Continental Resources feels it is “sensible” to adjust some finances until higher oil prices return, but it has taken a bold move in light of pulled-back prices and monetized nearly all of its oil contracts from October through 2016.
By lifting its hedging, Continental netted $433 million of proceeds in the fourth quarter in a move where the company loses protection against further oil price declines but opens the door to higher profits should prices soar. But Chairman and Chief Executive Officer Harold Hamm is confident that the oil price drop will be short-lived and expects prices to strengthen to the mid-$80s or $90 in the near future.
Even though it took the profit on its hedges, Continental also cut its capital spending budget for 2015 by 12 percent, slashing $600 million from its previous estimate of $5.2 billion, and said production will likely taper to only 23 percent growth next year instead of initial projections of 29 percent.
“An adjustment in capex is called for, as we believe the recent pullback in oil prices will ultimately prove to be beneficial to Continental in many ways,” Hamm said on the company’s quarter earnings call on Nov. 6. “First, a slower growth rate in our operating areas will allow us to further improve our operating efficiencies and lower well cost. Second, slower domestic oil production growth will allow global demand to keep pace at lower oil prices per demand growth and avoid an oversupply of crude oil long term in the future.”
Hamm said he does not believe the global supply and demand situation has fundamentally changed in the past three months, at least “not enough to justify a sell-off in Brent and WTI that has occurred.”
“The forward discussion continues to be centered on international political wrangling and price changes, not demand destruction,” Hamm continued. “In my opinion, it’s a great buying opportunity for equities and strong well-capitalized E&P producers.”
Continental’s board did not consult any outside credit agencies before making its decision to liquidate its hedges, but Hamm believes the oil prices have likely hit their lowest point.
“Understanding what our competition is and the prices they need to receive in international periods, particularly with OPEC members, we feel like we’re at the bottom rung here on prices, and we’ll see them recover pretty drastically, pretty quick,” he said. “We feel good about what we’ve done with prices.”
Philip Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter, said Continental’s decision on oil hedging may concern investors because the decision changes the firm’s business. “Hedging provides an assured cash flow,” he said. “By dropping the hedges, the firm is gambling that prices go up. If they go down, Continental will go bust.”
Slickwater completions provide best rates
Continental has updated its enhanced completions analysis to include industry-wide results along with its own so the study captures production of over 300 wells, with a third of them showing results spanning more than a year. President and Chief Operating Officer Jack Stark said as expected, slickwater and hybrid enhanced completions prove to provide the best results and, on average, generate higher initial production rates.
“Of even greater significance, our analysis shows that these high rates are being sustained, which translates to increased the EURs (estimated ultimate recovery),” Stark said. “Where we have the most complete data set, we have seen an average production uplift of approximately 45 percent in the first 90 days and an estimated 30 percent increase in EUR based on early-time projections. Looking forward, we expect to get similar results as these on at least 40 percent of our acreage based on the geology and data we have on hand.”
The data suggests that Continental’s projected EUR for its Bakken/Three Forks wells in 2015 is about 700,000 barrels of oil equivalent per well, which includes the production hike it expects to experience from 30-stage enhanced completions.
“The results also give enough support to say that our net unrisked Bakken resource potential contains at least eight years of drilling inventory averaging 775,000 barrels of oil equivalent per well, or 20 years of drilling inventory averaging 600,000 barrels of oil equivalent per well at our current run rate,” Stark explained.
Continental expects an average well cost of $9.6 million in 2015, which is a $400,000 decrease reflected by a reduction of high-cost 40-stage completions. The company did not provide much insight into results of the costlier completions, only saying that it will continue to monitor them and likely provide information by mid-2015 when it could potentially make adjustments to its EURs.
Shifting rigs to the core
Continental plans to shift its 22 rig program in the Bakken down to 19 in 2015, which Chief Financial Officer John Hart said is the “general working range” it has been using in the basin. However, some of those rigs will be taken out of Montana and the fringe areas of North Dakota’s Bakken and moved into more core areas of the basin. As the leading producer in the Bakken, Continental averaged 92,785 barrels of oil per day in August based on the latest data available from the North Dakota Department of Mineral Resources for operated, non-confidential wells. Its company-wide third quarter production totaled 182,335 boepd, a sequential increase of 9 percent from the second quarter and 29 percent higher than the same period a year ago. Third quarter production consisted of a 70/30 percent split between oil and natural gas. Continental’s October production averaged in excess of 187,000 boepd. The company’s average realized sales price excluding the effects of derivative positions was $85.49 per barrel of oil.
With market conditions unsettled, Continental boasts a “nimble” portfolio and capital structure in order to adapt. By choosing not to accelerate development in 2015, the company’s cash flow is aimed to better match development efforts.
“What we're dealing with here is a renaissance that’s going to be very long-lasting here in the U.S. and we see OPEC worried about that and wanting to slow down what we’re doing over here,” Hamm said. “If they slow it down a little bit, it’s probably going to be good for everybody and let world global demand pick up over the next couple of years to match the growth that we have here in the U.S. and will have for many years going forward. So … we may all be well served by what’s happening, even though we’re not looking probably at it that way right now.”
