Continental Resources, Inc.
Q2 2021 Earnings Call Transcript

Published: 3 Aug 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Continental Resources, Inc. Second Quarter 2021 Earnings Conference Call. At this time, are participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Rory Sabino, Vice President of Investor Relations. Please go ahead.

[Rory Sabino:]

Great. Good morning, and thank you for joining us. Welcome to today's earnings call. We will start today's call with remarks from Bill Berry, Continental's Chief Executive Officer; and Jack Stark, President and Chief Operating Officer. Bill and Jack will be joined by additional members of our team, including Mr. Harold Hamm, Chairman of the Board; John Hart, Chief Financial Officer and Chief Strategy Officer; and other members of our team. Today's call will contain forward-looking statements that address projections, assumptions and guidance. Actual results may differ materially from those contained in forward-looking statements. Please refer to the company's SEC filings for additional information concerning these statements and risks. In addition, Continental does not undertake any obligation to update forward-looking statements made on this call. Finally, on the call, we will refer to certain non-GAAP financial measures. For a reconciliation of these measures to generally accepted accounting principles, please refer to the updated investor presentation that has been posted on the company's website at www.clr.com. With that, I will turn the call over to Mr. Berry. Bill?

[Bill Berry:]

Thank you, Rory, and good morning, everyone. Thank you for taking time to join us on our call. I hope everyone is well. I'd like to begin by highlighting our exceptional performance in the second quarter, where we regenerated robust and company record-breaking free cash flow thanks to strong asset performance, in addition to continued capital and operating efficiency gains delivered by our teams. This significant free cash flow is being dedicated to shareholder capital returns in the form of an increased quarterly dividend to $0.15 per share, continued focus on debt reduction and resumption of our $1 billion share repurchase program. We appreciate our investors support and hope this continues to provide confidence in Continental being the best investment opportunity in the industry and the most shareholder return-focused company in any industry. During the second quarter, we generated a company record-breaking $634 million of free cash flow, reducing net debt by $284 million ending the quarter with $4.59 billion. Year-to-date, we've generated $1.34 billion in free cash flow, while reducing our net debt by $892 million. We distributed $40 million to shareholders with our previous $0.11 quarterly dividend. We exceeded our production guidance for the quarter, delivering 167,000 BOE a day and just over – barrels of oil a day and just over 1 billion cubic feet of gas per day. We delivered exceptional performance and efficiencies from our assets in the Bakken and Oklahoma, which Jack will provide more details.

[Jack Stark:]

Yeah. Thanks Bill and good morning, everyone. Appreciate you joining our call. Today, I'm going to share some highlights from the outstanding results our teams delivered this quarter, and there are three key takeaways I want to leave you with. First, our assets are performing with remarkable consistency and predictability, delivering their terms in excess of 100% from our Bakken and 60% to 80% for our Oklahoma drilling programs, assuming $60 WTI and $3 NYMEX gas. Second, we are on track to reduce our weighted average cost per well year-over-year by approximately 10%, and 70% to 80% of these savings are structural. Third, our capital efficiencies are reaching record levels and we expect to deliver a projected return on capital employed of approximately 18% for 2021. Our assets also provide optionality to respond to changing market conditions. For example, the decision to focus up to 70% of our rigs on our Oklahoma natural gas assets in the second quarter of last year has proven to be very strategic. Our second quarter 2021 natural gas production in Oklahoma was up approximately 10% over the first quarter of 2020, while NYMEX natural gas prices, more than doubled over this same period of time. With today's improved crude prices, we are exercising this optionality once again in migrating up to 75% of our rigs to a more oil weighted portfolio in the back half of this year. As bill highlighted our well production remains un-hedged and our shareholders are receiving the full benefit of the improved crude oil price. So let's get into the quarterly highlights. During the quarter, we brought on 108 gross operated wells with 70 in the Bakken and 38 in Oklahoma. Early performance from our 2021 Bakken wells is right on track as shown on Slide 8. This chart compares the average performance of our 2021 wells with average performance of 488, Continental operated wells completed over the prior four years, grouped by program year. The overlap of these annual performance curves illustrates the consistent performance the Bakken has delivered year-over-year, which is arguably the best repeatability of any oil play in the country. Over the last four years, we have also reduced our cycle time for putting Bakken wells online by 50% and dropped our completed well costs by approximately 30% driving our capital efficiencies in the Bakken to record levels. Today, we are producing approximately 45% more BOE per $1,000 spent in the first 12 months than we did in 2018. Our Bakken differentials are also improving, driven by demand for Bakken crude and the expansion of DAPL, which was put into operation August 1. With this expansion, there is approximately 1.6 million barrels of pipeline and local refining takeaway capacity from the Bakken excluding rail. This is approximately 500,000 barrels per day, more than the Bakken field produced on average in the month of May.

