Continental Resources Inc. Value Stock - Dividend - Research Selection
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Description of the company
We are an independent crude oil and natural gas company with properties in the North, South and East regions of the United States. The North region consists of properties north of Kansas and west of the Mississippi River and includes North Dakota Bakken, Montana Bakken, and the Red River units. The South region includes all properties south of Nebraska and west of the Mississippi River including various plays in the SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend Anadarko Canadian Kingfisher) areas of Oklahoma. The East region is primarily comprised of undeveloped leasehold acreage east of the Mississippi River with no significant drilling or production operations.
We were formed in 1967 to explore for, develop and produce crude oil and natural gas properties. Through the 1980s, our activities and growth remained focused primarily in Oklahoma. In the 1980s, we expanded our activity into the North region. The North region comprised approximately 59% of our crude oil and natural gas production and approximately 69% of our crude oil and natural gas revenues for the year ended December 31, 2017. The Company’s principal producing properties in the North region are located in the Bakken field of North Dakota and Montana. Approximately 50% of our estimated proved reserves as of December 31, 2017 are located in the North region. In recent years, we have significantly expanded our operations in our South region with our increased activity in the SCOOP and STACK plays. The South region comprised approximately 41% of our crude oil and natural gas production, 31% of our crude oil and natural gas revenues, and 50% of our estimated proved reserves as of and for the year ended December 31, 2017.
We focus our exploration activities in large new or developing crude oil and natural gas plays that provide us the opportunity to acquire undeveloped acreage positions for future drilling operations. We have been successful in targeting large repeatable resource plays where three dimensional seismic, horizontal drilling, geosteering technologies, advanced completion technologies (e.g., fracture stimulation) and enhanced recovery technologies allow us to develop and produce crude oil and natural gas reserves from unconventional formations. As a result of these efforts, we have grown substantially through the drill bit.
As of December 31, 2017, our estimated proved reserves were 1,331 MMBoe, with estimated proved developed reserves of 602 MMBoe, or 45% of our total estimated proved reserves. Crude oil represents approximately 48% of our estimated proved reserves as of December 31, 2017. The standardized measure of our discounted future net cash flows totaled approximately $10.5 billion at December 31, 2017.
For 2017, we generated crude oil and natural gas revenues of $2.98 billion and operating cash flows of $2.08 billion. Crude oil accounted for approximately 57% of our total production and approximately 78% of our crude oil and natural gas revenues for 2017. Production averaged 242,637 Boe per day for 2017, a 12% increase compared to average production of 216,912 Boe per day for 2016. Average daily production for the quarter ended December 31, 2017 increased 37% to 286,985 Boe per day compared to 209,861 Boe per day for the quarter ended December 31, 2016 due to increased drilling and completion activities.
Business Environment and Outlook
Our industry has been significantly impacted by lower commodity prices in recent years. The downward pressure on prices experienced in 2015 and 2016 showed signs of easing in 2017. Commodity prices remained volatile during the year, but generally increased on average in 2017 relative to 2016 in response to improving domestic and global supply and demand fundamentals and other factors. Crude oil prices in particular showed significant signs of improvement in late 2017 and early 2018, with West Texas Intermediate crude oil benchmark prices reaching a three-year high of $66 per barrel in January 2018. Crude oil prices remain volatile and it is uncertain whether the increase in market prices experienced in recent months will be sustained.
Continental marked its 50th anniversary in the oil and gas business in 2017. Our leadership team has significant experience with operating in challenging commodity price environments. With our portfolio of high quality assets, we are well-positioned to manage the ongoing challenges and price volatility facing our industry.
For 2018, our primary business strategies will focus on:
• Balancing strong production growth with free cash flow generation;
• Enhancing cash flows and return on capital employed through improvements in operating efficiencies, technical innovations, and optimized completion methods;
• Continuing to exercise disciplined capital spending to maintain financial flexibility and ample liquidity; and
• Improving debt metrics by further reducing outstanding debt using available operating cash flows or proceeds from asset dispositions or joint development arrangements.
