Weak oil prices have made it tough for oil companies to make much money. This is forcing producers such as Continental Resources to make changes to reposition the company to run on a lower oil price. Here are five things its management team recently said on its third-quarter conference callabout its progress toward this goal.
1. We're spending less, but producing moreCEO Harold Hamm first pointed out its production progress noting:
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According to CFO John Hart, the company is on pace to be "$200 million to $250 million under our $2.7 billion CapEx budget for the full year," but the company's production will be much higher than its initial guidance. This is largely due to the powerful combination of significant cost deflation as well as the strong well results thanks to its new enhanced completions.
2. We're working toward cash flow break-evenThis is putting the company in the position to balance cash flow with spending at a much lower oil price than ever imagined. According to Hamm:
Being cash flow neutral is an important place for Continental to be because it will put the company on the path toward long-term sustainability should the current oil price be the new normal. That said, like many of its peers, including larger integrated names like Occidental Petroleum, it still needs oil to recover substantially from the current level in order to balance cash flow with capex next year, with Occidental Petroleum currently requiring a $60 oil price while Continental needs oil to top $50.
3. Our finances are in good shapeThe oil price downturn has had a negative impact on producers with a lot of debt and limited liquidity. And while Continental is stronger than some peers, with Hart noting that it "continue[s] to have ample liquidity and no near-term debt maturities," the company still undertook a number of transactions during the quarter to further strengthen its position just in case. However, Hart wanted to make one thing clear:
In other words, the company is focused on being financially disciplined during this tough time and this has taken a bit more work because of its slightly weaker financial position. That said, even with these moves it is still well behind a company like Occidental Petroleum, which not only boasts of a strong A-rated balance sheet but currently has enough cash on hand to pay for an entire year of capex.
4. We continue to find more oilWhile the oil market is abundantly oversupplied at the moment, that's not stopping Continental from exploring for additional sources of oil. Hamm noted:
Continental is among a small handful of companies to have locked up acreage in a really compelling trend in Oklahoma called the STACK play. Initial drilling returns have been strong, even in the current price environment, which is why the company is so excited about the potential to develop its acreage in the region.
5. Initial guidance for 2016In looking ahead to 2016, and assuming no recovery in the oil price, Hart gave the following initial thoughts on guidance for 2016. He said:
In other words, gone are the days of robust growth, with Continental Resources' new focus being to aim to maintain its production next year so that it doesn't burden its balance sheet with any more debt.
Investor takeawayThe key takeaway of Continental Resources' third-quarter conference call is that the company has made significant progress to transition the company to run sustainably at a much lower oil price. That said, it still has work to do given that its current breakeven is still well below recent oil prices. While that doesn't mean it will dig itself into a hole next year, it does suggest that the company will need to get creative should oil remain weak.
The article 5 Things Continental Resources Inc. Wants You to Know originally appeared on Fool.com.
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