[Operator:]

And our first question will come from Arun Jayaram of JPMorgan. Please go ahead.

[Arun Jayaram:]

Yes. Good morning. Good afternoon. I wanted to get management's view on just how you're thinking about incremental cash return. Obviously, you increased the dividend, but I wanted to get your perspective on why you went with buybacks versus variable dividends and love to hear what kind of feedback you're getting from investors regarding cash return, including Harold's view given his ownership position in the company.

[Bill Berry:]

Well, thanks, Arun. I know that's the question of the moment and everyone's keenly focused on that. We've done a lot of work internally with our discussions, not only with the board, but also with analysts such as yourself, as well as our investors and just say what was the preferred vehicle. And we've seen a lot of comments that there's a very high level of comfort that the share buyback is actually the preferred vehicle. I know a lot of companies are actually engaging in some special dividends, some variable dividends. And I think all of us are watching to see how that actually gets played out in the market. Today, we're seeing a preference for buyback and I don't – Harold's here with us and he can probably share with you his perspective on that as well.

[Harold Hamm:]

Yes. Arun, that’s a good question. All crops are secular. I think we realized undervalued market that we're in today and we feel that the buybacks are – that's a good thing to do at this time.

[Arun Jayaram:]

Fair enough.

[Bill Berry:]

And Arun, just to follow-up on that, one of the things that you'll look to on Slide 5, if you look at what our cashflow yield is that suggests that we're significantly undervalued. And so I think the buyback is the appropriate vehicle to use in that type of scenario.

[Arun Jayaram:]

Great. Great. And then just my follow-up, it sounds like late in the year you may add a rig in the Bakken, a couple in Oklahoma if I heard you correctly. So how are you guys thinking about 2022? I know you have a targeted reinvestment rate range that you've put out there, but how are you thinking about preparing for 2022 if we get some of those OPEC plus barrels back online?

[Bill Berry:]

Yes. Let me start and then Jack may add some color to it on the rigs, but we're very comfortable with what we've articulated before. That 65% to 75% reinvestment ratio is about the right level. We're obviously well below that today, we're at 35%. But the things that we've talked about for – in the last several quarters is there is still a pretty significant production overhang, that's out there. If you look at OPEC plus, it's probably 5 million barrels a day. The COVID variant Delta, and we're all seeing what's happening to that here in our country, but also around the world. You see, particularly what's happening in Asia on this on the demand side. So both of those things are out there that suggests that as we look forward into the future, our reinvestment ratio is still seems to be in the right thing for us to be focusing on. As far as additional rigs, I think, goes, Jack articulated was a possibility of doing that. We're still looking at it. And Jack, I don't know whether you've got any other texture on the rigs we're picking up toward the end of the year.

[Jack Stark:]

No. Clearly, we have the inventory to move into it, which is, as you said, we're keeping around macro and we’ll adjust accordingly.

[Arun Jayaram:]

Great. Thanks a lot, gents.

[Bill Berry:]

Thanks, Arun.

[Operator:]

The next question comes from Doug Leggate of Bank of America. Please go ahead.

[Doug Leggate:]

Thank you. Good morning, everyone. I hope everyone's doing well out there. I appreciate you getting on the call this morning.

[Bill Berry:]

Thanks, Doug.

[Doug Leggate:]

So gentlemen, first of all, the fact that you've deliberately run unhedged business has clearly played dividends as is your capital allocation strategy. But I want to put a scenario to you and ask your opinion on this. The market is pricing the sector, in our opinion, at the strip price, which is $20 backwardated over a four- or five-year period. And it seems to us that the free cash flow you're generating as a proportion of your free float is extraordinary, frankly, given you've only got a 15% free float. So my question is, how far can you take the buyback because it seems the scale of free cash flow in the next two or three years could be very significant compared to what the market is pricing you are based on the strip.

