Stock of the Week
NYSE Symbol: CLR
Industry: Oil Refinery
Price as of 9/26: $68.32
The third quarter is coming to an end and we're finally seeing some volatility. After Thursday, all the major averages are in the red for the month. The S&P 500 and the Nasdaq have held up better than most while the Dow is only up 3% year to date and the small cap, Russell 2000, is down 4% year to date and down 8% from the yearly highs. The transportation stocks (railroads & airliners) have been on fire the last several years succumbing to profit-taking in only the last few weeks. The US dollar has spiked in recent weeks causing many commodity prices including oil to drop significantly. The oil sector has gone from one of the best performing sectors to one of the worst performing sectors dropping 10% from the June highs. The energy sector is starting to look attractive particularly the land-based oil and gas drilling companies. This week, we'll highlight an oil refinery company, Continental Resources. Continental Resources engages in the exploration, development, and production of crude oil and natural gas properties in the north, south, and east regions of the United States. The company has benefited from the huge oil and gas reserves discovered in the West thanks to fracking in the Bakken, Colorado region. The stock has followed the boon coming under pressure in the last month due to higher short term costs. The stock may have further downside in the short term, but with the CEO stepping in to buy $5 million worth of stock is a good validation that the issues should be short term and long term the fundamentals remains strong. The company provides no dividend, but investors looking for growth particularly in the oil and gas sector may want to take a look at Continental Resources.
Back in August, Continental Resources missed earnings by 19 cents while sales did beat estimates. Revenues rose 28.7% year over year to $1.15 billion verse consensus of $1.1 billion. Second quarter 2014 net production totaled 15.3 million barrels of oil equivalent, or 167,953 Boe per day, a sequential increase of 10% from first quarter 2014 and 24% higher than second quarter 2013. Total net production included 116,441 barrels of oil per day (69% of production) and approximately 309 million cubic feet of natural gas per day (31% of production). Going forward, the Company anticipates oil inventories will increase in the second half of 2014 as line fill requirements are satisfied for new pipeline infrastructure being developed in key operating areas. This could result in reduced sales volumes in the third and fourth quarters by an aggregate total of approximately 500,000 net barrels, although such impact may be partially offset by sales of previously stored production throughout the Company's facilities in the Bakken. A couple weeks ago, the stock took a hit after Continental Resources explained they would spend $500 million more this year than initially forecasted due to pricey well techniques in North Dakota's Bakken shale formation and a new project in Oklahoma, though the company tempered 2014 production expectations. The new projections, unveiled the day before the company's analyst meeting highlighted the increasing competition and cost to find and develop energy reserves, even in the North American shale industry.
Since this quarterly update, Continental's stock has drifted lower, falling to a four month low. The weakness in the stock has brought down valuations. Currently, Continental Resources is trading for 16 times next year's reduced earnings and 4.4 times sales. The company does not pay a dividend, but has strong cash flow. Typically you want to be cautious when a company's earnings are coming down, but the recent insider buying should give shareholders confidence that the stock is coming into a value range. Chairman and CEO, Harold Hamm spent $5million of his own money to buy the stock this week at current prices. Analysts also remain bullish on Continental Resources. Global Hunter Securities raised their target to $85 a share. The analyst is comfortable with recent concerns about inventory levels and increased short term costs. Another analyst at Canaccord Genuity defended the stock with a price target of $95 a share. This analyst believes the Street overacted to CLR's 2015 production/capex guidance as well as some management commentary made during the analyst day. In their view, the EUR uplift in the WB from enhanced completions, increased activity in the SCOOP and the Springer Shale discovery were overlooked as the stock sold off heavily on Thursday and Friday.
Continental is not a conservative investment and earnings estimates may be volatile, but with recent insider buying, Continental's long term fundamentals remain strong.