Morningstar | Continental Shooting for 10%-15% Annual Production Growth Through 2023. See Updated Analyst Note from 19 Feb 2019
Continental Resources delivered barnstorming fourth-quarter production growth, with volumes averaging 324 thousand barrels oil equivalent per day (9% higher sequentially and 13% higher year over year). That pushed full-year volumes to the high end of guidance and set the firm up for a flying start to 2019. As the firm had already announced operating results, this success was incorporated by the market before the release of fourth-quarter financials. That presumably explains the stock’s negative reaction to what we see as a strongly positive update. Adjusted EBITDA and adjusted EPS were short of consensus at $851 million and $0.54, respectively, but this was attributed to short-lived weakness in realized crude prices (management says the firm’s basis differentials have already recovered; 2019 guidance indicates a typical discount of around $5/bbl at the midpoint, compared with about $9 in the fourth quarter).We have reduced our fair value estimate to $51 per share after incorporating these results, but our wider thesis is unchanged. In our view, investors focusing on quarterly results are missing the point with Continental. The firm has put itself in a position to deliver 10%-15% production growth over the next five years while delivering $500 million-$1 billion in annual free cash flows. Management based this forecast on a $60/bbl deck for West Texas Intermediate, but our model indicates it can hit this target at $55/bbl. In addition, the firm can withstand significantly lower prices if necessary. We tested and confirmed the claim that the firm can remain cash flow neutral for several years in a $45/bbl world while continuing to increase production. All this underscores our view that Continental enjoys a sustainable cost advantage due to the ideal location of its acreage. The firm is once again earning excess returns on invested capital after a three-year hiatus triggered by the downturn in global crude prices, and it is expected to keep doing so.
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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