It was a disappointing start to Continental Resources’ (CLR, Financial) fiscal 2015. The company disappointed by posting a net loss in the first quarter, reporting a decline in the earnings. This came in mainly as a result of the ongoing weakness in the commodity market. This can be a grave situation for the company as the commodity market isn’t showing any signs of a big recovery soon. Also, the stock price has also fallen during the last five years.
Now, the management is counting mainly on its production. The company showed slight improvement in the production in the first quarter, which is a ray of hope for it in the future. The company is looking forward to gain momentum on the back of its growing production. Let us have a look if Continental can really succeed in that.
Focus on the action plan
Considering the need of a strict action plan, Continental is now focusing on various initiatives to improve its profitability. It is making necessary adjustments to meet its goals for 2015. For this, it is now aligning its capital expenditures with the cash flows. In addition, it is also reducing the capital expenses to maximize its returns.
Under these situations, production growth can save its skin and can give slight uplift to its declining performance. Continental is seeing good production growth in 2015 and is aligning its drilling and completion activities according to it. Looking forward, analysts are also expecting the oil production across the U.S. to roll over. This is a bright opportunity for the company, as it has a good asset portfolio that will add to its glory in the coming quarters. Considering this, Continental seems well positioned to deliver good cash flows and earnings with the recovery in oil prices. This can also be a long-term opportunity for Continental.
Growth drivers
Moving forward, Bakken is expected to contribute well to Continental’s production. It is pleased to see its drilling programs on track at Bakken. Continental is now planning to keep 10 drilling rigs and three completion crews running through year end. These rigs will be focused on developing its core acreage in Williams, McKenzie and Dunn and Mountrail counties as the company moves into the first stages of full-field development.
Based on these efforts, Continental is seeing a significant improvement in the Bakken rates of return at the well level, as costs are aligning with commodity price. This will add meaningful revenue to Continental. Continental is further focusing on bringing down the costs at Bakken , as it is expecting approximately 15% reduction in costs in SCOOP, which will drive additional reductions in costs through operational efficiencies as it gains more experience in drilling and completing wells in this play. In addition, SCOOP programs will continue to add value and evaluate new opportunities for it further.
Conclusion
Moving to the fundamentals, the stock is reasonable with a trailing P/E of 27.11 and the forward P/E of 42.79 shows good earnings growth in the near term. In addition, a profit margin of 16.20% can be an attraction to the investors and it will also help it to gain market share in future. All these signs indicates that despite weak market conditions , Continental Resources is a good pick as of now but only for a short period of time.
