Continental Resources [stock_market_widget type="inline" template="generic" color="default" assets="CLR" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock has taken a massive beating of late despite the company’s impressive financial performance. The market has ignored Continental’s strong operational performance as oil prices have started retreating of late. Let’s take a look at the problems faced by Continental last quarter, and why investors are skeptical of the stock in the wake of the recent oil price weakness.
Weak Pricing Hits Continental
Continental Resources delivered production of 332,236 barrels of oil equivalent per day (BOE/d) in the first quarter of 2019, a substantial increase of 16% from the prior-year period’s production of 287,410 BOE/day.
The company’s oil production was up from 163,837 BOE/day last year to 193,921 BOE/day a year ago. But this increase in the company’s production was mitigated by lower oil prices. Continental’s average realized oil price during the quarter came in at $50.05 per barrel, down nearly 15% from the year-ago quarter.
At the same time, Continental sold natural gas at a rate of $2.56 per Mcf, down from the year-ago period’s pricing of $2.98 per Mcf. In crude oil equivalent terms, Continental’s average realized natural gas price was $35.56 per BOE as compared to $41.26 per BOE a year ago.
So, the gains from higher production were erased by lower prices. As a result, its revenue during the quarter fell slightly to $1.12 billion as compared to $1.14 billion in the prior-year period. But this wasn’t the only problem that Continental faced last quarter as its expenses ballooned.
Another Big Problem
Higher expenses turned out to be another headwind for Continental last quarter.
The company’s total operating expenses came in at just over $819 million during the quarter, up from $760 million in the prior-year period. Also, the higher production led to an increase in production costs, which came in at $107 million during the quarter as compared to $93 million a year ago.
A combination of higher expenses and lower prices dented Continental’s bottom line last quarter. The company posted net income of $186.5 million as compared to $234 million in the year-ago period. So, lower oil prices knocked the wind out of Continental’s sails during the quarter, affecting its financial performance on all fronts.
The problem for Continental is that the oil price sentiment has turned negative of late thanks to an increase in inventories. As it turns out, crude oil inventories in the U.S. have shot up to their highest levels since July 2017.
The increase in inventories is a result of weak refinery rates in the U.S., as refining usage in the Midwest has dropped to its lowest level in the past six years. According to Jim Ritterbusch, president of Ritterbusch and Associates:
The potential weakness in oil prices could dent Continental Resources stock further as the year progresses so investors should wait for a turnaround in prices before buying the stock.
