How Continental’s Debt Has Impacted Its Valuation
In a previous series, we read about Continental Resources’ (CLR) management objectives and operational plans in 2017. In this series, we’ll focus on Continental’s key fundamentals. Let’s begin by looking at its debt position.
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Continental’s net-debt-to-adjusted-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple was mostly under 2x between 4Q14 and 3Q15. Since 3Q15, Continental’s net-debt-to-EBITDA multiple has risen, and its net debt had been on the rise since 4Q14. It stabilized and was stagnant between 3Q15 and 2Q16, before finally falling in 3Q16 and 4Q16, as the chart above shows. Although Continental’s net debt stabilized in 3Q15, its falling EBITDA continued to push its net-debt-to-EBITDA multiple higher.
Continental’s 4Q16 net-debt-to-adjusted-EBITDA multiple was ~5x. In the above graph, we can see that Continental’s net debt rose sharply between 4Q14 and 2Q15, but higher EBITDA in those periods kept its net-debt-to-EBITDA multiple well under 2x. Therefore, the rise in its net-debt-to-EBITDA multiple had less to do with its rising net debt and more to do with its lower EBITDA levels, which were tied to lower crude oil prices.
Continental’s 4Q16 net debt was ~$6.6 billion, compared with ~$7.1 billion in 4Q15. Its trailing-12-month adjusted EBITDA for 4Q16 was ~$1.3 billion, compared with the 4Q15 trailing-12-month EBITDA of ~$1.9 billion. Despite the drop in its debt, the more significant decline in its EBITDA caused its 4Q16 net-debt-to-EBITDA multiple to rise, though not to the same degree as it had in the past.
In comparison, peers Oasis Petroleum (OAS), Newfield Exploration (NFX), and Bill Barrett (BBG) had net-debt-to-adjusted-EBITDA ratios of 6.5x, 2.9x, and 6.3x, respectively. Continental, Oasis, and Newfield make up 6% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Liquidity and financial position
Continental had $16.6 million in cash and cash equivalents as of December 31, 2016, and $1.8 billion available in borrowing capacity under its revolving credit facility.