Continental Resources (CLR)

The company commented July 10th, 2008 that results from a test of its second well in a promising area of North Dakota were encouraging.

Continental said initial results of the Mathistad 1-35H well, drilled into the Bakken shale of McKenzie County, on July 4, flowed at an average rate of 1,095 barrels of crude oil equivalent per day (or about 6.57 mmcf/d for you shale gas followers). The company said 90% of the Mathistad 1-35H production was crude oil and 10% was natural gas.

On May 20 of this year, Continental reported that its first North Dakota Bakken shale well, the Bice 1-29H, had flowed at an average rate of 693 barrels of crude oil equivalent per day in its initial week of production. The Mathistad 1-35H was drilled 23 miles north northwest of the Bice well.

Background

The Bakken shale lies beneath parts of western North Dakota and eastern Montana, as well as Saskatchewan. Continental is the largest leaseholder in the Bakken Shale play, with approximately 500,000 acres in North Dakota and Montana. In April, the U.S. Geological Survey estimated that technically recoverable crude oil in the North Dakota and Montana Bakken shale area at 3-4.3 billion barrels of undiscovered crude oil.

Continental has been able to successfully acquire properties and set up rigs to drill the wells while maintaining a very attractive cost per barrel. When asked about cost issues this week, management stated that with the exception of some moderate steel price increases, the rest of their cost structure appears to be very stable. With rising prices being fetched for the production, this equates to growing margins and more value for shareholders.

Continental has been able to successfully acquire properties and set up rigs to drill the wells while maintaining a very attractive cost per barrel. When asked about cost issues this week, management stated that with the exception of some moderate steel price increases, the rest of their cost structure appears to be very stable. With rising prices being fetched for the production, this equates to growing margins and more value for shareholders.

Continental is looking forward to the upcoming expiration of a fixed price arrangement. A portion of their production (10,000 barrels per day) had been fixed at $72.90 and when this contract expires the company will be able to recognize even larger margins with this additional production being sold at market rates. Management gave no indication as to whether additional production would be hedged in a similar manner, but it would make sense for them to lock in at least some of their future production at these attractive long-term rates.

CLR's strategy is to scavenge around to find storage facilities and sit on the oil until prices come back in line. This is exactly the situation that Continental faced in the fourth quarter as the local Rocky Mountain markets experienced seasonal price differential from the standard WTI crude contract. The company simply refused to sell at such discounted levels and stored roughly 125,000 barrels until the price came back into equilibrium. The strategy paid off well as the company realized much better prices in the first 2 months of 2008 and the inventory was distributed bringing in significantly higher profits.

Contenental Resources is a US based oil and natural gas producer that operates primarily in the US western states. The company issued its IPO mid-year last year at $15 but has impressed investors enough to nearly double the stock since then. One of the primary drivers of growth has been a project in North Dakota that had many skeptics. Despite some negative feedback during the company’s road show leading up to the IPO, management continued to pursue the promising development and has begun to see very positive results. Production in this area is ramping up and should be a strong addition to 2008.