STUDENT MANAGED INVESTMENT FUND
Independent Oil and Gas E&P
This report is published for educational and investment purposes only
by students enrolled in American University’s Student Managed
Investment Fund.
Date: 11/7/2011
Continental Resources
Ticker: CLR
Price: $66.07
Recommendation: Buy
Price Target: $108
___________________________________________________________
Safety Ratings
Moody’s
Outlook
Long Term Rating
Senior Unsecured Debt
Standard & Poor’s
Outlook
LT Foreign Issuer Credit
LT Local Issuer Credit
Pos
Ba3
B1
Stable
BB
BB
Earnings/Share
Mar
Jun
Sept
Dec
$0.53
$0.76
$0.62
$0.04
$2.00
31x
2009
-$0.03
$0.16
$0.26
$0.34
$0.74
96x
2010
$0.49
$0.34
$0.43
$0.51
$1.73
39x
2011
$0.62
$0.60
$0.68
$0.69
$2.49
28x
2012
$0.72
$0.75
$0.79
$0.81
$3.10
21x
___________________________________________________________
Investment Rationale




P/E Ratio
2008
Highlights

Year
Continental Resources is the top producer in the Bakken Shale by
many metrics: rig counts, well counts, permits, and acreage
The company has seen consistent organic reserves growth and
currently holds 365 million barrels of oil that should last 23 years
CLR is over 3/4s oil levered
The company uses its assets far more efficiently than most
competitors



Continental Resources is at the forefront of emerging oil and gas
plays in the United States
There is large potential for expanding the amount of hydrocarbons
produced in the U.S. by using hydraulic fracturing.
Increasing worldwide demand for oil will either drive prices up or
necessitate major new fields; probably both.
Continental Resources is extremely well positioned to ride both of
these macro-economic forces through its state in the Bakken shale
field.
Key Statistics
Exchange
NYSE
Bloomberg Raw Beta (11/04/2011)
1.63
Current Price (Nov 4th, 2011)
$66.07
Bloomberg Adj. Beta (11/04/2011)
1.42
52 Week High (Mar 30th, 2011)
$73.48
Shares Outstanding
52 Week Low (Oct 4th, 2011)
$42.43
Market Cap (Nov 4, 2011)
Prior Year EPS
$X
Projected 12 M Dividend Yield
Forward P/E (Bloomberg)
21x
Fiscal year ends
180,483k
$11,295M
N/A
December
11/7/2011
Continental Resources
Business Description
Continental Resources is an independent exploration and production, oil & gas company. The company
discovers or purchases hydrocarbon plays and then develops and produces crude oil & natural gas.
Continental is on the forefront of oil production and relies heavily on rapidly evolving technologies. The
company is purely ‘upstream’ meaning that they only produce crude oil and do not deliver, refine, or market
it.
Operations
Continental Resources only operates in the United States where production is split up into three broad
regions, North, South, and East. Continental’s ‘home’ is in the Woodford oil fields of Oklahoma. However,
starting in 1993 Continental reinvented itself and began exploring in the Bakken field of North
Dakota/Wyoming where the majority of their profit comes from today. The Bakken is an oil heavy play and
as a result the company is highly oil levered, with 75% of its reserves consisting of crude oil.
Reserves by Field
East
Region
1%
Other
3%
Oklahoma
Woodford
27%
Bakken
54%
Red River
15%
The Bakken’s geology is a tight oil shale formation which is unreachable by conventional drilling
technology. Continental uses horizontal drilling techniques as well as hydraulic fracturing (‘fracking’) to
extract this oil. There will be a further discussion of hydraulic fracturing below but CLR is a leader in the
field and has been fracking for many years. Continental Resources is one of the most technology forward oil
companies in America often pioneering improvements in tight sands drilling.
Continental sells its oil and natural gas to numerous midstream pipelines and distributors. Marathon Oil
accounts for 57% of CLR’s hydrocarbon sales; no other purchaser accounts for more than 10% of sales.
Bakken Ultra High Sweet Crude currently trades at a spread to NYMEX WTI of +$1.25 but it has varied
from -$4.5 to +$7 over the past year. For the full year 2010 Continental saw an average differential to WTI of
-$9 but has seen that spread improve to -$5 over the past nine months. The company has hedged 83% and
70% of its expected 2012 and 2013 crude oil production respectively. Natural gas remains mostly unhedged
with only 10% of expected 2012 production locked in. The company uses a combination of swaps and collars
to hedge.
