Description

Company: Continental Resources (CLR)

Security: CLR US Equity

Stock Price: $65.21

Target Price: $75

Timeline: 6 months

Situation: Minority takeout

Investment Overview

The Hamm family had made a non-binding offer to take Continental Resources private for $70 per share in cash on 6/14/22. CLR’s BoD is arranging a special committee to evaluate the proposal. A higher price ($75+) is expected to take out the minorities Hamm & affiliates do not control. CLR on pure valuation can fetch $80/share, however there is only one buyer (Hamm) and a negotiated price between CLR’s BoD and Hamm is likely to occur in the $75 to $80 range.

Transaction

On June 14th 20  before the market opened, CLR received a non-binding proposal letter from Harold G. Hamm, Harold G. Hamm Trust and certain trusts established for the benefit of Mr. Hamm’s family members. The Hamm family owns an 83% controlling stake in the company, related parties take the total ownership to 90.5% (ownership table in appendix).

The company announced its BoD would arrange a special committee to evaluate the proposal. The special committee's strategic review could take 2-3 months to complete. The committee would consist of board independent directors, and may have independent advisers (financial and legal) to assist. The proposal is only an indication of interest from the Hamm family.

The $70 per share proposal reflects a 9% premium to prior closing price, 21% premium to the volume-weighted average price in 202 and a 7.3% premium to the current price.

 Transaction Rationale

The Hamm family wants to take CLR private to pursue a shale strategy of acquiring, exploring, and developing reserves in 'second tier' plays with more geological complexity, e.g. Powder River Basin and Southern Delaware.

This strategy differs from other peers that focus on maintaining capital discipline and concentrating 'tier one' assets to maximize cash flow.  CLR’s concentrated ownership base has allowed CLR to take a counter-cyclical view compared to peers, the result is the stock has underperformed peers. CLR’s stock was up 44% YTD before the deal was announced but lagged the XOP (+59%) and WTI prices (+66%).

Another bidder buying CLR is highly unlikely as any merger or acquisition would be dilutive to the family’s control and voted against by the Hamm block. Furthermore, Hamm’s letter to CLR indicated they are 'not interested in selling any' of their current CLR stock, or in 'pursuing other strategic alternatives involving' CLR.

Company Overview

Continental Resources (NYSE: CLR) is a top 10 independent oil producer in the U.S. Based in Oklahoma City, OK Continental is the largest leaseholder and the largest producer in the Bakken play of North Dakota and Montana. The Company has significant positions in the SCOOP and STACK plays of the Anadarko Basin of Oklahoma and recently acquired positions in the Powder River Basin of Wyoming and Permian Basin of Texas.

Source: May 2022 CLR Investor deck

Harold Hamm, the youngest of 13 children born to poor Oklahoma sharecroppers, started in the energy industry at the age of 18 with an oilfield- services business he funded with a $1,000 loan. CLR was founded by Hamm in 1967 at the age of 21 as Shelly Dean Oil Company, originally named for Hamm's two daughters. In 1990, Shelly Dean re-branded itself as Continental Resources. Continental helped pioneer the shale-oil boom and debuted as a publicly traded company in 2007. Hamm’s net worth is $19.7 billion, according to the Bloomberg Billionaires Index.

Hamm has taken steps this year to secure his legacy. In February 2022, he handed each of his five children stakes in the company which at the time were valued at about $2.3 billion. Despite the transfers, which were largely tax-free, Hamm said that he retained control because his children can’t sell the shares until he dies.

Valuation

A blend of the below three metrics results in a valuation target of $80/share.

EV/EBITDA – target $82/share

Using a 4x forward multiple results in a $82/share target. Peers reviewed are FANG (4x), PXD (4.7x), HES (5.5x), MRO (3.6x), COP (3.8x).

NAV – target $77/share

DCF – target $81/share

Financials

With minimal oil hedges and nearly half of gas hedged in 2022 and 2023, CLR is bullish on commodity prices. The company produced Q1’22 free cash flow of $1.15 billion (4.9% of market cap) and expects full year 2022 free cash flow of $4.3 billion (18% of market cap) to $4.7 billion (20% of market cap), which may be conservative.

The majority of US large cap E&Ps focused on maintenance capex driven business plans with free cash flow returned to shareholders in recent quarters, CLR recently expanded into Powder River Basin with an acquisition of CHK's position there (taking CLR to 390k net acres in the PRB and the largest acreage holder in Converse County for $450MM, closed on 3/31/22) and entry in the Delaware Basin (90k net acres from PXD for $3.25bn closed on 12/21/21, increased to 170k net acres in the basin by Q1’22). The company’s recent acquisitions were fueled by its high free cash flow and now account for ~20% of overall company production and ~30% of 2022 drilling activity (four rigs in the Delaware and two in the PRB).

 Appendix

Email communication from Harold G. Hamm to employees of Continental Resources, Inc. distributed June 14, 2022.

 Continental started in 1967 and operated as a private company with a great deal of success for the next 40 years. In 2007, to help further capitalize the development of the Bakken, we made the decision to enter the public market. At that time, the public market rewarded companies for both growth and performance.

For many years, being in the public market made sense for Continental, and its shareholders were able to participate in the success of the company. Times have changed in the public market, particularly since the Covid pandemic. The market response has not been there for the oil and gas industry. In 2017, just five years ago, there were nearly 50 public E&P companies. Today, that number has dwindled to almost half, due to mergers, companies going out of business, or companies going private. This diminishing number of public entities is illustrative of a lack of support from the public market, and we believe there is a resulting under-appreciation of Continental.

We have consistently said that as long as we were appreciated in the market, we would remain a public company, but if our opportunities were limited by being public, we should look at alternatives.

We have determined that the opportunity today is with private companies who have the freedom to operate and aren’t limited by public markets, similar to the way that we operated approximately 15 years ago, prior to becoming a public entity. I know that we will all continue to stay focused on doing our work safely, efficiently and effectively with our unwavering commitment to producing energy responsibly.

Your total compensation in a privately held Continental will be substantially equivalent. We will have an annual bonus program just as we have in the past. We will preserve the economics of your currently unvested stock awards and, while we will no longer have publicly traded stock for the long-term incentive portion of your compensation, we will develop a long-term incentive program that will be its economic equivalent, or better.

 Continental Resources Announces Receipt of “Take Private” Proposal From Hamm Family

 Buyer’s Advisors

Financial advisor - Intrepid Partners, LLC 

Legal advisor - Vinson & Elkins L.L.P.

Ownership Table

Catalyst

Bump in Hamm's takeout price