Continental expects to nearly double its oil production within the next five years, and expects the Bakken to contribute between 50 to 60 percent of the total growth.
Its Scoop and Stack assets in Oklahoma, meanwhile, are expected to provide from 40 to 50 percent of that growth.
In its fourth quarter earnings call, Continental officials reported a 23 percent increase in overall production year over year, and a 14 percent increase in oil growth quarter over quarter.
“This growth is driven by over 12 percent of oil growth in the Bakken,” Continental CEO Harold Hamm said. “Our teams accomplished this feat while delivering an industry-leading operation cost of $3.59 per BOE as compared to our oil-weighted production peers — an enviable cost efficiency for development, even when considering some of the harshest operating conditions.”
By that he meant horizontally drilled wells, deep underground, with high pressure and extreme cold.
“My hat is off to our operating teams,” Hamm said. “A great job by all.”
Bakken production by itself grew 26 percent year over year, and 10 percent quarter over quarter, company president Jack Stark said.
Continental completed 52 operated Bakken wells in 2018, which flowed at an average initial rate of 2,800 barrels of oil equivalent per day, per well, of which about 80 percent was oil. Four of its new wells made the company’s top 10 list of Bakken producers, based on their initial 30-days of production. Those wells are a large part of what drove its record production numbers in the fourth quarter of 2018.
But the company didn’t just boost production in 2018. It also continued to drive down costs to new lows. Completions are now down to 45 stages from 60, saving about $200,000 per well, and bringing the costs to complete a Bakken well down to about $8.2 million on average per well.
The new and better economics are also being driven by multi-zone development of stacked reservoirs across 95 percent of the company’s drilling activity. That means rather than drilling and completing just the Bakken formation, the company is also drilling out Three Forks 1 and 2 at the same time.
Three Forks 2 is generally the poorer performer, which brings down the overall performance averages for the unit, but by optimizing the performance of all three formations at once and treating the unit as a whole, overall values have been increased and new efficiencies have been found.
“Obviously it’s growing production,” Stark said. “You look at our growth last year, 23 percent year over year. And that is on top of paying down debt, about $825 million, I think it was. So you can just see the horsepower that we have in these units to generate cash and grow production.”
With 75 percent of the company’s net resource acres held by production, the company also has flexibility to adjust its pace to the “prevailing commodity environment,” Stark added.
“This is an ideal position to be in to participate and grow value in today’s new global oil market,” he said.
For 2019, the company plans capital expenditures of $2.6 billion, down about 9 percent from 2018.
This fits a trend most oil and gas exploration companies are following right now, with a capital market that has signaled a bigger appetite for debt reduction than new growth projects when it comes to oil and gas.
Continental will split its capital expenditures 50-50 between the Bakken and its Oklahoma assets and plans to run an average 25 rigs for 2019, down from 31 during 2018. Of those, 6 will be running in the Bakken, which company officials said aligns with $55 oil.
Even so, that doesn’t mean the Bakken is necessarily less active. The company is getting more per dollar spent in the Bakken than ever before.The decision to stick with six rigs is partly related to takeaway capacity. It can be adjusted if and when the market and logistics make sense, Stark pointed out.
Despite the reduction in rigs, the company still expects to drill more wells in 2019 than it did in 2018, Gary Gould added.
“It’s really a matter of drilling efficiencies in terms of that rig count,” he said.
Chief Finance Officer John Hart said that the expected production levels will sustain about $500 to $600 million in free cash flow in 2019 at $55 WTI, and $3 per mcf at Henry Hub, allowing the company to further reduce debts to its target $5 billion. At that point, the company may consider implementing dividends for shareholders.
Every $5 change per barrel on WTI price affects cash flow by $300 to $325 million. The company is cash neutral at mid-$40 per barrel.
Its “blended” rate of return for $60 WTI is 60 percent, and for $50 WTI, 40 percent, where blending refers to its new, multi-zone approach.
A significant amount of Bakken pipeline and gas processing is expected in the near future, and deregulation and improved American infrastructure are positioning the U.S. upstream to supply global markets, Hamm added.
“Both crude oil and natural gas infrastructure are being planned in the United States, which will diminish and eliminate market differentials between Brent and U.S. crudes,” he said.
About $55 billion in infrastructure has been invested in the Corpus Christi shipping area alone.
“Access to global markets for our production is a primary focus of Continental’s strategy to normalize the difference between brent and WTI,” he said.