Continental Resources' Extraordinary Run

Last May, following the announcement of Continental Resources' (NYSE: CLR  ) fiscal first-quarter results, I mentioned that Fools need not worry about the company's $369 million unrealized derivatives loss incurred back then. My reasons were simple -- the Oklahoma-based company's business and management looked sound.

Not surprisingly, Continental proved to be a solid bet grounded on strong fundamental growth (more on that later). In order to give some teeth to my claims, all I need to do is check out how the company's stock has performed. In 2011, the stock returned 13%, during which the S&P 500 ended more or less flat. And since the turn of 2012, the stock has already returned a whopping 36%  following a production update last month. It's heartening to note that, so far, the market has ignored these paper losses -- which, unfortunately, has marred Continental's fourth-quarter bottom line yet again.       

Paper losses
In the latest earnings release, net losses stood at $112 million, thanks to a $402.5 million loss on derivative instruments. Digging deeper, I see that over $399 million of these losses are actually unrealized, which means it's just an accounting entry -- in other words, the company suffers no actual cash outflows. On a comparative basis, the fourth quarter of 2010 saw net loss clock in at $45 million, which includes a $188 million derivatives loss.

I'm not too concerned about these paper losses and agree with Motley Fool community member badbernanke's comments:

Derivative "losses" from hedging commodity production are better than derivative gains for companies with rapidly growing production profiles. "Gains" normally means that prices for the commodity are dropping and that marginal, unhedged production is receiving prices lower than the hedge price. "Losses" mean that the commodity prices are rising (actually, have risen) above the hedge price. So marginal, unhedged production will benefit from higher market prices.

Solid fundamentals
Production averaged 75,219 barrels of oil equivalent per day (Boe/d), out of which crude oil accounted for 72%. This is a strong 57% jump over the year-ago period. Production growth, coupled with higher realization per barrel, resulted in an 86% jump in fourth-quarter revenue, to $508 million. For the full year, production grew a good 43%, to 22.6 million barrels of oil equivalent (Mmboe), out of which 73% was crude oil.

I must say that Continental's growth has been phenomenal. The company took full advantage of higher average crude oil prices by increasing production. This is exactly what Foolish investors should be looking for in oil exploration and production (E&P) companies.

The 'Hamm' angle
For 2012, CEO Harold Hamm has revised the production growth guidance from 28% to 40% from current levels. That's huge. In fact, for a 45-year-old E&P company with a $16 billion market cap and proven reserves of over half a billion barrels of oil equivalent, this is pretty much unheard of. But then, that's exactly what sets Continental's management apart. The guidance is in line with management's aim to triple production in five years. Interestingly, Mr. Hamm holds 68% of all outstanding shares -- and Fellow Fool Sean Williams argues lucidly that CEOs holding a major stake in their companies historically tend to do better for their shareholders. I couldn't agree more.

Foolish bottom line
All in all, I believe Continental has excellent growth prospects. The company has been growing by leaps and bounds. Investors must keep an eye on its Bakken shale activity this year. In order to stay up to speed on the top news and analysis on the company, you can start here by adding Continental Resources to your free Watchlist

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. 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.


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  • Report this Comment On March 01, 2012, at 9:40 PM, docpatrick wrote:

    CLR has grown to be my largest position. Thought about taking some profits but think I'll wait a while.

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