How Financially Strong Is Continental Resources Inc (NYSE:CLR)?

July 10, 2018
  •  Updated
August 16, 2022
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There are a number of reasons that attract investors towards large-cap companies such as Continental Resources Inc (NYSE:CLR), with a market cap of US$23.37b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, its financial health remains the key to continued success. Today we will look at Continental Resources’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CLR here. See our latest analysis for Continental Resources

Does CLR produce enough cash relative to debt?

Over the past year, CLR has reduced its debt from US$6.51b to US$6.17b – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$98.15m for investing into the business. On top of this, CLR has produced US$2.50b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 40.46%, meaning that CLR’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CLR’s case, it is able to generate 0.4x cash from its debt capital.

Can CLR meet its short-term obligations with the cash in hand?

With current liabilities at US$1.39b, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.93x, which is below the prudent industry ratio of 3x.

NYSE:CLR Historical Debt July 10th 18
NYSE:CLR Historical Debt July 10th 18

Does CLR face the risk of succumbing to its debt-load?

With total debt exceeding equities, Continental Resources is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether CLR is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In CLR's case, the ratio of 2.52x suggests that interest is not strongly covered. The sheer size of Continental Resources means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as CLR’s low interest coverage already puts the company in a risky position.

Next Steps:

Although CLR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure CLR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Continental Resources to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CLR’s future growth? Take a look at our free research report of analyst consensus for CLR’s outlook.
  2. Valuation: What is CLR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CLR is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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Continental Resources

Continental Resources, Inc. explores for, develops, produces, and manages crude oil, natural gas, and related products primarily in the north, south, and east regions of the United States.

Solid track record and fair value.