Last week Continental Resources (CLR) reported earnings.  The figures were a bit disappointing as the company essentially broke even for the quarter.  Management blamed falling commodity prices for the earnings miss which is no surprise given the steep drop in oil and natural gas prices.

But despite the lackluster performance, the stock actually traded higher after the report.  Apparently traders were pleased with the fiscal discipline management is employing to ensure the company remains healthy throughout these challenging times.

The company has actually taken drastic steps to reduce production growth for the time being.   In October there were 32 rigs in action drilling for resources.  As of last week, this number was reduced to 7.  And management stated that during the coming year, they will average only 5 rigs in operation.  This significantly reduces the amount of capital being spent on drilling projects and management said they would not increase activity until they see meaningful recovery in the price of oil and natural gas.

Despite drilling less, Continental has actually increased its proven reserves.  This essentially means that the company has been successful in its remaining drilling projects and the proven level of resources continues to climb.  This is certainly good news at a time when competitors are having trouble replacing reserves that are actually produced (pulled out of the ground for consumption).  It appears the conservative approach that management is taking will pay off.

For 2009, the management expects production growth of 8%.  However, according to a Raymond James report that digs into the production statistics for current wells in the regions CLR is drilling, these numbers are likely to be overly conservative.  It probably works to the company’s best interest to under-promise and then over-deliver.  That way if commodity weakness continues, they can back off drilling programs even further to save capital.

Speaking of capital spending, the budget for 2009 is set up to spend $275 million.  This is sharply lower than the 2008 budget of $609 million.  Of this $275, the company will use $211 for drilling, $58 million for land and seismic tests, and the remaining $6 mil for general purposes.  With only $5.2 mil in cash and 198.1 available under a credit facility, the company will rely on sales of resources to fund much of the budget.  But even at the current low prices, this should be more than adequate.

So in a time when economic pressures are hampering growth, Continental has taken the wise step of retreating from unstable growth.  The company should remain in a strong position to capitalize on increases in prices for years to come.  The recovery will take time, but investors might be wise to begin building positions now.

CLR Notes
FD: Author does not have a position in CLR
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