[Bill Berry:]

Yes, Doug, it’s a great question. And we see it exactly the same way that the pricing at the strip is $20 backwardated, that does and I think that's what you're describing with your question here. It does suggest that a buyback is the appropriate vehicle. Going forward into 2022, I'll probably revisit those same comments made earlier that there is a risk overhang with that production capacity and with the demand side of things with COVID that's out there. So it's probably pretty early to be articulating where we end up going in the future in the 2022-2023 timeframe, which I think is the root of your question. Absolutely, the right question. We talk about it every day, but as far as guidance, it's probably not now that we feel it's the right time to be making that guidance in the future. But with regard to the macro, I might say if Harold’s got any thoughts, he wants to share with you as well. Thanks, Doug.

[Harold Hamm:]

I think right now we’re seeing this overhang diminish actually with week and month. And until that's gone, I don't think anybody can say exactly what the future holds.

[Doug Leggate:]

You see my point though, fellows, I mean, you're buying back is essentially about 40% of your feet float. Now it's going to be tough to sustain at that rate without the inevitable happening, which is the free float doesn't stick around for too much longer. I just wonder if I'm thinking about it the right way.

[Harold Hamm:]

Well, obviously, we don't have hope continue doing that. We hope that next three quarters we’ll see things change.

[Bill Berry:]

Yes. We hope that people see it the same way you do and start buying the stock and then that that drives it to the position that we don't think we're needing to buy it.

[Doug Leggate:]

Okay. Well, my follow-ups hopefully is a bit quicker than that, and it's really just about capital allocation. You took advantage of the weakness in oil prices you pivoted to your gas optionality. What are you doing today because obviously both sides of the coin are pretty good. How are you allocating capital today? And I'll leave it there. Thanks.

[Bill Berry:]

Yes. No, that's a great question, Doug. And we had lots of discussions internally about that very subject. It's great to have the optionality, and I think that's what you're seeing with some of Jack's comments. And I'll have him talk to you a little bit about what we're doing on the – where we're headed in the latter part of the year on the oil versus gas, but both of the commodities are seeing some good strength and we're seeing capability to go late.

[Jack Stark:]

Yes. I mean, that's the beauty of it. And you're exactly right, we've talked about this a lot that we continue on with gas prices where they're at and be a little more aggressive on the gas or do we push to a more oil weighted portfolio. And right now, I mean, we're looking at, as we said, adding another rig in the Bakken. And we do just from where we're at right now there's a percentage of rig, we're seeing that we will become more oil weighted in the back half of the year here just by allocation of rigs would probably have, as I said, could be upwards of 75% of the rigs more focused on oil. And when you look at the completions in the back half of the year, you got close to 70% and we're really going to be in the Bakken. And so you will see obviously that tick up, but believe me that the guys in Oklahoma did some outstanding wells. I mean, we had some wells we put on here recently. I mean, I think it's going to be somewhere in the range of, Doug, I wish I knew the number, but it's going to be somewhere in the range of like eight wells we brought on here that earned the gas window. And there are 13, 15 million a day with like 300, 350 barrels of condensate with them. So just an outstanding well. So we have the option to go either way. You're exactly right. We're looking at $4 gas, pretty darn attractive, trying to bring on gas as well. So we're just kind of – we feel like we're a little bit in the catbird seat and we can take advantage and adjust rigs as we think, where we think we can get the best benefit.

[Doug Leggate:]

Hey, Jack, I might have to republish our stock primer when Lori was over here. But congrats on a great quarter, guys. Thank you.

[Jack Stark:]

Thanks, Doug.

[Bill Berry:]

Thanks, Doug.

[Operator:]

The next question comes from Derrick Whitfield of Stifel. Please go ahead.

[Derrick Whitfield:]

Yes. Good morning, all. Congrats on your strong quarter and return of capital program or a return of capital update.

[Bill Berry:]

Thanks, Derrick.

