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, 2021 . 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 and in our Form 10-Q for the quarter endedJune 30, 2022 and our Form 10-K for the year endedDecember 31, 2021 , along with Cautionary Statement for the Purpose of the "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.
Overview
We are an independent crude oil and natural gas company engaged in the exploration, development, management, and production of crude oil and natural gas and associated products with properties primarily located in four leading basins inthe United States - the Bakken field ofNorth Dakota andMontana , theAnadarko Basin ofOklahoma , thePermian Basin ofTexas , and thePowder River Basin ofWyoming . 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, natural gas, and natural gas liquids and expect this to continue in the future. Our common stock currently trades on theNew York Stock Exchange under the symbol "CLR" and our corporate internet website is www.clr.com.
Recent developments
OnOctober 16, 2022 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") withOmega Acquisition, Inc. ("Merger Sub"), an entity owned by the Company's founder,Harold G. Hamm . Pursuant to the Merger Agreement, onOctober 24, 2022 , Merger Sub commenced a tender offer to purchase any and all of the outstanding shares of the Company's common stock, other than: (i) shares of common stock owned by the Hamm Family and (ii) shares of common stock underlying unvested equity awards issued pursuant to the Company's long-term incentive plans for$74.28 per share in cash. There are approximately 58 million shares of Continental's common stock that are subject to the tender offer. Subject to the satisfaction of customary closing conditions, the transaction is expected to close prior toDecember 31, 2022 . See Notes to Unaudited Condensed Consolidated Financial Statements-Note 1. Organization and Nature of Business-Recent Developments and Liquidity and Capital Resources-Recent Developments below for additional information.
Third Quarter 2022 Highlights
Financial and operating highlights for the third quarter of 2022 are summarized below.
•Generated
•Exited the third quarter with approximately
•Production averaged 414,441 Boe per day for the 2022 third quarter, a 4% sequential increase from the 2022 second quarter and 25% higher than the 2021 third quarter.
Financial and Operating Metrics
Commodity prices have increased significantly in 2022 compared to 2021 levels resulting from the ongoing rebalancing of crude oil and natural gas supply and demand fundamentals coupled with the disruption of global hydrocarbon markets prompted by the outbreak of military conflict betweenRussia andUkraine . The increase in commodity prices contributed to improved operating results and cash flows for the three and nine month periods endedSeptember 30, 2022 compared to the comparable 2021 periods. Additionally, our property acquisitions in thePermian Basin andPowder River Basin over the past year contributed to increased production, revenues, and cash flows in 2022 compared to the 2021 periods. Commodity prices remain volatile and unpredictable and our operating results for the three and nine month periods endedSeptember 30, 2022 may not be indicative of future results. Given the uncertainty surrounding theRussia /Ukraine conflict and ongoing volatility in commodity prices, we are unable to predict the extent to which the conflict or other factors will have on the Company's future performance. 23 --------------------------------------------------------------------------------
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 September 30, Nine months ended September 30,
2022 2021 2022 2021
Average daily production:
Crude oil (Bbl per day) 200,464 157,153 197,869 158,609
Natural gas (Mcf per day) (1) 1,283,865 1,045,521 1,190,516 1,004,954
Crude oil equivalents (Boe per day) 414,441 331,407 396,288 326,102
Average net sales prices (2):
Crude oil ($/Bbl) $ 89.46 $ 66.48 $ 95.51 $ 60.79
Natural gas ($/Mcf) (1)(3) $ 8.56 $ 4.62 $ 7.63 $ 4.38
Crude oil equivalents ($/Boe) $ 69.91 $ 46.07 $ 70.59 $ 43.04
Crude oil net sales price discount to NYMEX
($/Bbl) $ (2.16)
$ 0.37 $ 0.62 $ 0.74 $ 1.17
Production expenses ($/Boe) $ 4.34 $ 3.39 $ 4.22 $ 3.29
Production and ad valorem taxes (% of net
crude oil and natural gas sales) 7.5 % 7.3 % 7.4 % 7.3 %
Depreciation, depletion, amortization and
accretion ($/Boe) $ 12.79 $ 15.29 $ 12.91 $ 16.26
Total general and administrative expenses
($/Boe) $ 1.79 $ 1.92 $ 1.91 $ 1.87
(1) Natural gas production volumes, sales volumes, and net sales prices
presented throughout management's discussion and analysis reflect the combined
value for natural gas and natural gas liquids.
