4 Things to Know About Continental Resources' Earnings Report
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bad news for you Bakken bears: Continental Resources (NYSE: CLR) reported stellar second quarter numbers. There were lots of things to like in the conference call - rapid production growth, falling drilling costs, and several new catalysts. But in case you missed it, here are four things you need to know about Continental's earnings report.
1. The big Bakken bonanza
Investors have come to expect big production growth numbers from Bakken players, and Continental didn't disappoint. During the second quarter the company's North Dakota and Montana properties produced 88,000 barrels of oil equivalent per day, up 65% year-over-year. It's a huge contrast to what we saw last week from the oil majors, who are struggling just to maintain current production rates.
Source: Continental Resources Investor Relations
2. Drilling costs are falling
But while rapid production growth steals the headline, the more interesting trend is the falling price of doing business in the Bakken. In the past year Continental's average well completion costs have fallen from $9.2 million to $8.2 million due to operating efficiencies. That's a pretty substantial number. When you figure $1.0 million in cost reductions multiplied over the 73 wells the company drilled last quarter, that equals an annualized $292 million in savings.
Much of these savings can be attributed to a new technique called 'pad drilling.' The concept is simple: rather than complete only one well per site, operators use horizontal drilling techniques to complete multiple wells from a single location - or pad. The benefit of a drilling pad is that operators can drill multiple wells in a shorter time than they might with just one well per pad. There's no need to disassemble and reassemble a rig at each site.
Pad drilling has been a source of improved returns at other exploration companies. When Chesapeake Energy (NYSE: CHK) - one of the technique's pioneers - begins a new pad in the Utica Shale, it costs $8.5 million to drill the first well. However, the next five wells drilled on the same pad afterwards cost an average of $5.9 million each. That equals a 30% cost savings.
Chesapeake plans on expanding its pad drilling program across to other plays in its portfolio. For example, by the end of this year the company plans to drill 50% of its Eagle Ford wells on multi-pad sites and 75% by the end of 2014.
The move to multi-well pads is also driving down costs for other players in the Bakken. While rig counts are down 20% in the region from the peak, well starts are actually up 20%.
The convergence between West Texas Intermediate and Brent crude was the big story this last quarter. Today, domestic oil is no longer trading at a significant discount to international benchmarks as new pipeline capacity clears the supply glut in the Midwest. This was a particularly important development for Continental as its landlocked crude will now fetch a 10% higher price in the market.
Notably Continental has no plans to abandon its practice of shipping crude by rail in spite of cheaper pipeline alternatives. Continental embraced rail transit last year when rising production from the Bakken and the Alberta oil sands outstripped pipeline capacity. Today, Continental sees rail as more nimble and agile than pipelines. Perfect for exploiting short-term market opportunities that occasionally arise.
Conversations about Continental usually focus on its Bakken operations, but the company has its hands in other plays as well. This quarter Continental posted great drilling results from its SCOOP play in Oklahoma. Exploratory production was up 23% quarter over quarter to 17,550 barrels of oil equivalent per day.
Continental will focus on expanding to prove the commercial viability of the play and de-risk the company's leaseholds. Investors will have a better sense of SCOOP's potential by the end of the year, and it could be a huge upside catalyst for the stock.
Foolish bottom line
After listening to the conference calls this past earnings season, it's hard not to be taken aback by the contrast a between the majors and the mid-cap names. Big Oil - companies like Exxon Mobil and Shell - are struggling to stand still. Their scale and size is a liability. In comparison the second tier players - firms like EOG Resources and Continental Resources - seem to effortlessly grow production, drive down costs and find new reserves. Welcome to the age of 'Medium Oil.'
Think the days of $100 oil are gone? Think again. In fact, the market is heading in that direction now. But for investors that are positioned to profit from the return of $100 oil, it can't come soon enough. To help investors get rich off of rising oil prices, our top analysts prepared a free report that reveals three stocks that are bound to soar as oil prices climb higher. To discover the identities of these stocks instantly, access your free report by clicking here now.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool has the following options: long January 2014 $30 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!