CONTINENTAL RESOURCES, INC. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this report and our historical consolidated financial statements and notes included in our Form 10-K for the year endedDecember 31, 2019 . The following discussion and analysis includes forward-looking statements and should be read in conjunction with the risk factors described in Part II, Item 1A. Risk Factors included in this report, if any, and in our Form 10-K for the year endedDecember 31, 2019 and our Form 10-Q for the quarter endedMarch 31, 2020 , along with Cautionary Statement for Purpose of "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 at the beginning of this report, for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements. Our operating results for the 2020 second quarter discussed below were significantly impacted by the economic effects from the COVID-19 pandemic on crude oil demand and prices and may not be indicative of future results for the remainder of 2020. Crude oil prices have improved from historic lows inApril 2020 and we have begun to restore a portion of our voluntary production curtailments initiated in the second quarter as discussed below. Accordingly, although our performance and ability to execute our business strategies continue to be impacted by the effects of COVID-19, our operating and financial results for the remainder of 2020 are expected to improve relative to the 2020 second quarter if current prices for crude oil, natural gas, and natural gas liquids are sustained or improve. Overview We are an independent crude oil and natural gas company engaged in the exploration, development and production of crude oil and natural gas. Additionally, we pursue the acquisition and management of perpetually owned minerals located in certain of our key operating areas. We derive the majority of our operating income and cash flows from the sale of crude oil and natural gas and expect this to continue in the future. Our operations are primarily focused on exploration and development activities in the Bakken field ofNorth Dakota andMontana and the SCOOP and STACK areas ofOklahoma . Our common stock trades on theNew York Stock Exchange under the symbol "CLR" and our corporate internet website is www.clr.com. Business Environment and Outlook Crude oil prices decreased to historically low levels inApril 2020 due to reduced global and domestic demand for crude oil caused by the impact of the COVID-19 pandemic and resulting changes in consumer behavior and restrictions implemented by governments to mitigate the pandemic. The economic turmoil resulting from COVID-19 resulted in material decreases in our production, revenues, and cash flows in the second quarter of 2020. In response to the significant reduction in crude oil prices, we voluntarily curtailed approximately 55% of our operated crude oil production and associated natural gas in the 2020 second quarter to preserve shareholder value. Additionally, we implemented cost saving initiatives and significantly reduced our operated rig and completion crew counts in order to preserve our assets and better align our capital spending with expected available cash flows. As a result of these actions, our total production declined to 202,815 Boe per day for the 2020 second quarter, a decrease of 44% compared to the first quarter of 2020 and 39% lower than the second quarter of 2019. Further, we reduced our non-acquisition capital spending by$460 million , or 71%, in the 2020 second quarter compared to the 2020 first quarter. Crude oil prices have shown signs of stabilization and improvement in June and July in response to the gradual lifting of restrictions and resumption of economic activity and ongoing restoration of crude oil demand, withWest Texas Intermediate crude oil benchmark prices averaging approximately$40 per barrel inJuly 2020 . As a result, in July we began to partially restore our curtailed production and plan to continue restoring production as improved supply and demand fundamentals continue to benefit oil prices. Accordingly, we expect to see production growth in the second half of the year relative to 2020 second quarter levels. Our production volumes are evaluated on an ongoing basis and are subject to change as market conditions evolve. We continue to actively evaluate the impact of COVID-19 on our operations, financial condition, suppliers, industry, and workforce. We are committed to the responsible stewardship of our assets and, in light of economic uncertainty from the pandemic, we will continue to preserve shareholder value and focus on protecting the strength of our balance sheet, preserving financial flexibility and liquidity, delivering capital efficient operations and cost savings, and conserving the development of our assets. Our leadership team has significant experience with operating in challenging commodity price environments. The depth and quality of our asset base, the optionality provided by our predominant amount of acreage held by production, and our financial 24 -------------------------------------------------------------------------------- strength allow us to be adaptable in a variety of price environments. We will remain flexible as we monitor and adapt to market conditions. See the subsequent section titled Liquidity and Capital Resources for additional discussion of our financial condition. Financial and Operating Metrics The following table contains financial and operating metrics for the periods presented. Average net sales prices exclude any effect of derivative transactions. Per-unit expenses have been calculated using sales volumes. Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Average daily production: Crude oil (Bbl per day) 95,174 193,586 147,922 193,753 Natural gas (Mcf per day) 645,846 826,969 803,434 828,422 Crude oil equivalents (Boe per day) 202,815 331,414 281,828 331,823 Average net sales prices (1): Crude oil ($/Bbl)$ 16.35 $ 54.66 $ 32.37 $ 52.36 Natural gas ($/Mcf)$ 0.12 $ 1.66 $ 0.59 $ 2.11 Crude oil equivalents ($/Boe)$ 7.88 $ 36.03 $ 18.56 $ 35.79 Crude oil net sales price discount to NYMEX ($/Bbl)$ (7.54 ) $ (5.11 ) $ (6.66 ) $ (4.94 ) Natural gas net sales price discount to NYMEX ($/Mcf)$ (1.58 ) $ (0.98 ) $ (1.26 ) $ (0.79 ) Production expenses ($/Boe)$ 3.58 $ 3.74 $ 3.60 $ 3.66 Production taxes (% of net crude oil and natural gas sales) 7.8 % 8.7 % 8.7 % 8.4 % Depreciation, depletion, amortization and accretion ($/Boe)$ 16.07 $ 16.14 $ 16.25 $ 16.37 Total general and administrative expenses ($/Boe)$ 2.30 $ 1.57 $ 1.66 $ 1.58
(1) See the subsequent section titled Non-GAAP Financial Measures for a
discussion and calculation of net sales prices, which are non-GAAP measures.
25
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Three months ended June 30, 2020 compared to the three months ended June 30,
2019
Results of Operations
The following table presents selected financial and operating information for
the periods presented.
