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Image source: Continental Resources.

Continental Resources (NYSE:CLR) is known as a major Bakken producer. In recent months, however, the company has been talking more about its new plays than the Bakken.

First we heard about Continental's SCOOP play and now the company can't stop raving about its new STACK acreage. Investors interested in Continental need to get to know these new plays.

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Image source: Continental Resources.

Looks like a boomer of a well

Continental recently issued a press release detailing a well that it drilled into the over-pressured oil window of its Oklahoma STACK acreage. The details provided included the following: "The Verona 1-23-14XH flowed at an initial 24-hour test rate of 3,339 barrels of oil equivalent per day, comprised of 2,345 barrels of oil, or 70% of production, and 6.0 million cubic feet of 1,370-Btu natural gas."

This well would be the continuation of some wells that Continental has been drilling into the STACK that are commencing production at very high rates. Wells coming on production at over 2,000 barrels of oil equivalent per day are big relative to most shale plays.

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Image source: Continental Resources.

Another positive occurring in CLR's STACK acreage is that the costs of drilling and completing these wells are coming down. This last well cost $9 million which is $500,000 below Continental's 2016 year-end objective for the entire enterprise.

As at March 31, 2016, Continental had approximately 171,000 net acres of leasehold in the STACK play, 95% of which is in the over-pressured window.

That is all very good, but do these wells actually make any money?

It could, however, be argued that it's a bit of a red flag when a shale producer starts promoting the initial results of individual wells. Having eye-catching big initial production rates doesn't tell you much about the true long-term economics of a well.

With the way these shale wells come on with a bang of flush production and then quickly decline the initial production rate is often not all that meaningful. A much better indication of how economic a well is going to be would be average daily production over the first couple of years.

In the slide below, Continental provides a production type curve for how it thinks a STACK well in the over-pressured oil window is going to perform over its life. Continental believes that at $45 oil and $2.25 natural gas, these wells will generate a 75% rate of return. That seems almost too good to be true.

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Image source: Continental Resources.

If you don't think oil is going higher, better stay away

If you think oil prices are going to continue to rebound and are on their way to $70 per barrel or higher, then I think Continental and most other shale oil producers are likely going to work out well for investors.

If you don't think considerably higher oil prices are in the relatively near future, then just stay away. The slide below tells you everything that you need to know. The company proudly shows that it had the highest recycle ratio of its peers in 2015. While Continental may have had the highest recycle ratio, it doesn't mean that it had a good one.

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Image source: Continental Resources.

The recycle ratio is an important metric because it provides a glimpse of how much money a company is making per barrel of oil equivalent that it produces. To calculate the recycle ratio you take the operating profit per barrel (revenue less operating costs and royalties/taxes) and divide it by the finding and development cost per barrel.

A recycle ratio of 1.0 (like Continental's) means that operating profit equals finding and development cost. In other words the company is breaking even by producing each barrel of oil.

Except it is much worse than that, because the finding and development cost doesn't include all of the company's general and administrative costs, interest expense on debt, or income taxes paid.

If you have a recycle ratio of 1.0 it means that your company is losing money producing oil. Amazingly, that puts Continental at the head of the pack.

While Continental might be excited about the STACK, investors shouldn't get excited about Continental unless they think that oil prices are going considerably higher and staying there.

Christopher Malcolm has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.