Management
Harold G. Hamm
John D. Hart
Jeffrey B. Hume
Eric Spencer Eissenstat
Richard E. Muncrief
Steven K. Owen
Jack H. Stark
Mark E. Monroe
Edward T. Schafer
David L. Boren
Analyst: Seth Borko
Chairman of the Board, Chief Executive Officer, Founder
Chief Financial Officer, Senior Vice President, Treasurer
President, Chief Operating Officer
Senior Vice President and Chief Legal Officer
Senior Vice President - Operations
Senior Vice President - Land
Senior Vice President - Exploration
Director
Director
Independent Director
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11/7/2011
Continental Resources
Industry Overview and Competitive Positioning
400
Domestic oil exploration and production is, and has always been, and extremely fractured industry. Integrated
oil majors only account around 35% of production with the rest being independent. Continental is in good
company with thousands of publically traded companies.
350
Production
(Thousands of
Barrels/Day)
300
One of the biggest changes in the oil business in recent years is the rise of hydraulic fracturing. In a
conventional well changes pressure force oil to the surface, often at great speeds (think of the classic Texan
well gusher). Even once pressure weakens, most oil can still be pumped out. This is due to two factors, the
density of the rock, and the viscosity of the oil. We normally think of a well as a giant cavern filled with oil
but this is not always so. In the case of shale formations the rock is so tight together that oil and gas cannot
easily flow upwell. The solution is to pump a fracking mixture down a sealed well until the pressure is so
great that the rock literally fractures internally. Once the rock has been cracked open there are more openings
in the shale and crude oil can now easily flow out. Fracking requires a fracking mixture (99% sand and water)
that is to be pumped and substantial pressure.
250
200
150
100
50
0
Most shale formation are natural gas heavy but the Bakken in unique in that it produces a large amount of
liquids. A 2008 United States Geological Survey placed total recoverable reserves at 3-4.3 billion barrels of
oil and said the play was the largest contiguous field they had ever surveyed. The estimate is 25 times a 1995
survey because the study focuses on recoverable reserves which have increased substantially alongside
technology and oil prices. Daily production has grown exponentially over the past ten year once again,
mainly due to technological advances in horizontal well drilling and hydraulic fracturing.
Source: Google Finance
Competitive Position within Industry
Continental Resources is a top company in the Bakken play. CLR was amongst the first to arrive and leads
all other competitors in new permits issued, wells drilled, and rig count. The company is the second largest
leaseholder in the field just behind Hess with 869k acres and 900k acres respectively, the next largest
leaseholder, EOG Resources, owns only 600k acres. Even then Continental holds 4.8
70
Permits Issued
60
Well Drilled
50
40
30
20
10
5/1/2011
3/1/2011
1/1/2011
9/1/2010
7/1/2010
11/1/2010
5/1/2010
3/1/2010
1/1/2010
9/1/2009
11/1/2009
7/1/2009
5/1/2009
3/1/2009
1/1/2009
9/1/2008
11/1/2008
7/1/2008
5/1/2008
3/1/2008
0
Continental Resources performs above its peers on many oil industry metrics. Netbacks are all costs
associated with finding and bringing oil to market subtracted from sales price; essentially profit per barrel.
The recycle ratio divides netbacks by costs of discovery and extraction; essentially the metric is one of profit
to costs. By these metrics both in the short run and averaged over three years, CLR far outperforms its peer
group. Continental also finds new reserves at a faster rate and has a greater reserve lifespan than similar
companies. Finally, Continental generates higher operating cash flows as measured by earnings before
interest, taxes, depreciation, amortization, and exploration (EBITDAX).