Three months ended June 30,
In thousands 2020 2019
Crude oil and natural gas sales $ 174,652 $ 1,137,425
Gain (loss) on derivative instruments, net (7,782 ) 53,448
Crude oil and natural gas service operations 8,789 17,509 Total revenues 175,659 1,208,382 Operating costs and expenses (472,435 ) (828,535 ) Other expenses, net (1) (17,498 ) (67,748 ) Income (loss) before income taxes (314,274 )
312,099
(Provision) benefit for income taxes 72,143 (75,649 ) Net income (loss) (242,131 )
236,450
Net loss attributable to noncontrolling interests (2,845 ) (107 )
Net income (loss) attributable to
$ 236,557 Production volumes: Crude oil (MBbl) 8,661 17,616 Natural gas (MMcf) 58,772 75,254 Crude oil equivalents (MBoe) 18,456 30,159 Sales volumes: Crude oil (MBbl) 8,270 17,549 Natural gas (MMcf) 58,772 75,254 Crude oil equivalents (MBoe) 18,065 30,091 (1) Net of gain on extinguishment of debt of$46.9 million for the three months endedJune 30, 2020 . See Notes to Unaudited Condensed Consolidated Financial Statements-Note 8. Long-Term Debt for further discussion. Production The following table summarizes the changes in our average daily Boe production by major operating area for the second quarter period. Boe production per day 2Q 2020 2Q 2019 % Change Bakken 88,822 194,014 (54 %) SCOOP 72,296 71,471 1 % STACK 34,756 57,209 (39 %) All other 6,941 8,720 (20 %) Total 202,815 331,414 (39 %) 26
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The following tables reflect our production by product and region for the
periods presented.
Three months ended June 30, Volume
2020 2019 Volume percent
Volume Percent Volume Percent decrease decrease
Crude oil (MBbl) 8,661 47 % 17,616 58 % (8,955 ) (51 %)
Natural gas (MMcf) 58,772 53 % 75,254 42 % (16,482 ) (22 %)
Total (MBoe) 18,456 100 % 30,159 100 % (11,703 ) (39 %)
Three months ended June 30, Volume
2020 2019 Volume percent
MBoe Percent MBoe Percent decrease decrease
North Region 8,711 47 % 18,440 61 % (9,729 ) (53 %)
South Region 9,745 53 % 11,719 39 % (1,974 ) (17 %)
Total 18,456 100 % 30,159 100 % (11,703 ) (39 %)
The 51% decrease in crude oil production for the 2020 second quarter was driven
by the previously described production curtailments implemented during the
quarter coupled with minimal drilling and completion activities, which led to a
7,802 MBbls, or 58%, decrease in Bakken crude oil production, a 526 MBbls, or
22%, decrease in SCOOP crude oil production, and a 509 MBbls, or 59%, decrease
in STACK crude oil production.
Our production curtailments and minimal drilling and completion activities also
impacted our natural gas production, leading to a 22% decrease in natural gas
production for the 2020 second quarter compared to the 2019 second quarter.
Natural gas production in the Bakken decreased 10,626 MMcf, or 43%, and natural
gas production in STACK decreased 9,205 MMcf, or 35%, from the prior year second
quarter. These decreases were partially offset by a 3,607 MMcf, or 15%, increase
in SCOOP natural gas production.
Revenues
Net crude oil and natural gas sales and related net sales prices presented below
are non-GAAP measures. See the subsequent section titled Non-GAAP Financial
Measures for a discussion and calculation of these measures.
Net crude oil and natural gas sales. Net crude oil and natural gas sales totaled
$142.3 million for the second quarter of 2020, an 87% decrease compared to net
sales of $1.08 billion for the 2019 second quarter due to significant decreases
in net sales prices and sales volumes as discussed below.
Total sales volumes for the second quarter of 2020 decreased 12,026 MBoe,
or 40%, compared to the 2019 second quarter, reflecting reduced sales from the
previously described production curtailments in the current period. For the
second quarter of 2020, our crude oil sales volumes decreased 53% from the
comparable 2019 period, while our natural gas sales volumes decreased 22%.
Our crude oil net sales prices averaged $16.35 per barrel in the 2020 second
quarter, a decrease of 70% compared to $54.66 per barrel for the 2019 second
quarter due to significantly reduced market prices and wider price
differentials. The differential between NYMEX West Texas Intermediate ("WTI")
calendar month prices and our realized crude oil net sales prices averaged $7.54
per barrel for the 2020 second quarter compared to $5.11 per barrel for the 2019
second quarter. The increased differential reflects changes in supply and demand
fundamentals and economic effects from COVID-19 that impacted location
differentials and price realizations compared to the prior year period.
See the subsequent section titled Future Capital Requirements-Commitments and
contingencies for discussion of recent developments that may impact the
operation of the Dakota Access Pipeline ("DAPL") owned by a third party that we
and other operators utilize to transport Bakken crude oil production to market
centers outside the basin. The restriction of DAPL's takeaway capacity may have
an impact on prices for Bakken-produced barrels and result in wider
differentials relative to WTI benchmark prices in the future, the amount of
which is uncertain. If transportation capacity on DAPL becomes restricted or
unavailable, we have the ability to utilize other third party pipelines or rail
facilities to transport our Bakken crude oil production to market, although such
alternatives may be more costly.
Our natural gas net sales prices averaged $0.12 per Mcf for the 2020 second
quarter, a decrease of 93% compared to $1.66 per Mcf for the 2019 second quarter
due to significantly reduced market prices and lower price realizations. The
discount between our net sales prices and NYMEX Henry Hub calendar month natural
gas prices weakened to $1.58 per Mcf for the 2020 second quarter compared to
$0.98 per Mcf for the 2019 second quarter. We sell the majority of our operated
natural gas production to
27
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midstream customers at lease locations based on market prices in the field where
the sales occur. The field markets are impacted by residue gas and natural gas
liquids ("NGLs") prices at secondary, downstream markets. NGL prices in 2020
have decreased significantly compared to 2019 levels in conjunction with
decreased crude oil prices and other factors, resulting in reduced price
realizations for our natural gas sales stream relative to benchmark prices. As a
result of the significant decrease in prices, under certain of our arrangements
on operated properties the contractual pricing adjustments applied by midstream
customers exceeded the sales consideration we were entitled to receive,
resulting in a net payment owed by us to the customers. Additionally, in some
instances on non-operated properties the costs incurred by the outside operator
exceeded the consideration we were entitled to receive, resulting in a net
payment owed by us to the outside operator. The net amounts paid or payable
under these arrangements on operated and non-operated properties totaled $30.5
million for the 2020 second quarter, with immaterial amounts in prior periods,
and are reflected as a reduction of natural gas revenues and net sales prices.
