we will refer to certain non-GAAP financial measures. For a reconciliation of these measures to generally accepted accounting principles, please refer to the updated investor presentation that has been posted on the company's website at www.clr.com.

With that, I will turn the call over to Mr. Hamm. Harold?

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [3]

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Thank you, Rory, and good morning, everyone. Thank you for joining Continental's Full Year 2018 and Fourth Quarter 2018 Earnings Call.

For many of you who have followed our progress for the past 11 years, you may grow weary of our consistently over-delivering on our guidance. Thanks to our operations team, 2018 was no different. So at the risk of driving you over the edge, let me, once again, cover a few of 2018's highlights.

We promised you a breakout year, and it truly was. First, financially, we delivered approximately $1 billion of net income, a net reduction of over $820 million, to achieve our net debt target of $5.5 billion in 2018. Over the past 2.5 years, we have paid off almost $1.5 billion in debt from our peak debt levels and have decreased our quarterly interest expense significantly, creating additional shareholder value. We also increased our year-end proved reserve by 14% over the last year.

Second was our tremendous production growth and ever-improving operational efficiencies as we progressed to full field-wide development. We promised a new wave of oil growth, and 14% sequential oil growth quarter-over-quarter best demonstrates this happening. This growth was driven by over 12% of oil growth in the Bakken and exceptional well results from our Project SpringBoard and STACK, all resulting in record production from our oil-weighted production mix, providing for 23% year-over-year production growth.

Our teams accomplished this feat while delivering an industry-leading operational cost of $3.59 per BOE as compared to our oil-weighted production peers and enviable cost efficiency development. Even when considering some of the harshest operating conditions, all horizontal, deep, high-pressure and extremely cold during these winter months, my hat is off to our operating teams, and great job by all. Thank you.

Lastly, our creative and ingenuity has been engaged all year, every year, to enhance shareholder returns. This was accomplished this year through a new innovative mineral royalty relationship with Franco-Nevada, which holds significant future growth potential as production increases from our SCOOP and STACK regions as we maximize value from these large resource plays, now primarily HBP. Although this arrangement started from a smaller entity, we expect this to germinate into a multibillion-dollar enterprise ultimately.

Our vision forward gives us great confidence in continuing our upward projection for 2019 and the 5 years ahead as we move from the 325,000 BOE per day production level. Our oil-weighted production in the Bakken will drive our production rates higher just as the SpringBoard project adds significant oil production here in Oklahoma's SCOOP play.

At Continental, we have the internal sophistication to provide meaningful long-term growth plans. We provided our first 5-year plan in 2019 (sic) [2009] with plans then to triple production, and we accomplished it in just 3.5 years. In 2012, we projected another 5-year plan to again triple production and accomplished that even while doing HBP acreage.

Our major plays are now primarily held and in the full-field development stage. Our vision is even clearer as to growing future production and generating free cash flow and shareholder returns as a result for doing this 5-year vision beginning in 2019. Our vision over the next 5 years is to deliver a unique combination of several billion of free cash flow generation while simultaneously nearly doubling our 2018 production from our much larger current production base. We plan to deliver significant and sustainable value to our shareholders, driven by our strong free cash flow generation. We're the most well-aligned company with shareholders and are strongly focused on value creation.

Since much of our business depends on world events, let's discuss the market macro a little bit. Last quarter, we talked about the onetime event of the unexpected Iranian crude oil purchase waivers causing a precipitous oversupply-induced price collapse in crude last fall. Don't expect to see another one of those as the 6-month window lapses. Apparently, there was a historic precedent to grant the onetime waivers to those purchasers. With the waiver grant, an oversupply situation of approximately 1 million barrels of oil per day was created. That oversupply wedge took 4.5 months to build up and will take about an equal amount of time to dissipate it. We're now in the fifth month following the grant decision, and measures to correct oversupply are in place and world prices have begun to stabilize and correct. Continental is well positioned to benefit and participate as higher prices are once again returning to the market.

Our 2019 budget reflects our fiscal discipline as we gauge rebalancing of world supply. As always, we will remain flexible and nimble as we view opportunities for value creation and future growth during this period of global rebalancing for many supply centers such as Venezuela, who has currently lost market share due to political in-fighting there and may have longer-term marketing disadvantage as U.S. shale producers produce light sweet crude that disrupts and displaces the heavy bitumen producers worldwide.

Deregulation and growing infrastructure in America are placing the U.S. substream in a new and unique position to supply global markets. Globalization of the U.S. supply is fast-occurring in the marketplace. Both crude oil and natural gas infrastructure are being planned and construction in the U.S., which will diminish and eliminate market differentials between Brent and U.S. crudes as the domestic marketplace become focused on the Gulf Coast region for waterborne [neat] barrels and LNG. Approximately $55 billion of new infrastructure is being invested in the Corpus Christi shipping area alone. Continental has been supportive and instrumental in moving our product to the Gulf and have sent needed Bakken oil to [further] serve in the Asian and [ASEAN] markets.

Access to global markets of our production is a primary focus of Continental's marketing strategy to normalize the differential between Brent and WTI. And again, I salute our marketing professionals here at the company who have positioned Continental so well [with new] infrastructure is built out for those who supply world markets. We have established and secured additional firm transportation to the Gulf Coast regions, and it is nice to be selling the top-notch barrels in the Gulf Coast and realizing WTI-NYMEX minus $2 range at the wellhead in North Dakota.

Thank you, and I'll turn the call over to Jack Stark.

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Jack H. Stark, Continental Resources, Inc. - President [4]

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Thank you, Harold, and good morning, everyone. Appreciate you joining us on our call. As Harold pointed out, 2018 was an exceptional year for Continental on many fronts as we delivered top-tier cash-flow-positive growth and a 14% return on capital employed.

We called it our breakout year as it marked the beginning of a new era of sustained cash-flow-positive growth for Continental as we began to develop the deep inventory accumulated from years of grassroots exploration. Over 95% of our drilling activity is now focused on multizone unit development. Most importantly, with over 75% of our net reservoir acres held by production, we have the flexibility to adjust our pace of growth and development to sustain corporate returns and accommodate the prevailing commodity environment. This is an ideal position to be in to participate and grow value in today's new global oil market. Today, I will provide some operating highlights from the full year and fourth quarter '18, followed by our plans for 2019 and our 5-year vision.

Company-wide, our 2018 production was up 23% year-over-year. Oil production was up 21% year-over-year and grew rapidly late in the year as fourth quarter oil production was up an impressive 14% over the third quarter 2018, reflecting our shift to oil-weighted drilling earlier in the year.