[Derrick Whitfield:]

With the understanding that you're firmly signaling a strong commitment to capital discipline, could you outline the macro conditions that would signal the need for return to growth and how measured Continental's response would be any more naturally balanced supply demand environment?

[Bill Berry:]

Yes, I think the thing that we always look at there is the fundamentals, I mean, that's what we've talked about for quite some time. It's a supply demand balance and we continue to look at that. As we talked about the supply side of things, it's got a little bit of production overhang in the demand side, still got that risk. So to look at whether those come back together to a reasonable period of time, and then to the other conversation I think what we were talking about on the re-investment rate, the 65% to 75%, that's kind of where we think is an appropriate level for us to be on a long-term basis. And again what we are focused on is mid-cycle type numbers. And so you'll see that in a conversation that you mean when we look at what's our debt-to-EBITDA and where we are today, we're really looking at longer term, what's the right debt-to-EBITDA that down to $3 billion or less on a debt basis. And that's kind of the driver for our overall cash distribution. The one other thing that we'll highlight to you is that we've got a six-year tracker – a track record of free cash flow return. And that's what we always focus on. It's a very aligned management and ownership team to continue to deliver free cash flow, strong free cash flow to our dried investors.

[Derrick Whitfield:]

Great. That makes sense. And with my follow-up, I wanted to focus on your strong results in the SpringBoard III and IV areas as shown on Slide 4. How would you compare the economics of SpringBoard III and IV to that of other areas across the Anadarko? And how should we think about the allocation of activity to the Anadarko as you increase your focus on oil in the second half and potentially out to 2022?

[Bill Berry:]

Well, good question here. And the purpose of this slide is to show that the returns and the performance that we're seeing here are very similar in these areas. And I agree with you, you're looking at this and you're going these – with this kind of performance, where does SpringBoard say III and IV fit into the equation? And we're just in our very early stages of developing SpringBoard III and IV. I mean, we're not even 5% into the inventory there. And – but what we wanted to show on this slide is that the early performance from the wells in the Woodford and the Sycamore here are really – they're right in line with the much higher statistical average we have from our oil wells in SpringBoard I and II. And to see this kind of results early in a play is extremely encouraging, but it's partly because it's in our area and we know what we're doing here. And so what does this portray for other areas? I think what you have to understand is we've got 360 square miles of reservoir with STACK phase upwards above 300- to 750-foot thick in here. And we've really controlled these areas. Our average work interest is 75%. So as to the whole Anadarko basin, I can't speak to that. But as far as to Continental, we have basically control of what I'd call the best portion of the reservoirs out here and that's because we're an early entrant into the play. We were leasing out here in 2008 when nobody really cared. It was really a tough time in market. And so these – our positions are so dominant just because of that. And we stayed focused on it through and we've done some strategic bolt-ons to continue to build our positions are so dominant just because of that and we stayed focused on it through and we've done some strategic bolt-on to continue to build our positions and so. Right now we have upwards of 600 gross operator locations remaining. And so a lot to do out here. And what's really encouraging on this is that, a lot of the drilling has been Woodford and Springer with some Sycamore out here. Well, now you look at the Sycamore performance down here in SpringBoard III and IV, and it's pretty darn impressive and performance there. And the Sycamore represents one-third of the inventory that I'm talking about here. So in the end, I think you take away from these, this one slide here, this in the deck is that SpringBoard I and II are not one-offs, they're actually we're continuing with III and IV, and we actually have some other areas out here that will be SpringBoard V and VI, ultimately we believe in. So the point of it is that, good consistent results and that's what we'd love to see, but it's because we know the rocks and how to develop them. That's the long-winded answer. I'm sorry, but I just – I guess I get off my soap box there.

[Unidentified Analyst:]

Yeah. Greatly appreciated about the detail. I mean, the results look fantastic. So I wish you guys the best of luck out here in the future wells.

[Bill Berry:]

Thank you.

[Jack Stark:]

Thanks.

[Operator:]

The next question comes from Neal Dingmann of Truist Securities. Please go ahead,

[Neal Dingmann:]

Good morning. Jack, just maybe a little more on your soapbox on the Mid-Con. Can you talk what's the latest and does the sub-site include some of the potential around the Franco-Nevada JV, and maybe any comments you can have around that and opportunities that's provided?