Comparables
Netback/
Recycle Ratio BOE
Ticker
Name
CLR
EOG
BEXP
HES
WLL
DNR
MRO
NFX
KOG
CONTINENTAL RESOURCES INC/OK
EOG RESOURCES INC
BRIGHAM EXPLORATION CO
HESS CORP
WHITING PETROLEUM CORP
DENBURY RESOURCES INC
MARATHON OIL CORP
NEWFIELD EXPLORATION CO
KODIAK OIL & GAS CORP
Average
CLR-Avg
Analyst: Seth Borko
F&D/
BOE
3 Year
3 Year Average Average
Recycle Ratio Netbacks
3 Year
Reserve
Reserve Year end
Average Relacement % Production Life (in Reserves EBITDAX Debt/
F&D
Ratio
oil
years) (MBOE) Margin Equity
3.71x
1.80x
1.94x
1.94x
1.92x
1.30x
1.26x
1.73x
0.80x
$49.25
$24.97
$47.47
$52.72
$46.77
$44.23
$45.65
$30.30
$42.46
$9.72
$15.27
$6.92
$43.82
$18.74
$22.50
$28.51
$31.58
$41.02
3.35x
1.89x
1.51x
2.45x
1.33x
2.51x
1.30x
2.13x
1.46x
$49.61
$13.31
$28.56
$13.34
$43.35
$42.38
$48.32
$28.27
$44.56 #N/A N/A
$43.39
$16.96
$44.17
$36.45
$33.38
$20.04
$41.88 #N/A N/A
1.82x
1.89x
$42.65 $24.23
$6.61 -$14.51
1.99x
1.36x
$41.91
$7.70
$24.39
-$11.09
7.79x
2.48x
14.36x
2.02x
2.28x
13.01x
0.95x
1.34x
16.34x
74.76%
19.33%
74.47%
69.06%
80.63%
82.16%
59.42%
30.82%
84.77%
23
14
22
10
13
15
7
13
20
6.73x
1.06x
63.94%
10.82%
15
8
AU SMIF
Page 3
365
1,588
67 N/A
351
51
398 N/A
297
585 N/A
12 N/A
413
-48
76%
51%
20%
71%
12%
46%
31%
77%
51%
51%
33%
32%
55%
33%
69%
13%
46%
31%
11/7/2011
Continental Resources
Macroeconomic Drivers within the Industry
GDP Growth
A major driver for energy prices are GDP growth. If GDP grows so will production and discretionary
income. Natural Gas and Crude oil are used in all aspects of the economy including gasoline/fuel, fabrics,
electricity, heating and much more. As a result increased production will boost demand for hydrocarbon
products. More discretionary income means consumers will drive more, heat more, and spend more – further
boosting demand for oil.
Supply
The other major factor (arguably the most important) for energy prices is supply available. Supply is tightly
controlled by a limited number of petroleum producing countries. In addition to ‘routine’ supply constraint,
such as an OPEC meeting, it is also very possible for extraordinary shocks to supply to effect prices. The
invasion of Libya, Gulf coast hurricanes, and innumerable other shocks can affect supply.
Falling Incomes/Unemployment
Demand for hydrocarbons is relatively inelastic. A majority of cuts to heating/lighting/driving that one would
expect due to unemployment have probably already occurred in ‘08/’09. It is likely that there is not much
more dependence on oil that can be cut going further on into the future
Imports/Exports
No oil produced by CLR is exported outside the U.S. A substantial portion of American energy is imported
but ironically, this works in the companies favor as there is a large political push to decrease energy imports
which will positively affect Continental and other domestic E&Ps.
Inflation
There is a substantial risk of inflation for Continental. As competition in the Bakken heats up prices for rigs,
crews, and other costs will rise accordingly. This has the potential to substantially cut into profit. So far CLR
has been good about maintaining margins even as production, well counts, and rig counts have soared.
Investment Summary
Continental Resources is an oil levered E&P company with over half of its reserves in the tight shale oil. The
company is the premier operating in the Bakken field and as such is position to succeed if the Bakken
Succeeds. Continental is a play on the future of domestic oil, continued success in fracking, and rising energy
prices. From a realistic and pragmatic vantage point, I believe that all three of these outcomes will come to
pass and in doing so provide a profit to Continental Resources.
