As the largest leaseholder in the Bakken, Continental Resources (NYSE:CLR) is a stock that investors interested in the region need to know. The company, which helped spearhead the play's development, has undergone lots of changes in recent years, to better position it to create shareholder value in those to come. In this Industry Focus: Energy clip, host Nick Sciple and contributor Matt DiLallo discuss:

  • An overview of Continental Resources.
  • Its growth rate, returns, and cash flow.
  • Its recent mineral partnership with Franco-Nevada.

A full transcript follows the video.

This video was recorded on Oct. 25, 2018.

Nick Sciple: Let's talk about some of the players in the Bakken that investors maybe should be aware of, maybe should pay attention to, for their portfolios. To start off, let's talk about Continental Resources. It's one of the largest players in the region. They claim to be the largest leaseholder in the Bakken. They also have leading positions in Oklahoma and the SCOOP and STACK plays. What's going on with Continental Resources right now? What should investors pay attention to?

Matt DiLallo: They've been the first mover out there, so they were able to gobble up a bunch land back in the early part of the drilling boom. They've been able to drill. They have so much drillable land out there that they can grow and grow and grow.

This year, between their Bakken land and their STACK SCOOP play, they can grow production 20-24%, which is phenomenal for a company that size. In addition to that, they can produce cash flow. Back during the drilling boom, companies were just drilling as fast as they could. They were taking on debt, issuing new stock, whatever they could to drill more wells. Now, with returns as good as they are, companies like Continental are able to just produce excess cash and still grow fast. It's great for investors because now they're actually making profits. Continental's case, they might use that money to institute a dividend. It's crazy for shale companies to actually pay a dividend, but that's what they're looking at. They could possibly buy back stock.

They're also using that money to do some creative things. They're doing a mineral partnership with Franco-Nevada, which is a gold and silver streaming company. It's a $220 million deal that will basically give them funds to drill more wells and offset the capital program. They can use this as another growth vehicle. There's a lot that they're doing out there.

Well-run. Their founder has been one of the champions of shale, Harold Hamm. He's constantly on things like CNB talking about how great the Bakken can be. He's really done a good job putting together a company that's geared toward that play.

Sciple: Let's talk a little bit more about this partnership with Franco-Nevada. It was really interesting to me. I saw in one of the more recent Continental Resources' earnings calls, John Hart, their CFO and treasurer, said that this is a first-of-its-kind partnership between a streaming-type resource company and a shale producer. They're partnering together to where Franco-Nevada is going to help purchase the new leases while Continental is going to work along with them to choose the new places that they're interested in drilling. They'll get some investment from Franco-Nevada to help supply that.

When you look at this deal, do you think this is something that could become a trend more long-term for other shale players? What kind of opportunities do you think this provides differently than the way things have been done in the past?

DiLallo: It looks like it could be a trend. It's the second type of these companies that's formed. The other is Viper Energy, which Diamondback Energy formed a couple of years ago. They've used it kind of like an MLP. They've converted it to a corporation, but where they would drop down these royalty acres or acquire these royalty acres, and they'd use that to generate cash flow that they'd pay to investors. It's kind of an income-producing vehicle. In Continental Resources' case, they're going to use this initially as a growth vehicle. They're going to try to buy up some more of these royalties and build up a company that they could turn into an IPO. They could split it off. They have a lot of options for it. It's another way to raise cash. Oil companies always need money. Even though they're generating cash flow now, oil prices take a dip, or they decide to grow faster, they'll need that cash sooner. They're always drilling more wells, and it costs lots and lots of money to do that. So, it's a way to do that and maybe free up some cash flow now that they can use to buy back stock, pay down debts, something like that.

I do think it'll probably become a trend to watch for investors, especially those that like income, because that's what these are geared toward.

Sciple: It's a novel way to raise cash. When it comes to the energy game, cash is king, it seems to be the case.

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