In the Bakken, our production grew 26% year-over-year and 10% over the third quarter. Continental continues to be the largest oil producer in the Bakken by a wide margin, operating approximately 14% of the Bakken production in North Dakota as of October 2018. Throughout the year, our optimized completions delivered record company results and outstanding capital efficiency. As proof, our 2017 drilling program has already paid out, and our 2018 drilling program is 60% paid out at this time. Results in the fourth quarter continued to impress as we completed 52 operated Bakken wells that flowed at an average initial rate of 2,800 BOE per day per well and approximately 80% was oil. Four of these new wells were added to the top 10 list of Bakken producers for the company based on their initial 30-day rates.

In Oklahoma, our development activities in SCOOP and STACK were in full swing in 2018. Combined, these assets grew production 24% year-over-year. Of note, fourth quarter oil production in SCOOP grew 47% over the fourth quarter of 2017 as production from our SpringBoard project began to grow. We turned 22 Springer wells to production in SpringBoard during 2018, most of which came on in the fourth quarter. Combined, these 22 Springer wells have produced, on a gross basis, around 2.3 million BOE and are currently flowing approximately 13,300 gross BOE per day, with 81% of the production being oil. The project is moving along on schedule, with 18 Springer and 27 Woodford and Sycamore wells currently waiting on completion. As previously guided, SpringBoard is on track to grow company third quarter 2018 oil volumes by 10% or approximately 16,500 barrels of oil per day by the end of the third quarter of 2019. Slide 12 in the deck shows SpringBoard is on track, with fourth quarter production averaging 5,260 BOE per day. In STACK, we achieved strong -- that is barrels of oil, excuse me.

In STACK, we achieved strong repeatable results during the year from our unit development activities in the overpressured oil and condensate windows. In the fourth quarter, we successfully developed another condensate unit in STACK called the Boden unit. The Boden unit included 3 wells targeting a single Meramec interval. The Boden was flowed at an average per well rate of 4,700 BOE per day and 1,200 barrels of oil -- were oil -- barrels were oil. These Boden wells are strong producers, outperforming the parent type curve by approximately 40% in the first 60 days. This is the fourth unit we've completed during the second half of 2018 utilizing the unit development model we introduced last year. These 4 units are meeting and exceeding our expectations and provide the templates for the 65 operated units that remain to be drilled in the overpressured oil and condensate window. Including the Boden wells, a total of 19 wells were completed in STACK during the fourth quarter, flowing at an average initial rate of 3,645 BOE per day per well.

In addition to the outstanding performance from our assets, our teams continued to drive down costs through added operating efficiencies. In the Bakken, our completions teams have demonstrated that 45-stage limited entry completions deliver similar results to our standard 60-stage completion. By treating the same number of perforations with fewer stages, we save approximately $200,000 per well, reducing the Bakken well cost to $8.2 million per well.

In SCOOP and STACK, our drilling teams are working on additional efficiencies in our Woodford, Sycamore and Meramec programs that could save up to $650,000 per well. These savings are not included in our 2019 budget, but represent significant potential upside during the year as these become standard operating procedure. For example, in our SCOOP, Woodford and Sycamore programs efficiencies gained in the second half of 2018 are translating to an incremental savings of $500,000 per well. This is on top of the $1 million of savings we announced earlier last year utilizing our new wellbore design. In STACK, our teams are ready to test a new wellbore design and could reduce the cost per well by up to $650,000 per well. We'll keep you posted.

Now let's move on to 2019. As we announced last week, our budget for 2019 is set at $2.6 billion. This is down approximately 9% from our 2018 non-acquisition CapEx. Our priority in preparing our 2019 budget was to ensure we generated adequate free cash flow to continue to reduce debt, targeting $5 billion in net debt by year-end 2019. At $55 WTI and $3 gas, we expect to generate approximately $500 million to $600 million in free cash flow and 9% to 12% annual return on capital employed from our 2019 activities. Our production growth will be oil-weighted, with oil production growing 13% to 19% and gas production growing 1% to 4% year-over-year.

Approximately $2.2 billion or 85% of the budget is allocated to drilling and completing an estimated 257 net wells during 2019. The capital expenditures are essentially split 50-50 between Bakken and our Oklahoma assets in SCOOP and STACK. We plan to operate an average of 25 rigs during 2019, down from 31 rigs at year-end 2018. Six of the rigs will be focused in the Bakken and 19 in Oklahoma, with 12 of the 19 focused on our SpringBoard project. Details are provided on Slide 16 in our deck.

As we look to the next 5 years, we do so with confidence that we can continue to deliver strong returns and top-tier production growth, thanks to the quality of our assets and efficiencies of our operations. Over the next 5 years, we are targeting production growth at an average annual compounded rate of 12.5%, while targeting average annual free cash flow in excess of $500 million.

Now I want to point out the words in excess, which we inadvertently left out of the press release last night. To clarify, we are expecting average annual free cash flow closer to $700 million to $800 million, with an actual range of $500 million to $1 billion or more per year. We apologize for this confusion.

Over the 5 years, we project return on capital employed to be in the 14.5% range, improving in latter years as we see continued improvements in capital efficiency and corporate returns. All of this is calculated based on $60 WTI. Approximately 50% to 60% of the total growth will come from the Bakken and 40% to 50% will come from Oklahoma. During this 5 years, we expect to develop less than 30% of our current inventory, delivering an impressive blended average rate of return of 60%, assuming $60 WTI. At $50 WTI, the blended rate of return would be approximately 40%. This, of course, does not include further efficiency gains we fully expect to realize during this time or any upside from technology or inventory growth through exploration.

Now this 5-year vision was meant to provide a framework on how we see the company evolving from here, offering competitive oil-weighted growth, significant free cash flow and strong corporate returns. I just want to point out this vision was not meant to be utilized as a granular company 5-year guidance.

Going forward, we plan to maintain a multiyear outlook to frame expectations to make clear the sustainability of our growth and corporate returns. The guidance will be on a region-specific basis, as shown on Slide 5, with the North region dominated by the Bakken and the South region being a combination of our SCOOP and STACK assets in Oklahoma. This guidance will focus less on describing our activity based on type curves alone as it would move to multizone unit development. Maximizing value through multizone unit development involves stacked reservoirs with different performance drilled in various combinations, the timing of which varies depending on the size of the pad, rig count, stim crew counts, facility, market dynamics, et cetera. So as a result, multizone performance is difficult to characterize based on type curves alone.

So with field-wide multizone unit development underway, we are just beginning to realize the true value of our assets for Continental and its shareholders. So please follow our leadership as our large resource plays have evolved to full field-wide development.

And with that, I'll turn it over to John.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [5]

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Good morning. Let me start with an overview of our 2018 annual accomplishments. Back in early 2018, we suggested that 2018 would be a breakout year for Continental, with targets to generate significant free cash flow to be utilized for debt reduction while also targeting production growth of 17% to 24% year-over-year.