Valuation
Discounted Cash Flow
2011 E
2012 E
2013 E
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
Terminal Value
EBITDAX
$1,147,637 $1,289,947 $1,563,345 $2,047,790
$2,426,389 $2,925,833 $3,528,081 $4,254,294 $5,129,990 $6,185,938
Taxes
78,019
101,654
140,119
205,702
269,993
366,788
498,286
676,928
919,615 1,249,307
Capex
2,000,000 1,750,000 1,743,097 1,736,194
1,729,292 1,722,389 1,715,486 1,708,583 1,701,680 1,694,778
Change in Working Capital
-52,952
-40,216
-27,480
-14,745
-2,009
10,727
23,463
36,198
48,934
61,670
FCF
-877,431 -521,491
-292,391
120,639
429,114
825,929 1,290,846 1,832,585 2,459,761 3,180,183
Interest Expense
68,857
77,395
93,799
122,865
145,580
175,546
211,681
255,253
307,793
371,149
FCFE
-946,287 -598,887
-386,190
-2,226
283,533
650,382 1,079,165 1,577,332 2,151,968 2,809,034
FCFE/share
-$5.24
-$3.32
-$2.14
-$0.01
$1.57
$3.60
$5.98
$8.74
$11.92
$15.56
$192.56
Discounted Value
-$5.24
-$2.92
-$1.66
-$0.01
$0.95
$1.91
$2.80
$3.60
$4.33
$4.98
$61.67
Intrinsic Value
70.41
Discounted Value
-$0.01
$1.38
$2.80
$4.09
$5.27
$6.33
$7.29
$90.13
3-Year Price Target
$117.28
Assumptions
Rm
Rf
Beta
CAPM
WACC
Shares out
Long Term Growth
10%
2.09%
1.441
13.49%
13.75%
180,483
5.00%
Analyst: Seth Borko
The basis of this discounted cash flow is EBITDAX assumptions. EBITDAX out until 2015 is estimated
using income statement projections (see below) and then grown at an average CAGR until 2020. EBITDAX
was used a proxy for operating free cash flow to which is then subtracted taxes, capital expenditures and
working capital to reach a free cash flow to the firm number. Interest expense was subtracted out to reach free
cash flow to equity. Taxes are extremely hard to estimate in this industry so a fixed rate based on the average
past five years was used. Capex for 2011 and 2012 has already been spelled out by management but I do not
believe that such a rate of expenditures (almost 100% of revenue) is sustainable. An industry average of
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11/7/2011
Continental Resources
70.41
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
8%
$134.48
$168.36
$205.38
$245.60
$289.05
$335.77
$385.81
$439.20
$495.97
10%
$68.12
$86.60
$106.71
$128.48
$151.91
$177.03
$203.87
$232.43
$262.74
Discount Rate
12%
13.49%
$40.45
$28.67
$52.50
$37.97
$65.55
$48.02
$79.62
$58.82
$94.72
$70.37
$110.86
$82.69
$128.05
$95.79
$146.31
$109.67
$165.63
$124.34
14%
$25.60
$34.18
$43.44
$53.38
$64.01
$75.34
$87.37
$100.12
$113.57
16%
$16.52
$22.98
$29.91
$37.32
$45.22
$53.62
$62.50
$71.89
$81.78
Changes in Commodity Prices
Changes in Commodity Prices
Capex/EBITDAX was calculated and then capex from 2013 onwards was shrunk down to that level by 2020.
Interest expense is based upon historical EBITDAX/Interest coverage ratios. My FCFE approach yields an
intrinsic value of $70 in line with where the stock is currently trading. CLR is fairly valued, and capital gains
will not be based upon a revaluation but rather growth by the bit. Using these assumptions, I reach a three
year price target of $117.
117.28
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
8%
$182.72
$225.25
$271.75
$322.29
$376.90
$435.65
$498.59
$565.75
$637.20
10%
$104.56
$129.01
$155.64
$184.47
$215.54
$248.87
$284.49
$322.41
$362.67
Discount Rate
12%
13.49%
$71.32
$56.86
$88.09
$70.29
$106.28
$84.83
$125.91
$100.47
$147.00
$117.23
$169.56
$135.13
$193.61
$154.17
$219.16
$174.36
$246.23
$195.72
14%
$53.03
$65.58
$79.15
$93.74
$109.36
$126.02
$143.74
$162.52
$182.37
16%
$41.52
$51.43
$62.09
$73.52
$85.72
$98.70
$112.46
$127.01
$142.35
Sensitivity Analysis of DCF
The FCFE discounted cash flow model is affected by many inputs. The two most important are the discount
rate used and commodity prices. I used an expected oil and natural gas price deck when projecting out my
income statement and therefore my dividend. The above table illustrates what an across the board change in
commodity prices or discount rates would have on my intrinsic and three year valuations. Green values are
above the current price.
