Continental Resources Inc. is betting that the sell-off in crude oil has hit bottom and has monetized nearly all of its hedge positions through 2016, while keeping about one-third of its natural gas hedged in 2015 at an average price of $4.34/Mcf.
The sell-off sent investors scrambling on Thursday, pushing the stock price down, but CEO Harold Hamm was defiant during a conference call.
"Our view ultimately comes back to global supply and demand, which in my opinion has not fundamentally changed in the past three months, certainly not enough to justify a sell-off" in Brent and West Texas Intermediate crude oil, he told analysts.
The discussion today, he said, centers around "political wrangling and price changes, not demand destruction. In my opinion, it's a great buying opportunity for equities in well capitalized...producers. We believe the pullback in oil prices will prove to be ultimately beneficial to Continental."
The company expects crude oil prices will "strengthen to the mid $80s and the lower $90 range," with the recent drop to be "short lived."
However, just in case, "we felt it was sensible to adjust 2015 guidance" and reduced capital expenditures (capex) for 2015 by 12%, said the CEO.
"While awaiting this recovery, we have elected to maintain our current level of activity and plan to defer adding rigs in 2015. This translates to a $600 million reduction in our 2015 capex budget, resulting in a revised 2015 capex budget of $4.6 billion, with 23-29% production growth."
The plan is to maintain a total of 50 rigs in the onshore, with around half in the South Central Oklahoma Oil Province (SCOOP) and 19 or so in the Bakken Shale. Some of the SCOOP rigs will target the Springer Shale.
Four other rigs will be dedicated to dry natural gas targets in the northwestern part of the Cana-Woodford Shale, where Continental recently partnered with South Korea's SK Group, its first foreign joint venture (JV) (see Shale Daily, Oct. 27). SK will provide a drilling carry over the next five years, which should fund all of the costs to develop the field, which still holds "enormous" potential, said CFO John Hart.
"Our northwest Cana dry gas assets have previously not garnered capital when compared to the Bakken and SCOOP, given recent commodity prices. These assets still have enormous potential for future cash flow generation. Bringing in SK, with its long-term investment horizon, allows us to develop this asset at a steady and consistent pace.
"This JV brings together two high quality companies that are very well aligned from a strategic standpoint. We have committed to keeping four rigs in this area, which will provide 15 to 20 gross wells per year over the course of the next five years. We estimate that specific to our northwest Cana assets, we will remain cash flow positive from now through the entire five-year drilling commitment, based on current natural gas prices."
Third quarter production totaled 16.8 million boe net, or 182,335 boe/d, a sequential increase of 9% and 29% higher than a year ago. Net production included 127,788 b/d of oil (70% of production) and 327 MMcf/d of natural gas. October production averaged 187,000 boe/d-plus.
Continental's average realized sales prices in 3Q2014, excluding derivative positions, was $85.49/bbl for oil and $5.10/Mcf for natural gas. Settlements of matured commodity derivative positions generated a 37 cent/bbl and 15 cent/Mcf gain, resulting in a net gain on matured derivatives of $200,000, or 1 cent/boe for the quarter.
Net earnings in the quarter totaled $533.5 million ($1.44/share), compared with $167.5 million (45 cents) in the year-ago period.