Continental Resources Has a Winning Formula

Continental Resources (CLR) continues to improve its cost structure. For instance, Continental Resources, during the first-quarter reduced well costs by another 5% to a targeted $9.5 million per operated well for its newly completed Meramec wells at STACK. This reduction in well costs is due to various efficiencies the company has realized so far this year.

For example, Continental Resources’ spud-to-TD drill times during the first quarter of 2016 came down significantly to 30 days from an average of 44 days in 2015.

Thus, at current well costs of $9.5 million per barrel and based on its economic model for a 9,800 foot-lateral at Meramec wells the company can generate a rate of return of 75% at $45 per barrel WTI and $2.25 per Mcf of gas.

As a result of this impressive progress in a weak oil and price environment, Continental Resources has narrowed the gap of declining revenue and earnings growth. For instance, although Continental Resources’ revenue for the quarter decreased by 31% on a year-over-year basis, the revenue growth on a percentage has improved to a negative 30.67% from a negative of 41.42% in the same quarter last year. Likewise, Continental Resources’ earnings for the quarter dropped by 50% on a year-over-year basis, but the earnings growth on a percentage basis has improved to negative 50.28% from a negative rate of 222.47. The table below demonstrates Continental Resources’ revenue and earnings performance and the year-over-year growth.

Revenue and Earnings performance in Million
Q1, 2015Q2, 2015Q3, 2015Q4, 2015Q1, 2016
Revenue Growth (%YOY)-41.42-30.25-45.69-38.56-30.67
Earnings Growth (%YOY)-158.33-99.61-115.45-222.47-50.28

Source: Continental’s financials

Looking ahead, Continental Resources is targeting further cost reductions and efficiencies at the STACK and SCOOP, which should improve its earnings performance in 2016. For instance, the company at its Woodford wells at SCOOP remains high to achieve a well cost of $9.6 million for a 7,500-foot lateral by this year end, representing a drop of 4% in the well cost compared to the current level of $10 million per operated well at Woodford.

The even more important thing is that Continental Resources at this level of cost and projected 2.0 MMBoe EUR, these Woodford wells will be able to generate 30% rate of return on $45 per barrel WTI and  $2.25 per Mcf of gas. This sort of rate of return at the current oil and gas prices should drive its growth going forward.


Thus, it is not surprising to see its stock soaring more than 80% this year so far. In my opinion, Continental Resources’ return on equity and return on assets will improve going forward due to the ongoing costs reduction and asset efficiency efforts. Therefore, the investors should stay positive with Continental that remains one of the best bets in the current oil and gas price environment.
Published on May 20, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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