[Jack Stark:]

Well regarding the Franco-Nevada JV, I mean we – there – it's basically, it has representation through all these areas, bottom line. So as far as that's concerned, it has definitely has exposure to these performance results that you're seeing here and will continue for quite some time. So and what was the other part of your question?

[Neal Dingmann:]

Well, I just wondered, would that Franco is there going to be a potential to, I don't know, down the road, would you potentially spin that up? Would you do something with that or is it just, with what it's helping with returns there's no near-term plans with that JV?

[Jack Stark:]

Yeah. That's another area of optionality we've got, it's a tremendous asset for the future. We're growing that asset today. Today's not the day to delve into that, but we do see a lot of optionality in the future. We're obviously in it to grow value and to do something that's valuable to our shareholders.

[Neal Dingmann:]

No, it makes sense. And then one follow-up, if I could, just you guys have been great on seeing some marketing opportunities, I'm just wondering, either for you or even Harold, how you see for export opportunities and what, what are the market opportunities you all see here in the coming quarters?

[Harold Hamm:]

I think over the coming few quarters, we're seeing the export market has stayed strong, obviously a lot of it's gone to Southeast Asia and we'll expect that to remain prominent future. We're seeing also, graphed the FTR prices continue to close so that best part is maybe that somehow an anticipation of a new market has been created in the Gulf.

[Neal Dingmann:]

Great point. Thanks Harold.

[Harold Hamm:]

Yes.

[Operator:]

The next question comes from Leo Mariani of KeyBanc. Please go ahead.

[Leo Mariani:]

Hi guys, wanted to follow up on one of your prepared comments from earlier. I just wanted to make sure that I heard this right. I think you guys talked about kind of a year-end 2021 exit rate around 165,000 BOE per day on oil this year. I noticed that you guys were at about 167,000 in the second quarter. I guess I thought that you guys were kind of ramping up well-weighted activity in the second half. So I guess I would have maybe expected your oil volumes to continue to kind of March higher in the second half. So maybe can you just help me kind of reconcile all that in my mind? And make sure I'm kind of understanding the plan there?

[Bill Berry:]

Yeah. Sure, Leo I understand that your thought there. Really, yeah, we were talking about December exit rated a 165,000 around that. When you look at it, because we moved wells from the second core, from the third core into the second quarter we're seeing about 60% of the wells for the year actually have been completed in the first half of the year. And so we have about 40% of the wells to be completed here in the second half of the year. So that's a big part of the equation here and that's on a net well basis and so. Just because of the acceleration, instead of being like 50-50 in first half, second half, we waited a bit more in the first half and so, that's really – so your question is right, do you see a ramp up and what you'll see is that the production will kind of be a little bit flatter, you know obviously it has to be through the third quarter and then start ramping up a bit in the fourth.

[John Hart:]

Cash flow will be strong throughout there, carrying into 2022 in good shape.

[Leo Mariani:]

Okay. And that’s helpful. And maybe you could just kind of talk to the CapEx piece of it. You talked about kind of 60% of the completions in the first half, and it looks like you guys are on a runway on first half CapEx which looks like it's well below kind of your total 2021 spend. So can you kind of maybe just help us a little bit here in the second half, maybe there's some timing issues on some of the payments, but CapEx kind of go up in the second half to hit the guide, or you guys think you're kind of under budget or what's happening with the capital dynamic?

[John Hart:]

We're firm on our $1.4 billion that would imply a little bit higher CapEx in the second quarter, it's just the timing, we've got Bill or Jack referenced some incremental rigs earlier today. So some of those Wells will be coming on early in 2022. Really, I know you don't have guidance on 2022 yet, but we'll give you that as we go forward. And it's just the timing of the completions and when they come on and the application of those dollars, but that's part of the reason I referenced earlier that we're set up well for 2022.

[Bill Berry:]

Yeah, one way to maybe frame this is, we set a dementia to constrain ourselves with $1.4 billion, then look to optimize the economics. And with that said, let's do what we can to get the most production on with the least amount of capital in the first half and then through the rest of the half year. I'll go in with where the rest of the span on that. So that's why you see about $600 million spent in the first half and about $800 million in the second half, but also why we bought all that production for that Jack mentioned.