Risked Net Asset Valuation
Risk
Risk Adjusted Value of
Reserves Adjusment Measure
Oil/Gas
Risk
Adjusted
Value
Value/
share
Proved Developed
Producing
Oil (mbbl)
Natural Gas (mccf)
BOE
99,565
233,501
138,482
90.00%
90.00%
89,609
210,151
$86.53
$5.32
$7,753,855
$1,118,946
$42.96
$6.20
Proved Developed
Non-Producing
Oil (mbbl)
Natural Gas (mccf)
BOE
1,707
1,198
1,907
80.00%
80.00%
1,366
958
$86.53
$5.32
$118,166
$5,103
$0.65
$0.03
123,512
604,869
224,324
70.00%
70.00%
86,458
423,408
$86.53
$5.32
$7,481,276
$2,254,433
$41.45
$12.49
$18,731,779
$1,650,000
$103.79
$9.14
$94.64
Proved Undeveloped
Oil (mbbl)
Natural Gas (mccf)
BOE
Long Term Debt
Net Asset Value
Risked Net Assets is a valuation technique used in the oil and gas industry to determine a fair price that
incorporates a company’s total reserves, even if they have started producing oil yet – the exploration part of
E&P. Proven reserves are a standardized measure that specialized geologists and engineers have estimated to
have a strong change of recovery. Different risk weightings are assigned based on the chances the reserves
won’t produce hydrocarbons and then valued using my pricing deck. Lastly debt is backed out to give a fair
assessment of the company’s assets. Using this technique I believe that Continental resources is fairly valued
at $95 a share.
Analyst: Seth Borko
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11/7/2011
Continental Resources
Multiples Valuation
Market
Enterprise EV/
Price/ Current Forward EV/Total EV/Net PV-10 Per
Capitalization Value
EBITDAX EBITDAX P/E
P/E
Reserves Acres
Share
Ticker
Name
Price
CLR
EOG
BEXP
HES
WLL
DNR
MRO
NFX
KOG
CONTINENTAL RESOURCES INC/OK
$66.07
EOG RESOURCES INC
$101.68
BRIGHAM EXPLORATION CO
$36.38
HESS CORP
$63.44
WHITING PETROLEUM CORP
$47.02
DENBURY RESOURCES INC
$17.38
MARATHON OIL CORP
$27.03
NEWFIELD EXPLORATION CO
$42.92
KODIAK OIL & GAS CORP
$7.10
Average
CLR-Avg
Pricing
5 year Average EV/EBITDAX
Future EBITDAX
Future EV
Net Debt
Future Mkt. Cap
Future Price
12.68x
$1,563
$19,824
918.075
$18,906
$104.75
5 Year Forward P/E
Future EPS
Future Price
$43.17
$3.11
$134.05
Ratios Implied Price Target
$119.40
$11,925
$27,337
$4,268
$21,563
$5,519
$6,993
$19,300
$5,777
$1,460
$12,778 16.65x
$31,178 10.59x
$4,506 N/A
$26,409
3.98x
$6,721
6.46x
$9,080 N/A
$19,710
2.48x
$8,731 N/A
$1,437 N/A
15.54x
9.29x
N/A
3.25x
5.30x
N/A
2.42x
N/A
N/A
27.88x
34.12x
38.29x
10.68x
14.88x
11.82x
6.81x
10.15x
47.33x
21.31x
23.06x
16.37x
9.37x
11.94x
15.62x
7.79x
9.60x
9.14x
35.04x
15.99x
67.41x
17.18x
22.05x
22.82x
18.49x
14.10x
124.89x
5.80x
3.28x
8.01x
1.64x
6.01x
9.61x
3.13x
3.27x
11.99x
$22.40
$49.39
$7.78
$48.17
$68.98
$13.26
$12.34
$36.02
$1.18
8.03x
7.16x 22.44x 13.80x
37.55x
5.86x
$28.83
8.62x
8.38x
5.44x
7.51x
-2.51x
-0.06x
-$6.43
The above comparables looks at CLR and its peers across many different pricing metrics, both general and
industry specific. Across many of these values CLR appears to be fairly valued if not even expensive.