We have executed at a very high level. 2018 has set the stage for our vision for the next 5 years, with year-over-year production growth of 23%, net debt reduction of over $820 million and nearly $1 billion in net income. Continental hit our 2018 year-end debt target with approximately $5.49 billion in net debt in December. We are on track toward our longer-term net debt target reduction of $5 billion, which we anticipate achieving late in 2019. We expect to redeem $400 million to $600 million of our outstanding 2022 5% bonds in 2019. This will be funded by cash on hand and temporary utilization of our revolving credit facility and will likely be in the near term.

Returns for 2018 were solidly within guidance, with a return on capital employed of approximately 14%. This is an overall return that notably distinguishes us against industry peers but also against other industries. I would refer you to Slide 7 in our investor presentation to see how our corporate returns compare to the broader market.

As Jack noted, we expect to see continued strong returns on capital employed over the next 5 years as we execute on our vision and continue our long-term emphasis on generating strong returns. A good optic here is return on capital employed is projected higher in year 5 versus year 1. In other words, it's improving throughout the 5-year horizon. Underpinning our 2019 returns is strong performance against a variety of cost measures. We generated peer-leading oil-weighted production expense coming in at $3.59 per BOE in 2018 while also generating exceptionally low G&A per BOE of $1.69. For a company our size, our G&A is relatively low with an employee headcount of approximately 1,200. This, combined with our results, generate exceptional productivity per employee.

Finally, I will note that our DD&A per BOE continues to decline. While we don't typically discuss this measure, it is a strong optic exhibiting our continued improvement in capital efficiency, driven by well productivity and capital discipline in line with growing returns on capital employed. We envision continued improvement in our DD&A rate throughout the next 5 years.

As mentioned during our third quarter conference call, the company expected higher oil differentials in the fourth quarter due to heavy refinery maintenance season and Clearbrook's impact on Bakken differentials. While Continental does not sell into Clearbrook, Bakken oil differentials were impacted late in the quarter, which led to a higher-than-expected corporate oil differential for the year. First quarter differentials are evidencing an improvement, with sequential monthly improvement resulting in significantly better differentials than the fourth quarter.

CapEx came in a bit higher than forecasted for 2018 at $2.8 billion as we added rigs in the second half of 2018 before the late fourth quarter oil price decline and accelerated our purchase of mineral royalties. As you can -- as you know, mineral royalties are largely reimbursed Franco-Nevada. As you can see in our 2019 budget release, we are moderating rig activity to align with the $55 oil price environment. We remain committed to operating in a capital-efficient manner to grow production while generating strong cash flow for debt reduction. We are extremely nimble as we are not burdened by significant long-term contracts. Rig count year-over-year is expected to be relatively flat, which is a decrease from the fourth quarter. We have begun these reductions and expect to continue over the near term.

As Jack stated, the 2019 capital budget is projected to generate approximately $500 million to $600 million of free cash flow for full year 2019 at $55 per barrel WTI and $3 per Mcf Henry Hub. This level of cash flow should provide the company the ability to reduce debt to our $5 billion target and begin considering implementing a sustainable dividend in the future. A $5 change or sensitivity per barrel in WTI is estimated to impact annual cash flow by $300 million to $325 million. And the company's current capital plan is cash neutral at a mid-$40 per barrel WTI.

Of the total $2.6 billion budget, the company is allocating approximately $125 million to our previously announced minerals agreement with Franco-Nevada for royalty acquisition. With a carry structure in place, the company will recoup $100 million from Franco-Nevada and earn 50% of the total revenue in 2019, based on our already achieving certain predetermined production targets. Continental will include the total $125 million in our consolidated CapEx but will be reimbursed monthly by Franco-Nevada.

While revenue from our minerals was minimal in 2018, we are beginning to see growth in royalty revenues as SpringBoard comes online, where our mineral venture owns 17% of the net mineral acres underlying our leasehold. The company expects to generate significant revenue from these minerals over the next few years as we focus our acquisitions in ongoing density development areas.

As I mentioned during last quarter's conference call, we have provided specific guidance on oil and gas volumes separately for 2019 to facilitate your understanding of Continental's oil-weighted production growth. You should expect to see strong 2019 oil volume growth of 13% to 19% over 2018. We also expect to generate 1% to 4% year-over-year gas production growth. While we focus on oil and gas volumes, respectively, and not the hydrocarbon percentage, we do expect the oil percentage to climb with our oil focus.

Our guidance for 2019: Cost measures exhibits expectations for strong performance. LOE is guided slightly higher than 2018 due to our emphasis on oil-weighted growth, which obviously has a different volumetric ratio than natural gas. The key is oil also has stronger margins relative to natural gas. For 2019, we have guided our oil differentials from a range of $3.50 to $4.50 in '18 to a range of $4.50 to $5.50 for 2019, due in part to our even greater Bakken oil focus in 2019. Bakken differentials are higher than the South due to the South being nearer to Cushing. And we risked a bit more this year due to the recent volatility.

We do expect a significant expansion in Bakken pipeline and gas processing in the near future and long term as well as continued infrastructure directed towards coastal markets benefiting our differentials. This is already benefiting improving differentials. While numerous companies will speak to production growth and free cash flow, we are one of the few that consistently delivers leading results for each measure and we continue to do so.

With that, we're ready to begin the Q&A session of our call, and we'll turn it over to the operator to take questions. Thank you for your time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Doug Leggate from Bank of America.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [2]

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So Jack and John, I think I speak for a lot of people in thanking you for the clarification on the free cash flow. But if I may, I'd just like to underline that a little bit. So just to be clear, the $55 number you gave, I guess, last week is now $700 million to $800 million at a $60 WTI basis. That's what you said, Jack, right?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [3]

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Yes, yes. We gave $55 because that's for the current year budget, because that's relative to where the market has been. Obviously, it's improving off that here recently. Obviously, we have a higher expectation for the longer term, so we're giving you a lot of sensitivity. And what you can see in various ranges and $5 type range is to give you -- trying to give you more color and transparency.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [4]

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Well as you know, that kind of detail is never enough for guys like us. So my question actually is can you give us some idea? Obviously, you're giving us the growth outlook as an average, but can you give us some idea of what the CapEx assumption looks like, how that evolves? And if I may tack on another detail, if you're prepared to go into it is, what happens to your cash tax outlook as you move into that 5-year view?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [5]

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Great questions. Let me give you more color than you probably want. Let's look to '19 first. First and second quarter will be sequentially lower as relative to the fourth quarter of last year. I'd say they'll be slightly above and below the average if you just took the 4 quarters and averaged them on our capital budget. Third quarter will be a bit higher than that, and then the fourth quarter will be lower. That's all based on project timing. As you know, we've got large multi-well units and multi-zones, so we've got big projects. So the timing can vary. But they're not all that different, but just to give you a little color on the transition.

