Morningstar | Continental Announces Disappointing 2Q Volumes But Plans to Hit Top End of 2018 Guidance
Narrow-moat-rated Continental Resources delivered 284 mboe/d in the second quarter (down from 287 mboe/d in the first quarter, and well below our 291 mboe/d estimate). The disappointment was attributed to weather issues in the North Dakota Bakken, along with a voluntary curtailment in the Midcontinent region that was necessary to access the previously announced Project Wildcat pipeline (which guarantees takeaway for 400 mmcf/d natural gas and enables it to earn a premium of about $0.30/mmbtu relative to in-basin pricing). Without these issues, second-quarter production would have been 289 mboe/d, within 1% of our estimate and 0.6% higher sequentially.But based on the preliminary press release dated July 24, there appears to be no cause for alarm. Continental’s completion schedule is weighted to the back half of the year, and management anticipates bringing several large pads online (both in the Bakken and Midcontinent regions). July volumes have averaged 296-298 mboe/d thus far (25% higher year over year) and despite the second-quarter setback, management expects to hit the top end of guidance for the full year (285-300 mboe/d) and for the 2018 exit rate (305-315 mboe/d). Thus, we see no reason for a fair value cut and the company is still one of the best positioned in the U.S. upstream segment, due to its abundant high-quality acreage and its very competitive cost position.
That said, shares have now overshot our $62 valuation, following a 40% run-up in crude prices over the last 12 months (in response to potential supply disruptions, especially in Iran and Venezuela). The WTI benchmark is now more than 25% above our midcycle forecast of $55/bbl, and U.S. drilling activity has rocketed as a result. But the current activity level is not sustainable in our view, and we think lower prices will eventually be required to prevent U.S. shale from overheating. In light of this commodity headwind, Continental investors should consider taking profits.
Continental Resources is an independent crude oil and natural gas company engaged in the exploration, development, and production of crude oil and natural gas mainly in the North, South and East regions of the U.S. The North region consists of properties north of Kansas and west of the Mississippi River and includes North Dakota Bakken, Montana Bakken, and the Red River units. The South region includes all properties south of Nebraska and west of the Mississippi River including various plays in the South Central Oklahoma Oil Province and Sooner Trend Anadarko Canadian Kingfisher areas of Oklahoma. The East region is comprised of undeveloped leasehold acreage east of the Mississippi River.
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