Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of U.S. independent oil and gas producer Continental Resources, Inc (NYSE:CLR) fell 10% today. The stock had rallied as much as 30% from a low of $30.95 in December, but after today's drop, the stock is still down more than 57% since the peak last August:
So what: This drop -- as with the overall decline since last year -- is the result of plummeting oil prices. On Jan. 5, oil prices actually fell below $50 for a time, before closing just over $50. Either way you slice it, American shale production for many producers like Continental Resources, exceeds current market prices, especially for new oil wells that are quite expensive to drill and complete.
In short, investors continue to fear Continental's ability to make money in the current oil market. And for good reason.
The company announced a significant reduction in its non-acquisition (meaning mostly new production development) capital expenditures budget for 2015 a couple of weeks ago, with the $2.7 billion target nearly 50% less than the $5.2 billion initial estimates.
The company will only average around 30 drilling rigs in operation over the full year, a major cut from the 50 currently in operation. Plain and simple, one of the fastest-growing producers of the past five years is finally taking its foot off the gas.
Now what: Continental Resources is facing its toughest challenge since the Great Recession, and quite frankly I'm not willing to call a bottom here. The reality is, there remains too much uncertainty in the global demand for oil, and until demand returns, U.S. producers seem the most likely to be forced to cut back as oil nations like Saudi Arabia have the resources to survive cheap oil for a year or more.
It's good to see Continental cut back on its plans for new drilling, but until the global demand and supply balance returns to equilibrium, independent American oil producers like Continental will remain volatile and risky investments. The long-term picture is likely good, but the short-term uncertainty probably makes waiting for a better global oil market before acting, a prudent call.