As you look to the -- so that's '19. As you look to the 5-year, where we've modeled our '20 and '21 are kind of in the low 3s, low $3 billions type total CapEx range. And then the latter years, '22 and '23 are in the mid-3s from a CapEx standpoint. We're growing that production on a larger base, so you're putting off a little more -- a lot more cash flow as you're growing, and you're also utilizing a bit higher CapEx. But it's not a huge amount, but it obviously is a bit more as you go through it on a bigger base.

And your question in regards to your cash tax question, we don't envision that really changing over the 5-year horizon. As you look to our balance sheet, you'll see that we have significant deferred taxes, which are primarily composed of net operating losses on a federal level and then also in our largest states, North Dakota and Oklahoma. So I don't think you'll see a big -- you won't see a cash tax change.

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Douglas George Blyth Leggate, BofA Merrill Lynch, Research Division - MD and Head of US Oil and Gas Equity Research [6]

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Okay. My follow-up, if I may, I'd love to ask Jack 5 questions, but I'm going to let someone else do that. So I'm sorry, John, if I'm going to stick with you for a minute. But line of sight to hit your $5 billion target. What happens after that? And you know where I'm going with this. And specifically, I'm looking for some idea what your thoughts are on a dividend and, specifically, maybe a variable upside component to that dividend. Because it looks like, once you hit your debt target, you're probably not buying back stock is my guess. What do you do with the cash? And I'll leave it there.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [7]

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The good point is we're going to have a lot of cash, so we've got a lot of options with what we do with it. We'll look at all of those options. I think the key there is balance. I'm not avoiding the question, but we do need to think in terms of balance. Some could go into further debt reduction. There's nothing that says -- paying debt down further, eliminating more interest expense, benefiting cash flow, that's certainly valuable. In regards to dividends, that's something that we've clearly spoken to. We continue to discuss that internally. That discussion will be ongoing. I think you could see us -- when you get to that $5 billion range, that's the time frame that we could be more likely to implement that. Obviously, that is up to a prospective decision by the Board of Directors. To your question on variable, I think that's fair. We would put something in place that we deem to be sustainable in a longer-term price-tested environment. So something that's sustainable in a $40 price environment, that would be more nominal. As prices go higher, I think we could have mechanisms to where we could return incremental cash to shareholders in a higher environment, we've certainly had that ability. But we would look at it in combination with further debt reduction, a dividend level. And then frankly, we've got a huge asset base and a very deep inventory, some of it would probably go back into investing a bit more. So I gave you a long answer, but it's really an answer of balance in how we'd look at all of those factors, but all of those factors would be in play and would be considerations. The good point is we can do it. We can generate the cash and we can generate the returns.

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Operator [8]

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And our next question comes from the line of Drew Venker from Morgan Stanley.

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Andrew Elliot Venker, Morgan Stanley, Research Division - VP and Lead Analyst for the Mid-Cap Oil & Gas Exploration & Production [9]

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Harold, I wanted to address the comment you made in the release that 2019 growth can adjust to market conditions. Can you just share more thoughts about how growth and spending, free cash flow might change at higher or lower prices in both '19 and the next 5 years?

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [10]

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Well, we do expect higher oil prices as we come out of this one event, out of the cataclysmic deal that happened last fall. So as it comes about, we'd be able -- one thing that's related to this 5-year inventory [op], very apparent we have a very, very deep inventory. And so we could step that up. But always want to keep an eye on the market and not oversupply it. We realize that it is world-market fragile, that's not that we're going to tip it just exactly, but we certainly need to be aware of it. So we could step it up if need be and develop more inventory as we go forward. And like John said, the dividend, it definitely could play a part in it. So I hope I've answered your question.

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Andrew Elliot Venker, Morgan Stanley, Research Division - VP and Lead Analyst for the Mid-Cap Oil & Gas Exploration & Production [11]

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Yes. I guess, Harold, just to clarify. So at higher prices, you'd likely spend a bit more than what you've laid out in the case based on $60 and in lower price, spend somewhat less.

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [12]

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Yes. No, absolutely, Drew.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [13]

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And obviously, we always look to the price being sustainable and we look to the broader supply and demand. We don't react to weekly, daily type prices like you see others do sometimes. So we -- something that's sustainable and balanced that -- where we have the assets.

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Jack H. Stark, Continental Resources, Inc. - President [14]

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Yes, and Drew, this is Jack. I just want to stress, and I think that's the point I think we're making here, too, is that we have the flexibility to do this. And our assets are secured. As we said, 75% of the net reservoir acres are HBP'd. And it's a real strength of the company to have the flexibility to be able to adjust.

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Andrew Elliot Venker, Morgan Stanley, Research Division - VP and Lead Analyst for the Mid-Cap Oil & Gas Exploration & Production [15]

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Understood. Just one follow-up on capital allocation and use of free cash. At $5 billion of net debt, I think you'll be at a healthy level for leverage ratio. Is there a desire to get that ratio down further beyond the end of this year? How are you guys thinking about that?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [16]

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The $5 billion -- the magic of the $5 billion is it's stress tested. In a $40 price environment, that keeps us below 2x debt-to-EBITDA. So that's the magic of how we got there. In the current price type environment, you're down around 1x debt-to-EBITDA. So that's a pretty strong, stable debt ratio. That's why we referenced that point as where we'd begin to consider implementing a dividend, and it can be a target type area. As we go beyond that, I think you could see a balance where we continue to pay down debt while also having those other opportunities for dividend and reinvestment. If you just look to our callable bond structure, you could go all the way down to about $4.2 billion. So I mean, if you want to know where ultimately we go, it's certainly down to that level. Beyond that, if you look out towards the end of our 5-year horizon, we've got about $1.5 billion of bonds coming due out there that are currently noncallable. We're going to generate enough cash flow that we could redeem those out -- when they come due out there if we chose to. So a lot of cash flow that gives us a lot of flexibility.

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Operator [17]

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And our next question comes from the line of Bob Morris from Citi.

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Robert S Morris, Citigroup Inc, Research Division - MD and Senior U.S. Oil and Gas Exploration and Production Analyst [18]

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John, you've kind of hit a lot of the points here on the flexibility on the free cash flow and being able to dial up or dial down depending on oil the price. And Harold, I know you're very bullish on the oil price from here. My question is on, as you look out to your balance and targets, do you have a target on ROCE or on free cash flow yield that sort of helps you toggle that? Because you've now put in the slide comparing your free cash flow yield to the rest of the industry, which is good. But at the same time, as you look at ROCE, obviously, at a higher oil price, the more you reinvest, which you mentioned as an option for that free cash flow, the higher your ROCE goes as opposed to paying down debt or paying a dividend. So I was just wondering if you -- how you look at the targets on free cash flow yield and ROCE.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [19]

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If you -- let me give you some sensitivity there. On 2019, we've guided, at $55, it's 9- to 12-type percent. At $60, it's about 4% higher on each end of that, so you're looking more in the 13% to 16% type range at $60. So there's little bit on price sensitivity. Obviously, your point on investment dollars and with the quality of inventory that we have and the strong returns that, that generates, accelerating some of those can improve that as well. If you go back and look over the last 10 or 11 years, we've averaged in the 19%, 20% type range, depending on how you calculate it, it can even be a few percentages higher than that. There are a number of different methodologies. So we see improving through the 5-year, we see putting off that strong cash flow and the other things and having that ability to reinvest. So the latter years are higher than that average. And whether they go higher than that can depend on some of the decisions. But we want to be a very strong, competitive return on capital employed, not only against E&P companies but against all sectors. And that's why we've laid it out in the slide. And I think you should look to us for generating superior type returns.

