David Meats: Third-quarter earnings are firmly in the rearview for our upstream oil and gas coverage. The rebound in oil prices that we saw back in the second quarter now looks like a false dawn. We're currently expecting WTI to average less than $50 a barrel in 2016, and it's the same story with gas prices. The 2016 strip is at just $2.40 per thousand cubic feet right now. These low prices are mainly supply driven, although the gas number is partially weather driven as well.
So, it's a very tough environment; but as we discussed in our financial-health review recently, most companies are still in decent shape. Leverage is rising across the board, but the majority of our coverage, which is admittedly skewed toward quality, has enough levers to pull in terms of liquidity and potential asset monetizations. Borrowing base redeterminations were a key risk going into the fall for firms subject to reserve-based lending constraints; but in reality, banks were fairly accommodating again.
We believe the ongoing downturn presents a handful of opportunities to own high-quality businesses at attractive prices. In particular, we like narrow-moat Best Idea Continental Resources (CLR), which has a fair value of $52 per share. The firm beat Wall Street estimates in the third quarter while simultaneously raising production guidance and lowering [capital expenditure] guidance for 2015. It also reported some very impressive drilling results from the Stack play in Oklahoma, which could be a meaningful source of upside if repeatable. Continental is a company with a rare mix of both high quality and high quantity of assets and the financial wherewithal to tolerate a temporary period of lower prices better than many peers. In fact, if WTI averages just $35/bbl in 2016, we believe Continental could still balance cash flows and spending without breaking any covenants.