Shares of oil producer Continental Resources (CLR) tumbled Tuesday, falling by more than 10% at one point during the morning. That sell-off came even though the company posted strong fourth-quarter and full-year results Monday. As of 1:42 p.m. ET, the stock was down by 7.1%.
Two factors seem to be weighing on the oil stock: First, the de-escalating situation between Russia and Ukraine, and second, Continental Resources' own outlook for 2022 and beyond. On Tuesday, Russia said that it had begun returning some of its troops and weapons to their bases after military exercises near the Ukrainian border. This move is viewed as reducing the likelihood that Russia will invade Ukraine in the near future. The threat of such a conflict and the sanctions on Russia that would result from it have pushed oil prices higher in recent weeks, given that Russia is a major oil producer.
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Now, Russia's signal that it's looking for a diplomatic resolution is taking some air out of oil prices. The price for U.S. benchmark West Texas Intermediate (WTI) crude declined by more than $3 a barrel (about 3.5%) Tuesday to around $92 a barrel after hitting a seven-year high on Monday.
That decline in oil prices is causing some concern about Continental Resources' long-term outlook. For starters, the oil producer plans to increase its capital spending this year by 15% across its legacy positions to boost its production. On top of that, it plans to spend an incremental $500 million on its recently acquired positions in the Permian Basin and the Powder River Basin. That production-growth strategy has burned investors in the past.
However, Continental Resources is increasing spending to grow production because it believes oil prices will remain high. It estimates that it can generate a cumulative operating cash flow of $20.7 billion from 2022 through 2025 based on $80 a barrel oil. Even with its increased spending to grow production, it says it can generate more than $11.6 billion in cumulative free cash flow over that time frame -- funds it could use to repurchase shares, repay debt, and pay a growing dividend. However, management also noted that a $5 change in the average price of WTI crude for the year would impact its annual cash flow to the tune of about $300 million. If oil prices decline sharply, it won't produce as much cash.
If Continental Resources is right that oil can remain above $80 a barrel in the coming years, it could produce the free cash flow equivalent of 55% of its current market cap through 2025. That suggests the stock could have significant upside ahead. So if you're as bullish about the future of oil prices as Continental, Tuesday's sell-off will seem like an overreaction.