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Operator [20]

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And our next question comes from the line of John Aschenbeck from Seaport Global.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [21]

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For my first one, I was hoping to follow up on the differences in your free cash flow outlooks for 2019 compared to the 5-year plan and maybe approach the topic a little differently, just to make sure I'm following correctly. If I use your comments that a $5 move in crude equates to about a $300 million to $325 million change in free cash flow, and then apply that...

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [22]

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For '19.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [23]

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For '19, right.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [24]

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It would be more than that as you go further out because -- in each of the subsequent years, obviously, because of the higher production base.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [25]

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Right. Perfect, okay. So I guess, using those assumptions, I'd more or less get an implied free cash flow breakeven over the 5-year plan that's very similar to 2019 levels, more or less in the mid-40s. Is that a fair assumption, that your corporate free cash flow breakeven price remains relatively stable over the next 5 years?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [26]

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Yes, I think relatively stable. I mean, I would say mid-40s to $50, maybe $1 or $2 above that. It just depends on the individual year and the timing of projects and what capital we're deploying and that. The key point that I think you're going to is it's not a high number. It stays very strong and competitive. It might be a few dollars higher than that mid-$40, but we're not talking significantly.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [27]

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Okay, perfect. That's exactly where I was looking to go for, I appreciate that...

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [28]

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That's a great observation. I mean, it is a very, very competitive amount for us.

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John W. Aschenbeck, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [29]

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Okay, great. Yes. So for my follow-up question, I was just hoping to touch on CapEx a little bit, specifically really just get your overall comfort with the $2.6 billion capital program you had out there for 2019, which you obviously just put in place. But if I just compare that to Q4 '18, which came in at $740 million, it implies that your quarterly CapEx run rate in 2019 is going to need to come down versus where you were in Q4. So I was just hoping you could walk us through some of the variables between Q4 '18 CapEx and 2019's quarterly run rate.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [30]

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I would say rig activity is one of those items. And we were a little bit above 30 in the fourth quarter, we're coming down from that currently. Just the timing of projects factors into that a lot. We also had a larger level of mineral activity in the fourth quarter than we potentially will the end of this quarter. Minerals will not be divided by 4. They're very opportunity-specific, and the timing of that can vary by quarters. For the first quarter, we're going to be somewhere in the $670 million type range, so that's obviously down significantly. Second quarter, as I indicated earlier, is lower than that. And then third quarter is a little bit higher, then the fourth quarter's lower than that. It's just driven by timing of projects and completions. But we do feel -- we feel very good about the $2.6 billion. It enables us to set up the 5-year horizon and to grow well here. Prices move up significantly, and we view them as stable. As we spoke to earlier, I think you would see us accelerate the debt paydown quicker, so more of the dollars would go to that. But ultimately, if we chose to invest a little more in -- later in the year to set up '20 even stronger, that could be an option if the market's there. But we do feel good about where we're at and we feel good about our ability to deliver.

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Operator [31]

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Our next question comes from the line of Brad Heffern from RBC Capital Markets.

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Bradley Barrett Heffern, RBC Capital Markets, LLC, Research Division - Associate [32]

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I just wanted to dig in on the 60% average rate of return figure that you guys called out over the 5-year plan. So just looking at the sort of type curves that you had for last year, all the major oil plays were above that figure. So I was wondering if there's degradation in well performance in there, if there's maybe service costs or something else that would bring the average below what the type curves were for 2018.

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Jack H. Stark, Continental Resources, Inc. - President [33]

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Sure, Brad, this is Jack. I appreciate the question here. It -- what's really transpiring here is that the company has moved into multizone full-unit development. And as you do that, you're going to see that you're going to be blending different zones. You're talking about multiple zones being developed within a given unit. And there are some zones that will definitely be the type curve wells and then there are other zones in there that will not, but we are all about maximizing the value from these units and getting as much oil and gas out of these as economically as we possibly can. So we are blending in all zones when we do this -- give you a 60% average rate of return for the -- at $60 for the program, okay?

And so -- and a good example would be, say, in the Bakken. When we go and drill the Bakken, we're drilling 3 different zones up there in many areas. We're drilling Middle Bakken, Three Forks 1 and Three Forks 2. And the returns on each of those zones will vary depending, obviously, on the EUR from each with, oftentimes, the Three Forks 2 being the poorer performer. And so it will bring down the stated average overall for that unit, but we are maximizing the PV and the value of that unit by developing it at that time. Because really, you get one shot to develop these units, and you want to go in and do everything you can to maximize the recovery and the net present value for those units.

So kind of going forward, I think you really need to look at the returns that we're talking about here, like we put out here for this 5-year vision. It's a transition from parent wells and some unit wells to full-unit development, multizone development. And this is the next phase that essentially plays like the Bakken, that are moving into this full unit development are actually going into. And so I think it takes some -- I guess, people just need to get kind of used to the fact that, that's it. But if you look at the value we're creating out of these units, the returns may be degraded a bit, but the returns are just -- I mean, the values are fantastic. And so -- and it -- obviously, it's growing production. You take a look at our growth that you saw last year, 23% production growth year-over-year. I mean -- and -- I mean, and that is on top of paying down debt of about $825 million, I think it was. And so with the -- you can just see the horsepower that is -- that we have in these units to generate cash and grow production. And it's just 2018 is kind of a good look or a template for what you can expect going forward.

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Bradley Barrett Heffern, RBC Capital Markets, LLC, Research Division - Associate [34]

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Okay. Appreciate the detailed answer. And then I guess as my follow-up, just any new thoughts on A&D? Are there any packages that you guys are shopping? Or conversely, are you looking at acreage anywhere?

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [35]

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Continental's always looking.

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Operator [36]

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And our next question comes from the line of Drew Lipke from Stephens.

