While Harold Hamm remains mired in the final stages of his divorce trial, the oil tycoon's
In a presentation today, newly promoted President Jack Stark and other top executives outlined how
However, some investors aren't sure they like what they're seeing at Continental; shares in the Oklahoma City-based company fell nearly 8% today while other oil and gas stocks were flat. Considering Hamm's 70% stake in Continental, today's market move has shaved about $1.2 billion off his fortune.
The concern appears to stem from Continental's disclosure that its well costs in the Bakken had climbed to $10 million per well, about $2.5 million than a year ago. This flies in the face of shale drilling trends nationwide where most operators have been focused on lowering costs. As a result of these higher costs, the company anticipates $4.55 billion in capital spending this year, up from a previously forecast $4.05 billion. Furthermore, last week Continental's President and COO Rick Bott resigned suddenly, only to be replaced yesterday by longtime exploration chief Stark. The move was a surprise to Wall Street and to many at Continental. Stark, 59, has been at Continental since 1998, working very closely with Harold Hamm the whole time. Bott, who joined Continental only in 2012, was formerly the COO of Cairn India.
A Continental spokesperson says there's nothing to be concerned about, that the company is ahead of schedule on its 5-year plan to double in size, and that Bott just wanted to do something else. Meanwhile, the investor presentation lays out ample rationale for investors to not be scared by rising costs. For instance, doubling the amount of sand blasted down into a Bakken well during the fracking process adds $900,000 in costs, says the company, but has resulted in a 20% increase in production rates -- enough extra oil to more than pay back the added cost in less than a year.
You can't fault Continental for wanting to experiment in the Bakken. Its 1.2 million net acres there hold about 11,000 more drilling spots, and the company is dedicated to figuring out how to make the most out of them. Since 2009 Continental has increased its Bakken production there from 11,000 barrels per day to almost 110,000 bpd (total company production is now running at 170,000 bpd). That growth in the Bakken will continue, but probably not at such an eye-popping rate. Because Bakken wells decline so rapidly, it gets harder to maintain those growth rates with every additional well drilled.
So Continental has been working hard to diversify (and to distract investors from those increased costs).
A big part of the presentation today was on Continental's work in an emerging play dubbed SCOOP, for South Central Oklahoma Oil Province. In general, the rock layer that Continental is drilling into here is called the Woodford. It is believed to be the source rock out of which billions of barrels of oil migrated up over millions of years to fill up some of Oklahoma's most prolific conventional oil fields. Most of that oil still remains locked down in the Woodford.
In just two years the company has grown its production in SCOOP from less than 5,000 bpd to 34,000 bpd. It's not quite as oily as the Bakken is, but SCOOP still boasts 46% oil and 74% total liquids. With 470,000 acres (up from 170,000 acres two years ago), Continental is the biggest leaseholder in the region. And you thought the shale land grab was over.
Continental may have leased up all that land just to get at the Woodford, but today the company revealed that it has found a hidden surprise -- an entirely separate layer of oil-bearing rock called the Springer shale. Initial results from the Springer look very promising, with ultimate total recoveries per well estimated at more than 900,000 barrels (compared with about 600,000 barrels per Bakken well). Considering that Continental's average well costs in both the Springer and Bakken are about $10 million per, it's no wonder that the company plans to add 7 rigs there to the 1 already working. Continental figures it has room to drill 400 wells into the Springer, and about 4,300 more into the Woodford.
That said, Continental thinks there's still plenty of growth to come. The company says it has identified and ranked 11,000 more drilling spots on its 1.2 million net acres. (The entire industry hasn't even drilled that many total wells in the field yet.)
Naturally, they drill the best and juiciest prospects first. But as time goes on and new advances are made on the best ways to drill, frack and produce this tight oil, even marginal locations will become attractive.
A key to continued success in the Bakken is the fact that the Bakken is not just the Bakken. There's other layers of oil-bearing rock, most notably the Lower Three Forks, which constitute four separate geologic zones sitting about 200 feet deeper than the Middle Bakken. Because these rock layers are separated from one another, it means that from a single drilling pad Continental can bore a dozen different wells intersecting each of the layers.
Just one oil-producing rock layer was great. Four or five layers of so-called "stacked pay" will be the gift that keeps on giving. I was shocked a few years when Harold Hamm told me that in time the Bakken would give up 24 billion barrels of oil. Continental's updated estimates today boost that grand total tremendously. The company's geologists figure that the entire petroleum system of the Bakken has more than 400 billion barrels of original oil in place. Assuming a recovery factor of just 15%, that's more than 60 billion barrels of recoverable oil.
Continental is doing some high-tech stuff to help maximize recoveries. At its Hawkinson Unit, they have installed an array of microseismic sensors above 10 wells. The sensors pick up the vibrations caused by rock cracking under the force of water and sand being blasted down the wells during the fracking process. Incredibly, the data from these sensors can be crunched to create a 3-D visualization of all the fractures extending from the wellbores. This kind of trick will go a long way toward helping Continental determine just how close it can place its wells and what kind of completions work best. The ultimate goal: improve the drainage of the reservoirs to get out as much oil as possible.
There's a lot of variables that Continental can experiment with. One that has proven particularly promising is increasing the amount of sand, or "proppant" that is shot down the well during fracking. The sand props open the cracks and fissures in the rock, creating pathways for the oil to get out. In just the past year Continental has doubled the amount of sand pumped per well, to 5.4 million pounds. All that extra sand adds $900,000 to the standard $7.8 million cost to drill and complete a well. But that incremental investment is paid back in less than a year because it gooses a well's oil output by about 20%.
In addition to testing out the effects of using more sand, Continental has also been experimenting with so-called "slickwater" fracks -- basically adding chemicals to frack water to reduce friction. This technique adds $1.3 million per well, but pays back in less than a year while increasing production rates 27%.
Continental is on track for about $4 billion in revenues this year and roughly $660 million in net income (about $1.80 per share after the recent 2:1 stock split). The company is on track to generate "EBITDAX" or earnings before interest, taxes, depreciation, amortization and exploration of about $3.2 billion this year, up from $2.8 billion in 2013. To help finance $4.55 billion in CAPEX this year Continental has is carrying $5.8 billion in debt. At $70 per share today, Continental shares are trading at about 38 times forward earnings.