Enterprise value is a common industry standard but some if CLR’s EV multiples may be skewed because of
the firms above average usage of debt (inflating the EV). Using the five year historical average
EV/EBITDAX and my projected 2013 EBITDAX number is estimated future EV and then a future pricing. A
similar method for P/E with projected 2013 net income was used. The two prices were averaged to determine
a future price target of $119. This further feeds into my thesis that CLR is fairly valued by the market and
price appreciation will come from new discoveries and rising oil prices.
Price Target
Weighting DCF 40%, RNAV 40%, and comparables 20%, established a price target for Continental
Resources of $108.65.
Risks to Your Price Targets
There are many substantial risks to my price target. The major risk is that oil prices will differ from my
projections. All of my models rely on very intricate estimates of net income with many assumptions built in.
If any of my assumptions about growth rates, tax rates, margin expansion/contraction and debt are wrong
then many of my targets will be thrown off.
Discussion of Projections and Oil & Gas expectations
2009
9,147
i
17,151
12,006
n
aAverage Realized Price
$88.87
nCrude (mbbls)
Nat Gas (MMcf)
$6.90
cBOE
$77.57
i
Revenue
aCrude (mbbls)
812,894
118,342
lNat Gas (MMcf)
10,022
21,606
13,623
11,820
23,943
15,811
15,347
33,208
20,881
17,466
39,172
23,995
19,878
46,208
27,580
22,624
54,508
31,708
25,748
64,298
36,465
$54.44
$3.22
$45.16
$70.69
$4.49
$59.65
$86.53
$5.32
$72.06
$86.46
$4.63
$70.49
$91.24
$5.11
$74.32
$105.72
$5.38
$84.68
$109.95
$5.45
$87.25
F
Production Volume
Crude (mbbls)
Nat Gas (MMcf)
BOE
545,598
69,571
931,236 615,169
20,580
17,600
$951,816 $632,769
835,556 1,327,953 1,510,161 1,813,716 2,391,788 2,831,031
107,504
176,816
181,203
236,124
293,251
350,423
943,060 1,504,768 1,691,364 2,049,840 2,685,040 3,181,454
56,790
62,699
70,473
85,410
111,877
132,561
$999,850 $1,567,467 $1,761,837 $2,135,250 $2,796,916 $3,314,015
E
EBITDAX Margin
77.67% 69.85%
aEBITDAX
$739,275 $441,989
rEBITDAX Growth
-40.21%
n
iNet Income Margin 33.42% 11.35%
nNet Income
$318,097 $71,819
gNet Income Growth
-77.42%
76.34%
73.22%
73.22%
73.22%
73.22%
73.22%
$763,285 $1,147,637 $1,289,947 $1,563,345 $2,047,790 $2,426,389
72.69%
50.35%
12.40%
21.19%
30.99%
18.49%
Total
Other revenue
Revenue
Analyst: Seth Borko
** Production grown at 4 year CAGR of past Production
2010 2011 E
2012 E
2013 E
2014 E
2015 E
2008
16.74%
$167,375
133.05%
19.91%
$312,076
86.45%
23.08%
$406,618
30.29%
26.25%
$560,478
37.84%
AU SMIF
29.42%
32.59%
$822,808 $1,079,971
46.80%
31.25%
Page 6
11/7/2011
Continental Resources
The above projected income statement was used for most of these models. It grows production based on
historical CAGR. Production is then valued by applying expected oil prices.
Price Deck
2012
Oil WTI
$94.64
Natural Gas Henry Hub $4.58
2013
$106.45
$5.11
2014
$113.72
$5.38
2015
$117.95
$5.45
This is the price deck used for all projections. It is derived as the mean of oil & gas industry analysts polled
by Bloomberg. The general trend is upward sloping in line with what the current energy supply demand
equation predicts. CLR’s oil is bought at a negative differential to WTI.
Hedging
Oil Hedged for 2012
Mbbl
Price
Percentage
Swaps
9,150
$90.17
52.39%
Collars
5,333
$80.00
30.53%
Unhedged
2,984
$86.64
17.08%
Total Mbbl
17,466
$86.46
Natural Gas Hedged for 2012
Mccf
Price
Percentage
Swaps
3,660
$5.07
9.34%
Unhedged
35,512
$4.58
90.66%
Total MMCf
39,172
$4.63
Oil Hedged for 2013
Mbbl
Price
Percentage
Swaps
5,110
$90.17
25.71%
Collars
8,760
$86.92
44.07%
Unhedged
6,008
$98.45
30.23%
Total Mbbl
19,878
$91.24
Continental Resources has hedged a substantial amount of their future production. When calculating
effectively realized oil & gas prices the above charts were used consistently. Swaps are fixed price contracts
where price paid will not differ from that agreed upon in advance. Collars allow delivery prices to fluctuate
between a set floor and collar. When calculating collars for projections the volume weighted floor price was
used making those numbers extremely conservative.