(2) See the subsequent section titled Non-GAAP Financial Measures for a
discussion and calculation of net sales prices, which are non-GAAP measures.
(3) Amounts for the 2022 periods include the recognition of $95 million of
natural gas revenues in the 2022 third quarter in conjunction with the
resolution of a legal matter, which increased our natural gas net sales prices
by $0.80 per Mcf and $0.29 per Mcf for the third quarter and year to date
periods of 2022, respectively.
Three months ended
Results of Operations
The following table presents selected financial and operating information for the periods presented.
24
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Three months ended September 30,
In thousands 2022 2021
Crude oil, natural gas, and natural gas liquids sales $ 2,767,262 $ 1,456,181
Loss on derivative instruments, net (337,778) (127,110)
Crude oil and natural gas service operations 17,747 12,341
Total revenues 2,447,231 1,341,412
Operating costs and expenses (1,037,116) (795,701)
Other expenses, net (66,227) (59,549)
Income before income taxes 1,343,888 486,162
Provision for income taxes (323,390) (115,641)
Income before equity in net loss of affiliate 1,020,498 370,521
Equity in net loss of affiliate (660) -
Net income 1,019,838 370,521
Net income attributable to noncontrolling interests 6,731 1,193
Net income attributable to Continental Resources $ 1,013,107 $ 369,328
Production volumes:
Crude oil (MBbl) 18,443 14,458
Natural gas (MMcf) 118,116 96,188
Crude oil equivalents (MBoe) 38,129 30,489
Sales volumes:
Crude oil (MBbl) 18,674 14,404
Natural gas (MMcf) 118,116 96,188
Crude oil equivalents (MBoe) 38,360 30,435
Production
The following table summarizes the changes in our average daily Boe production by major operating area for the third quarter period.
Boe production per day 3Q 2022 3Q 2021 % Change
Bakken 175,383 167,604 5 %
Anadarko Basin 162,829 152,522 7 %
Powder River Basin 31,234 4,937 533 %
Permian Basin 38,948 - - %
All other 6,047 6,344 (5 %)
Total 414,441 331,407 25 %
The following table summarizes the changes in our production by product for the
third quarter period.
Three months ended September 30, Volume
2022 2021 Volume percent
Volume Percent Volume Percent increase increase
Crude oil (MBbl) 18,443 48 % 14,458 47 % 3,985 28 %
Natural gas (MMcf) 118,116 52 % 96,188 53 % 21,928 23 %
Total (MBoe) 38,129 100 % 30,489 100 % 7,640 25 %
The 28% increase in crude oil production in the 2022 third quarter was primarily
driven by our property acquisitions in the Permian Basin and Powder River Basin
over the past year, which contributed to an increase in our 2022 third quarter
production by 2,721 MBbls and 1,481 MBbls, respectively, compared to the 2021
third quarter. These increases were partially offset by a 475 MBbls, or 15%,
decrease in crude oil production in the Anadarko Basin due to a change in
allocation of capital from oil-weighted projects to gas-weighted projects in the
play over the past year and the timing of well completions.
25
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The 23% increase in natural gas production in the 2022 third quarter was due in
part to the previously described property acquisitions over the past year.
Properties acquired in the Permian Basin and new well completions increased our
2022 third quarter production by 5,175 MMcf while properties acquired in the
Powder River Basin and new well completions increased our production by 5,629
MMcf compared to the 2021 third quarter. Additionally, natural gas production in
the Anadarko Basin increased 8,538 MMcf, or 13%, and Bakken natural gas
production increased 2,566 MMcf, or 8%, over the 2021 third quarter due to new
well completions over the past year.
