The oil market is broken, America’s oil champion, Continental Resources says, and that has prompted a buyback program that has already mopped up $92 million dollars worth of its own undervalued shares — 2.4 million of them so far.
The program, Chairman and CEO Harold Hamm said, will continue into 2020, even if commodity prices are trending lower than the company’s $60 WTI benchmark.
Obviously, a lower price scenario would mean less free cash flow for the buyback, company officials acknowledged in later questioning. But the company’s debt metrics will still trend lower per barrel even at lower commodity prices. To the extent that is true, the company can and will lean toward repurchasing shares over debt reduction.
It’s an aggressive strategy, but one that Hamm suggested is fully warranted by Continental’s performance in the shale fields of America. In Continental’s second quarter earnings call, Hamm not only announced higher than expected production, but lower than expected costs.
“I’m proud that our teams can exceed production estimates with lower rig activity,” he said. “That is operating and capital efficiency at its best.”
A Bank of America analyst asked Hamm about its buyback program, and suggested there is something broken in oil markets today.
In October of last year, the company was valued between $26 to $27 billion dollars, but today its value is less than half that at $12.7 billion.
“What is the value of Continental being a public company?” the analyst wondered.
Hamm was blunt.
“You know, we don’t see a lot of value in it, just to tell you like we see it today,” he said. “But we can’t control the market. We can control what we are dealing with on a daily basis, and that is what we are doing.”
Continental’s buyback isn’t an attempt to go private, either, Hamm added.
“We think as long as value is not reflected in the stock, we gotta be buying it back,” he said. “That is what we are doing. And that’s what we will continue to do.”
The Bakken, meanwhile, was a significant player in Continental’s favorable rise in production guidance, according to Continental President Jack Stark. The Bakken posted production gains of 23 percent year over year.
Continental drilled 35 wells in the Bakken, which flowed an average of 2,300 barrels of oil equivalent per day.
One of the wells, located in Dunn County, achieved an initial rate of 4,870 barrels of oil equivalent per day.
Contributing to that increase are three step-outs that the company announced previously in Billings, Mountrail, and Richland, Montana counties. They are outperforming legacy wells by as much as 145 percent, and are delivering returns of up to 85 percent.
Continental will continue to capitalize on its favorable margins in the Bakken with a new, high-impact oil project in Williams County, Stark added.
The 10-square-mile Long Creek Bakken Unit is in Williams County. Lessons learned in the company’s Springboard project in Oklahoma, where larger pads are allowing cost reductions of 10 to 15 percent, will be applied to the Bakken project.
Continental will operate two rigs in the Long Creek unit, adding 56 new wells to the existing five parent wells. That new production is expected to begin in the third quarter of 2020, and peak in the second half of 2021.
Long Creek is ultimately expected to add up to 20,000 net barrels of oil per day to production, which will be gathered and distributed by pipelines to centralized facilities.
Bakken rigs as a whole are going to remain steady at six, Stark said.
Efficiencies are being gained in the Bakken, which includes a 20 to 40 percent increase in the stage per day count for well completions.
Meanwhile, in Oklahoma, new efficiencies will allow the company to release seven of the 19 rigs it had there, while still meeting or exceeding production guidance.
The savings to capital expenditures will be used to purchase additional favorable assets, all without exceeding or lowering guidance for capital expenditures in 2019.
Gas gathering constraints in the Bakken has hurt some companies — contributing, for example, to Whiting’s layoff of at least 100 employees in the Bakken and 254 company-wide. Continental has been able to avoid such issues Hamm said.
“We have a very large footprint that allows us to work within certain areas,” he said. “We are able to work around it.
The company is capturing between 88 to 89 percent of its gas, meeting state targets.
Hamm added that a number of new facilities and pipelines are coming in the second half of the year, which will allow Continental to continue increasing its Bakken production.
“We have led the industry up there in gas capture and we still do,” he said. “We have been working ahead of it.”