Continental Resources (CLR) looks to be an okay value at its current $12.55 share price, with slight upside with longer-term $40 WTI oil prices and around 40% upside if longer-term oil prices averaged around $45.

While it could still use higher oil prices in the short-term, a high-$30s WTI oil scenario is still enough for it to generate a modest amount of positive cash flow while keeping production at around 300,000 BOEPD. If WTI oil went back to $50, Continental could potentially generate $700 million in positive cash flow with a maintenance capex budget.

Debt Reduction

Continental indicated in early August that it expected to have $500 million in positive cash flow in the second half of 2020. Current second half oil and gas price expectations are fairly close to strip from early August, with the decline in November/December oil futures largely offset by improved natural gas futures. Thus, Continental should still be able to generate close to $500 million in positive cash flow in 2H 2020.

It had $5.743 billion in outstanding debt at the end of Q2 2020, but is targeting around $5.4 billion to $5.5 billion in debt at the end of the year. Some of its positive cash flow is likely going to help reduce its working capital deficit.

The positive second half cash flow is going to come in conjunction with lower production levels though. Continental’s 2020 exit rate is estimated at 320,000 BOEPD, compared to its Q4 2019 production level of approximately 365,000 BOEPD.

2021 Breakeven Point

Continental mentioned that its maintenance D&C capex requirements (to keep production at approximately 300,000 BOEPD) were now around $1.2 billion. This is a significant reduction from the close to $2.0 billion maintenance D&C capex requirements that it had before (albeit at around 350,000 BOEPD).

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Some of the decline in maintenance D&C capex requirements is due to the lower production levels, while Continental’s corporate first-year base decline rate has also gone down from the upper 30s to the lower 30s with the reduction in activity in 2020.

In a scenario where Continental tries to maintain production at 300,000 BOEPD in 2021 (with a $1.5 billion total capex budget, including $300 million allocated for non-D&C capex), it looks like it could reach breakeven cash flow at around $37 WTI oil. This assumes a negative $5 oil differential, resulting in a realized net price of $32 per barrel for Continental’s oil production.

Continental’s 2021 hedges only consist of a modest amount of Q1 2021 natural gas hedges at last report.

Units Price Per Unit Revenue ($ Million)
Oil (Barrels) 59,130,000 $32.00 $1,892
Natural Gas [MCF] 302,220,000 $1.80 $544
Net Service Operations $25
Hedge Value -$3
Total $2,458

It mentioned that it could maintain production around 300,000 BOEPD for multiple years for $1.2 billion in D&C capex per year. Thus an oil price above $37 WTI oil would allow Continental to work on paying down its debt and/or invest in growth capex.

$ Million
Operating Costs $411
Production Tax $205
Cash SG&A $110
Cash Interest $238
Capital Expenditures $1,500
Total Expenditures $2,464

2021 Outlook At Strip

WTI strip prices for 2021 are currently averaging around $39.50. At that price, Continental may realize $34.50 per barrel for its oil, which would allow it to generate $2.606 billion in revenue (including hedges) with average production of 300,000 BOEPD.

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Units Price Per Unit Revenue ($ Million)
Oil (Barrels) 59,130,000 $34.50 $2,040
Natural Gas [MCF] 302,220,000 $1.80 $544
Net Service Operations $25
Hedge Value -$3
Total $2,606

Continental’s cash expenditures in this scenario would be $2.476 billion, resulting in an estimated $130 million in positive cash flow.

$ Million
Operating Costs $411
Production Tax $217
Cash SG&A $110
Cash Interest $238
Capital Expenditures $1,500
Total Expenditures $2,476

Thus in a high-$30s WTI oil scenario for 2021, Continental may go with a maintenance capex type of budget and potentially pay its debt down to around $5.3 billion by the end of 2021. A slightly below maintenance capex budget would help it to reduce its debt further.

Valuation And Conclusion

Continental Resources’ stock appears to be an okay value at around $12.50 per share. It can maintain production levels (if it chooses to do so) and generate $130 million in positive cash flow at high-$30s WTI oil.

At a longer-term oil price of $40 WTI oil, I’d value Continental at approximately $13 to $14 per share. At $45 WTI oil, its estimated value increases to around $17 to $18 per share.

While current oil prices aren’t great for Continental, at least it appears able to maintain a stable financial and production outlook while waiting for oil prices to rebound in the longer-term.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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