Continental Resources, Inc. CLR is well poised to grow on the back of strong presence in the Bakken Shale. However, rising production costs and balance sheet weakness are persistent concerns.
Oklahoma City, OK-based Continental Resources is an explorer and producer of oil and natural gas. The company has resources across the East, South and North United States. It is a leading producer in the Bakken play. The company has a market cap of $4.6 billion and an expected earnings growth rate of 8.5% for the next five years. The stock has risen 28% in the past six months compared with 24.5% rally of the industry it belongs to.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
Continental Resources has a premier position in the Bakken area. The shale play, which is ranked among the country’s largest onshore oilfields, produces premium quality of crude. In the said region, the company produced 148,416 barrels of oil per day in 2019, representing a year-over-year rise of 14%. Notably, it has adopted several measures to reduce costs in the basin. Around 70% of the cost savings are structural. Moreover, its operations in the SCOOP and STACK plays of Oklahoma generate huge profits for the company.
From 2019 to 2023, it expects oil equivalent production to see a compound annual growth rate of 8-10%. This will likely help the company generate average annual free cash flow of $3.5-$4 billion over the five-year period. Notably, it has decided to suspend quarterly dividend payouts to maximize cash flows amid the current market uncertainty. The company expects to generate $500 million in free cash flow for second-half 2020.
Moreover, capital expenditure for full-year 2020 is now estimated at $1.20 billion, reflecting a decline from the original guidance of $2.65 billion. In order to conserve cash amid the coronavirus pandemic, Continental Resources has reduced operational activities and voluntarily curtailed oil production. However, with oil price improvement over the past few months, it is gradually resuming output, which in turn will benefit the bottom line. For full-year 2020, the company expects to operate total net wells of 142.
However, there are a few factors that are impeding the growth of the stock lately.
As of Jun 30, 2020, Continental Resources had total cash and cash equivalents of $6.7 million, down from $517.6 million at first quarter-end. It had significantly higher long-term debt of $5,740.6 million (excluding current maturities) than the first quarter. In fact, the company had a debt to capitalization of 46.6%, higher than the industry’s 37.9%. The ratio has consistently been higher than the industry over the past few years, reflecting more leveraged balance sheet.
As commodity prices are now in the bearish territory as the coronavirus pandemic is hurting global energy demand, the outlook for exploration and production business seems gloomy. With crude accounting for nearly 50% of its production volumes, weakness in the price of the commodity is likely to hurt the upstream energy player’s bottom line.
Continental Resources’ production expenses rose 14% year over year in 2019. Exploration expenses also doubled in 2019, in turn affecting the company’s bottom line. Moreover, production expense for full-year 2020 is expected within $3.50-$4.00 per Boe, whose mid-point indicates a rise from the 2019 level of $3.58. Higher production expenses can hurt the bottom line.
To Sum Up
Despite significant growth opportunities, increasing production costs and volatile commodity prices are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include Equinor ASA EQNR, Pioneer Natural Resources Company PXD and Concho Resources Inc. CXO, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Equinor’s bottom line for 2021 is expected to skyrocket 118.2% year over year.
Pioneer Natural’s bottom line for 2021 is expected to surge 180.8% year over year.
Concho Resources’ bottom line for 2020 is expected to rise 34.4% year over year.
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