Why Is Continental Resources (CLR) Down 43% Since Last Earnings Report?

A month has gone by since the last earnings report for Continental Resources (CLR). Shares have lost about 43% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Continental Resources due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Continental Q4 Earnings Top Estimates on Oil Production

Continental Resourcesreported fourth-quarter 2019 adjusted earnings of 55 cents per share, which beat the Zacks Consensus Estimate of 52 cents. Moreover, the bottom line rose from the year-ago earnings of 54 cents per share.

Revenues of $1,195.1 million beat the Zacks Consensus Estimate of $1,131 million. Also, the figure increased from $1,149.3 million in the year-ago quarter.

The strong quarterly results can be attributed to rising year-over-year oil and gas production, and higher realized crude price.

Proved Reserves

As of Dec 31, 2019, Continental’s estimated proved reserves were 1,619 MMBoe, reflecting 6% year-over-year growth. The reserve replacement ratio was 178% in 2019.

Production Rises

Production from continuing operations averaged 365,341 barrels of oil equivalent per day (BOE/D) in the quarter, higher than 324,001 BOE/D in the year-ago period. This was supported by output growth at the company’s South and Bakken assets.

Oil production in the quarter came in at 206,249 barrels per day (Bbls/d), up from 186,934 Bbls/d a year ago. Natural gas production jumped from 822,402 thousand cubic feet per day (Mcf/d) in fourth-quarter 2018 to 954,556 Mcf/d.

Oil Equivalent Price Realization Declines

Crude oil equivalent price in the quarter fell to $33.49 per barrel from $37.13 in the prior-year period. Natural gas was sold at $1.73 per Mcf, down from $3.26 in the year-ago quarter. However, average realized price for oil was $51.33 a barrel, up from $50.06 in the prior-year quarter.

Total Expenses Jump

Total operating expenses of $901.3 million in the fourth quarter rose from $818.9 million in the December quarter of 2018. Total production cost rose to $111.2 million from $104.3 million in the year-ago quarter. Exploration costs in the quarter were $7.3 million compared with $3.3 million in the year-ago period. Transportation costs rose to $61.1 million from the year-ago level of $49 million.

However, production expense per barrel of oil equivalent in fourth-quarter 2019 was $3.31, marginally lower than the year-ago figure of $3.50.

Increasing Value for Investors

The company returned a total of $406 million to its shareholders in full-year 2019. It made $190 million of share buybacks and $18 million dividend payouts.

Capital Expenditure

In fourth-quarter 2019, total capital expenditure (excluding acquisitions) was $541.3 million, of which nearly 86.4% was used in exploration and development drilling.

Balance Sheet

As of Dec 31, 2019, the company had total cash and cash equivalents of $39.4 million, as well as debt of $5,324.1 million (excluding current maturities), with a debt-to-capitalization ratio of 42.8%. Notably, it reduced net debt by $198 million in 2019.

Guidance

Continental’s 2020 capital spending is expected to be $2.65 billion, flat year over year. It intends to allocate $2.2 billion for drilling and completion activities, of which 60% will be directed toward Bakken while the rest will be devoted to Oklahoma. Notably, $700 million of 2020 capital expenditure is not expected to realize first production until 2021.

For 2020, production of oil is expected in the range of 198,000-201,000 Bbls/d, indicating an increase from the 2019 level of 197,991 Bbls/d. Production of natural gas is projected in the band of 935,000-960,000 Mcf/d, suggesting a significant improvement from the 2019 level of 854,424 Mcf/d. The company expects production expense for 2020 in the range of $3.50-$4.00 per BOE.

In 2020, the company expects to generate free cash flow within $350-$400 million, assuming WTI crude price at $55 per barrel and Henry Hub gas price at $2.50 per Mcf. The metric implies significant fall from the 2019 level of $608.4 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -66.72% due to these changes.

VGM Scores

Currently, Continental Resources has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Continental Resources has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.