Harold Hamm, the billionaire founder and chairman of Continental Resources, has decided to make an offer to take the shale giant private. His bid comes at a time when oil and gas companies are outperforming the market and crude prices are topping $120 per barrel.
CLR stock traded down 3.5% to 71.61 on Wednesday, after surging 15% on the initial news on Tuesday.
The Hamm family collectively currently holds approximately 83% of the company's total outstanding shares. Continental announced Tuesday that Hamm made a $4.3 billion offer to purchase all remaining shares. The offer of $70 per share represented a 9% premium to Monday's CLR stock price and valued the company at $25 billion.
CLR stock, even after Wednesday's drop is trading above Hamm's offer, signaling investors expect a higher bid.
The company said it plans to create a special committee to consider the proposal. It stressed that nothing has so far been agreed on.
Hamm founded the Oklahoma City-based oil producer in 1967. He took the company public in 2007, in order to fund development of the Bakken Shale oil fields in Montana and North Dakota. The Bakken has grown to become one of the most robust oil-producing regions in the U.S.
As a result, the majority of CLR's revenue and production comes from oil fields in the northern U.S. It is the largest leaseholder and the largest producer in the Bakken. Continental is also the largest producer in the Anadarko Basin of Oklahoma. It has also newly acquired positions in the Powder River Basin of Wyoming and the oil-rich Permian Basin of Texas.
In 2019, Hamm stepped down as CEO and was replaced by longtime board member William Berry.
Hamm's Plan
Hamm, in a letter to employees, explained why he wants to take CLR private. He appeared to suggest that he wants additional flexibility to pump more oil without being beholden to shareholders.
Rising oil prices in the past have tended to send U.S. oil companies into production frenzies. Many of these eventually triggered price collapses. After many years of oil field bankruptcies, companies have approached the current supply crunch with more caution.
The trend has been to prioritize shareholder interests and balance sheet fitness over racing to boost short-term production in an effort to cash in on surging energy prices. A quarter of large oil and gas firms responding to a March survey conducted by the Federal Reserve Bank of Dallas said they expected their production levels to remain the same from fourth quarter 2021 to fourth quarter 2022.
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As a result, oil stocks have soared. Ten of the top 11 gains among industries since the start of the year have been oil industries. CLR stock is up 61% this year.
In the Dallas Fed survey, 59% of executives also said that "investor pressure to maintain capital discipline" is the primary reason publicly traded oil producers are restraining growth despite high oil prices.
"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," Hamm wrote, according to public filings.
Strength Of Continental, CLR Stock
Hamm added that since the coronavirus pandemic, the public market has not been supportive of oil and gas companies and that Continental is underappreciated.
"Positioning ourselves as a private company will allow us to take maximum advantage of our greatest strength — our strong heritage as one of the leading exploration companies in the world," he wrote.
CLR, along with other shale oil producers including Diamondback Energy and EOG Resources, have helped to boost the U.S. to the head of the global oil market, outpacing the industry's traditional powerhouses, Saudi Arabia and Russia.
Like most producers surfing the current price wave, Continental has had strong quarterly earnings per share growth, with a 244% increase in March, and an 878% surge in December 2021. Annual EPS growth is estimated at 149% for 2022. CLR reported record quarterly sales of $2.3 billion and earnings of $2.65 per share of CLR stock in the first quarter.
Wall Street predicts $3.01 earnings per share on $2.6 billion in revenue for the second quarter.
However, Continental has not been immune to macroeconomic conditions. At the end of fiscal year 2021, CLR struggled to deliver oil volume growth. It was also one of the first companies to increase its 2022 capital budget after underestimating the impact of cost inflation.
Continental ranks second in its industry group, according to IBD Stock Checkup. CLR has a best-possible 99 Composite Rating. Its Relative Strength Rating is 98.
Is the Bid Enough?
With oil and gas stocks continuing to head sharply higher, it is unclear if Hamm's initial offer will be enough to satisfy shareholders.
Credit Suisse analyst William Janela raised the price target for CLR stock to $78 from $64. Janela believes investors will likely desire a higher valuation, closer to $78 per share.
While Hamm's initial bid is a premium to Monday's price, it is a 5% discount on last week's 52-week high of 73.54, noted analysts for Piper Sandler.
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"We have no questions of Mr. Hamm's intentions," they wrote. "We do think CLR minority shareholders are likely to demand higher compensation for their shares in the current environment where short-cycle supply is constrained from responding to price signals."
However, Wells Fargo analyst Nitin Kumar downgraded Continental. Kumar wrote that he doubts a higher bid may emerge. He sees the move as a way for Hamm to pursue a "differentiated strategy in U.S. shale without being beholden to public equity markets."
Please follow Kit Norton on Twitter @KitNorton for more coverage.
