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Continental CEO Sees U.S. Drilling Slower And Orderly

By: Investor's Business Daily
Posted: 12/31/2013 5:12:00 PM
Referenced Stocks: APC;CLR;DVN;EOG;PXD

The U.S. energy sector renaissance under way the past five years is continuing as domestic drillers such asContinental Resources ( CLR ) hone ways to reach oil and natural gas in fields across the nation.

The rich deposits of formerly unrecoverable oil and gas could make the U.S. energy-independent in the next decade as the practice of horizontal drilling continues to be a chiefly North American story.

Land grabs are expected to keep happening, but to be more orderly as growth matures. Smaller players with a foothold in U.S. shale formations are likely to benefit from having entered the regions early.

Continental, whose stock lifted 53% in 2013, is the sixth largest name in IBD's Oil & Gas-Exploration & Production industry group, afterEOG Resources ( EOG ),Anadarko Petroleum ( APC ),Pioneer Natural Resources ( PXD ),Devon Energy ( DVN ) andNoble Energy (NBL) .

Continental is also one of the largest producers of oil in the Bakken play in the Dakotas -- it does roughly 65% of its total production there.

Harold Hamm is CEO of the Oklahoma-based company and has always been in the oil business, but not always on the top. He started out as a gas station attendant before starting a tank truck service.

He recently spoke with IBD about opportunities and challenges for domestic drillers in 2014:

IBD: Shell (RDS) left Eagle Ford in 2013 because land was too expensive. Is the private land grab over?

Hamm: I think for a while there was a big land grab going on. I won't say it's over but it's definitely down from what it was. Most companies had a budget outspend; we are seeing reduced outspend on projects for the next year. Our company is looking at half the outspend that we have had in the past.

IBD: How will drilling abroad affect domestic drilling?

Hamm: Everyone expected we would see shale development all over the world. But that earlier thought perhaps has waned some due to the experience in Poland, due to some of the obstacles in other places. Some of the countries could have a lot of shale gas and oil, but those countries don't need it yet, like Russia for instance.

We are on track to see fulfillment of earlier predictions we will see energy independence in this country in 10 years, so that would be 2020-2021 -- we are on track to do that.

A lot of people get into a little bit of a hurry -- once they realize that this could happen they get to thinking that it would happen quicker.

It's going to take longer with oil -- it's unlike natural gas, in that it's a commodity that isn't as plentiful on the Earth as gas is. Gas is easier to find, gas is easier to produce. A molecule of oil is about three times the size of a molecule of natural gas. It doesn't come through the rock as well and it doesn't come through the shale as well, so it's going to take longer.

With gas we've reached a crowded market real quickly because when shale gas started coming on, supply and demand was pretty much in equilibrium, even though gas prices were a little bit elevated due to projected shortages and the fact that we would have to import natural gas. With oil we were at a 60% deficit at the height of imports in the country, in 1997 or 1998. As increased supplies come on we have to make that deficit up.

IBD: Where do you see oil prices going next year?

Hamm: I think 2014 we will see fairly stable prices. A lot of people tend to forget that OPEC is still there. It takes $80 a barrel to maintain the quality of life in Saudi Arabia. If it gets much below that, they would cut back the amount of oil being produced. You can't forget OPEC even though it looks we might be able to supply our own needs here in this country within the next several years.

IBD: What are your expectations for the regulatory and legal climate in 2014?

Hamm: Federal regulation for fracking has been pushed for, and I think everyone understands pretty well that the states have done pretty well for the past 100 years (in regulating drilling) and continue to do a good job. I don't think there will be any regulations come about as a result of fracking.

IBD: How important is fracking to drillers vs. other types of drilling?

Hamm: Fracking was basically a distraction, a divergence. There is just one thing that created this energy renaissance that we are experiencing today: horizontal drilling. The ability to use Space Age technology to drill down two miles below the ground and then turn right and go two to three miles further in these twin-bed reservoirs and expose a lot of the rock to the bore hole. Multistage completion technology has helped but the primary No. 1 factor has been horizontal drilling.

IBD: If the land grab isn't quite over, where do you see development in 2014?

Hamm: A lot of the shale plays have already been identified in the U.S. There may be some other applications but we are almost 20 years into this renaissance when all the plays were being identified -- the Barnett, the Bakken, the Marcellus, Haynesville, Fayetteville.

IBD: What can we expect from a more mature drilling environment?

Hamm: Perhaps slower, more orderly development. And we are seeing that in the Bakken, going from a high rig count of 237 to a stabilized rig count of 180.

IBD: What are your overall expectations for 2014?

Hamm: I see a lot of great things occurring for our country, for national security. A lot of people are being put to work in the industry.

If you look around, the oil-producing states have very low unemployment numbers. One of the biggest (benefits) is the psychological benefit, the fact that America can be energy-independent. I think that's done more for our country than any single thing.

The New America section featured Continental Resources on Oct. 9, among 10 oil and gas companies profiled in the fourth quarter of 2013.