Analyst Note| Dave Meats, CFA |
We have increased our fair value estimate for Continental Resources to $18 from $17 after taking a second look at the firm's second-quarter operating and financial results. We were previously modeling a gradual rebound in activity, pegging Continental with 18 operated rigs by 2022 (up from the seven it currently has in service). Our bullish view on long-term crude prices has not changed--we still believe the current commodity environment offers insufficient incentive for producers to restart operations and ensure that U.S. crude volumes do not fall short of what's necessary to keep global supply and demand in balance over the next few years. But we have moderated our growth outlook for Continental, taking into account management's desire to pay down debt as quickly as possible (which is what we think it will do with the $500 million free cash flows we model, consistent with guidance, for the company in the second half of 2020). We now assume the firm's rig count will settle at 15, and the slight reduction weighs on our valuation. However, the decrease was more than offset by a raft of positive data points from the quarter (lower well costs, improved operating expense outlook, and new guidance for production that trumps our prior estimate).