Continental Resources Inc. plans to pivot from natural gas to oil-directed drilling in the latter half of 2021 in response to strengthening crude prices and a tighter supply-demand balance.
Drilling in 2021 is to be mainly focused on the South Central Oklahoma Oil Province (SCOOP) and the mighty Bakken Shale of North Dakota, management said during a conference call Thursday (April 29) to discuss first quarter results.
“In Oklahoma, our oil and gas assets continue to afford us commodity optionality, which is a significant attribute as it provides great flexibility in various commodity environments,” CEO Bill Berry told analysts. “Just as the gas commodity fundamentals last year suggested we should switch to gas-weighted drilling, which we did, we see the fundamentals this year supporting more oil weighting for our Oklahoma assets.”
Continental expects to deliver about 143 gross operated wells at its northern operations this year, which include its Bakken and Powder River Basin (PRB) assets, Berry said. He noted that Bakken production is already ramping up in the second quarter. Of those 143 wells, around 10 will be in the PRB, with the remainder in the Bakken, said COO Jack Stark.
Continental expects to deliver 67 gross operated wells at its Oklahoma operations in 2021, of which about 85% are likely to be in the SCOOP, Stark estimated.
In Oklahoma, Continental brought 14 wells online during the first quarter, the majority of which are gas-directed, Berry said, although, “This will shift to oil-weighted wells in the second half of 2021.”
Continental is forecasting $1.7 billion of free cash flow (FCF) in 2021, assuming a $60/bbl West Texas Intermediate oil price and $2.75/MMBtu Henry Hub natural gas price.
The company also is projecting a roughly 12% return on capital employed for the year, while its board recently approved a doubling of the previous quarter’s dividend to 11 cents/share.
“Given the company’s significant annual cash flow generation, the company is accelerating its debt reduction and projects debt below $4 billion by year end 2021,” management said, translating to a roughly $1.5 billion year/year reduction. Total debt stood at $4.97 billion as of March 31, with a cash balance of $96 million, equating to net debt of $4.88 billion.
Continental reduced its greenhouse gas intensity and methane intensity by 23% and 31%, respectively, in 2020 versus 2019, Berry said. “Our goal is to strive for a similar year-over-year greenhouse gas intensity reduction range in 2021.
“Notably, based upon our current operation program, we anticipate achieving as much as a 45% reduction from 2016 to 2021, and we aim to continue with additional methane intensity reductions as well.”
Continental saw only a modest adverse impact to February production due to Winter Storm Uri, which caused widespread natural gas shortages and power outages in Texas and Oklahoma. Continental’s operating teams were “literally working 24/7 during absolutely miserable conditions to keep as much gas flowing as possible,” Berry said.
Continental is on track to deliver on second quarter production guidance of 160,000-165,000 b/d oil and 920-940 MMcf/d natural gas.
Continental’s Bakken well costs continue to trend lower because of structural improvements and enhanced operational design. For 2021, the company is targeting well costs of $641/lateral foot, down 7% from 2020.
Berry said Continental is seeing “strong, repeatable performance from our condensate assets” in Oklahoma, and that it is targeting 2021 condensate well costs of $891/lateral foot, 17% below 2020 levels.
Continental expects about 70% of well completions in the second half of 2021 to be in the oil-rich Bakken, versus about 50% in the first half, according to Stark. Oklahoma drilling, meanwhile, would likely be about 60% oil-directed this year, versus 2H2021 when it was about 70% gas-directed.
Regarding the Dakota Access Pipeline, Berry said, “We’ve seen continuation of positive comments coming out of everything from the [US Army Corps of Engineers] to the owners of the pipeline that this is strongly expected to continue to operate.”
Continental has backup plans in place to move all its oil out of the Bakken, “but our anticipated base case is that the pipeline’s going to continue to flow.”
Executive chairman Harold Hamm joined Berry and Stark on the call, and said that oil supply and demand “is coming back into balance, which bodes well for commodity prices in the future.”
He added that as long as the Organization of the Petroleum Exporting Countries “functions as they do” and producers stay disciplined, “we feel very positive about the commodity risk.”
Continental reported net income of $260 million (72 cents/share) for the first quarter, compared to a loss of $185.7 million (minus 51 cents) in the first quarter of 2020.
Production totaled 307,942 boe/d, comprising 151,852 b/d oil and 936.5 MMcf/d. These figures compare to 360,841 boe/d, 200,671 b/d and 961 MMcf/d in the year-ago period.
Production in 2021 remains on track to meet or exceed full-year guidance, Berry said, with production growth weighted toward the second half of the year.
Continental recorded average net sales prices of $53.09/bbl for crude oil and $5.56/Mcf for natural gas during the quarter, up from $39.64 and 90 cents, respectively, in 1Q2020.
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