Oklahoma City-based Continental Resources, Inc. announced second quarter operating and financial results on Tuesday, according to a company press release. The Company reported net income of $242.5 million, or $0.65 per diluted share, for the quarter ended June 30, 2018. The Company’s net income includes certain items typically excluded by the investment community in published estimates, the result of which is referred to as “adjusted net income.” In second quarter 2018, these typically excluded items in aggregate represented $30.4 million, or $0.08 per diluted share, of Continental’s reported net income. Adjusted net income for second quarter 2018 was $272.9 million, or $0.73 per diluted share.
Net cash provided by operating activities for second quarter 2018 was $753.8 million. EBITDAX for second quarter 2018 was $896.7 million.
As of June 30, 2018, the Company’s balance sheet included approximately $130.0 million in cash and cash equivalents and $6.17 billion in total debt. During June, the Company achieved its short-term goal to drop below $6 billion in net debt. On June 30, 2018, net debt was slightly higher at $6.04 billion due to working capital changes and incremental acquired minerals. On July 12, 2018, the Company announced a partial call of its 5% Senior Notes Due 2022. This represents 20% ($400 million) of the $2 billion in aggregate principal amount of these notes currently outstanding. The Company continues to pursue its $5 billion long-term net debt goal. The Company’s second quarter annualized net-debt-to-EBITDAX ratio was 1.68x and continues to approach the historically low levels seen prior to the three-year commodity down cycle.
The Company’s second quarter 2018 crude oil differential was $4.55 per barrel below the NYMEX daily average for the period, an improvement of $1.76 per barrel compared to second quarter 2017. The realized wellhead natural gas price for second quarter 2018 was $0.15 per Mcf below the average NYMEX Henry Hub benchmark price. The Company expects to realize improved crude oil differentials in third quarter 2018 based on widening Brent/WTI spread and lower Cushing inventories.
The Company is increasing its 2018 annual production guidance to 290,000 to 300,000 Boe per day and is increasing its projected exit rate by 10,000 Boe per day to 315,000 to 325,000 Boe per day. This increase is driven primarily by Bakken outperformance, realized operational efficiencies and the reallocation of rigs to higher, non-carried working interest wells in SCOOP and STACK.
The Company also updated its 2018 Capex guidance from $2.3 billion to $2.7 billion. Approximately $275 million of this increase is associated with an investment in minerals within our existing leasehold, which is expected to be partially funded by mineral divestiture proceeds of approximately $220 million in fourth quarter 2018. New capital of $125 million and reallocated capital of $75 million will be used for additional drilling and completions (D&C) activity, including the addition of three rigs by year end, focused on high rate of return, oil-weighted assets. One-third of the D&C Capex increase is associated with higher value, 60-stage Bakken completions and two-thirds is associated with activity in Oklahoma.
Included within the updated 2018 Capex guidance is approximately $600 million for wells that will not have first production until 2019, providing a catalyst for continued oil-weighted production growth. The Company expects to exit 2018 with a wells in progress (WIP) inventory in the Bakken of approximately 130 gross operated wells, including approximately 50 already stimulated, with first production expected in 2019. In Oklahoma, the Company expects to exit 2018 with a WIP inventory of approximately 55 gross operated wells, including approximately 5 already stimulated, with first production expected in 2019. These wells will further prompt oil-focused growth in 2019.
“Continental is in an advantaged position in the current market, with high rate of return oil plays benefitting from existing infrastructure,” said Harold Hamm, Chairman and Chief Executive Officer of Continental. “As we look into the second half of 2018 and beyond, Continental and its shareholders have an exciting opportunity to accelerate capital-efficient, oil-focused production growth while remaining disciplined in achieving our targets for free cash flow and debt reduction.”
In the Bakken, the Company is projected to average 5 completion crews and 6 rigs in the second half of the year, ramping up to 7 rigs by year end. The Company expects to complete approximately 125 additional Bakken wells with first production by year end, with more than half of these in fourth quarter 2018. In Oklahoma, the Company is projected to average 4 completion crews and 18 rigs in the second half of the year, ramping up to 19 rigs at year end. Over 95% of our drilling activity in 2018 will be focused on oil and liquids-rich prospects.
The Company also improved guidance for select 2018 operating expenses. Total G&A expense, which is comprised of cash and non-cash G&A expense, is expected to be $1.60 to $2.15 per Boe in 2018. Of this total, cash G&A expense is expected to be $1.20 to $1.65 per Boe, a reduction from the previous $1.25 to $1.75 per Boe. Non-cash equity compensation is expected to be $0.40 to $0.50 per Boe, a reduction from the previous $0.45 to $0.55 per Boe. Continental also reduced 2018 guidance for DD&A to $17.00 to $18.00 per Boe for the year, down from the previous range of $17.00 to $19.00 due to strong well productivity and capital efficiency.
On Tuesday, the Company announced the formation of a strategic minerals relationship with Franco-Nevada. The Company expects to receive approximately $220 million in net proceeds at closing in fourth quarter 2018. In addition, the parties have also committed, subject to satisfaction of agreed upon development thresholds, to spend up to a combined $125 million per year over the next three years to acquire additional minerals through the newly-formed subsidiary. With a carry component on capital acquisition costs, the Company is to fund 20% of future mineral acquisitions. The Company will be entitled to between 25% and 50% of total revenues generated by the minerals subsidiary based upon performance relative to certain predetermined targets. This new relationship is expected to enhance the value of minerals by targeting areas of the Company’s future development in Oklahoma.