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Andrew Jay Lipke, Stephens Inc., Research Division - Exploration and Production Analyst [37]

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Just thinking about the production variability around sort of that 12.5% average over the 5-year plan, and appreciate all the color there, how should we think about maybe 2020 production growth, just given lower activity levels in the Bakken? And then also thinking about the SCOOP with the amount of flush production tied to Project SpringBoard, is it maybe reasonable to assume that 2020 could be below that 12.5% average?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [38]

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I think 2020's fine. I mean, we feel very good about all years in the 5-year plan. I wouldn't say the Bakken is really lower level of activity. We're getting more per dollar spent than we ever have there. The rig productivity and the well cost improvements, Jack alluded to some of those in the script, were doing exceptionally well. As we look out over the 5-year horizon, we're seeing good, solid growth throughout that. It'll -- 12.5% is kind of the average, but it varies in that 10% or -- 10% to 15% or even a little better than that. And frankly, that's low end. As we go out through the year -- through the plan, we'll optimize and we'll improve and we'll get more per dollar spent. If you look back to our 2 previous 5-year windows, we made those targets and we made them quickly. And this is a plan that will almost double the size of the company. So that requires consistent results and good, strong production growth throughout. So I think we're very comfortable with where we're at.

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Jack H. Stark, Continental Resources, Inc. - President [39]

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And I'll mention too, Drew, that our rig count in the Bakken really is basically equivalent -- on average, for the year, is equivalent to where we were last year. We had ramped up to 8 rigs at year end and now backed off to 6. And so the point of it is that really, on a full year basis, our activity is very comparable in the Bakken.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [40]

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And Drew, pick up also that, like in '19, the oil growth and the gas growth are different. So you're overcoming a decline in gas volumes in a 6:1 ratio and replacing them with oil. So we're getting oilier in our plans here. And we're still growing on a BOE basis in that with a 12.5% CAGR, but that's more weighted towards the crude oil side than it is the gas side. So I think we feel good.

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Andrew Jay Lipke, Stephens Inc., Research Division - Exploration and Production Analyst [41]

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Got it, that's helpful. And then just quick follow-up on the '19 guide. You mentioned the higher production expense per BOE, albeit still at very low levels for a heavily oil-weighted operator. But with more capital being allocated to Oklahoma in '19, just on a relative weighted basis, I would have thought production expenses might come down year-over-year. Is that just all attributable to the oil composition? Or is there anything else going on here?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [42]

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It's the oil composition. I mean, when you have a -- when you're a gas company, you're dividing by -- you've got 6:1 on your gas versus oil, so that gives you a different BOE. That's why I made the reference to the margin. You need to look beyond just that. I also point out, one of our headlines that we had in the press release just talked about LOE in general. It's 36% lower than in the last 4 years. So the Bakken used to be around $6, it's around $4 to $4.50 now. Oklahoma, to your point, is below $2. But even in Oklahoma, we're shifting more towards the oil side than the gas side. So still very strong, maybe a little higher on the BOE perspective but so is the price realization we're getting on the commodity, so.

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Operator [43]

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And our next question comes from the line of Neal Dingmann from SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Was wondering if you could give me -- maybe give me a little bit more detail on how you're thinking about first quarter CapEx. I think you said around $670 million and the full year of $2.6 billion. Given your comment that production. I think you said, might be down a little bit in 1Q, I guess what I'm hoping for is maybe a little bit more on the timing of the large projects and how might that impact this quarterly -- the CapEx for the year.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [45]

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I wouldn't say the production would be down in Q1. I think I'm not sure where that one came from. We exited '18 at a very healthy level, almost 325,000 BOE a day. I think you see us maintaining or growing that a bit earlier on, and then you see stronger growth later in the year. Again, we're focusing more on oil and the timing of those projects, so it's just when they come on. They're large units like SpringBoard. We've talked about the cadence of SpringBoard before. It will be coming on over the next -- certainly through '19 and beyond. So the timing of those coming on impacts of the capital cost, it impacts the production. And -- but I wouldn't say that we see the first quarter declining. I think it's going to maintain and grow some, and then we go from there.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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And the CapEx is going to be pretty well evenly spread then throughout the year?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [47]

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No, I mean -- yes, I mean, it's pretty -- within a band, it's pretty evenly spread. The fourth quarter is a fair amount lower, just because we've got some completions that don't -- the real completion dollars don't start to come in until early '20, when that activity is. And that's just the timing of some of these units across our portfolio. So first and second quarter are lower than the -- all four quarters are lower than the fourth quarter of '18.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [48]

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Okay. And then just one last follow-up, if I could, just regarding sort of rig allocation or overall activity. I'm just -- my question is regarding the Bakken, obviously, the massive inventory you have there and just how great those wells continue to outperform. Your thoughts on why just 6 rigs there versus, what, the 18 or 19 you're running in the MidCon.

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Jack H. Stark, Continental Resources, Inc. - President [49]

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Well, we're comfortable with the 6 right now, and we think it's a good balance with what we see as the takeaway capacity and our ability to go ahead and manage and grow our SpringBoard project. So we clearly have the ability to increase that. You could see we were up to 8 rigs at year end, we can go right back to that if we choose to if the market would justify it and if it makes sense for us. But -- so it's always about a balance, Drew.

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [50]

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Yes, [Neil] needs 6 rigs up there, it's unreal how fast these units are drilled and how much -- how many wells that then go through in a year's time. So Gary?

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Gary E. Gould, Continental Resources, Inc. - SVP of Production & Resource Development [51]

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Yes, this is Gary Gould. And even though we're going down in rigs, we expect to drill more wells this coming year than last year. So it's really a matter of drilling efficiency in terms of that rig count.

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Operator [52]

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And our next question comes from the line of Derrick Whitfield from Stifel.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [53]

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Regarding the inventory comment associated with your 5-year vision, would it be fair to say that well productivity and returns in years 6 through 10 or the following 5 years are not materially different than years 1 through 5 or the first 5 years?

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Jack H. Stark, Continental Resources, Inc. - President [54]

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Yes, I think that's a great comment there. Because when I was talking earlier about the blended inventory that we have when we get into this multizone full-unit development, what you're doing is you're kind of perpetuating that type of return over a much longer period of time. And so we do see that second 5 years after these 5 years to look really similar in performance to the first year as far as returns are concerned.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [55]

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Very helpful. And then shifting over to the Bakken. Could you speak to your appraisal initiatives for testing enhanced completions beyond the core fairway in 2019? And specifically, I'm thinking of really testing your current design in Northern Williams and Divide.

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Jack H. Stark, Continental Resources, Inc. - President [56]

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Yes, we have that in the Q. We have some testing going on in -- as we continue to step out with our optimized stimulations. And you're right, we're stepping out north, south and west.

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Operator [57]

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And our next question, from the line of Paul Sankey from Mizuho.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [58]

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Appreciate all your comments. If we take a further step back and look at Continental today against 2 years ago, 4 years ago, 6 years ago, would you say that you're very much now pursuing returns over growth in how your strategy has shifted?

