Continental Resources Tech Taps Oil And Natural Gas
Oil and gas explorer and producerContinental Resources ( CLR ) is once again at the forefront of technological innovation and advancement.
The Oklahoma City-based company isn't afraid to go after the higher-hanging fruit in the North Dakota Bakken Shale formation. As the Middle Bakken zone is starting to mature, Continental Resources is now leading the way in the lower Three Forks formation.
The firm is the sixth-biggest by market cap in IBD's Oil & Gas-U.S. Exploration and Production industry group, afterEOG Resources ( EOG ),Anadarko Petroleum ( APC ),Pioneer Natural Resources ( PXD ),Devon Energy ( DVN ) andNoble Energy (NBL).
Continental, however, is the largest leaseholder in the Bakken area, operating 22 rigs across some 1.2 million net acres in the Williston Basin. The company is also the largest and the most active driller in the area, drilling about 300 net wells in 2013.
Cooking At Three Forks
As the largest producer, Continental derives about 65% of its total production from the Bakken play.
"If you think of the Williston Basin as a layer cake, you have the Middle Bakken -- the main area that everyone was focused on at first," said Paul Grigel, analyst at Macquarie Research. Below that, there is an area called the Three Forks, which has four different benches. The first bench has proven to be very prospective across a large acreage swath for much of the industry, he says.
"The area where Continental is really leading the way is on the testing of the lower Three Forks benches," Grigel said. "There are some other industry peers who are testing various benches there, but Continental has the most thorough program to go through in both the second and third benches, and testing a couple of wells in the fourth bench."
Continental plans to drill 20 wells this year to test the commercial productivity of the three lowest benches. As of the end of the last quarter, it had finished 13 wells.
"We see oil there (in those deeper benches); we see the appropriate rock type that we think we can drill horizontal wells in and fracture stimulate. That program is about two-thirds of the way," said Continental President Rick Bott. "Results have been pretty much according to plan. We think we have proven now about a 3,800-square-mile area within the overall 15,000 to 18,000-square-mile area that's productive in the Middle Bakken.
"That is essentially helping the industry see that there is much more oil there to be gotten out at commercial rates than was previously thought. And that's not in a lot of estimates of the basin capacity."
Refining Some Techniques
Another initiative Continental has undertaken in the Bakken Shale formation is downspacing. In downspacing, the company drills more wells in the same acreage area, thus increasing production.
Continental applies what it calls an "appraisal approach": It tries to determine how far apart the wells need to be to try to maximize oil that can come out of the rock.
"After we get those results, we are going to do some more of these types of programs into 2014 and then probably if you look onward into 2015, we'll be taking all that knowledge and going into fulfilled development," said Bott.
Continental also has been using innovative techniques to cut costs and produce oil more efficiently.
By using what the company calls an ECO-pad, it is able to drill four wells from a single drilling pad in the same smaller area. After drilling the well, instead of having to disassemble and haul the rig to a new area, the ECO-pad walks from one hole to the next on hydraulic feet.
Not only is this technique more ecologically friendly with less impact on local farmers, but it also reduces costs, due to time savings and having less surface infrastructure.
"Think of it as buying in bulk," said Grigel. "They've done a good job in 2013 of reducing costs on the per-well cost front and that's something they want to continue to focus on in 2014." Grigel estimates the per-well cost savings to be 5% in 2014 from this technology.
Another promising area is the SCOOP, or the South Central Oklahoma Oil Province. Continental has 277,000 net acres prospective in the area.
Sideways In The SCOOP
The company is addressing the area with horizontal wells with the goal of unlocking value.
"They've shown some interesting results there. I think it's an area they're still working to understand as well as investors," said Grigel.
Continental is investing 15% of capital in the SCOOP this year and the company plans to allocate 25% of its budget in 2014.
In addition to the cost savings that come from using the ECO-pad, Continental also increased efficiencies in drilling and completion of wells and worked out transportation bottlenecks. It is currently using rail in addition to pipelines to transport oil.
The company also has shown strong capital discipline. Even though it has been outspending its cash flow due to continued capital expenditures, the rate of the outspending has slowed. Continental's credit was recently upgraded to investment grade by Standard & Poor's Rating Services.
Quarterly earnings grew at a strong double-digit rate in the past eight quarters, with significant acceleration in the past three. Revenue growth has slowed down in recent quarters.
In the second quarter, earnings per share were up 96% from a year ago to $1.33 as revenue rose 10% to $1.1 billion.
Pushing Ahead Production
The company has set its 2014 production target to between 26% and 32% growth, in line with analyst estimates. It plans to have 400 net well completions, a 22% year-over-year increase. Capital expenditures are expected to be $4.05 billion.
CEO Harold Hamm, who is Continental's founder, and his family hold a 74% controlling interest in the company's stock.
Risks for Continental include the level of oil prices as well as risks associated with exploration of unknown areas. Investors will be watching further developments in the downspacing and the Three Forks area, noted Grigel.
"It's an interesting story and they're certainly one of the leaders in the Williston Basin," added Grigel. "I think they're going to keep pressing forward with new concepts. It's an exciting time to be an investor or a company who is operating in the Williston Basin."
IBD's Oil & Gas-U.S. Exploration and Production industry group ranks No. 13 of 197 groups tracked.