Second quarter 2018 production totaled 25.8 million barrels of oil equivalent (Boe), or 284,059 Boe per day, up 26% from second quarter 2017. Total production for second quarter included 157,116 barrels of oil (Bo) per day and 761.7 million cubic feet (MMcf) of natural gas per day. The following table provides the Company’s average daily production by region for the periods presented.
The Company uplifted its type curve EUR for the Bakken 9% to 1,200 MBoe per well in the second quarter. This increase reflects the Company’s move from 40-stage to 60-stage completions, based on improved performance observed from 70 wells completed with the Company’s 60-stage optimized completion techniques. A 60-stage completion increases the cost of a typical Bakken well by approximately $0.5 million for a total completed well cost of $8.4 million. At this cost, the 1,200 MBoe type curve delivers a 175% rate of return (ROR) at $70 WTI and approximately $0.4 million of incremental cash flow per well in the first year, as compared to the Company’s previous 1,100 MBoe type curve.
“Our Bakken team continues to unlock value for our shareholders through innovative thinking and advanced technologies,” said Gary Gould, Senior Vice President of Production & Resource Development of Continental. “Over the past year, our team increased our Bakken type curve twice, cumulatively raising the EUR 22%, doubling the rate of return, and adding $3.5 million of incremental first-year cash flow per well for an additional cost of only $1.4 million per well. This step change in performance is uplifting Bakken economics throughout the field. With 4,000 wells of operated inventory still ahead of us, the Bakken will be a growth vehicle for Continental for many years to come.”
The Company’s Bakken production averaged 158,119 Boe per day in second quarter 2018, up 32% versus second quarter 2017. During the quarter, the Company completed 35 gross (19 net) operated wells flowing at an average initial 24-hour rate of 2,282 Boe per day. Four of the wells ranked as top ten 30-day rate Bakken wells for the Company, including the first 30-day Bakken well to average over 3,000 Boe per day (Mountain Gap 7-10H in Dunn County, 3,104 Boe per day).
The Company’s SCOOP production averaged 64,786 Boe per day in second quarter 2018, up 6% versus second quarter 2017. The Company completed 16 gross (13 net) operated wells with first production in second quarter 2018.
The Company previously announced Project SpringBoard, which is a massive, multi-year, stacked pay, oil development project that covers approximately 70-square miles and includes 45,000 gross (31,000 net) contiguous acres. SpringBoard holds up to 400 MMBoe of gross unrisked resource potential, with wells expecting to average 70%-85% oil across both phases. The Company estimates up to 100 Springer and 250 Woodford and Sycamore potential locations and will operate SpringBoard with an average working interest of approximately 75%. In addition, SpringBoard is expected to benefit from the Company’s row development operational efficiencies and production will benefit from access to premium markets through existing pipeline infrastructure.
Drilling is underway in both Phase I and Phase II of Project SpringBoard, with 7 rigs targeting the Springer reservoir (Phase I) and 4 rigs, ramping up to 6 rigs by year end, targeting the Woodford and Sycamore reservoirs (Phase II). The Company expects first production from the Springer wells in Project SpringBoard to begin late third quarter 2018, with up to 18 Springer wells producing by year end 2018. First production from the Woodford and Sycamore wells is expected to begin in first quarter 2019.
“Project SpringBoard is an outstanding, high impact oil project for Continental and its shareholders,” said Jack Stark, President. “This project alone has the potential to increase Continental’s oil production by as much as 10% over the next 12 months.”
The Company’s STACK production increased 62% to 51,722 Boe per day in second quarter 2018, compared to second quarter 2017. Continental completed 26 gross (13 net) operated wells with first production in second quarter 2018. The top Company-operated STACK oil wells in second quarter include the Swaim 3-14H: 3,476 Boepd (2,596 Bopd), Madeline 2-4-9XH: 3,540 Boepd (2,548 Bopd), Lugene 1-33H: 3,600 Boepd (2,004 Bopd), Nelda 1-3-10XH: 4,032 Boepd (1,886 Bopd) and Brown Family 1-13-24XH: 3,065 Boepd (1,443 Bopd).
“Continental’s positive revisions to production guidance reflect the oil-focused opportunity we see in accelerating our activity in a capital-efficient manner. The momentum built from these decisions will directly correlate to revenue generation and oil-weighted growth as we enter the back half of 2018 and 2019,” said John Hart, Chief Financial Officer of Continental. “Continental will conduct the capital spend from both our D&C activity and our new minerals opportunity in a manner supportive of cash flow enhancement and debt reduction.”
In second quarter 2018, the Company’s average net sales price excluding the effects of derivative positions was $63.35 per barrel of oil and $2.65 per Mcf of gas, or $42.16 per Boe.
Production expense per Boe was $3.49 for second quarter 2018, which represented an $0.11 quarter over quarter improvement versus first quarter 2018 and a $0.50 year over year improvement versus second quarter 2017. Other select operating costs and expenses for second quarter 2018 included production taxes of 7.7% of net crude oil and natural gas sales; DD&A of $17.29 per Boe; and total G&A of $1.82 per Boe.
Non-acquisition capital expenditures for second quarter 2018 totaled approximately $714.2 million, including $627.9 million in exploration and development drilling, $44.9 million in leasehold, and $41.4 million in workovers, recompletions and other.
The following table provides the Company’s production results, per-unit operating costs, results of operations and certain non-GAAP financial measures for the periods presented. Average net sales prices exclude any effect of derivative transactions. Per-unit expenses have been calculated using sales volumes.
Continental plans to host a conference call to discuss second quarter results on Wednesday, August 8, 2018, at 12 p.m. ET (11 a.m. CT). Continental plans to publish a second quarter 2018 summary presentation to its website at www.CLR.com prior to the start of its earnings conference call on August 8, 2018.