Nearly all of such amounts are associated with our North region natural gas
production.
NGL prices have improved from recent lows in conjunction with increased crude
oil prices and other factors, which has resulted in improved price realizations
for our natural gas sales stream. If prices remain at current levels or improve,
while we may recognize additional negative gas revenues in the second half of
2020, we would not expect such amounts to be of a similar magnitude as the
negative gas revenues recognized in the 2020 second quarter.
Derivatives. Changes in crude oil prices during the second quarter of 2020 had
an overall unfavorable impact on the fair value of our derivatives, which
resulted in negative revenue adjustments of $7.8 million for the period compared
to positive revenue adjustments of $53.4 million in the comparable 2019 period.
Crude oil and natural gas service operations. Our crude oil and natural gas
service operations consist primarily of revenues associated with water
gathering, recycling, and disposal activities and the treatment and sale of
crude oil reclaimed from waste products. Revenues associated with such
activities decreased $8.7 million , or 50%, from $17.5 million for the second
quarter of 2019 to $8.8 million for the second quarter of 2020 due to a decrease
in the magnitude of water handling and recycling activities resulting from our
curtailment of production activities during the current quarter. The decreased
activities also resulted in a reduction in service-related expenses compared to
the prior period.
Operating Costs and Expenses
Production Expenses. Production expenses decreased $47.7 million , or 42%, from
$112.4 million for the second quarter of 2019 to $64.7 million for the second
quarter of 2020 due to the previously described production curtailments and
associated 40% decrease in sales volumes. Production expenses on a per-Boe basis
averaged $3.58 for the 2020 second quarter, improved from $3.74 per Boe
recognized for the 2019 second quarter. We expect our total production expenses
to increase in the second half of 2020 relative to second quarter levels as we
begin to resume production on curtailed wells, the amount of which is uncertain.
Production Taxes. Production taxes decreased $82.8 million , or 88%, to $11.1
million for the second quarter of 2020 compared to $93.9 million for the second
quarter of 2019 primarily due to an 85% decrease in crude oil and natural gas
sales. Our production taxes as a percentage of net crude oil and natural gas
sales decreased from 8.7% for the second quarter of 2019 to 7.8% for the second
quarter of 2020 primarily resulting from an increase in the proportion of our
revenues being generated in Oklahoma in the current period, which has lower
production tax rates compared to North Dakota .
Depreciation, Depletion, Amortization and Accretion. Total DD&A decreased $195.3
million , or 40%, to $290.3 million for the second quarter of 2020 compared to
$485.6 million for the second quarter of 2019 due to a 40% decrease in total
sales volumes. The following table shows the components of our DD&A on a unit of
sales basis for the periods presented.
Three months ended June 30,
$/Boe 2020 2019
Crude oil and natural gas $ 15.65 $ 15.91
Other equipment 0.30 0.16
Asset retirement obligation accretion 0.12 0.07
Depreciation, depletion, amortization and accretion $ 16.07
DD&A expenses associated with other equipment and asset retirement obligations increased on a per-Boe basis in 2020 due to the 40% decrease in total sales volumes with no corresponding decrease in DD&A, as DD&A for such assets is recognized on a ratable basis over defined periods irrespective of current production levels. Property Impairments. Property impairments increased$2.6 million to$23.9 million for the second quarter of 2020 compared to$21.3 million for the second quarter of 2019, reflecting an increase in the amortization of undeveloped leasehold costs from 28 -------------------------------------------------------------------------------- changes in the Company's estimates of properties not expected to be developed before lease expiration in response to significantly reduced commodity prices. There were no proved property impairments recognized in the second quarter periods of 2020 and 2019. General and Administrative Expenses. Total G&A expenses decreased$5.7 million , or 12%, to$41.5 million for the second quarter of 2020 compared to$47.2 million for the second quarter of 2019. Total G&A expenses include non-cash charges for equity compensation of$15.3 million and$12.2 million for the second quarters of 2020 and 2019, respectively, the increase of which was due to additional grants of restricted stock awards coupled with higher forfeitures of unvested restricted stock in the 2019 second quarter that resulted in lower equity compensation expense for that period. G&A expenses other than equity compensation totaled$26.2 million for the 2020 second quarter, a decrease of$8.8 million , or 25%, compared to$35.0 million for the 2019 second quarter. This decrease was primarily due to a reduction in employee benefits and other efforts to reduce spending in response to significantly reduced commodity prices and economic turmoil from the COVID-19 pandemic, partially offset by lower overhead recoveries from joint interest owners driven by reduced drilling, completion, and production activities. The following table shows the components of G&A expenses on a unit of sales basis for the periods presented. Three months ended June
30,
$/Boe 2020
2019
General and administrative expenses $ 1.45$ 1.17 Non-cash equity compensation 0.85
0.40
Total general and administrative expenses $ 2.30
The increase in G&A expenses on a per-Boe basis in 2020 was driven by the 40% decrease in total sales volumes from the previously described production curtailments with no similar reduction in G&A expenses, as certain G&A expenses continue to be incurred in the absence of production. Interest Expense. Interest expense decreased$3.4 million , or 5%, to$65.1 million for the second quarter of 2020 compared to$68.5 million for the second quarter of 2019 due to a decrease in our weighted average interest rate from changes in the mix of outstanding debt between periods driven by the redemption or repurchase of senior notes over the past year using available cash and lower-rate credit facility borrowings. The decrease in interest expense from lower average interest rates was partially offset by an increase in total outstanding debt as a consequence of the COVID-19 pandemic that led to reduced cash flows and higher credit facility borrowings in recent months. Our weighted average outstanding debt balance for the 2020 second quarter was approximately$6.1 billion with a weighted average interest rate of 4.2% compared to averages of$5.8 billion and 4.5% for the 2019 second quarter. Income Taxes. For the second quarters of 2020 and 2019 we provided for income taxes at a combined federal and state tax rate of 24.5% of pre-tax income/loss generated by our operations inthe United States . We recorded an income tax benefit of$72.1 million for the 2020 second quarter and an income tax provision of$75.6 million for the 2019 second quarter, which resulted in effective tax rates of 23.0% and 24.2%, respectively, after taking into account statutory tax rates, permanent taxable differences, tax effects from equity compensation, valuation allowances, and other items. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 13. Income Taxes for a summary of the sources and tax effects of items comprising our effective tax rates. 29 -------------------------------------------------------------------------------- Six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 Results of Operations The following table presents selected financial and operating information for the periods presented. Six months ended June 30, In thousands 2020 2019 Crude oil and natural gas sales$ 1,037,395 $ 2,247,009 Gain (loss) on derivative instruments, net (7,782 )