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [59]

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Yes, Paul, I'd be glad to do that. I mean, you go through about 4 stages, we'll talk about leadership here and [Paul and Sue] each one of those. Basically, you deal with discovery, delineation, unit development testing and then get into full-field development. And that's basically where we're at with the Bakken. We're also there with SCOOP and STACK. So I mean, that's the position that Continental is in. And you go through all -- through most of the first stages, you're dealing with trying to hold acreage, HBP acreage, and with all those steps that I just talked about. And here, we're in an HBP position. We're developing these at a very good rate of return unit-wise across -- and field-wide. So Continental is in a very good situation. Our relative debt is low, and we turned out a lot of free cash flow and contemplating paying a dividend. This is -- this all (inaudible) itself.

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Jack H. Stark, Continental Resources, Inc. - President [60]

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And Paul, the capital efficiencies that go along with moving into this mode of development, and when you get into this multizone full-unit development mode, those efficiencies really start evolving. And a great case in point is, here, we're just starting in SpringBoard drilling Springer wells in row 1, and our teams have already knocked down the cost -- the complete well cost for a well 10% after drilling the first row, and they're looking at another 5% to 10% reduction ahead of us. And you heard me talk previously about anywhere from $500,000 to $600,000 a well that our teams are targeting for further cost reductions down in our SCOOP project. All those things result from concentrated effort within unit development. And then on top of that, take SpringBoard, there, you've got an oil-gathering facility right in the center of this 73-square-mile project. You have direct pipeline connectivity to a refinery. You've got just a short distance by pipe to Cushing. And then we've got, basically, our own firm transportation on pipe that takes our gas right down to what we consider to be some premium markets down in Texas. And so we -- right now, in row 1, about 100%, 95% of our oil and water are all piped. And row 2 and 3 that are under development right now are basically heading in the same direction. And so all of the completion fluid, all the water we have is being recycled through our own recycling facility, et cetera. So you get to the point that the efficiencies we built really start being turned on. And that's where it translates to how do we get the reserves and the production, but we also get it a very cost-effective process.

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [61]

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And Gary?

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Gary E. Gould, Continental Resources, Inc. - SVP of Production & Resource Development [62]

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This is Gary Gould...

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [63]

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I appreciate those comments. Sorry, was there someone else? Sorry.

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Gary E. Gould, Continental Resources, Inc. - SVP of Production & Resource Development [64]

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So this is Gary Gould. I'd like to add one more thing to what Jack has talked a lot about in our operational efficiencies. Earlier, Harold talked a lot about our 5-year plans and how we have a history of meeting them over and over again. I think one thing that's important to point out about this 5-year plan is that it's very detailed by type curve area, by zone, but it's based on efficiencies that we've already realized. And what you see with Continental is the ability to continue to improve efficiencies, whether it be on CapEx or completion design as we go forward. So this is a conservative look on a 5-year plan in that it's based on what we've already witnessed to date for our type curves and CapEx.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [65]

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Yes, but if I've said that you should cut CapEx by 30%, what would be your comment?

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Gary E. Gould, Continental Resources, Inc. - SVP of Production & Resource Development [66]

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If I should cut CapEx by 30%?

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [67]

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Yes.

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [68]

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Well, we would have several comebacks on that, I think. And first of all, we've got people that suggest that we up it to the limit of free cash flow. I think that a balanced program, as John talked about, is very important here. And certainly that resonates with us real well.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [69]

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I'd say if we cut about 30%, we're also still growing. I mean, if you look -- that's still a number that's above our maintenance capital level for '19. And we'd still be in good shape. Not the same numbers, obviously, but we would be very strong relative to our industry.

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Paul Benedict Sankey, Mizuho Securities USA LLC, Research Division - MD of Americas Research [70]

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Sure. Sorry to go on, but how -- what's your perspective on Washington, D.C. right now? It feels like the big threat is Iran sanctions. But any further thoughts you have?

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [71]

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Well, I think that Iran sanctions will happen. This president is somebody that carries out what he says. And obviously, there are several things at work. Last time the precedent was there to those grant extensions and -- on waivers, and that's what he did. But I think that's a good thing. I think being a little bit pro-business President, and that bodes well for our industry as well. He believes in America first. And putting America first in energy, that's very important to him.

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Operator [72]

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And our next question comes from the line of Jeanine Wai from Barclays.

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Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [73]

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So I just wanted to follow up on Brad's question. I was a little surprised that you included the Bakken in the blended lower RORs. And I was kind of expecting that commentary to be more skewed towards the STACK and the SCOOP. If I'm thinking about it right, the Bakken is a bit more of a mature play for Continental. So I was just wondering what's driving what sounds like a change in the development style, especially given that the 2018 program in the Bakken has an ROR of 125%. So is this more related to maybe any updated inventory assumptions you have in the Bakken? Or have you really improved the economics of the lower zones enough now that you're more willing to do a more wholesale development style versus being more selective? Just trying to thinking -- seeing if I'm thinking about this right.

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Harold G. Hamm, Continental Resources, Inc. - Executive Chairman & CEO [74]

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Basically, it's been no change. It's the same development style as we've had up here when we developed units. If you don't -- like Jack said, if you don't develop the first and second Three Forks, basically, you don't get it. And it's much too valuable to leave behind. And even at moderate prices that we have today, they -- it still makes economics. And while we're on -- own those pads, it makes a lot of sense to develop it.

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Jack H. Stark, Continental Resources, Inc. - President [75]

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Yes. And Jeanine, I would say take a look at Slide 9. And we're not -- as Harold said, there's no change -- I will use the Bakken as an example because people are very -- most familiar with the Bakken. And so -- but you can see the performance that we're seeing in '17 and '18, and we don't see -- expect to see different performance there.

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Jeanine Wai, Barclays Bank PLC, Research Division - Research Analyst [76]

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Okay, great. That's really helpful. And then my second question is back to your prepared remarks on the 5-year plan. You mentioned that the range of annual free cash flow is somewhere between $500 million and $1 billion, all on the same $60 WTI. So can you discuss what factors are driving the high end versus the low end of the range?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [77]

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It's larger production base as we grow through the cycle. I think we indicated it was $500 million, $1 billion to $1 billion-plus. The average is obviously higher than kind of that $700 million, $800 million range, as Jack's said. But if you think out to 5-year and you just take the 325,000 from the fourth quarter and tack on 12.5% a year, you're getting the company, to Harold's script comment, that's almost double the size of today. And then you factor back to that, I think it was the first question we got on just the CapEx cadence through that 5-year being from where we're at now up into the mid-3s, you can extrapolate from that a significant amount of cash flow growth and an increasing amount of cash flow growth as you're going through the 5-year horizon.

