Vinik Asset Management, a $7.7 billion fund managed by Jeffrey Vinik, more than tripled its position in Continental Resources (CLR) in the first quarter of 2012 and had over 2.1 million shares of the company on March 31st, making it the fourth largest holding in his portfolio (see Vinik’s other stock picks). Continental’s stock has dropped 26% since the end of April (though it is only down 5% on the year), so Vinik has likely lost quite a bit of money in this stock.
Also owning Continental at the end of March was Peter Eichler’s Aletheia Research and Management, which tends to overweight the basic materials sector. This fund owned 1 million shares of CLR, which made it their fifth largest holding. Other large positions in the basic materials sector were Molycorp (MCP) and Noble Energy (NBL). Learn more about Aletheia’s portfolio and find other owners of CLR.
Continental Resources is a major player in the exploration and production of shale oil in the United States, and is a particular leader in North Dakota’s Bakken Shale. As a result of the boom in shale oil, Continental increased their crude oil and natural gas sales- the primary source of their revenue- by 69% in the first quarter of 2012 over the first quarter of 2011. The company’s quarterly net income flipped from a loss of $137 million to a profit of $69 million. Continental also has strong insider ownership for a company with a market cap of $12 billion, a sign that management is well incentivized to deliver value.
While CLR does offset some of the risk of low oil prices with derivative contracts, as a growth company it depends on an investment thesis of continued exploration and development of new shale oil & gas resources, including Oklahoma’s Anadarko Woodford and Colorado and Wyoming’s Niobrara. As a result, prolonged low oil prices may hurt the company’s prospects. So far this year, while the company has slightly outperformed oil, the two assets have tended to move together and over the last three months the correlation has been very strong. However, the attractive long-term economics of the Bakken region (CLR estimates an IRR of over 40% on a Bakken well even at $80/barrel) and the sheer size of potential reserves- Continental estimates that a total of 20 billion barrels of oil are recoverable- are what is probably driving investor interest from Vinik and others.
Continental’s most comparable peer is EOG Resources (EOG), a larger company with a $24.6 billion market cap but similarly focused on shale resources. EOG trades at a price-to-earnings ratio of 19, similar to Continental, and pays a small dividend yield of under 1%. Aside from some underperformance it has tracked Continental’s ups and downs very closely this year. However, it has grown less rapidly than CLR and that lower growth is expected to continue; as a result, it has a slightly higher forward price-to-earnings ratio. Kodiak (KOG), another comparable stock, is a $2.3 billion market cap Bakken-focused oil company. Due to its high growth prospects, it has an enormous price-to-earnings ratio of 151 (revenue growth in the first quarter of 2012 was 500% compared to the same quarter a year ago, and 45% compared to the previous quarter). It deserves mention to put Continental’s Bakken operations into perspective, but as more of a pure play would certainly have more of a growth focus than CLR. We think Continental resources is attractively priced in comparison to EOG and KOG. Vinik and other Continental investors are likely choosing to invest in a reasonably valued company with the potential to achieve solid growth from continued development in oil shale.