Harold Hamm, the billionaire CEO of Continental Resources CLR -3.83% has proven that he is comfortable taking big risks. He is so bullish on oil prices that in late October and early November he monetized all his crude price hedges.
By unwinding its array of puts and calls that protected it from falling oil prices, Continentalreceived $433 million in cash, but left itself fully exposed to crude swings. “Can’t argue with money in the bank,” said Hamm in an interview Monday afternoon. And besides, he says, “a commodity producer should be comfortable being exposed to prices.”
And yet oil prices have fallen further since Hamm abandoned the hedges. In early November West Texas Intermediate was selling for about $80 a barrel. It’s down to $55 now. Continental shares have slid 30% in that time (and are down 50% in six months).
That’s why Hamm is pulling in his horns — a little. After the Monday market close Continental announced dramatic cuts to its 2015 capital spending budget.
From planning $5.2 billion in 2015 capex just a couple months ago, the company now says it will invest just $2.7 billion. Even with that astonishing 48% reduction in capex, Hamm says Continental should still manage to boost its oil and gas volumes about 20% in 2015 to around 220,000 bpd by year’s end.
“It’s all part of our plan,” says Hamm. “If prices go down, we are going to cut back to save our wealth — which is oil in the ground.”
It’s fascinating that Hamm sees his wealth as barrels of black gold rather than dollars. Continental Resources has 1.2 billion barrels of proved oil (and equivalent natural gas) reserves. With a 72% equity stake in the company, Hamm’s personal wealth amounts to more than 850 million barrels.
Measured only in oil, Hamm is undoubtedly the wealthiest American and is only getting richer with every development well that Continental drills.
But measured in dollars it’s been a tough few months for the tycoon. When we finalized the Forbes 400 list in August, Hamm’s fortune tallied up to $18.7 billion. With the fall in Continental shares since then, as well as the court-ordered $1 billion award to his now ex-wife Sue Ann, his cache has dropped to $8.9 billion.
Talking to Hamm, it’s incredible how calm and confident he is about the future of the oil business. It’s a been-there-done-that mentality earned from five decades in the business. “I’ve seen this six or seven times,” he says.
“We have ample liquidity, our total revolver available, no near-term debt, a lean organization with just 1,100 people, production of 200,000 barrels per day, and a low-cost, high-margin operation. We’re going to navigate right through it.”
Hamm’s move will preserve cash and help shore up Continental’s balance sheet. Like many other leading tight oil drillers Continental has taken on a lot of debt in order to accelerate its pace of development. This year the company will pay about $290 million in interest on its $5.8 billion in long-term debt.
Those bond holders have been getting a little nervous. Continental’s $2 billion in 5% senior notes yielded as little as 2.25% back in June when oil prices were still around $100. As the notes have sold off, their yield has surged to 5.69% as of the last trade today.
Hamm expects bondholders to welcome today’s news. “Bondholders are very happy. They’ve been happy. We’re not ever too far out over our skis.”
Hamm isn’t the only wildcatter pulling in his horns amid the popping of the oil bubble. Marathon Oil MRO -1.36% and ConocoPhillips COP -1.73% both announced 20% capex cuts, while smaller operators like Laredo Petroleum have also slashed about 50%.
How bad could it get? The analysts at Bernstein Research figure that if oil were to stay at $65 per barrel for 2015, it would mean a 50% reduction in oil company cash flow and precipitate a 35% overall cut in capex. Bernstein’s crew doesn’t think 2015 will be that bad, however. And neither does Hamm.
“I still think this is a short term move,” he says. “This is the Saudis trying to cut the legs out from under people.”
Which people? If the Saudis are trying to take market share from the U.S. producers, why not just come out and say it? “There’s more going on,” says Hamm.
He sees the Saudi move not to cut oil production not as an attack on American producers (the U.S. is Saudi’s protector after all) but more as a volley launched at its true religious and political rivals Iran and Russia. “This is about taking away capital,” says Hamm. “It’s their way of waging war.”
There’s a wildcard that Hamm sees creeping to the top of the deck. And it’s labeled “The law of Unintended Consequences.” Low prices have turned the ruble into rubble, while Iran needs much more oil revenue to keep its economy afloat.
Venezuela too is teetering on the edge of collapse, while Libya remains a basket case. It wouldn’t take much of an oil supply disruption in any of those countries to send prices right back up to match long-term marginal costs of around $100 a barrel.
It’s all about steering around the potholes while keeping an eye way down the road. Which is why Hamm continues to back lobbying efforts aimed at getting the new Congress to lift the crude oil export ban.
“We need to be competing for markets in Asia,” says Hamm. He’s already started. In October Continental cut a joint venture to drill for natural gas in Oklahoma with SK Group, one of Korea’s largest conglomerates, biggest oil refiner, and a natural future customer for American crude oil.