Revenues
Net crude oil, natural gas, and natural gas liquids 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, natural gas, and natural gas liquids sales. Net sales totaled$2.68 billion for the third quarter of 2022, a 91% increase compared to net sales of$1.40 billion for the 2021 third quarter due to significant increases in net sales prices and sales volumes as discussed below. Total sales volumes for the third quarter of 2022 increased 7,925 MBoe, or 26%, compared to the 2021 third quarter primarily due to new wells added from our property acquisitions over the past year. For the third quarter of 2022, our crude oil sales volumes increased 30% and our natural gas sales volumes increased 23% compared to the 2021 third quarter. Our crude oil net sales prices averaged$89.46 per barrel in the 2022 third quarter compared to$66.48 per barrel for the 2021 third quarter due to the previously described increase in market prices along with improved price differentials. The differential between NYMEX West Texas Intermediate calendar month prices and our realized crude oil net sales prices improved to an average of$2.16 per barrel for the 2022 third quarter compared to$4.09 per barrel for the 2021 third quarter, reflecting strong price realizations across our assets. Our natural gas net sales prices averaged$8.56 per Mcf for the 2022 third quarter compared to$4.62 per Mcf for the 2021 third quarter primarily due to the previously described increase in market prices. The difference between our net sales prices and NYMEX Henry Hub calendar month natural gas prices was a premium of$0.37 per Mcf for the 2022 third quarter compared to a premium of$0.62 per Mcf for the 2021 third quarter. The decrease in premium was driven by price volatility, wider basis differentials between prices received in our sales markets and NYMEX settlement prices, and significant improvement inHenry Hub prices as compared to increases in NGL prices, causing the uplift in price realizations for our full gas stream relative to benchmark prices to be less significant in the current period. Derivatives. Elevated commodity prices during the third quarter of 2022 had a significant unfavorable impact on the fair value of our derivatives, which resulted in negative revenue adjustments totaling$337.8 million for the period, representing$226.1 million of cash losses and$111.7 million of unsettled non-cash losses, compared to negative revenue adjustments totaling$127.1 million in the third quarter of 2021.
Operating Costs and Expenses
Production Expenses. Production expenses increased$63.1 million , or 61%, to$166.3 million for the third quarter of 2022 compared to$103.2 million for the third quarter of 2021 due to an increase in the number of producing wells from drilling activities and property acquisitions, cost inflation for services and materials, and higher workover-related activities aimed at enhancing production from producing properties prompted by the favorable commodity price environment. Production expenses on a per-Boe basis averaged$4.34 per Boe for the 2022 third quarter compared to$3.39 per Boe for the 2021 third quarter, the increase of which reflects higher workover-related activities, cost inflation, and the addition of oil-weighted production acquired in the Permian andPowder River basins over the past year which typically have higher per-unit operating costs compared to gas-weighted properties in theAnadarko Basin . Production and Ad Valorem Taxes. Production and ad valorem taxes increased$98.2 million , or 96%, to$200.6 million for the third quarter of 2022 compared to$102.4 million for the third quarter of 2021 due to the previously described increase in sales. Our production taxes as a percentage of net sales averaged 7.5% for the third quarter of 2022, consistent with 7.3% for the third quarter of 2021. Depreciation, Depletion, Amortization and Accretion. Total DD&A increased$25.1 million , or 5%, to$490.5 million for the third quarter of 2022 compared to$465.4 million for the third quarter of 2021 primarily due to the previously described 26% increase in total sales volumes largely offset by a decrease in our DD&A rate per Boe as further discussed below. The following table shows the components of our DD&A on a unit of sales basis for the periods presented. 26 -------------------------------------------------------------------------------- Three months ended September 30, $/Boe 2022 2021 Crude oil and natural gas $ 12.51$ 14.98 Other equipment 0.20 0.22 Asset retirement obligation accretion 0.08 0.09 Depreciation, depletion, amortization and accretion $
12.79