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Operator [78]

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And our next question comes from the line of Brian Singer from Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [79]

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Was planning on asking a question on Slide 5, which, I guess, it sounds like the bottom right of the projected free cash flow, point to Slide 5, the upper end of that range may be much higher relative to what's in there. Maybe you could just verify that. But I guess, philosophically, you have a $55 and a $60 case here, if commodity prices average below $60 -- well, let's say $55 just for the sake of it, how would you respond in the longer term? Would you anchor to more of the free cash flow number or would you anchor more toward to a growth CAGR?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [80]

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Good questions. First of all, on the chart, I think the charts the low end of the range we talked about there and just taking that low end out, so it's a very conservative look, I would say. That's probably something we need to update to be more reflective of what we're really seeing. And so I appreciate the comment there. That chart's overly conservative is the answer there.

On your question in a $55, a great question. I think we would just see -- in terms of usage of that cash, we would continue to pay down towards certainly that $4.2 billion range on total debt. That's approximately that with the callable bonds, so continuing to pay down debt. And then if it's in a $55 flat environment, we can execute fairly comfortably on our plans. It wouldn't get quite as much cash flow as compared to $60, that's just math. But it gives us plenty to continue to put off a significant amount of free cash flow, achieve our debt targets and then have amounts left for a dividend. That's why we speak to dividends in sustainable type fashions down to as low as $40.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD & Senior Equity Research Analyst [81]

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Okay, great. And my follow-up goes back to, I think, a comment you made earlier with regards to oil mix. And I think you said but it would be great if you can clarify that, over the next few years, you expect your oil mix for the total company to rise. I wasn't sure if I heard that right. But maybe you could talk about a little bit of the dynamic between production and the mix in production versus the mix in reserves and whether you see the oil mix, which I think is lagging in reserves relative to production, catching up over time or whether the oiliness of the producing base at some point starts to decline.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [82]

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Look at our year-end reserve reporting, you'll see that our oil percentage went up this year by several percentage points. I think we still have some opportunities in that as we go forward. And even within our gas, there's a lot of condensate in there, a lot of NGL. So if you look from a total liquids standpoint, you could add 10% on it from just a pure total liquids standpoint. In terms of the ratio, I gave the oil and gas volumes separately for '19. We're going to continue doing that as we give the granular year-by-year guidance. We -- as we move forward, we do see our oil ratio growing in our 5-year horizon. Both volume sets will be growing, oil and gas. And certainly, where we're at right now, very focused on the oil side.

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Operator [83]

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And our next question comes from the line of Leo Mariani from KeyBanc.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [84]

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I was hoping you could give me a little bit more clarity around your oil growth target this year. I know you guys were saying around 13% to 19% growth. I guess, relatively wide. What are sort of the key variables that kind of influence you guys to be closer to the low end versus the top end this year?

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [85]

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We deal with a lot of variables. I mean, for instance, in the Bakken, you have weather considerations that -- frankly, that can impact any of the 12 months of the year, so we always factor those types of scenarios in. We factor -- we've got a lot of infrastructure coming into basin. So we factor in a bit of risking associated with the timing of that. Projects can move up or back a month on the infrastructure side and that can impact production, so we factor that in. Then we factor our normal just overall production type risking in. So I think what you see there is, one, we're somewhere in the midst of that on our set internal target. And then we've got a degree of risking and a degree of upside opportunities in there that kind of gives you some range.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [86]

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Okay. But that range is not really based on moving your spending around or increasing anything like that in '19.

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John D. Hart, Continental Resources, Inc. - Senior VP, CFO & Treasurer [87]

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No, it's based on what we've deployed. I mean, there might be a little bit in there in terms of you're moving spending around. The timing of individual projects can impact the actual production in a period. If a project moves forward by a couple of months on one of these large units in any of our plays, that can obviously benefit production for this year. So that type of movement is certainly considered in our range. So you look at the size of some of the things we've brought on the last few quarters, you can imagine, what -- if you have that 2 months sooner, that can have a material impact on the overall.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [88]

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Yes, okay, I know that makes sense. And I guess you talked about some potential well cost reductions that you would like to achieve here in 2019. Sounds like a lot of that was more based on some new well design. I just wanted to kind of clarify. You guys have not factored any of that, I guess, into the '19 budget. And I'm assuming that's not factored into the 5-year outlook as well. I'm just trying to get a sense if there's a service cost component to some of those well cost reductions or if that's more just efficiencies in well design this year.

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Patrick W. Bent, Continental Resources, Inc. - SVP of Drilling [89]

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Yes. This is Pat. And one of the things I'd like to bring up is the well cost reduction, those are a function of the technical and operational efficiency of our organization. And so those are not price-related. And so the teams have done a great job with respect to design work on our wellbore designs. And so in answer to your question, a portion of those costs are built in. We previously referenced $1 million per well savings in our SCOOP Woodford, Sycamore program based on a mono-bore design. And we've included that in the budget. We're anticipating an incremental -- we've already realized in the second half of '18 another $500,000 on that same well set that's not been built into our budget. In addition, in STACK, we're contemplating a new wellbore design that will increase our rate of penetration, lower our tubular costs, et cetera, that could bring as much as $650,000 gross per well to the table. And so that's not contemplated in the budget as well. So a portion of it is and a portion of it isn't.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [90]

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Okay, that's very helpful color. And I guess, just lastly on your fourth quarter Bakken well, it looked materially stronger on 24-hour IP rates versus your third quarter levels. And you have a pretty big sample size, I guess, with 52 operated wells this quarter. Just trying to get a sense, kind of what drove that heady increase there in production rates versus 3Q?

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Gary E. Gould, Continental Resources, Inc. - SVP of Production & Resource Development [91]

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Yes, this is Gary Gould. And yes, that was a record quarter for us. If you look on Slide 9, what you see is the 2018 average. I would tell you the fourth quarter 2018 average is even above that. And then if you look at Slide 10, you can see that we had 4 wells that hit our top 10 list just from this quarter, and they continue to expand our core up in the Bakken area. When you talk about what things we are working on from a completion perspective, we continue to like multiple entry points as far as our perf cluster spacing being around 30 feet. And what we're doing is we're looking at limited entry perforating in order to go to larger stages but still have the same amount of production and same amount of contact points within the wellbore.

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Leo Paul Mariani, KeyBanc Capital Markets Inc., Research Division - Analyst [92]

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Okay, no, that's helpful. I was just trying to get a sense of whether or not that was maybe driven by moving activity kind of closer to the core or it was more just you guys getting better at sort of drilling and completing these wells.

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Jack H. Stark, Continental Resources, Inc. - President [93]

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Well, I would say it's our guys getting -- folks getting better at it, and I agree with that. On Slide 10, I mean, the key point there and putting those on there, the spotting of wells, was just show it's a broad footprint on where these results have been achieved. And so it's not like we just went in and cherry-picked a particular area.

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Operator [94]

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Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Rory Sabino for closing remarks.

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Rory R. Sabino, Continental Resources, Inc. - VP of IR [95]

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Great. Thank you very much for your time today. And please reach out to the IR team with any further questions. [We'll conclude now].

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Operator [96]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude our program, and you may all disconnect. Everyone, have a great day.