Continental Resources (CLR 0.04%) is due to report earnings next week. Over the past year everything has been going the company's way and the stock price has been up big in tandem. The questions for investors is this: Does Continental have any new catalysts that can continue to drive the stock higher?
Earnings at a glance
|Analyst EPS Estimate||$1.34|
|Change From Year-Ago EPS||29%|
|Revenue Estimate||$956 million|
|Change From Year-Ago||42.7%|
|Earnings Beats in Past 4 Quarters||4|
How badly will Continental earnings get hurt this quarter?
We have a pretty good idea what Continental is going to report next week. In January, the company announced record proved reserves and production numbers for full-year 2013. Output totaled 49.6 million barrels of oil equivalent, or boe, a 39% bump compared to the same period in 2012. Total proved reserves were also revised higher to 1.08 billion boe, an increase of 38% year over year.
However, thanks to the falling price of Bakken crude, analysts have been cutting their earnings estimates recently for Continental. Over the past 90 days, analysts have reduced their EPS estimate for the upcoming quarter by $0.23 per share and reduced their full-year 2014 estimate by $0.27 per share. Predictably the stock has moved lower, down about 6% since the company's last earnings report.
What investors really need is a new catalyst that can continue the rally into 2014. And the company may have one in a new shale field called the Southern Central Oklahoma Oil Province, or SCOOP.
The play straddles the Woodford Shale and the Anadarko Basin and covers an area about 3,300 square miles in size. At its deepest, the pay-zone is 400 feet deep, twice as thick as the Bakken. And Continental CEO Harold Hamm estimates that there may be as much as 70 billion barrels of recoverable crude oil sitting in SCOOP.
The company has committed a $900 million investment to the field - roughly 25% of its 2014 capital budget. As Continental continues its exploration efforts and delineates the region, investors could see a big jump in the recoverable reserves the company can book, which could serve as a new catalyst for the share price.
Early reports from other operators in the SCOOP formation are encouraging. Last year Marathon Oil (MRO 0.17%) started ramping up its exploration efforts in the area. The company's unconventional Oklahoma production averaged almost 14,000 net boepd during the last quarter.
Other players are also betting big on SCOOP. To date Newfield Exploration (NFX) has drilled seven wells in the SCOOP, with initial production rates averaging 900 boepd and 30-day average production of 640 boepd. These results definitely suggest that the play is economical, but management has warned that more exploration work is needed.
While big finds steal all the headlines, investors also want to know how much of that potential revenue growth will trickle down to the bottom line. Fortunately as drillers become more experienced operating in the Bakken, costs are coming down. Last quarter EOG Resources (EOG -0.18%) reported its average well completion costs fell by 20% year over year to $8.2 million per well. Management credited most of this improvement to the falling cost of hydraulic fracturing services, the transition to pad drilling, and other operational efficiencies.
In the past year Continental has been able to shave $1 million off its average well completion costs, which now come in at $8.3 million per well. When you multiply that figure across the 300 net wells that company is expected to complete this year, you get $300 million in cost savings. That's a sizable figure. Investors should be looking to see if management can deliver even more savings in the upcoming quarter.
Foolish bottom line
We know Continental is likely to deliver another round of jaw-dropping growth numbers out of the Bakken this quarter. But investors should look for a new catalyst if the stock is to continue moving higher. And new plays like the SCOOP as well as improved operational efficiencies might just be what shareholders ordered.