Based on an expectation for higher operating cash flows in 2018 in response to improvement in crude oil prices in late 2017 and early 2018, we have increased our planned non-acquisition capital spending for 2018 to $2.3 billion compared to $2.0 billion spent in 2017, with approximately 78% of our 2018 drilling and completion budget focusing on oil-weighted areas in
the North Dakota Bakken and SCOOP Springer plays. We expect to fund our budgeted spending using cash flows from operations. We may adjust our pace of drilling and development as 2018 market conditions evolve.
For 2018, we plan to operate an average of approximately 21 drilling rigs and 10 completion crews for the year. We expect to spend approximately 52% of our 2018 capital expenditures budget on drilling and completion activities in North Dakota Bakken, 20% in SCOOP, and 14% in STACK. The remaining 14% of our 2018 budget will target other capital expenditures such as leasing and renewals, work-overs, and facilities. See the section below titled Summary of Crude Oil and Natural Gas Properties and Projects for further discussion of our 2018 plans.
Our Business Strategy
Despite ongoing volatility and uncertainty in commodity prices, our business strategy continues to be focused on increasing shareholder value by finding and developing crude oil and natural gas reserves at costs that provide attractive rates of return. The principal elements of this strategy include:
Growing and sustaining a premier portfolio of assets focused on balancing production growth with free cash flow generation. We hold a portfolio of leasehold acreage, drilling opportunities and uncompleted wells in certain premier U.S. resource plays with varying access to crude oil, natural gas, and natural gas liquids. We pursue opportunities to develop our existing properties as well as explore for new resource plays where significant reserves may be economically developed. Our capital programs are designed to allocate investments to projects that provide opportunities to deliver strong production growth while generating cash flows in excess of operating and capital requirements, to work down our large inventory of uncompleted wells, to convert our undeveloped acreage to acreage held by production, and to improve hydrocarbon recoveries and rates of return on capital employed. While our operations have historically focused on the exploration and development of crude oil, we also allocate significant capital to natural gas areas that provide attractive rates of return.
Enhance cash flows and return on capital employed through costs reductions, operating efficiencies, technical innovations, and optimized completions. We continue to manage through the current commodity price environment by focusing on improving operating efficiencies and reducing costs. Our key operating areas are characterized by large acreage positions in select unconventional resource plays with multiple stacked geologic formations that provide repeatable drilling opportunities and resource potential. We operate a significant portion of our wells and leasehold acreage and believe the concentration of our operated assets allows us to leverage our technical expertise and manage the development of our properties to achieve cost reductions through operating efficiencies and economies of scale.
We continued to achieve efficiency gains in various aspects of our business in 2017, including additional reductions in spud-to-total depth drilling times and average days to drill horizontal laterals, which has led to reductions in drilling costs in our core areas. In addition to lowering our drilling costs, we also work to enhance cash flows through the use of optimized completion technologies that help improve recoveries and rates of return. These efforts have had a positive impact on the efficiency of our capital deployed in recent years, resulting in significant improvement in the quantity of reserves found and developed per dollar invested.
Maintaining financial flexibility and a strong balance sheet. Maintaining a strong balance sheet, ample liquidity, and financial flexibility are key components of our business strategy. In 2017, we reduced our total debt by $226 million, or 3%, from $6.58 billion at year-end 2016 to $6.35 billion at year-end 2017. We are actively targeting further debt reduction using available cash flows from operations or proceeds from potential sales of non-strategic assets and joint development opportunities and will continue our focus on preserving financial flexibility and ample liquidity as we manage the risks facing our industry.
Focusing on organic growth through disciplined capital investments. Although we consider various growth opportunities, including property acquisitions, our primary focus is on organic growth through leasing and drilling in our core areas where we can exploit our extensive inventory of repeatable drilling opportunities to achieve attractive rates of return. From January 1, 2015 through December 31, 2017, our proved reserve additions through extensions and discoveries were 743 MMBoe compared with insignificant proved reserve acquisitions during that same period.