52,324
Crude oil and natural gas service operations 26,847 33,284 Total revenues 1,056,460 2,332,617 Operating costs and expenses (1,546,824 ) (1,647,804 ) Other expenses, net (1) (62,929 ) (134,231 ) Income (loss) before income taxes (553,293 )
550,582
(Provision) benefit for income taxes 124,378 (127,639 ) Net income (loss) (428,915 )
422,943
Net loss attributable to noncontrolling interests (3,965 ) (590 ) Net income (loss) attributable to Continental Resources$ (424,950 ) $ 423,533 Production volumes: Crude oil (MBbl) 26,922 35,069 Natural gas (MMcf) 146,225 149,944 Crude oil equivalents (MBoe) 51,293 60,060 Sales volumes: Crude oil (MBbl) 26,521 34,922 Natural gas (MMcf) 146,225 149,944 Crude oil equivalents (MBoe) 50,891 59,912 (1) Net of gain on extinguishment of debt of$64.6 million for the six months endedJune 30, 2020 . See Notes to Unaudited Condensed Consolidated Financial Statements-Note 8. Long-Term Debt for further discussion. Production The following table summarizes the changes in our average daily Boe production by major operating area for the year to date period. Boe production per day YTD 6/30/2020 YTD 6/30/2019 % Change Bakken 145,162 196,704 (26 %) SCOOP 90,057 69,576 29 % STACK 39,455 56,863 (31 %) All other 7,154 8,680 (18 %) Total 281,828 331,823 (15 %) 30
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The following tables reflect our production by product and region for the
periods presented.
Six months ended June 30, Volume
2020 2019 Volume percent
Volume Percent Volume Percent decrease decrease
Crude oil (MBbl) 26,922 52 % 35,069 58 % (8,147 ) (23 %)
Natural gas (MMcf) 146,225 48 % 149,944 42 % (3,719 ) (2 %)
Total (MBoe) 51,293 100 % 60,060 100 % (8,767 ) (15 %)
Six months ended June 30, Volume Volume
2020 2019 increase percent
MBoe Percent MBoe Percent (decrease) increase (decrease)
North Region 27,715 54 % 37,151 62 % (9,436 ) (25 %)
South Region 23,578 46 % 22,909 38 % 669 3 %
Total 51,293 100 % 60,060 100 % (8,767 ) (15 %)
The 23% decrease in crude oil production for year to date 2020 was primarily
driven by an 8,530 MBbls, or 31%, decrease in Bakken oil production along with a
589 MBbls, or 36%, decrease in STACK oil production due to the previously
described production curtailments and minimal drilling and completion activities
undertaken during the 2020 second quarter. These decreases were partially offset
by a 1,146 MBbls, or 26%, increase in crude oil production in SCOOP due to new
well completions over the past year in our oil-weighted Project SpringBoard,
which exceeded the adverse impact of production curtailments in the play in the
2020 second quarter.
Our production curtailments and minimal drilling and completion activities in
the 2020 second quarter also impacted our year to date natural gas production,
leading to a 15,128 MMcf, or 29%, decrease in STACK gas production and a 3,920
MMcf, or 8%, decrease in Bakken gas production over the prior year period. These
decreases were nearly offset by a 15,909 MMcf, or 33%, increase in SCOOP gas
production in conjunction with the previously described increase in SCOOP oil
production over the prior year period.
Revenues
Net crude oil and natural gas sales. Net crude oil and natural gas sales for
year to date 2020 totaled $944.6 million , a decrease of 56% compared to net
sales of $2.14 billion for the comparable 2019 period due to significant
decreases in net sales prices and sales volumes as discussed below.
Total sales volumes for year to date 2020 decreased 9,021 MBoe, or 15%, compared
to year to date 2019, reflecting reduced sales from the previously described
production curtailments in the current period. For year to date 2020, our crude
oil sales volumes decreased 24% from the comparable 2019 period, while our
natural gas sales volumes decreased 2%.
Our crude oil net sales prices averaged $32.37 per barrel for year to date 2020,
a decrease of 38% compared to $52.36 per barrel for year to date 2019 due to
significantly reduced market prices and wider price differentials. The
differential between NYMEX WTI calendar month prices and our realized crude oil
net sales prices averaged $6.66 per barrel for year to date 2020 compared to
$4.94 per barrel for year to date 2019. The increased differential reflects
changes in supply and demand fundamentals and economic effects from COVID-19
that impacted location differentials and price realizations compared to the
prior year period.
Our natural gas net sales prices averaged $0.59 per Mcf for year to date 2020, a
decrease of 72% compared to $2.11 per Mcf for year to date 2019 due to
significantly reduced market prices and lower price realizations. The discount
between our net sales prices and NYMEX Henry Hub calendar month prices weakened
to $1.26 per Mcf for year to date 2020 compared to $0.79 per Mcf for the year to
date 2019 period. NGL prices have decreased significantly over prior year levels
in conjunction with decreased crude oil prices and other factors, resulting in
reduced price realizations in 2020 for our natural gas sales stream relative to
benchmark prices and leading to the previously described recognition of $30.5
million of negative gas revenues in the 2020 second quarter.
Derivatives. Changes in crude oil market prices during the six months ended June
30, 2020 had an overall unfavorable impact on the fair value of our derivatives,
which resulted in negative revenue adjustments of $7.8 million for the period
compared to positive revenue adjustments of $52.3 million in the comparable 2019
period.
Crude oil and natural gas service operations. Revenues associated with our crude
oil and natural gas service operations decreased $6.5 million , or 19%, from
$33.3 million for year to date 2019 to $26.8 million for year to date 2020 due
to a
31
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decrease in the magnitude of water handling and recycling activities resulting
from our curtailment of production activities in the 2020 second quarter. The
decreased activities also resulted in a reduction in service-related expenses
compared to the prior period.