[John Hart:]

And We also don't have any what you'd call ducks in the second half of the year as well. So we had some costs that were obviously expended in the prior year that ultimately turned into completed wells in the first half of the year. So we won't see any of that in the second half, really we're keeping right up with wells as they come available from a completion standpoint, which wasn't the case in late 2020.

[Leo Mariani:]

Okay. That makes sense, guys. Thank you.

[John Hart:]

Thank you.

[Operator:]

The next question comes from Oliver Huang of Tudor, Pickering, Holt & Co., please go ahead.

[Oliver Huang:]

Good morning, everyone.

[John Hart:]

Hello.

[Bill Berry:]

Good morning.

[Oliver Huang:]

In the SCOOP, could you remind us what sort of spacing you all are running by targeted formation in the 2021 program? And if there have been any changes related to the last two years or any thoughts on further winding out spacing there?

[Jack Stark:]

As far as spacing is concerned, it varies by formation and thickness of reservoir and all that. So we don't really have say a set number of wells. We drill per unit it's area dependent and reservoir thickness dependent, but you can – so I guess with that saying, we'll be anywhere, I would say maybe 1,320 apart maybe 880 feet apart, something like that in wells, but again, it's area dependent. The interesting thing is that, the Woodford wells that we're showing here on Slide 10 are actually pairs of wells, which is really interesting. The four of them are, well, I guess really five of them are, and that we're drilling one in there. They're basically 1,320 feet apart from themselves apparent well. And the reason we did that was we wanted to get early indications of what unit development might look like. And interestingly enough, you look at the way the curves are, and it sure looks a lot like the 2020-2021 SpringBoard I and II units curve. So again, consistency of performance, the Sycamore Wells on their charter actually single one-off parent wells. So we would expect to see them performing at a higher rate. So all that said is that we're very cognizant of giving understanding of spacing, even in these other projects, in these other areas as soon as possible. So we know how to we can move into full unit development every time we drill well, every time we drill unit.

[Oliver Huang:]

Okay, that's helpful color. And for my second question, you all made significant advances on the D&C per lateral foot front in both the Bakken and Oklahoma since 2018. Do you all see more running room on this front from improving completion techniques, such as simo-frac technology and if so, could you expand on that opportunity set or is this potentially – a potential trough with how raw materials are trending higher? And also if there's any color on how much inflation you all are baking in the back half of this year?

[Pat Bent:]

Thanks. And this is Pat Bent and that's a lot of questions. So when I think about is there any additional funding there, the answer to that is yes, we continue from an engineering perspective to build in natural improvements that help us lower our costs, whether that's from a technical design, on the drilling side to a stimulation design, on the completion side we see an additional running room, obviously it's – we feel good about being on track to reach our targets here in 2021. And so that incorporates any modest pricing pressure inflation that we might see through the year, which we do and which we are offsetting. So there is pressure from a steel perspective but that doesn't amount to a significant component number completed well costs. We've got good pricing in place through September and we'll have through the end of the year that keeps any impact from the steel side of the business to that just around that 5% of the completed well cost. So feel real strongly about our ability to continue to manage costs to engineering design and leveraged procurement. And then so see that continuing to grow this year.

[Bill Berry:]

Yeah. Oliver, one other thing I might build on that. One thing that we did all through 2020 is we didn't have lay-off programs. And so, although we slowed down our activity, we had all that engineering talent and Pat’s group continuing to focus on, Hey, how do we optimize this? So we were able to come out of the gate, running with lots of opportunities but there's a lot of things that they studied during that last year, we actually have not implemented yet. So to Pat’s point, we're still looking at a lot of things from when it comes to time, how do you do all these activities faster time is cost, so that's one part of it. And the other one that Pat mentioned is, looking at technologically, how do we do it differently? How do we improve on the way we've been doing in the past? And the 30% learning curve is pretty significant from 2018, that's quite typically a learning curve over a life. And we feel it down, that's still got a lot of running room in front of us, as Pat was describing.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Rory Sabino for any closing remarks.

[Rory Sabino:]

Great. Thank you very much for joining us today. Please reach out to the IR team with any further questions. We appreciate your time. Thank you.

[Bill Berry:]

Thanks everyone. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.