Oil news: Falling oil prices force Continental Resources Inc. to cut its 2015 budget (again)

It’s amazing how quickly things change in the energy industry. In September, Continental resources (NYSE: CLR) announced that it is stomping on the accelerator and increasing its capital spending plan for the remainder of 2014, while also increasing its spending plan for 2015. Now, a few months later, the company is again cutting its spending plan for 2015 as it reacts to the relentless sell-off in oil prices, which has brought down its stocks with it.

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Continental Resources’ revised capital budget for next year is a dramatic reduction from the company’s starting point in September. At that time, the company had just accelerated its spending plan for 2014, from its initial forecast of $ 4.05 billion to $ 4.55 billion. On top of that, he announced that his 2015 budget would be further accelerated to $ 5.2 billion. These funds would be used to increase production by 26% to 32% from its 2014 level.

However, when oil prices started to fall, so did the company’s budget. In November, the company cut its 2015 budget to $ 4.6 billion, which is roughly what it spent in 2014. However, given the relentless fall in oil prices, the company is cutting now its 2015 plan at $ 2.7 billion. This is an almost 50% reduction in expenses from where they were originally, which is actually in line with the reductions we’re seeing with many other shale-focused producers. That being said, even with these deep cuts, the company still plans to increase production by 16-20% next year.

Bold bet gone wrong
One of the reasons Continental Resources is cutting its budget so dramatically is that it plans to align its spending with its cash flow. That cash flow is expected to drop significantly after the company’s bold gamble to cut its oil hedges appears to have returned and burned the company down as oil prices continue to fall. Without protection against falling oil prices, the company had to adjust its spending to avoid taking on debt to finance the difference if prices did not improve.

Continental Resources wants to avoid taking on more debt as there is growing concern that energy-related debt could be a big problem down the road if oil prices don’t improve. The company wants to avoid some of the problems its peers face by maintaining its good credit rating, which was upgraded to investment grade late last year. The only way to do it now is to slow down spending until the oil market improves. This is the right decision because it should ensure the survival of the company if the oil market remains depressed for a long time.

Takeaway for investors
Continental Resources is taking the necessary steps to control spending until the oil market stabilizes. While the company might not have had to cut spending so dramatically if it hadn’t cashed in its oil hedges, it is avoiding at least a second mistake by closing the debt gap. This will at least allow the company to accelerate its spending whenever the oil markets recover in the future.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Steve R. Hansen

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