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Is Continental Resources’ Debt Level a Threat?

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Sep. 17 2015, Published 1:43 p.m. ET

Continental Resources’ debt

We have already discussed Continental Resources’ (CLR) production trend over the past 13 quarters. Did strengthening production translate into higher income? We’ll also analyze whether its debt levels increased.

Continental Resources’ net debt has been on the rise in the past 13 quarters. In 2Q15, CLR’s net debt (total debt less cash and cash equivalents) increased 3.3% from 1Q15 to ~$6.96 billion, due primarily to higher long-term borrowing. In comparison, SM Energy’s (SM) net debt decreased 5.5% in 2Q15 over 1Q15. Cimarex Energy’s (XEC) net debt, however, remained unchanged from 1Q15 to 2Q15. Newfield Exploration’s (NFX) net debt increased 2% during the same period. Continental Resources makes up 0.2% of the iShares US Energy ETF (IYE).

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Continental Resources’ net debt to EBITDA

Between 2Q12 and 2Q15, Continental Resources’ net debt to EBITDA ratio had initially increased, then remained relatively flat, and started increasing again in the past two quarters. In 2Q15, it increased to 2.89x from 1.95x in 4Q14. In 1H15, CLR borrowed a total of $1.05 billion from its credit facilities in connection with its 2014 drilling program, and to fund a portion of its 2015 drilling program. The company was in compliance with its debt covenants (agreements with lenders) by the end of 2Q15. CLR’s 2Q15 cash and marketable securities also decreased to $25 million from $47 million in 1Q15.

Compared to 1Q15, CLR’s EBITDA more than doubled in 2Q15 due to higher sales volume, despite lower average realized prices for its energy products. Compared to a year ago, however, EBITDA decreased 28%. This was primarily due to a 47% fall in 2Q15 in crude oil per barrel equivalent price compared to 2Q14. The company’s net debt to EBITDA ratio could continue to remain strained unless a sharp rise in energy prices causes CLR’s income to improve.

Continental Resources’ debt-to-equity ratio

Continental Resources’ debt to equity, or leverage, was 144% in 2Q15, up from 142% a year ago. Compared to Marathon Oil (MRO), Pioneer Natural Resources (PXD), and Concho Resources (CXO), CLR has the highest debt-to-equity ratio. A higher debt-to-equity ratio typically indicates higher risk, as it shows the company has been aggressively financing its growth through debt.

Next, we will discuss Continental Resources’ capex plans and cash flow trends.

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