Operating Costs and Expenses
Production Expenses. Production expenses decreased $36.2 million , or 17%, from
$219.4 million for year to date 2019 to $183.2 million for year to date 2020 due
to the previously described production curtailments and associated 15% decrease
in sales volumes. Production expenses on a per-Boe basis averaged $3.60 for year
to date 2020, improved from $3.66 per Boe recognized for the comparable 2019
period.
Production Taxes. Production taxes decreased $98.0 million , or 54%, to $82.3
million for year to date 2020 compared to $180.3 million for year to date 2019
due to a 54% decrease in crude oil and natural gas sales. Our production taxes
as a percentage of net crude oil and natural gas sales averaged 8.7% for year to
date 2020 compared to 8.4% for year to date 2019.
Exploration expenses. Exploration expenses, which consist primarily of
exploratory geological and geophysical costs and dry hole costs that are
expensed as incurred, increased $8.7 million to $13.6 million for year to date
2020 compared to $4.9 million for year to date 2019 due to changes in the timing
and extent of our exploration-related activities compared to the prior year
period. The 2020 period includes $6.3 million of dry hole costs recognized in
the first quarter associated with an unsuccessful exploratory well with no
comparable dry hole costs incurred in the prior year period.
Depreciation, Depletion, Amortization and Accretion. Total DD&A decreased $153.6
million , or 16%, to $827.0 million for year to date 2020 compared to $980.6
million for the comparable 2019 period due to a 15% decrease in total sales
volumes. The following table shows the components of our DD&A on a unit of sales
basis for the periods presented.
Six months ended June 30,
$/Boe 2020 2019
Crude oil and natural gas $ 15.95 $ 16.14
Other equipment 0.21 0.16
Asset retirement obligation accretion 0.09 0.07
Depreciation, depletion, amortization and accretion
16.37
Property Impairments. Property impairments increased$199.8 million to$246.5 million for the year to date period of 2020 compared to$46.7 million for the year to date period of 2019 primarily reflecting higher proved property impairments as described below. Impairments of proved oil and gas properties totaled$181.0 million for the year to date period of 2020, all of which were recognized in the 2020 first quarter resulting from the significant decrease in commodity prices that indicated the carrying values for certain fields were not recoverable. The impairments were recognized on legacy properties in the Red River Units ($166.5 million ) and various non-core properties in the North and South regions ($14.5 million ). Additionally, in response to decreased crude oil prices we recognized a$24.5 million impairment in the 2020 first quarter to reduce the value of our crude oil inventory to estimated net realizable value. There were no proved property impairments recognized during the year to date period of 2019. Impairments of unproved properties decreased$5.8 million , or 12%, to$40.9 million for year to date 2020 compared to$46.7 million for year to date 2019 primarily due to a reduction in the balance of unamortized leasehold costs over the past year. General and Administrative Expenses. Total G&A expenses decreased$10.4 million , or 11%, to$84.4 million for year to date 2020 compared to$94.8 million for year to date 2019. Total G&A expenses include non-cash charges for equity compensation of$31.7 million and$24.3 million for the year to date periods of 2020 and 2019, respectively, the increase of which was due to additional grants of restricted stock awards coupled with higher forfeitures of unvested restricted stock in 2019 that resulted in lower equity compensation expense for that period. G&A expenses other than equity compensation totaled$52.7 million for year to date 2020, a decrease of$17.8 million , or 25%, compared to$70.5 million for the comparable 2019 period. This decrease was primarily due to a reduction in employee benefits and other efforts to reduce spending in response to significantly reduced commodity prices and economic turmoil from the COVID-19 pandemic, partially offset by lower overhead recoveries from joint interest owners driven by reduced drilling, completion, and production activities. 32 --------------------------------------------------------------------------------
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented.
Six months ended June 30,
$/Boe 2020
2019
General and administrative expenses $ 1.04$ 1.18 Non-cash equity compensation 0.62
0.40
Total general and administrative expenses $ 1.66
Net (gain) loss on sale of assets and other. For the six months endedJune 30, 2020 we paid a deposit and transaction fees totaling$5.7 million associated with a potential property acquisition that was terminated by the Company. Such amounts were expensed and are included in the caption "Net (gain) loss on sale of assets and other." Interest Expense. Interest expense decreased$7.6 million , or 6%, to$128.7 million for year to date 2020 compared to$136.3 million for the comparable 2019 period primarily due to a decrease in our weighted average interest rate from changes in the mix of outstanding debt between periods driven by the redemption or repurchase of senior notes over the past year using available cash and lower-rate credit facility borrowings. Our weighted average outstanding debt balance for year to date 2020 was$5.8 billion with a weighted average interest rate of 4.3% compared to averages of$5.8 billion and 4.5% for year to date 2019. Income Taxes. For the six months endedJune 30, 2020 and 2019 we provided for income taxes at a combined federal and state tax rate of 24.5% of pre-tax income/loss generated by our operations inthe United States . We recorded an income tax benefit of$124.4 million and an income tax provision of$127.6 million for the year to date periods of 2020 and 2019, respectively, which resulted in effective tax rates of 22.5% and 23.2%, respectively, after taking into account statutory tax rates, permanent taxable differences, tax effects from equity compensation, valuation allowances, and other items. