Clearly, Continental’s success going forward requires sustained high oil prices, although their drilling costs are decreasing as technology improves. I expect the stock to increase close to $50 a share over the next year or 10x Capital Expenditures. Continental is my favorite inflation hedge because of their attractive and growing North American reserves and their decreasing costs. Oil is a far more attractive hedge against inflation because its consumption dramatically exceeds gold. Continental Resources is not without significant risks and shareholders require significant trust in management and Harold Hamm. Continental has a myriad of drilling sites in the Rocky Mountain Region and surrounded by properties of exploration companies like EOG Resources and Brigham Exploration. I don’t believe you can model Continental’s potential because future-drilling success is unknown and they have many holes to drill over the next 10-15 years.
An important location for Continental is the North Dakota Bakken shale where they hold 444,000 acres, which as of year-end is still mostly undeveloped. You can view their operating locations via this link. http://www.contres.com/index.cfm?id=70
Continental’s strategy involves funding their capital expenditures via their cash flow, which is why I believe 10x Capital expenditure is an appropriate valuation because their drilling success can be measured with increasing capital expenditures and additional wells. Continental’s capital expenditures for 2010 are roughly $850 million or a 31% increase over 2009.
Continental’s focus on maintaining a strong balance sheet and oil exploration is undoubtedly the result of Mr. Hamm’s 40 years of riding the highly cyclical oil wave. Overall, I consider Mr. Hamm a conservative individual and he stated this year shareholder’s are going to be rewarded, which I believe means his projections for reserve growth and cash flows are conservative. Mr. Hamm understands the scarcity of capital and by increasing 2010 capital expenditures from $650 million to $850 million is a sign of his confidence in Continental’s drilling program and their properties.
A few key facts from their latest report:
“The PUD’s in the 2009 proved reserves included only 9 percent of Continental's undeveloped acreage in the North Dakota Bakken”
“The Company completed eight gross operated wells (4.3 net) in North Dakota during the quarter, with six gross wells targeting the Three Forks/Spanish (TFS) zone. The six TFS wells averaged 1,242 Boepd in their initial seven-day production tests. These completions involved 18 fracture stimulation stages and approximately 100,000 pounds of proppant injected per stage.”
“At year-end 2009, the Company had 481,850 net acres in the North Dakota Bakken, of which 81 percent were undeveloped. The Company had increased its total acreage position in the North Dakota Bakken to 488,500 net acres as of February 25, 2010.”
Author owns shares of CLR