Similar to wise buying decisions, offloading certain companies at the right time helps maximize portfolio returns. So, if you are still holding on to shares of Continental Resources, Inc. CLR in your portfolio, it is time you dump those as chances of favorable returns in the near term appear dim.
As we know, the energy sector had a tumultuous ride in 2018, with crude prices starting the year above $60 a barrel and touching multi-year highs of more than $76 in early October before hitting a deadly downdraft since mid-October. Crude downturn in the final months of the year amid supply glut, U.S.-China trade tussle, weakening demand outlook and economic headwinds hit the oil and gas companies hard.
Notably, shares of Continental Resources have declined around 14% in the past three months. The weakness in the commodity price is expected to continue amid renewed concerns over economic slowdown and trade tensions, further ailing the stock as 100% of its oil production is unhedged.
Markedly, Continental Resources is the leading producer in North Dakota’s Bakken field (having the maximum number of producing wells in the region). While WTI oil prices have been currently hovering around $54 a barrel, Bakken crude is trading at a discount at around $43. The situation is not likely to wane soon as the pipeline’s spare capacity is vanishing rapidly amid high demand and there is a need for infrastructure development that can allow for the movement of more oil, which is certainly going to take time. With oil prices unlikely to move much beyond $50 per barrel in the near term, oil volume in North Dakota is expected to experience muted growth as producer profits remain under pressure.
While the company does face geographic concentration risk, with operations mainly focused on the Bakken play, it recently expanded operations in Oklahoma with the discovery of STACK and SCOOP plays, which are gas- and condensate-heavy, and hence are more challenging to prove profitable.
Apart from the crude weakness, the company is also suffering from rising costs, elevated leverage, pricey valuations and the lack of commitment to increase its shareholders’ value.
As of Sep 30, 2018, Continental Resources had only $12.9 million in cash and cash equivalents, while the total debt balance was way higher at $6 billion. In fact, the company had a debt-to-capitalization ratio of 50.1%, significantly higher than the industry’s 44.6%. The high debt burden can restrict the company’s financial flexibility and limit its growth process.
Continental Resources is also bearing the brunt of rising cost and expenses. Operating expenses of the firm increased around 18% through 2017. Third-quarter 2018 operating cost and expenses also rose 24.5% year over year. Further, the company has updated its production expense for the full year to the range of $3.50-$3.75 from the previous guidance of $3-$3.50 per BOE. The rising costs are expected to put further pressure on its financials.
Continental Resources also seems overvalued as the company’s trailing 12-month EV/EBITDA ratio of 7.5 is higher than its industry’s 6.3.
Moreover, investors’ confidence is dampened by the fact that the company does not have any dividend and share buyback program in place.
Looking at the prevailing challenges and an unfavorable Zacks Rank #4 (Sell), it is wise to refrain from investing in Continental Resources at the moment.
Stocks to Consider
Meanwhile, some better-ranked players in the energy space are RGC Resources Inc. RGCO, TransCanada Corporation TRP and Golar LNG Partners LP GMLP, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
RGC Resources delivered average positive earnings surprise of 87.6% in the trailing four quarters.
TransCanada will likely record earnings growth of 2% in 2019.
Golar LNG’s earnings growth in 2019 is expected at 11.9%.
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