Current Oil and Gas Markets
West Texas Intermediate (WTI) is the benchmark standard of oil for the United States. As a U.S. mined
grade, Bakken UHC trades at a price differential to WTI and is little affected by the major European
benchmark, Brent. WTI traded on the N.Y. Mercantile exchange is currently in backwardation (downward
sloping) until 2015 at which point the trend reverses to contango (upward sloping). This conflicts with
estimates that analysts provide used in my price deck. However because of hedging and the effect of the WTI
differential my realized prices expected for crude are more in line with this chart. Backwardation is very
Analyst: Seth Borko
AU SMIF
Page 7
11/7/2011
Continental Resources
unusual, especially in the oil markets so this chart may not accurately reflect future expected prices but could
be because of outside price shocks such as Libya.
Henry Hub is the main benchmark of natural gas traded on the NYMEX. Gas differentials are much smaller
and the company has not disclosed any serious fluctuation so Henry Hub prices were used in all assumptions.
Natural gas markets are currently in contango with a strong linear progression (minus the winter peaks). This
is in line with my estimated price deck and Bloomberg estimates. Very little natural gas is hedged for
Continental but even so the company’s gas exposure is low reducing risks that a substantial price swing will
impact the company.
Investment Risks
Regulatory Risk
Continental’s biggest risk is regulatory. Hydraulic Fracturing is extremely controversial and the subject of
ongoing legal battles. Fracking is accused of damaging ground water and polluting once pristine
environments. The industry gained substantial negative publicity from ‘Gasland’ and academy award
nominated documentary critical of fracking. The EPA has recently announced plans to regulate fracking and
is currently drafting regulation to control waste water. There is no doubt more regulation is coming. Yet
fracking is an increasingly large part of the oil industry providing more hydrocarbon yields at a time when
demand is growing worldwide and stable supplies are shrinking. A complete shutdown is highly unlikely,
especially in a regulatory friendly state like North Dakota. I expect fracking to not only continue but continue
profitably; regardless, it would be naïve not to expect further regulation in the future
Commodity Risk
The biggest determinant of Continental Resources value is the price of oil and natural gas. The company
explores for commodities and is fully exposed to them. These risks are often mitigated by hedging but
companies never commit 100% of expected production.
Exchange Rate Risk
Continental Resources in a fully domestic company with no substantial exchange rate risk at all.
Analyst: Seth Borko
AU SMIF
Page 8
11/7/2011
Continental Resources
Figure 1: Income Statement
Continental Resources, Inc. and Subsidiary
Consolidated Statements of Income
Year Ended December 31,
2010
2009
2008
In thousands, except per share data
Revenues:
Crude oil and natural gas sales
Crude oil and natural gas sales to affiliates
Loss on mark-to-market derivative instruments, net
Crude oil and natural gas service operations
Total revenues
Operating costs and expenses:
Production expenses
Production expenses to affiliates
Production taxes and other expenses
Exploration expenses
Crude oil and natural gas service operations
Depreciation, depletion, amortization and accretion
Property impairments
General and administrative expenses
Gain on sale of assets
Total operating costs and expenses
Income from operations
Other income (expense):
Interest expense
Other
Income before income taxes
Provision for income taxes
Net income
Basic net income per share
Diluted net income per share
$ 917,503
31,021
(130,762)
21,303
839,065
$584,089
26,609
(1,520)
17,033
626,211
$875,213
64,693
(7,966)
28,550
960,490
86,557
6,646
76,659
12,763
18,065
243,601
64,951
49,090
(29,588)
528,744
310,321
76,719
16,523
