Continental Resources Is a Risky Bet Despite Production Growth

Though oil prices have declined in the past year due to oversupply in the industry, Continental Resources is still looking to increase production. Though the shale oil company’s shares are down 25% in 2015, it is still positive about demand in the end market, which is why it seems to be focused on increasing production.

Steps taken to increase production

Continental’s organic production and total proved reserves since 2010 has grown at a CAGR of 43%, comprising of 68% oil and 32% natural gas and total proved reserves expanding at an average CAGR of 39% since 2010, comprising of 64% oil and 36% natural gas.
The continuously expanding production at each of the key shale regions of Continental with growing rates of return at controlled drilling expenditures is believed to deliver solid top line growth for the company, allowing it to successfully execute on its commitment to deliver improved shareholder returns.

Continental is reporting significant production results for its first STACK well in Oklahoma which is the Ludwig 1-22-15XH in Blaine County. The initial production at the well has been robust, delivering 76% oil with a notable natural gas stream and thus making STACK as another significant, long-term expansion driver for the company.

Depending on the solid operating results during the first half of 2015, Continental is enhancing its production growth guidance in 19% to 23% range for 2015, compared to the previously illustrated growth guidance in 16% to 20% range since last year.

The ongoing notable production at Continental’s first STACK well in Oklahoma is estimated to deliver long-term profitability for the company and encourage the key fuel driller to increasingly explore newer growth opportunities as highlighted from Continental’s planned increase in full year growth guidance for 2015.

Moreover, Continental Resources has ample liquidity of approximately $2.5 billion and no near-term debt maturities, as the nearest maturity is worth $200 million in 2020. In addition, Continental has received an investment grade credit rating of Baa3 from Moody’s and BBB- from S&P. Thus, the extremely well-optimized cost structure of Continental and significant growth efforts has encouraged the key rating agencies to provide an investment grade rating to the stock.

Conclusion

I think that it will be prudent for investors to hold their position in Continental Resources due to the poor growth prospects of the company as it has a negative PEG ratio of 53.97, depicting no growth but a decline in earnings. Additionally, the stock also seems overvalued with trailing P/E and forward P/E ratios of 19.48 and 37.21, respectively, which further indicate a decline in earnings. On top of this, Continental is debt-burdened with total debt of $6.99 billion as against a weaker cash position of $25.46 million only, restricting the company to continue with its operations profitably.
Published on Sep 23, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...