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Will Continental Resources’ Capex Remain Strong?

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Continental Resources’ cash flows

In 2Q15, Continental Resources’ (CLR) cash flows from operations (or CFO) decreased 24% to $394 million from $522 million a quarter ago. However, on a year-to-date basis, they decreased 36%. The fall was primarily due to lower oil and gas prices, partially offset by lower production taxes and an increase in cash gains on matured derivatives. In comparison, Newfield Exploration’s (NFX) 1H15 CFO dropped 21% over 1H14. Gulfport Energy’s (GPOR) 1H15 CFO decreased 31% compared to 1H14. Cimarex Energy’s (XEC) CFO also decreased 53% over the same period. Continental Resources makes up 0.19% of the iShares North American Natural Resources ETF (IGE).

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Continental Resources’ free cash flows

Continental Resources’ free cash flows (or FCF), defined as operating cash flows less capital expenditure, have continued to remain negative in the past 13 quarters. In 2Q15, CLR’s FCF improved to a negative $321 million from a negative $757 million recorded in 1Q15. This can be attributed to lower capital expenditures (or capex) compared to 1Q15, as described in the previous part of this series. In 1Q15, CLR spent heavily on the Bakken Shale, particularly on the core leasehold in Williams, McKenzie, Mountrail, and Dunn counties.

Continental Resources’ capex and cash flow alignment

Although Continental Resources’ CFO fell from 1Q15 to 2Q15, the fall in its capex was higher, leading to FCF improvement in 2Q15. On September 8, CLR announced a $300 million to $350 million reduction in its 2015 capex budget. This would take its 2015 non-acquisition capital expenditure to ~$2.3 billion. The planned capex decrease would be on account of well completion activity deferral. CLR also plans to reduce its operated rig count in the Bakken from ten to eight rigs. CLR expects that lower capex will align with its projected cash flows in a depressed energy price environment.

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