45,645
12,615
10,740
207,602
83,694
41,094
(709)
493,923
132,288
80,935
20,700
58,610
40,160
18,188
148,902
28,847
35,719
(894)
431,167
529,323
(53,147)
1,293
(51,854)
258,467
90,212
$ 168,255
$
1.00
$
0.99
(23,232)
952
(22,280)
110,008
38,670
$ 71,338
$ 0.42
$ 0.42
(12,188)
1,395
(10,793)
518,530
197,580
$320,950
$ 1.91
$ 1.89
Figure 2: Cash Flow Statement
Continental Resources, Inc. and Subsidiary
Consolidated Statements of Cash Flows
2010
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, amortization and accretion
Property impairments
Change in fair value of derivatives
Stock-based compensation
Provision for deferred income taxes
Excess tax benefit from stock-based compensation
Dry hole costs
Gain on sale of assets
Analyst: Seth Borko
$
Year Ended December 31,
2009
In thousands
168,255
242,748
64,951
166,257
11,691
77,359
(5,230)
3,024
(29,588)
AU SMIF
$ 71,338
208,885
83,694
2,089
11,408
36,119
(2,872)
6,477
(709)
Page 9
2008
$ 320,950
148,573
28,847
(26,703)
9,081
184,115
—
20,002
(894)
11/7/2011
Continental Resources
Other, net
Changes in assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other
Accounts payable trade
Revenues and royalties payable
Accrued liabilities and other
Other noncurrent liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Exploration and development
Purchase of crude oil and natural gas properties
Purchase of other property and equipment
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Revolving credit facility borrowings
Repayment of revolving credit facility
Proceeds from issuance of Senior Notes
Other debt
Repayment of other debt
Debt issuance costs
Repurchase of equity grants
Excess tax benefit from stock-based compensation
Dividends to shareholders
Exercise of stock options
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
4,366
2,607
780
(299,480)
(11,651)
(2,398)
146,473
66,262
47,842
2,286
653,167
48,738
(4,501)
21,961
(117,643)
(11,371)
13,842
2,924
372,986
(65,989)
(3,834)
(16,520)
101,967
10,811
8,545
184
719,915
(1,031,499)
(7,338)
(44,564)
43,985
(1,039,416)
(497,496)
(1,217)
(8,257)
7,148
(499,822)
(841,479)
(74,662)
(14,651)
3,175
(927,617)
341,000
(537,000)
587,210
—
—
(9,191)
(7,561)
5,230
(2)
257
379,943
(6,306)
14,222
$
7,916
426,100
(576,500)
297,480
3,304
(3,304)
(10,028)
(4,299)
2,872
(41)
245
135,829
8,993
5,229
$ 14,222
443,000
(231,600)
—
—
—
(1,717)
(6,748)
—
(207)
1,442
204,170
(3,532)
8,761
$ 5,229
Figure 3: Balance Sheet
Continental Resources, Inc. and Subsidiary
Consolidated Statements of Income
Year Ended December 31,
2010
2009
2008
In thousands, except per share data
Revenues:
Crude oil and natural gas sales
Crude oil and natural gas sales to affiliates
Loss on mark-to-market derivative instruments, net
Crude oil and natural gas service operations
Total revenues
$ 917,503
31,021
(130,762)
21,303
839,065
$584,089
26,609
(1,520)
17,033
626,211
$875,213
64,693
(7,966)
28,550
960,490
Operating costs and expenses:
Production expenses
Production expenses to affiliates
Production taxes and other expenses
Exploration expenses
Crude oil and natural gas service operations
Depreciation, depletion, amortization and accretion
Property impairments
General and administrative expenses
86,557
6,646
76,659
12,763
18,065
243,601
64,951
49,090
76,719
16,523
45,645
12,615
10,740
207,602
83,694
41,094
80,935
20,700
58,610
40,160
18,188
148,902
28,847
35,719
Analyst: Seth Borko
AU SMIF
Page 10
11/7/2011
Continental Resources
Gain on sale of assets
Total operating costs and expenses
Income from operations
Other income (expense):
Interest expense
Other
Income before income taxes
Provision for income taxes
Net income
Basic net income per share
Diluted net income per share
Analyst: Seth Borko
(29,588)
528,744
310,321
(709)
493,923
132,288
(894)
431,167
529,323
(53,147)
1,293
(51,854)
258,467
90,212
$ 168,255
$
1.00
$
0.99
(23,232)
952
(22,280)
110,008
38,670
$ 71,338
$ 0.42
$ 0.42
(12,188)
1,395
(10,793)
518,530
197,580
$320,950
$ 1.91
$ 1.89
AU SMIF
Page 11