May 15, 2014 (Chinavestor) We initiate a BUY rating on Continental Resources (NYSE:CLR) based on a strong pipeline of oil and gas reserves production, mainly in the Bakken and SCOOP regions in the US. The company shows industry leadership in tight oil extraction technology and exhibits high return on assets and return on equity ratios. Continental Resources has an intrinsic value of $180.38 using free cash flow valuation, and is a significant premium to its recent price.
- Company overview
Continental Resources (‘Continental’) is engaged in the exploration and production of onshore oil and gas in the US with operations in the North, South and East regions. It is a top 10 independent oil company in the US and is headquartered in Oklahoma. The company was formed in 1967 by CEO Harold Hamm, originally called Shelley Dean Oil & Co. Continental acquired Petro-Lewis in 1985 as its largest acquisition, including over 500 oil and gas wells. In 1990 the company was renamed to Continental Resources and subsequently listed on the NYSE in 2007.
The company entered the North Dakota Bakken region with a 300,000 acre purchase in 2003. Continental is the largest leaseholder and producer in Bakken and is currently Continental’s largest production region.
The current proved reserves consists of 68% oil and 32% gas. Most of the proven reserves are in Bakken region (64%) in North Dakota. Total proved reserves are up 38% YoY. In 2013, proved reserves were 1084 MMBoe compared with 785 MMBoe in 2012.
Continental’s strong overall performance is due to a combination of obtaining large plots of acreage; solid production history; being a leader in fracturing horizontal drilling technology; and the low competition from the major oil and gas corporations for US tight oil. The larger competitors do not have a strong appetite for tight oil extraction, as they have historically found it cost prohibitive.
- Revenue and earnings outlook
Revenue and earnings have grown dramatically since 2010. The most recent quarterly release shows a EBITDAX of $775 million which is a significant improvement of 25% YoY. With revenues increasing annually at approximately 50% since 2010, this has translated to an annual average increase in net profit of 77% between 2010 and 2013. To be continued...