Continental Resources: A Good Combination Of Growing Production And Positive Cash Flow – Continental Resources, Inc. (NYSE:CLR)

Continental Resources (CLR) continues to deliver a strong combination of production growth and positive cash flow. It should deliver over $500 million in positive cash flow in 2019 at $55 WTI oil, while increasing average 2019 oil production by over 4% compared to Q4 2018 levels. It also outlined its five-year vision to grow production by 12.5% per year while delivering nearly $4 billion in positive cash flow by 2023 if WTI oil averages $60. Lower oil prices may result in Continental reducing its production growth, but it still remains well positioned in that scenario.

The Outlook For 2019

Continental Resources expects to average around 195,000 barrels of oil production and 800,000 Mcf of natural gas production per day in 2019 at its guidance midpoint. This represents a 4.3% increase in average oil production and a -2.7% decrease in average natural gas production compared to Q4 2018 levels (for a +1.3% increase in average total production).

With that production level, Continental Resources should generate around $4.374 billion in revenue net of hedges at $55 WTI oil and $2.95 Henry Hub natural gas. It only has natural gas hedges in place, and these hedges currently have a slightly negative value in aggregate.

UnitsPrice Per UnitRevenue ($ Million)
Oil (Barrels)71,175,000$50.00$3,559
Natural Gas [MCF]292,000,000$2.70$788
Net Service Operations$35
Hedge Value-$8

With a $2.6 billion capital expenditure budget, Continental may end up with approximately $3.858 billion in cash expenditures. This would result in around $516 million in positive cash flow in this $55 WTI oil scenario.

Continental also indicated that it would be reimbursed by Franco-Nevada (NYSE:FNV) for $100 million of its $125 million contribution (included in the $2.6 billion capital expenditure budget) to the mineral royalty venture, and would receive 50% of the total revenue generated from that venture in 2019. Thus, Continental’s results should be even better than the above calculation.

$ Million
Operating Costs$479
Production Tax$355
Cash SG&A$162
Cash Interest$262
Capital Expenditures$2,600
Total Expenditures$3,858

A $5 change in WTI oil prices would affect Continental’s cash flow by close to $325 million. This makes Continental able to achieve neutral cash flow (including its Franco-Nevada reimbursement) at approximately $45 to $46 WTI oil. An increase to a low $60s average WTI price could result in Continental generating $1 billion in positive cash flow in 2019.

Forward Outlook

Continental also mentioned that it is targeting a 12.5% compound annual growth rate in production over the next five years (excluding acquisitions), along with around $750 million in positive cash flow per year at $60 WTI. This implies that it is attempting to boost production to over 525,000 BOEPD by 2023, along with reducing net debt to under $2 billion depending on oil prices.

Continental also estimates that less than 30% of its current inventory will be developed by 2023. If Continental makes acquisitions to boost its inventory, this may affect its net debt, depending on how it funds its acquisition.

It appears that Continental would expect neutral cash flow during that five-year period at approximately $51 to $52 WTI oil (while growing production by 12.5% per year). It may decide to reduce growth expectations should oil prices stay consistently below $60 WTI.

Source: Continental Resources

Continental’s 60% average ROR at $60 WTI oil is solid still, but is significantly lower than the RORs that it estimated for $60 oil with its 2018 drilling plan which is shown below.

Continental Resources: A Good Combination Of Growing Production And Positive Cash Flow - Continental Resources, Inc. (NYSE:CLR)

Source: Continental Resources

This appears to be due to Continental developing inventory that is probably close to its average grade during its five-year plan, rather than focusing on primarily its best inventory.

Valuation And Conclusion

Continental Resources has an enterprise value of approximately $20 billion based on its current share price and its projected year-end net debt of close to $5 billion. It is currently trading for an EV to 2019 EBITDA multiple of 5.9x based on its projected 2019 EBITDA at $55 WTI oil. This is probably a bit on the low side given Continental’s ability to keep growing production and generating positive cash flow with oil in the mid-$50s.

The combination of growing production and debt reduction should result in Continental’s net debt dropping below 1.0x EBITDA within a few years, and it appears to be one of the strongest shale oil producers.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CLR over 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.