Continental Resources (CLR) Q1 2012 Earnings Call May 03, 2012 10:00 am ET Executives John D. Hart - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer Jeffery B. Hume - President and Chief Operating Officer Jack H. Stark - Senior Vice President of Exploration Analysts Eli Kantor - Jefferies & Company, Inc., Research Division Joanna Park Noel A. Parks - Ladenburg Thalmann & Co. Inc., Research Division Jason Selch Stephen P. Shepherd - Simmons & Company International, Research Division Marshall H. Carver - Capital One Southcoast, Inc., Research Division Andrew Coleman - Raymond James & Associates, Inc., Research Division Hsulin Peng - Robert W. Baird & Co. Incorporated, Research Division Presentation Operator
Please refer to our press release for the company's definition and our reconciliation of EBITDAX to net income.After accounting for an unrealized mark-to-market loss on derivatives, we recorded net income of $69 million or $0.38 per diluted share for the first quarter of 2012. Net income included a $129 million pretax unrealized loss on mark-to-market derivative instruments, a $30 million pretax property impairment charge and a $50 million pretax gain on sale of assets related to our Worland, Wyoming divestiture. Without the combined effects of these noncash items, we would have diluted net income of $0.76 per share for the first quarter of 2012. For the reconciliation of this result to GAAP earnings per share, see non-GAAP financial measures adjusted earnings per share at the end of our press release. There's a table in the press release to reconcile this. Now let's take a moment to address our capital and funding plans for 2012. To begin, the dramatic increase in our oil-focused production base, coupled with strong commodity processes, is enabling us to generate higher levels of cash flows available to fund our capital program. The current increase in our capital budget is consistent and comparable with our announced increase in production guidance. Incrementally generated cash flows will fund the majority of our increased capital spend to the extent that at the end of 2012, we do not anticipate that our debt metrics will materially differ from historical norms. We expect them to be relatively consistent with where they're at now. Continental remains focused on generating long-term sustainable growth while preserving our financial strength and flexibility. The quality of our credit ratios and leverage levels are key aspects of our strategy that we intend to preserve. Moody's and Standard & Poor's recently upgraded our corporate credit to one notch below investment grade. Our goal as a company is to transition Continental to an investment-grade credit. Continental is a unique and distinct company with clear operating advantages, a strong balance sheet and premium assets. Although we are increasing our level of capital spend, it is largely self-funding and focused on long-held organic growth crude oil opportunities. I believe this, along with the remainder of Continental's mission, is clearly understandable, reasonable and transparent.
With that, I'd like to turn it over to Jeff to review our operating results.Jeffery B. Hume Thank you, John. There has been a lot of interest in the last several months about differentials on hot barrels delivered to Clearbrook Minnesota and Guernsey, Wyoming markets and how this market volatility is affecting our net wellhead price realizations. So let's start today with how the transportation picture is changing, gathering systems, pipelines and rail. All of our Red River Unit oil is gathered at the wellhead and piped to Guernsey, Wyoming, where it is marketed. Roughly half of our Bakken oil is currently being railed to markets where it is priced against waterborne barrels, mainly Brent or Louisiana Light Sweet, which has been $17 to $23 higher than WTI during the first quarter of 2012. Obviously, the rail transportation cost is much higher than pipe. It's been running about $20 to $22 per barrel all-in from the wellhead to the ultimate end market. But even though the rail transportation cost is higher than pipeline, delivery to the coastal markets has provided superior net pricing lately due to the recent high differentials experienced at Clearbrook and Guernsey, especially during March and April. With the pipelines currently at full capacity, we anticipate our incremental growth over the next 18 to 24 months will be shipped by rail. And we're having no issues getting railcars and capacity. We reported last night an average oil differential for the first quarter of 2012 of $12.27 per barrel below WTI, which is considerably above our guidance range of $7 to $9 for a year as a whole. Due to the spikes in oil differentials in early 2012 and continued supply-demand volatility at Clearbrook and Guernsey, we now expect average differentials for the year to be in the range of $9 to $11 per barrel. That's the long-haul transportation picture. Now let's talk about local gathering systems. Read the rest of this transcript for free on seekingalpha.com