Continental makes another sharp capex cut

Analysts comment on revised figures

As commodity price drops continue to put pressure on cash flow for numerous oil and gas companies, Continental Resources expects core assets in the Bakken and SCOOP plays to drive production growth despite another cut to the company's 2015 capital program.

This third cut to 2015 capex drops the budget from $4.6 billion to $2.7 billion and is “certainly the most dramatic cut of the bunch as the unhedged company right sizes its business,” noted analyst with Wunderlich Securities.

To help fortify the balance sheet, the Oklahoma City-based company is lowering its operated rig count from 50 to 31 (38% year over year), with the drop coming quickly as the company expects to exit the first quarter of 2015 with 34 rigs. In the company’s core North Dakota Bakken and SCOOP Woodford/Springer plays, rigs are expected to drop to 11 and 16, down 42% and 38%, respectively, noted analysts with Stiefel following the news.  Four rigs are expected to remain in Northwest Cana, where 50% of the costs applicable to the company's interest is being carried by a JV partner.

This level of activity is projected to yield 16% to 20% production growth in 2015 compared to estimated 2014 production.

Harold G. Hamm, chairman and CEO, commented, "This revised budget prudently aligns our capital expenditures to lower commodity prices, targeting cash flow neutrality by mid-year 2015. This budget also maintains our financial flexibility and strong balance sheet while continuing to grow production in our core Bakken and SCOOP plays."

Focus on core assets to drive returns
While continued lower oil prices will shape profitability in some areas, US Energy Information Administration's Adam Sieminski said earlier in December that oil prices are "expected to remain high enough in 2015 to support new drilling in the major shale areas in North Dakota and Texas."

Continental is a key player in the Bakken, and the company expects to complete 188 net wells targeting an increased average estimated ultimate recovery (EUR) of 800,000 boe per well. Completed well cost estimates are expected to average at least 15% below 2014 averages as service costs adjust to lower commodity prices. 

Citing these "aggressive assumptions," Wunderlich Securities analysts noted "the increased EURs and lower OFS cost assumptions certainly play major factors in these changes. These are still to be seen, and likely can have an impact, but with them baked in already we feel there is minimal upside to the figures."

Considering the current 2015-2016 strip, Stifel analysts project Continental will "outspend 2015 and 2016 cash flow by $600 million and $100 million, respectively, which is based on 2015 guidance and a flat budget and 5% y/y growth in 2016. Under this scenario, we project CLR's balance sheet will remain strong and exit 2015 and 2016 with debt/TTM EBITDA ratios of 2.6x and 2.3x and liquidity of $1.2B and $1.0B, respectively. We estimate oil would have to average $70/bl for CLR to achieve cash flow neutrality in 2015."

Overall, the company’s cash flow has fallen along with the underlying commodity and the company's previous decision to monetize its hedges has led to the drastic cuts in 2015 capex, said Stifel analysts, however, they noted, "we see meaningful long-term upside should oil move toward our long-term forecast of $80/bl."

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