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 13. Income Taxes for a summary of the sources and tax effects of items comprising our effective tax rates. Liquidity and Capital Resources Our primary sources of liquidity have historically been cash flows generated from operating activities, financing provided by our credit facility and the issuance of debt securities. Additionally, in recent years asset dispositions and joint development arrangements have provided a source of cash flow for use in reducing debt and enhancing liquidity. In light of the challenges facing our business and industry, we will remain committed to operating in a responsible manner to preserve financial flexibility, liquidity, and the strength of our balance sheet. AtJuly 31, 2020 , we had approximately$848 million of borrowing availability under our credit facility after considering outstanding borrowings and letters of credit. Our credit facility, which is unsecured and has no borrowing base subject to redetermination, does not mature untilApril 2023 . Further, we have no near-term senior note maturities, with our earliest scheduled maturity being our$1.1 billion of 2022 Notes due inSeptember 2022 . Based on our planned capital spending, our forecasted cash flows and projected levels of indebtedness, we expect to maintain compliance with the covenants under our credit facility and senior note indentures. Further, based on current market indications, we expect to meet in the ordinary course of business other contractual cash commitments to third parties as ofJune 30, 2020 , including those described in Note 10. Commitments and Contingencies in Notes to Unaudited Condensed Consolidated Financial Statements, recognizing we may be required to meet such commitments even if our business plan assumptions were to change. We monitor our capital spending closely based on actual and projected cash flows and have the ability to reduce spending or dispose of assets if needed to preserve liquidity and financial flexibility to fund our operations. Cash Flows Cash flows from operating activities Net cash provided by operating activities totaled$643.6 million and$1.50 billion for the six months endedJune 30, 2020 and 2019, respectively, reflecting a significant decrease in our 2020 second quarter cash flows due to the previously described decrease in crude oil prices and our voluntary curtailment of production during the quarter. As a result of these factors, we generated negative operating cash flows of$20.2 million in the 2020 second quarter compared to$663.8 million of positive operating cash flows in the 2020 first quarter. 33 -------------------------------------------------------------------------------- WTI crude oil prices have improved from historic lows reached inApril 2020 and averaged approximately$40 per barrel inJuly 2020 . If crude oil prices remain at current levels or further improve and we continue to restore our curtailed production, our operating cash flows are expected to improve in the second half of 2020 relative to second quarter levels, the amount of which cannot be estimated. Cash flows from investing activities Net cash used in investing activities totaled$1.02 billion and$1.56 billion for the six months endedJune 30, 2020 and 2019, respectively, reflecting the significant decrease in our drilling and completion activities prompted by the decrease in crude oil prices and economic uncertainty from the COVID-19 pandemic. As a result of our reduced activities, our investing cash outflows decreased significantly from$706.7 million in the 2020 first quarter to$312.2 million in the 2020 second quarter. Cash flows from financing activities Net cash provided by financing activities for the six months endedJune 30, 2020 totaled$342.6 million , comprised of$521.1 million of net financing cash inflows for the 2020 first quarter partially offset by$178.5 million in net financing cash outflows for the 2020 second quarter, the change of which was primarily driven by credit facility borrowing and repayment activities. Net credit facility borrowings totaled$532 million for year to date 2020, representing net borrowings of$680 million in the first quarter offset by subsequent net repayments of$148 million in the second quarter. These net credit facility borrowings for year to date 2020 were partially offset by$126.9 million of cash used to repurchase shares of our common stock,$18.5 million of cash dividends paid on common stock, and$74.0 million of cash used to repurchase senior notes in open market transactions. Net cash used in financing activities for the six months endedJune 30, 2019 totaled$23.5 million , which primarily represents$69.7 million of cash used to repurchase shares of our common stock and$21.2 million of cash paid to taxing authorities to satisfy tax withholdings associated with restricted stock awards that vested during the period, partially offset by$75.7 million of cash inflows for contributions received from Franco-Nevada Corporation for the funding of its share of mineral acquisition costs incurred by The Mineral Resources Company II. Future Sources of Financing Although we cannot provide any assurance, we believe funds from operating cash flows and availability under our credit facility should be sufficient to meet our cash requirements inclusive of, but not limited to, normal operating needs, debt service obligations, planned capital expenditures, and commitments for at least the next 12 months. Our capital spending plans for the remainder of 2020 have been adjusted to be reflective of the adverse commodity price environment and will be guided by our expectation of available cash flows. Any cash flow deficiencies are expected to be funded by borrowings under our credit facility. If cash flows are materially impacted by declines in commodity prices, we have the ability to reduce our capital expenditures or utilize the availability of our credit facility if needed to fund our operations and business plans. We may choose to access banking or capital markets for additional financing or capital to fund our operations or take advantage of business opportunities that may arise, although uncertainties existing in the financial markets as a result of the COVID-19 pandemic may increase the expense and difficulty of completing a bank or capital markets financing. Additionally, the terms available to the Company in connection with such a financing transaction may be less favorable than those enjoyed by the Company prior to the COVID-19 pandemic, although the degree, if any, by which such terms may change cannot be predicted at this time. Further, we may sell assets or enter into strategic joint development opportunities in order to obtain funding if such transactions can be executed on satisfactory terms. However, no assurance can be given that such transactions will occur. InMarch 2020 , our corporate credit rating was downgraded byStandard & Poor's Ratings Services ("S&P") in response to weakened oil and gas industry conditions and resulting revisions made to rating agency commodity price assumptions. Such downgrade negatively impacted our cost of capital and increased our borrowing costs under our credit facility. Also inMarch 2020 , our corporate credit ratings were reaffirmed by bothMoody's Investor Services and Fitch Ratings. Such ratings are subject to ongoing review and adjustment. Credit facility We have an unsecured credit facility, maturing inApril 2023 , with aggregate lender commitments totaling$1.5 billion . The commitments are from a syndicate of 14 banks and financial institutions. We believe each member of the current syndicate has the capability to fund its commitment. As ofJuly 31, 2020 , we had$647 million of outstanding borrowings and approximately$848 million of borrowing availability on our credit facility. 