July 17
CLR : NYSE : US$67.34, Target US$89.00
Upgrading to BUY on expected production outperformance, better macro/basin backdrop
Investment thesis
We are upgrading CLR to BUY and raising our target $6 to $89 per share due to greater capital spending. Specifically, our annual capital spending estimate increased $0.2 billion. We now anticipate $2.5 billion in organic capital spending this year, above guidance of $2.3 billion.
We believe production should grow 54% this year, above the company target of 47-50%.
Our upgrade should be viewed in a larger macroeconomic context.
With NYMEX crude off from a peak of ~$110 near $87.50, we no longer see oil prices as a headwind to oil-weighted shares. Further, we believe E&P shares only reflect ~$72.50 long-term WTI oil prices, significantly below our $90 + long-term expectation.
Additionally, we expect infrastructure constraints to ease over the next few months, boosting Continental netbacks. Specifically, unhedged price discounts to NYMEX should improve from $12+ in Q1 to ~$9 going forward. The 190 Mbpd of nominal Bakken rail capacity that commenced in Q2 should ramp to full capacity over the next few months. Another 250 Mbpd of nominal capacity should commence over the next three quarters. Incremental Bakken output should not reach a comparable ~450 Mbpd level until early ’14.
Investment highlights
Bakken: In Q1/12, North Dakota wells commenced at ~950 Boepd, below the ’11 average of ~1,100 Boepd and suggesting a recovery of 400+ Mboe. Yet the first wells drilled on 320-acre spacing were encouraging as they commenced at an average of ~1,300 Boepd.
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