Continental Stock: Assessing Its Value After Harold Hamm’s Offer

Continental Resources (NYSE:CLR) has received a non-binding offer at $70 per share from Harold Hamm to buy the remainder of the shares that the Hamm Family doesn’t own. The Hamm Family owns approximately 83% of Continental’s stock.

I estimate Continental’s value in the $80s in a scenario where actual commodity prices follow current strip until the end of 2023 and then long-term oil prices end up around $70 to $75.

The Proposal

Hamm’s proposal is to acquire the outstanding Continental shares that the Hamm Family doesn’t own for $70 per share in cash. Hamm notes that this $70 offer is a 9% premium to the closing price as of June 13, and an 11% premium to the VWAP over the previous 30 trading days.

Continental’s Board of Directors is establishing “a special committee consisting of independent directors of the Board to consider the proposal”. For the take-private transaction to eventually be consummated, it is likely that the special committee would need to give its approval of the offer and then a majority of the non-Hamm Family shares would need to be tendered.

Updated 2022 Outlook

Based on current strip (including roughly $108 to $109 WTI oil) for 2022 and its updated guidance, Continental Resources is projected to generate $11.035 billion in revenues before hedges.

Continental is unhedged on oil, but its natural gas hedges have approximately negative $510 million in estimated value in 2022 due to natural gas strip being around $6.80 now.

	Units	Price Per Unit	Revenue ($ Million)
Oil (Barrels)	74,825,000	$105.50	$7,894
Natural Gas [MCF]	419,750,000	$7.40	$3,106
Net Service Operations			$35
Hedge Value			-$510
Total			$10,525

Continental has bumped up its capital expenditure budget from $2.3 billion to approximately $2.65 billion. Around $125 million of this increase is attributed to outside operated spending, while the remainder of the increase in capex budget is due to the activity on its recent bolt-on Permian acquisition and dealing with inflationary issues.

Continental’s cash taxes are now estimated at around $920 million with its strong projected earnings in 2022, while its dividend payments would be around $388 million if it maintains its quarterly dividend at $0.28 per share for the remainder of the year.

	$ Million
Operating Costs	$543
Production Tax	$853
Cash SG&A	$188
Cash Interest	$275
Cash Taxes	$920
Capital Expenditures	$2,650
Dividend	$388
Total Expenditures	$5,817

Thus Continental is now projected to generate $4.708 billion in positive cash flow in 2022, after factoring in its current dividend.

Debt And Uses Of Cash

Continental had $6.862 billion in net debt at the end of 2021. Its Powder River Basin acquisition ended up closing for $403 million net of purchase price adjustments. It has also invested $63 million so far towards Summit Carbon Solutions and spent $197 million (also net of purchase price adjustments) for its bolt-on Permian acquisition. As well, it has spent $100 million on share repurchases so far in 2022.

	$ Million
YE 2021 Net Debt	$ 6,862
Powder River Basin Acquisition	$ 403
Summit Carbon Capture Investment	$ 63
Permian Acquisition	$ 197
Share Repurchases	$ 100
Less: 2022 Positive Cash Flow	$ 4,708
YE 2022 Net Debt	$ 2,917

Thus Continental is projected to end up with $2.917 billion in net debt in 2022 before any additional acquisitions, share repurchases, dividend increases or carbon capture investments.

Continental has $960 million remaining on its current share repurchase program, and is committed to investing $250 million in Summit Carbon Solutions over the next two years.

Notes On Valuation

In a scenario where oil and gas prices follow current strip until the end of 2022 and then revert back to long-term prices of $70 WTI oil and $3.50 Henry Hub natural gas, I’d estimate Continental’s value at approximately $75 per share. This would increase to approximately $81.50 per share at long-term (after 2022) prices of $75 WTI oil and $3.75 Henry Hub natural gas.

If actual oil and gas prices also end up follow current 2023 strip (approximately $96 WTI oil and $6.15 Henry Hub natural gas), then Continental’s value would increase to approximately $82 per share in a long-term (after 2023) $70 WTI oil scenario and $87.30 per share in a long-term $75 WTI oil scenario.

Conclusion

Harold Hamm is offering $70 per share to take Continental Resources private. This offer is a 9% premium to Continental’s previous closing price, but I believe Continental’s value is generally in the $80s per share. For example, in a scenario where actual prices follow current strip until the end of 2023 and then long-term WTI oil prices average $75, Continental’s estimated value is $87.30 per share.