34 -------------------------------------------------------------------------------- The commitments under our credit facility are not dependent on a borrowing base calculation subject to periodic redetermination based on changes in commodity prices and proved reserves. Additionally, downgrades or other negative rating actions with respect to our credit rating, such as the downgrade by S&P that occurred inMarch 2020 in response to weakened oil and gas industry conditions, do not trigger a reduction in our current credit facility commitments, nor do such actions trigger a security requirement or change in covenants. The downgrade of our credit rating did, however, trigger a 0.25% increase in our credit facility's interest rate and prompted a 0.05% increase in the rate of commitment fees paid on unused borrowing availability. Our credit facility contains restrictive covenants that may limit our ability to, among other things, incur additional indebtedness, incur liens, engage in sale and leaseback transactions, or merge, consolidate or sell all or substantially all of our assets. Our credit facility also contains a requirement that we maintain a consolidated net debt to total capitalization ratio of no greater than 0.65 to 1.00. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 8. Long Term Debt for a discussion of how this ratio is calculated pursuant to our credit agreement. We were in compliance with our credit facility covenants atJune 30, 2020 and expect to maintain such compliance. AtJune 30, 2020 , our consolidated net debt to total capitalization ratio was 0.43 to 1.00. We do not believe the credit facility covenants are reasonably likely to limit our ability to undertake additional debt financing if needed to support our business. AtJune 30, 2020 , our total debt would have needed to independently increase by approximately$8.4 billion above the existing level at that date (with no corresponding increase in cash or reduction in refinanced debt) to reach the maximum covenant ratio of 0.65 to 1.00. Alternatively, our total shareholders' equity would have needed to independently decrease by approximately$4.5 billion (excluding the after-tax impact of any non-cash impairment charges) below the existing level atJune 30, 2020 to reach the maximum covenant ratio. These independent point-in-time sensitivities do not take into account other factors that could arise to mitigate the impact of changes in debt and equity on our consolidated net debt to total capitalization ratio, such as disposing of assets or exploring alternative sources of capitalization. Future Capital Requirements Senior notes Our debt includes outstanding senior note obligations totaling$5.16 billion atJune 30, 2020 . We have no near-term senior note maturities, with our earliest scheduled maturity being our$1.1 billion of 2022 Notes due inSeptember 2022 . Our senior notes are not subject to any mandatory redemption or sinking fund requirements. For further information on the face values, maturity dates, semi-annual interest payment dates, optional redemption periods and covenant restrictions related to our senior notes, refer to Note 8. Long-Term Debt in Notes to Unaudited Condensed Consolidated Financial Statements. We were in compliance with our senior note covenants atJune 30, 2020 and expect to maintain such compliance. We do not believe the senior note covenants will materially limit our ability to undertake additional debt financing. Downgrades or other negative rating actions with respect to the credit ratings assigned to our senior unsecured debt, such as the downgrade by S&P that occurred inMarch 2020 , do not trigger additional senior note covenants. Mineral acquisition relationship InOctober 2018 , Continental entered into a strategic relationship with Franco-Nevada Corporation to acquire oil and gas mineral interests within an area of mutual interest in the SCOOP and STACK plays through a minerals subsidiary namedThe Mineral Resources Company II, LLC ("TMRC II"). Under the relationship, the parties have committed, subject to satisfaction of agreed upon acreage development thresholds, to spend a remaining aggregate total of approximately$154 million through year-end 2021 to acquire mineral interests. Continental is to fund 20% of future mineral acquisitions and will be entitled to receive between 25% and 50% of total revenues generated by TMRC II based upon performance relative to predetermined production targets, while Franco-Nevada will fund 80% of future acquisitions and will be entitled to receive between 50% and 75% of TMRC II's revenues. Based upon production targets achieved to date, Continental is currently earning 50% of TMRC II's revenues and such allocation is expected to continue through at least year-end 2020. The timing and amount of future mineral acquisitions and resulting achievement of production targets are expected to be adversely impacted by Continental's previously described reduction in 2020 capital spending, which may impact the allocation of revenues between Continental and Franco-Nevada in periods beyond 2020, the extent of which cannot be estimated. Capital expenditures We remain committed to operating in a disciplined, capital-efficient manner in light of ongoing economic uncertainty and volatility in commodity prices. Our original capital budget for 2020 was$2.65 billion , which was reduced to$1.2 billion inMarch 2020 in response to the significant decrease in crude oil prices resulting from the COVID-19 pandemic and actions by 35 -------------------------------------------------------------------------------- theOrganization of Petroleum Exporting Countries . We diligently evaluate and adjust our spending plans on an ongoing basis based on market conditions. For the six months endedJune 30, 2020 , we invested$841.5 million in our capital program excluding$30.0 million of unbudgeted acquisitions and excluding$153.5 million of capital costs associated with reduced accruals for capital expenditures as compared toDecember 31, 2019 . In light of the challenges facing our business and industry we significantly reduced our drilling and completion activities beginning inMarch 2020 in order to preserve our assets and better align our spending with expected available cash flows. As a result of these actions, our non-acquisition capital spending was reduced by$460 million , or 71%, in the 2020 second quarter compared to the 2020 first quarter. Our 2020 year to date capital expenditures were allocated as shown in the table below. We expect our capital spending to continue declining in the second half of the year. In millions 1Q 2020 2Q 2020 YTD 2020 Exploration and development drilling$ 544.0 $ 155.8 $ 699.8 Land costs (1) 39.9 8.9
48.8
Capital facilities, workovers and other corporate assets 63.0 25.8
88.8
Seismic 3.8 0.3
4.1
Capital expenditures, excluding unbudgeted acquisitions 650.7 190.8
841.5
Acquisitions of producing properties 19.3 0.1
19.4
Acquisitions of non-producing properties 10.6 -
10.6
Total unbudgeted acquisitions 29.9 0.1 30.0 Total capital expenditures$ 680.6 $ 190.9 $ 871.5
(1) Amount includes
the six months ended
Franco-Nevada.
