NEW BEARISH Plays
Continental Resources - CLR - close: 30.69 change: -0.80
Stop Loss: 33.05
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 20, 2015
Time Frame: Exit
Average Daily Volume = 3.4 million
New Positions: Yes, see below
Unless you have been living under a rock for the last year then you already know crude oil is getting crushed. Oil is down nearly -60% from its 2014 highs. Today oil closed at $40.94 a barrel. More and more we are hearing analysts forecasting oil in the low $30s. A few outliers are suggesting oil in the $20s or even lower. That's because so far none of the oil producers have been willing to cut production.
OPEC is producing as much oil as they can. Russia is producing as much as they can. Iraq is boosting its production. If the Iran nuclear deal gets approved then they will start unloading more oil on the market. The problem is that all of these producers are desperate. They need the cash flow. OPEC has been trying to price U.S. producers out of the market but American energy companies have been resilient and U.S. production remains near all-time highs.
Put it all together and we have high oil production as demand stalls. The global economy, especially China, is slowing down. That means less demand for oil. Add to that a rising dollar and you have a very bearish recipe for commodities. Today oil is trading at levels not seen since 2009. The market is worried that crude oil won't bottom until we see a number of bankruptcies in the U.S. energy sector. Anyone with a high debt load is being seen as a risk.
CLR is in the basic materials sector. According to the company,
"Continental Resources (CLR) is a Top 10 independent oil producer in the United States and a leader in America's energy renaissance. Based in Oklahoma City, Continental is the largest leaseholder and one of the largest producers in the nation's premier oil field, the Bakken play of North Dakota and Montana. The Company also has significant positions in Oklahoma, including its SCOOP Woodford and SCOOP Springer discoveries and the Northwest Cana play. With a focus on the exploration and production of oil, Continental has unlocked the technology and resources vital to American energy independence and is a strong free market advocate in favor of lifting of the domestic crude oil export ban. In 2015, the Company will celebrate 48 years of operations."
The plunge in oil prices is very evident in CLR's revenues. Their 2014 Q4 results saw revenues down -0.1% to $902.3 million. 2015 Q1 revenues were down -41% to $592.8 million. 2015 Q2 revenues were down -30% to $790 million.
The trend is lower. While we are short-term bearish on the stock I have to give credit to CLR for their ability to manage costs. The company has been doing a great job cutting expenses and boosting efficiencies. Through the first half of 2015 CLR has managed to reduce their costs by -20%. They see further efficiencies throughout 2015 and just lowered their estimated cost per barrel of oil by another $1.00.
When oil finally finds a bottom CLR should be a winner. Unfortunately, in the meantime, investors are selling everything in the oil business. CLR's high debt load, about $7 billion, is a negative. Bulls can argue that yes, CLR has high debt, but none of it is due until 2019. Hopefully by then crude oil will have recovered.
The challenge is that crude oil may not recover any time soon. There is a growing camp of analysts forecasting oil in the $30s for much of 2016. That's bad news for CLR. The company's CEO Harold Hamm said if crude oil is under $50 a barrel they will have cash flow issues (outspending their cash inflow).
Technically the trend for CLR's stock is down. Shares of CLR have declined toward major support near $30.00. A breakdown here would be very bearish. A drop under $30.00 would also generate a new sell signal on the point & figure chart.
My biggest concern is volatility in the stock. There are already a lot of investors who are bearish on CLR. The company has 370 million shares outstanding but only 82 million shares in their float. The most recent data listed short interest at 18% of the float. Traders may want to use options to limit their risk. Tonight I am suggesting a trigger to open bearish positions at $29.85.
Trigger @ $29.85
- Suggested Positions -
Short CLR @ $29.85
- (or for more adventurous traders, try this option) -
Buy the DEC $28 PUT (CLR151218P28) current ask $3.00
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike