One of the Best-Positioned E&P Firms

David Meats: Continental Resources (CLR) is one of our best ideas, and it's one of the best-positioned E&P firms in our coverage to withstand the current downturn. We recognize that low oil prices are weighing on earnings, especially since the company has no hedge protection. That's driving up leverage and, at strip prices, the company could see its net debt/trailing EBITDA ratio go as high as four times next year.

But the firm has a very strong liquidity position, with around $1.2 billion available on its credit facility. This is an investment-grade company, which means it doesn't have to worry about redetermination. And it doesn't need to borrow more anyway. Unlike most peers, Continental is expected to remain free-cash-flow neutral next year.

We project a gradual rebound for WTI [West Texas Intermediate] in the next two to three years. Our midcycle price estimate is $64 a barrel. Under those circumstances, the stock looks undervalued. But even if things get worse before they get better, this firm is in a better position than most. Even if oil prices only average $35 a barrel in 2016, we estimate that Continental can live within cash flows without violating covenants. And its balance-sheet flexibility is supported by a substantial inventory of low-cost oil and gas acreage. 

We continue to believe that the market is not giving this firm full credit for the quality of its assets. Investors looking for exposure to the E&P industry should take a closer look at this undervalued, narrow-moat firm.