Commitments and contingencies Refer to Note 10. Commitments and Contingencies for discussion of certain future commitments and contingencies of the Company. Based on current market indications, we expect to meet in the ordinary course of business our contractual cash commitments to third parties as ofJune 30, 2020 . OnJuly 6, 2020 , theU.S. District Court for the District of Columbia ruled that the Dakota Access Pipeline ("DAPL"), which is owned and operated by a third party and carries Bakken-produced crude oil fromNorth Dakota toIllinois , must shut down pending the completion of a new environmental impact statement. The pipeline owner sought an emergency stay of the shut-down order from theU.S. Court of Appeals for the District of Columbia Circuit (the "Appeals Court"). OnJuly 14, 2020 , the Appeals Court issued a temporary administrative stay of such order, which has allowed the pipeline to continue operating as of the date of this filing. The continued operation of DAPL in the future is uncertain. The Company utilizes DAPL to transport a portion of its North region crude oil production to ultimate markets on theU.S. gulf coast . Currently, the Company is committed to transport 3,550 barrels per day on the pipeline throughFebruary 2026 and has an additional commitment to transport an incremental 26,450 barrels per day for 7 years effective upon the pending completion of a DAPL expansion project which is estimated to occur in mid-2021. If transportation capacity on DAPL becomes restricted or unavailable, we have the ability to utilize other third party pipelines or rail facilities to transport our Bakken crude oil production to market, although such alternatives may be more costly. The restriction of DAPL's takeaway capacity may have an impact on prices for Bakken-produced barrels and result in wider differentials relative to WTI benchmark prices in the future, the amount of which is uncertain. Dividend payments To preserve cash in response to the significant reduction in crude oil prices and economic uncertainty resulting from the COVID-19 pandemic, inApril 2020 the Company's quarterly dividend was suspended by the Board of Directors until further notice. 36 -------------------------------------------------------------------------------- Share repurchase program InMay 2019 our Board of Directors approved the initiation of a share repurchase program to acquire up to$1 billion of our common stock beginning inJune 2019 . ThroughJune 30, 2020 , we had repurchased and retired a cumulative total of approximately 13.8 million shares at an aggregate cost of$317.1 million since the inception of the program. The timing and amount of the Company's share repurchases are subject to market conditions and management discretion. The share repurchase program does not require the Company to repurchase a specific number of shares and may be modified, suspended, or terminated by the Board of Directors at any time. To preserve cash in the current environment, we do not expect to engage in significant share repurchase activity in the near term. Senior note repurchases As discussed in Note 8. Long-Term Debt in Notes to Unaudited Condensed Consolidated Financial Statements, in March andApril 2020 we repurchased a portion of our 2023 Notes and 2024 Notes in open market transactions at a substantial discount to face value. From time to time, we may seek to execute additional repurchases of our senior notes for cash in open market transactions, privately negotiated transactions, or otherwise. Such repurchases will depend on prevailing market conditions, our liquidity and prospects for future access to capital, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. Legislative and Regulatory Developments OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law, which is aimed at supporting theU.S. economy and providing emergency assistance to individuals, families, and businesses affected by the COVID-19 pandemic. In particular, key income tax-related provisions of the CARES Act include (1) elimination of the 80% of taxable income limitation by allowing entities to utilize 100% of net operating losses ("NOLs") to offset taxable income in 2018, 2019, or 2020, (2) allowing NOLs originating in 2018, 2019, or 2020 to be carried back to each of the preceding five years to generate a refund, (3) increasing the net interest expense deduction limit from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020, and (4) allowing taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years. The CARES Act is not expected to have a material impact on our business. Off-balance sheet arrangements Currently, we do not have any off-balance sheet arrangements with unconsolidated entities to enhance liquidity and capital resources. Critical Accounting Policies There have been no changes in our critical accounting policies from those disclosed in our 2019 Form 10-K. New Accounting Pronouncements See Note 2. Basis of Presentation and Significant Accounting Policies in Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the new credit loss accounting standard adopted onJanuary 1, 2020 along with a discussion of an accounting pronouncement not yet adopted. Non-GAAP Financial Measures Net crude oil and natural gas sales and net sales prices Revenues and transportation expenses associated with production from our operated properties are reported separately as discussed in Notes to Unaudited Condensed Consolidated Financial Statements-Note 4. Revenues. For non-operated properties, we receive a net payment from the operator for our share of sales proceeds which is net of costs incurred by the operator, if any. Such non-operated revenues are recognized at the net amount of proceeds received. As a result, the separate presentation of revenues and transportation expenses from our operated properties differs from the net presentation from non-operated properties. This impacts the comparability of certain operating metrics, such as per-unit sales prices, when such metrics are prepared in accordance withU.S. GAAP using gross presentation for some revenues and net presentation for others. In order to provide metrics prepared in a manner consistent with how management assesses the Company's operating results and to achieve comparability between operated and non-operated revenues, we have presented crude oil and natural gas sales net of transportation expenses in Management's Discussion and Analysis of Financial Condition and Results of Operations, which we refer to as "net crude oil and natural gas sales," a non-GAAP measure. Average sales prices calculated using net 37 -------------------------------------------------------------------------------- crude oil and natural gas sales are referred to as "net sales prices," a non-GAAP measure, and are calculated by taking revenues less transportation expenses divided by sales volumes, whether for crude oil or natural gas, as applicable. Management believes presenting our revenues and sales prices net of transportation expenses is useful because it normalizes the presentation differences between operated and non-operated revenues and allows for a useful comparison of net realized prices to NYMEX benchmark prices on a Company-wide basis. The following tables present a reconciliation of crude oil and natural gas sales (GAAP) to net crude oil and natural gas sales and related net sales prices (non-GAAP) for the three and six months endedJune 30, 2020 and 2019. Three months ended June 30, 2020 Three months ended June 30, 2019 In thousands Crude oil Natural gas Total Crude oil Natural gas Total Crude oil and natural gas sales (GAAP)$ 158,720 $ 15,932 $ 174,652 $ 1,005,146 $ 132,279 $ 1,137,425 Less: Transportation expenses (23,518 ) (8,787 ) (32,305 ) (45,981 ) (7,412 ) (53,393 ) Net crude oil and natural gas sales (non-GAAP)$ 135,202 $ 7,145 $ 142,347 $ 959,165 $ 124,867 $ 1,084,032 Sales volumes (MBbl/MMcf/MBoe) 8,270 58,772 18,065 17,549 75,254 30,091 Net sales price (non-GAAP)$ 16.35 $ 0.12 $ 7.88 $ 54.66 $ 1.66 $ 36.03 Six months ended June 30, 2020 Six months ended June 30, 2019 In thousands Crude oil Natural gas Total Crude oil Natural gas Total Crude oil and natural gas sales (GAAP)$ 932,490 $ 104,905 $ 1,037,395 $ 1,916,264 $ 330,745 $ 2,247,009 Less: Transportation expenses (73,890 ) (18,917 ) (92,807 ) (87,628 ) (14,903 ) (102,531 ) Net crude oil and natural gas sales (non-GAAP)$ 858,600 $ 85,988 $ 944,588 $ 1,828,636 $ 315,842 $ 2,144,478 Sales volumes (MBbl/MMcf/MBoe) 26,521 146,225 50,891 34,922 149,944 59,912 Net sales price (non-GAAP)$ 32.37 $ 0.59 $ 18.56 $ 52.36 $ 2.11 $ 35.79 38
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