Estimated proved reserves are a key component in our computation of DD&A expense. Proved reserves are determined using the unweighted arithmetic average of the first-day-of-the-month commodity prices for the preceding twelve months as required bySEC rules. Holding all other factors constant, if proved reserves are revised downward due to commodity price declines or other reasons, the rate at which we record DD&A expense increases. Conversely, if proved reserves are revised upward, the rate at which we record DD&A expense decreases. Our proved reserves have been revised upward over the past year prompted by significant increases in first-day-of-the-month commodity prices and other factors, which, when coupled with improvements in capital efficiency and strong well productivity, resulted in a decrease in our DD&A rate for crude oil and natural gas properties in the third quarter of 2022 compared to the third quarter of 2021 and helped offset the additional DD&A recognized in 2022 from increased sales volumes. Property Impairments. Total property impairments increased$4.8 million to$12.8 million for the third quarter of 2022 compared to$7.9 million for the third quarter of 2021, reflecting an increase in the amortization of undeveloped leasehold costs driven by an increase in our balance of unproved properties resulting from property acquisitions over the past year. There were no proved property impairments recognized in the third quarter periods of 2022 and 2021. General and Administrative Expenses. Total G&A expenses increased$10.3 million , or 18%, to$68.7 million for the third quarter of 2022 compared to$58.4 million for the third quarter of 2021. Total G&A expenses include non-cash charges for equity compensation of$16.7 million and$14.3 million for the third quarters of 2022 and 2021, respectively. G&A expenses other than equity compensation totaled$52.0 million for the 2022 third quarter, an increase of$7.9 million compared to$44.1 million for the 2021 third quarter primarily due to the growth of our operations and increases in payroll costs and employee benefits, partially offset by higher overhead recoveries from joint interest owners driven by increased drilling, completion, and production activities compared to the 2021 third quarter. Additionally, G&A expenses for the 2022 third quarter include$7.0 million ($0.18 per Boe) of expenses consisting primarily of fees and expenses of the legal and financial advisors engaged by the Special Committee of our Board of Directors that was established to, among other things, review and evaluate the terms and conditions of, and to determine the advisability of, the Hamm Family's take-private transaction. We expect to incur additional transaction-related fees, some of which are contingent and payable if and when the take-private transaction is consummated, which is currently expected to occur byDecember 31, 2022 .
The following table shows the components of G&A expenses on a unit of sales basis for the periods presented.
Three months ended September 30,
$/Boe 2022 2021
General and administrative expenses $ 1.36 $ 1.45
Non-cash equity compensation 0.43 0.47
Total general and administrative expenses $
1.79
As discussed in Notes to Unaudited Condensed Consolidated Financial Statements-Note 1. Organization and Nature of Business-Recent Developments, as of the effective time of the Merger, each unvested restricted stock award issued under the Company's long-term incentive plans that is outstanding immediately prior to the effective time will be canceled and replaced with a restricted stock unit award issued by the Company that provides the holder of such canceled award with the right to receive, on the date that such restricted stock award otherwise would have been settled, and at the Company's sole discretion, either a share of the Company, a cash award designed to provide substantially equivalent value, or any combination of the two. Upon such event, the Company plans to remeasure the cumulative compensation expense recognized on the modified awards pursuant toU.S. GAAP, which we estimate is expected to result in the recognition of additional non-cash equity compensation expense totaling approximately$160 million , reflecting the increase in the value of the awards from the original grant date to the subsequent modification date. 27 -------------------------------------------------------------------------------- Interest Expense. Interest expense increased$10.8 million , or 18%, to$70.7 million for the third quarter of 2022 compared to$59.9 million for the third quarter of 2021 due to an increase in our weighted average outstanding debt balance from$4.8 billion for the third quarter of 2021 to$6.3 billion for the third quarter of 2022. This increase was driven by debt incurred in the fourth quarter of 2021 to fund a portion of ourDecember 2021 acquisition of properties in thePermian Basin . Income Taxes. For the third quarters of 2022 and 2021 we provided for income taxes at a combined federal and state tax rate of 24.5% of our pre-tax income. We recorded an income tax provision of$323.4 million for the 2022 third quarter and an income tax provision of$115.6 million for the 2021 third quarter, which resulted in effective tax rates of 24.1% and 23.8%, respectively, after taking into account statutory tax rates, permanent taxable differences, tax effects from equity compensation, changes in valuation allowances, and other items. See Notes to Unaudited Condensed Consolidated Financial Statements-Note 12. Income Taxes for a summary of the sources and tax effects of items comprising our effective tax rates.
Nine months ended
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