Continental Resources: Projected Cash Flow of $2 Billion in H2 2022 (NYSE: CLR)

Imaginima

The estimated value of continental resources’ (NYSE: CLR) the stock fell slightly due to lower oil prices. I haven’t changed my outlook on long-term oil prices (which I hold at around $70 WTI oil). However, Continental has no oil hedges, so lower oil prices in the shorter term (like 2H 2022 and 2023) reduce the additional cash flow it could generate at the strip compared to $70 oil.

I now estimate the value of Continental at around $76 to $77 per share in a scenario where commodity prices follow the current strip until the end of 2023 and then find themselves at long-term prices of $70 of WTI oil and $4.00 of NYMEX gas.

Harold Hamm’s non-binding offer to take Continental private at $70 per share will likely keep Continental’s price from falling much further, unless the outlook for oil prices collapses (which increases the odds that Hamm will withdraw the offer). A situation where oil prices drift moderately lower would likely cause the special committee to back the $70 offer or attempt to negotiate a modest increase in that offer.

Hedges

Continental is not hedged on crude oil (with the exception of NYMEX roll swaps). It has the majority of its 2H 2022 natural gas production hedged, as well as approximately 43% of its 2023 natural gas production and 31% of its 2024 natural gas production hedged (based on production levels from 2H 2022 at least).

Continental’s 2H 2022 hedges are worth approximately $325 million negative at the current strip, while its 2023-2025 hedges are worth approximately $441 million negative at the current strip.

Continental hedges

Continental’s Hedges (Continental Resources – Q2 2022 – 10Q)

Outlook 2H 2022

The strip for the second half of 2022 has dropped significantly, to around $84 for WTI oil (including actuals to date) and $7.50 for Henry Hub gas. At these prices, Continental is expected to generate $4.92 billion in oil and gas revenue for the second half of 2022 before hedging. It expects production to increase in the second half, with oil production around 213,500 barrels per day.

As noted above, Continental’s 2H 2022 natural gas hedges have a negative estimated value of approximately $325 million.

Units Price per unit Revenue (millions of dollars)
Oil (Barrels) 39,284,000 $81.50 $3,202
Natural gas [MCF] 212,888,000 $8.00 $1,703
Network service operations $15
Coverage value -325$
Total $4,595

Continental has approximately $1.48 billion for its capital budget for 2022, leading to a projection that it could generate $1.945 billion of positive cash flow in the second half of 2022 before dividends (approximately $203 million). to $0.28 per share per quarter).

millions of dollars
Operating costs $310
Production tax $380
Cash SG&A $95
Cash interest $135
Cash taxes $250
Capital expenditure $1,480
Dividend $203
Total expenses $2,853

Continental is now expected to end 2022 with net debt of $4.034 billion, assuming no more share buybacks or acquisitions.

Notes on assessment

In a scenario where oil and gas prices follow the current band through the end of 2022 and then return to long-term prices of $70 WTI Oil and $4.00 Henry Hub Natural Gas, i I would estimate Continental’s value at around $74 to $75 per share. I raised my outlook for long-term gas prices to $4, which helps Continental’s value, although lower near-term cash flow (with lower oil prices) offsets that benefit. .

If oil and gas prices also follow the current 2023 band (about $74 WTI oil and $5.55 Henry Hub gas), then Continental’s value would increase to about $76 to $77 per share long term (after 2023) $70 WTI oil and $4 gas scenario.

Conclusion

Continental Resources is not hedged on its oil production, so it is fully affected by short-term oil price fluctuations. So, while my outlook for long-term oil prices is unchanged (at $70 WTI oil), Continental’s short-term cash flow projections reduce its value a bit.

I still believe Continental is worth more than Harold Hamm’s $70 per share offer, although the gap has closed due to lower oil prices. With WTI oil at $70 long-term and Henry Hub gas at $4, I estimate Continental’s value at around $70 per share.

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