Continental Resources’s Big Bet and the Implications for Its Stock



CLR’s big bet

Continental Resources (CLR) has been facing flak ever since its CEO, Harold Hamm, liquidated its hedge positions for $433 million, betting on an oil price recovery in November 2014. Hamm noted in the company’s 3Q14 earnings release, “We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand. Accordingly, we have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery.

“While awaiting this recovery, we have elected to maintain our current level of activity and plan to defer adding rigs in 2015. This translates to a $600 million reduction in our 2015 capex budget, resulting in a revised 2015 capex budget of $4.6 billion, with 23% to 29% production growth.”

Crude oil prices were averaging $75 per barrel in November 2014. They continued to fall rapidly, dropping to sub-$30 levels in early 2016. Currently, they have recovered and are trading at ~$48 per barrel.

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Retracting its statement

Within one month of saying that it would maintain the same level of rig activity in 2015, CLR lowered its average rig count for 2015 by ~40% compared to 2014 levels. Moreover, it revised its capex from the previous $4.6 billion to $2.7 billion.

As we can see in the image above, Continental’s stock was on a bullish trend until 2013, significantly overperforming the S&P 500 Index (SPX) and the Dow Jones US Oil and Gas Index (DJUSEN). However, CLR has fallen from those highs, declining by 27% since 2013.

Year-over-year, CLR has fallen by 13% while its peers Cimarex Energy (XEC), Concho Resources (CXO), and Hess (HES) have declined by 0.26%, 1.5%, and 16%, respectively. All these companies make up 8.3% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

In the following part, we will see what steps the company has taken in 2016 to align with the prevailing energy price environment.


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