Continental’s $3.2 billion entry into the Permian Basin does not reflect a lack of horsepower in the Bakken, company officials told investors in its third-quarter earnings call.
Continental’s President and Chief Operating Officer Jack Stark said the Bakken continues to consistently deliver some of the company’s best wells, and still has a long “runway.”
“Take a look at the Long Creek wells,” he suggested. “I mean, we’ve got 11 wells in there. They’re the first 11 we’ve completed (there) and they are substantially outperforming you know, the statistical average we’ve had over the prior years.”
That’s despite the fact the Bakken began in the early 2000s, almost two decades ago, Stark added.
“It just shows that there’s still a lot of horsepower out here in the Bakken that remains to be tapped,” he said. “And we’ve got 56 wells in this Long Creek unit to drill and we’ve got five more that will get completed here probably by year-end.”
The well performance of the Long Creek wells, Stark added, is a bellwether for what the company expects to see going forward.
“To me, that doesn’t look like a play that has reached full maturity and development,” he said.
Those kinds of results are why Continental has chosen to build a dominant position in the Bakken, and expects to remain active there for years to come, Stark said.
The Permian acquisition just diversifies the company, Continental’s CEO Bill Berry said, giving it strategic positions in the nation’s four leading basins in the lower 48 states.
The $3.25 billion purchase of Pioneer’s Delaware assets comes with 92,000 acres that already have more than 650 drilling locations in the three primary reservoirs, and perhaps more than 1,000 locations, if you consider all the other known producing reservoirs that underlie the acreage.
There are 50,000 net royalty acres that are already producing 55,000 barrels of oil per day, which means the purchase, which will close at the end of the year effective as of Oct. 1, immediately adds revenue to Continental’s balance sheet.
Not only that, but the purchase includes significant water infrastructure and surface ownership, including 31,000 surface acres and about 180 miles of pipeline, water facilities and disposal wells. All of these can readily be expanded to accommodate future growth. They also offer the potential for future beneficial transactions, but company officials were mum about where those transactions might be, confirming only that the company is looking at its opportunities.
Stark said he expects the company’s world class drilling and completion techniques to further enhance production estimates for the new assets.
The Permian purchase is the second major entry into a new shale play for Continental this year. They also spent $215 million on a position in Wyoming’s Powder River Basin in January.
John Hart, Continental’s Chief Financial Officer, said the Permian purchase has been immediately credit-enhancing, and pointed out that it bought the company improved investor ratings from Fitch, Moody’s and S & P.
The projected cash flow from the assets will allow rapid debt pay down, while at the same time enhancing the company’s commodity options and geographic diversity, Hart said.
With $700 million in cash on hand and the expectation for continued strong free cash flow moving forward, Continental has multiple options for financing the purchase.
“We intend to utilize available cash and our revolver to fund a significant amount of this transaction,” Hart said. “Remaining acquisition financing will be derived from Debt Capital Markets and/or bank term facilities. We will not issue additional equity as a means to fund this deal.”
Continental plans to reduce its net debt back to current levels, or about $4 billion, by year-end 2022, and has the ability to get to zero debt within five years, if it chooses.
Given that, the share purchase program is likely to continue as long as market conditions warrant, company officials indicated.
“Our commitment to shareholder returns remains solid and strong,” Hart said. “Buybacks are an important part of that. They remain in place. We bought about 2 million shares this quarter. That will continue. Ongoing debt reduction has been a part of it. That is achievable as well. And obviously we increased the dividend. We’re generating a significant amount of cash flow. So that gives us the ability to add resource here and fund it while continuing with share buybacks and strong competitive dividends.”