Continental Resources Inc. expects to generate positive free cash flow (FCF) for a sixth straight year in 2021 amid an improving outlook for oil prices, according to management.
During a Feb. 17 conference call to discuss the firm’s 2020 earnings, Executive Chairman Harold Hamm cited “unprecedented challenges” faced in 2020 due to the Covid-19 pandemic, including U.S. crude oil prices briefly plunging negative for the first time ever in April.
“Despite the dramatic impact of Covid on crude oil demand last year, global inventories now appear to be rebalancing on vaccine optimism and tighter supplies as the U.S. and global producers exhibit capital and market discipline.”
The always outspoken Hamm added that “arbitrary” executive actions by the Biden administration to limit federal leasing and drilling on federal property “tend to hinder U.S. oil and gas supplies, driving those prices higher.
“We have clearly seen this impact to domestic oil prices the past 60 days.”
Hamm also blamed a “renewable-laden grid system” for the electricity outages in Texas amid an unprecedented cold snap during the week of Feb. 15, adding that a reliable grid “is not possible without significant” natural gas-fired capacity.
Although wind and solar generation was impacted by the cold front, natural gas shortages were found to contribute to as much as 31 GW of gas-fired capacity in Texas being knocked offline, dwarfing the amount of unavailable wind and solar capacity.
In any event, “The U.S. oil and gas industry will continue to play a vital part in the American energy landscape as the world seeks access to our gas and light sweet crude,” Hamm said.
He added, “On top of protecting U.S. energy security, U.S. producers have also addressed investor concerns that E&Ps prioritize reinvestment ratio and shareholder returns.”
Continental said it achieved its 2020 completed well cost targets in both the Bakken Shale and in Oklahoma, recording go-forward well costs in the Bakken of about $690/lateral foot at a 10,000-foot lateral length, and in Oklahoma of about $1,070/lateral foot at an 8,200-foot lateral length.
The company said the all-in well cost savings were “70-80% structural, and are being driven by a reduction in drilling cycle times, stage counts, proppant volumes and stimulation days, as well as the optimization of artificial lift.”
Continental also announced it has executed definitive agreements to acquire about 130,000 net acres and 9,000 boe/d of production in the oil-rich Powder River basin for $215 million from Samson Resources II, LLC. The acquisition includes 96 federal drilling permits and is expected to close in March 2021, management said, adding that Continental plans to begin delineating and developing the Shannon, Frontier and Niobrara reservoirs with two rigs in 2Q2021.
“These Powder River Basin assets provide Continental another oil-weighted platform, adding over 400 million boe of net unrisked resource potential to our portfolio,” said COO Jack Stark. “We especially like the fact that the basin is in the very early stages of development with solid economics even before applying our low cost efficient operations.”
Back to Work
Continental is forecasting a $1.4 billion capital expenditures (capex) budget for 2021, translating to a 58% cash flow from operations reinvestment rate.
About $1.1 billion will go toward drilling and completions (D&C) activities, with about 60% allocated to the Bakken Shale and some 35% to Oklahoma, with the remainder going to the Powder River assets. An additional $300 million is designated for non-D&C activities, namely leasehold, mineral acquisitions, workovers and facilities.
The capex budget is expected to generate about $1 billion of free cash flow (FCF) for the full year assuming a West Texas Intermediate (WTI) crude oil price of $52/bbl and a Henry Hub natural gas price of $2.75/Mcf. A $5/bbl increase in the WTI price is estimated to translate to a roughly $250 million increase in FCF, management said.
“Our 58% reinvestment rate at $52 WTI in 2021 highlights our commitment to generating significant and sustainable free cash flow,” said CEO Bill Berry, highlighting that Continental aims to deliver shareholder capital returns in excess of 40% of cash flow from operations.
The company’s total debt stood at $5.53 billion as of Dec. 31, a figure management aims to trim to $4.5 billion by end-2021 and $4 billion by end-2022.
Crude oil production is expected to range between 160,000 and 1650,000 b/d in 2021, while gas output is seen averaging between 880 and 920 MMcf/d.
Continental produced 339,307 boe/d of hydrocarbons during the fourth quarter, comprising 176,639 b/d oil and 976 MMcf/d, versus 365,341 boe/d, 206,249 b/d and 955 MMcf/d in 4Q2019.
Corresponding full-year figures were 300,090 boe/d, 160,500 b/d and 838 MMcf/d in 2020, compared to 340,395 boe/d, 197,991 b/d and 854 MMcf/d in 2019.
Continental reported a net loss of $92.5 million (minus 26 cents/share) for the quarter, versus a profit of $194 million (53 cents) in the fourth quarter of 2019.
Full-year losses totaled $597 million (minus $1.65) for 2020, compared to profits of $776 million ($2.08) in 2019.
Full-year FCF was $275 million, marking Continental’s fifth straight year in the black on the non-Generally Accepted Accounting Principles metric.
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