At Continental, Oil Fuels Slick Growth

9/30/2013


  Recent Price
$106
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
24
  Shares (millions)
185
  Long-Term Debt as % of Capital
55%
  52-Week Price Range
$107.25 - $66.07

Continental Resources ($106; CLR), an independent producer of oil and natural gas, generates about 80% of its revenue from crude oil. That leaves operating results highly dependent on oil prices, though Continental uses derivatives to hedge some production to limit volatility. Proved reserves have expanded at an annualized rate of 44% over the past three years, and management has laid out an aggressive strategy to replenish reserves as production ramps.

At 24 times trailing earnings, shares trade 14% above the median for S&P 1500 exploration-and-production stocks. But the company looks attractive relative to its growth prospects, with the consensus expecting per-share-profit growth of 63% this year, 32% in 2014, and 35% annually over the next five years. Shares trade at less than 15 times projected 2014 earnings, a 4% discount to the peer group. The stock's PEG ratio (forward P/E divided by estimated five-year growth) is just 0.9, well below the peer-group median of 1.6.

Continental is a Long-Term Buy.

Business breakdown

The company uses horizontal drilling and other nontraditional techniques to extract oil and natural gas from unconventional formations. Continental is the largest leaseholder in the Bakken, an energy-rich region in the Dakotas and Montana that accounted for 77% of the company's production in the first half of 2013. The company also operates in Oklahoma, Kansas, Colorado, and Wyoming.

Crude oil and natural gas accounted for 93% of revenue in the first half of 2013, with most of the rest coming from gains on derivatives, which can vary hugely from quarter to quarter. Sales rose 29% in the six months ended June (55% excluding derivative gains), while operating cash flow surged 50%.

Prices benefited from Continental's reduced reliance on pipeline transportation. Instead, the company delivered more of its crude oil by rail to higher-priced markets along the coasts. Rail transport costs more than using pipelines, but higher realized prices more than made up for the increased spending. In recent months, however, the regional spread in oil prices has narrowed.

Management claims to be on track to triple production and proved reserves by 2017 from 2012 levels. It projects production will surge 26% to 32% in 2014, on top of projected growth of 38% to 40% this year. While natural gas has steadily gained importance for Continental over the past six years, crude oil should still comprise about 70% of that production.

The balance sheet contains just $220 million in cash versus $4.44 billion of debt, but almost none of that debt will come due before 2019. In August, Standard and Poor's upgraded the company's credit rating to investment grade, potentially making future borrowing cheaper. The pending divorce of Continental founder and CEO Harold Hamm, who owns 68% of the company's shares, could cost the man his voting control. While the uncertainty adds some risk to the shares, it could make Hamm more receptive to a takeover offer.

An annual report for Continental Resources Inc. can be obtained at 20 N. Broadway, Oklahoma City, OK 73102; (405) 234-9000; www.clr.com.

CONTINENTAL RESOURCES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '13
1.33
vs.
0.68
69%
89.63
-
72.35
24 - 19
Mar '13
1.17
vs.
0.76
41%
93.99
-
74.03
28 - 22
Dec '12
1.04
vs.
0.88
31%
80.59
-
66.07
25 - 21
Sep '12
0.87
vs.
0.69
49%
84.19
-
61.02
28 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
2,419
3.36
0.00
97.19
-
61.02
29 - 18
2011
1,680
2.71
0.00
73.48
-
42.43
27 - 16
2010
970
1.73
0.00
59.98
-
36.27
35 - 21
2009
628
0.99
0.00
47.27
-
13.84
48 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
84
59
96
84
96
69

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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