Continental Resources, Inc.

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Continental Resources, Inc.

302 North Independence Street
Enid, Oklahoma 73702
U.S.A.
Telephone: (580) 233-8955
Toll Free: (800) 256-8955
Fax: (580) 548-5253
Web site: http://www.contres.com

Public Company
Incorporated: 1967 as Shelly Dean Oil Company
Employees: 286
Sales: $483.7 million (2006)
Stock Exchanges: New York
Ticker Symbol: CLR
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

EXPANDING FROM OKLAHOMA ORIGINS

UNCONVENTIONAL EXTRACTION METHODS FORMING STRATEGIC FOCUS

BIDING TIME WITH BROAD-BASED DEVELOPMENT

ROCKY MOUNTAIN SUCCESS LEADING TO INITIAL PUBLIC OFFERING

PRINCIPAL SUBSIDIARIES

PRINCIPAL COMPETITORS

EXPANDING FROM OKLAHOMA ORIGINS

Continental Resources, Inc., originated as Shelly Dean Oil Company in 1967, during one of Oklahoma’s booms in oil and gas discoveries. The company became Hamm Production Company in 1976, when Harold Hamm obtained ownership. The company focused on resource development exclusively in Oklahoma during the first 20 years of operation, with a majority of wells extracting natural gas in the Anadarko Basin. Just as it began to pursue geographical expansion of its oil and gas development activities, the company took the name Continental Trend Resources in 1987, then simply Continental Resources in 1991.

Continental’s expansion involved a particular interest in oil well development and gas production services, to counter changes in the natural gas pricing. Disgruntled with overproduction of natural gas in Oklahoma, which flooded the market at unprofitable pay rates, Hamm guided the company toward expansion into oil development beginning in 1988, initially in eastern Montana’s Lustre field. Continental increased its interest in that area through a successful bid in 1992 for an interest in 27 oil wells owned by Exxon USA. Located in Montana’s Lustre and Midfork fields, gross production of the wells averaged 350 barrels of oil per day. After legislation regulated gas production and restrained underpricing, Continental renewed its interest in gas development as an avenue of growth. In 1990, the company formed a subsidiary, Continental Gas, Inc., for the purpose of providing ancillary services to the gas industry. These services included gas marketing as well as construction of gas pipelines, gas gathering systems, and gas plants. Also, in 1992, Continental purchased 60 gas wells from ARCO Oil and Gas. Continental paid approximately $2.5 million for the wells, located on the Sooner Trend in north central and northwest Oklahoma. The acquisition brought Continental’s well ownership to slightly more than 500, not including partial interests in almost as many wells. A year later Continental announced the completion of three productive wells, in the Arbuckle field at Sooner Trend. Together the three wells supplied 992 barrels of oil and 355,000 cubic feet of natural gas per day.

Continental’s expansion plans involved technological development in the use of alternative extraction methods, such as horizontal drilling. Horizontal drilling involved vertical drilling that turned at an angle, up to 90 degrees, in order to gain more effective access to underground oil or gas by aligning the drill hole and wellbore with the shape of the reservoir. Continental improved the technology, and then applied the technique successfully in its home state, drilling under Oklahoma City and the towns of Enid and Chickasha, as well as in the Mississippian, Tonkawa, and Austin formations in the Anadarko Basin in western Oklahoma and the Texas Panhandle. Thus Continental developed a strategy to purchase properties with wells nearing peak production in order to pursue secondary oil recovery with alternative extraction methods.

UNCONVENTIONAL EXTRACTION METHODS FORMING STRATEGIC FOCUS

In 1993, Continental made its first substantial acquisitions outside of Oklahoma, and most of the properties were suitable for alternative extraction of secondary reserves. The company purchased oil and gas interests along the Gulf Coast, in Texas and Louisiana; however, the company focused primarily on exploratory drilling. Marginal properties amendable to experimentation with different extraction techniques involved properties acquired in the Rocky Mountain region. Continental acquired significant acreage for oil exploration and existing oil wells in the Williston Basin, an area that overlapped the states of South Dakota, North Dakota, and Montana. Many sites of oil production would peak shortly after acquisition and secondary recovery could begin. At various well locations, the company applied horizontal drilling, water injection, or air injection, also known as “fire flooding.” Horizontal drilling was most effective at the Red River “B” play, but air injection emerged as the preferred method overall.

To gain access to air-injection technology, Continental acquired 50,000 acres of mineral rights from Koch Exploration in 1995. Koch pioneered high pressure air injection (HPAI) in 1978, and ten of the 154 wells included in the northwestern South Dakota property operated with HPAI. Koch’s HPAI method involved the use of generators to compress 4,500 pounds per square inch of air for injection into an oil or gas well. When oxygen in the air encounters the heat at the bottom of the well, at 200 to 215 degrees Fahrenheit, some of the oil ignites, producing nitrogen and carbon dioxide. These gases push the remaining oil out of the reservoir surrounding the injector wellbores. Satisfied with the potential of the HPAI technology, Continental purchased the patents from Koch in 1996 and used existing wells to experiment with new air injection methods.

COMPANY PERSPECTIVES

At Continental, we combine creative expertise, advanced technology, and innovation in horizontal drilling to unlock oil and natural gas reserves from unconventional formations in several basins of the U.S.

Our strategy proves that hard work, determination, and the ability to think “outside the box” can and does yield powerful results.

COMPANY PERSPECTIVES

Our strategy proves that hard work, determination, and the ability to think “outside the box” can and does yield powerful results.

Over time, Continental developed an HPAI process that differed from conventional applications. Usually, HPAI applied compressed air at the surface of the well, but Continental began to inject air deep into the reservoir itself. This method created ancillary recovery mechanisms that made the oil extraction process more efficient. For instance, the “fireflood” tends to burn heavy oil which would otherwise be unrecoverable. Thus, the 6 to 10 percent of the oil burned to create the chemical explosion is made useful. Also, the heat disperses heavy crude, allowing lighter oil to rise more quickly to the surface. Furthermore, heat contact with water in the lower depths of the geological formation generates steam which assists the movement of oil to the surface. Applying the method in conjunction with horizontal drilling at marginal wells in the Buffalo and Medicine Pole Hills fields in South Dakota’s Williston Basin, Continental recovered an average of 30 barrels of oil per day, more than twice production levels of conventional extraction.

While the value of HPAI depended on the price of crude oil, which would have to be enough to compensate for high operating costs, success with the improved HPAI led Continental to seek other properties suitable to the technology. In 1996, the company purchased 19 oil and gas wells in Kansas and New Mexico and planned to apply the technique there when it became economically feasible. A private offering of $150 million in senior subordinate notes supported the 1998 purchase of oil development interests at Big Horn Basin in northern Wyoming. The acquisition involved 292 producing wells for a purchase price of $86.5 million; Hamm then acquired a 50 percent interest from Continental through another company he owned, Hi-land Partners. Big Horn Basin comprised the fourth largest oil producer in the Rocky Mountain region at that time. As such, it promised to provide abundant primary and secondary oil recovery opportunities for Continental.

One of the few companies to successfully implement alternative methods of oil extraction, Continental operated half of all HPAI projects in North America at the end of 1998. The successful application of precision horizontal drilling at 167 wells, often in conjunction with HPAI technologies, increased recoverable reserves at Continental’s properties as much as 400 percent. Continental estimated proved oil reserves at 29.1 MMBoe, of which the Rocky Mountain region interests comprised nearly 67 percent of total estimated reserves. Production of 5.1 MMBoe in 1998 derived from 1,254 wells, including 1,033 operated by the company. Moreover the company held interest in 551,000 net acres, with 62 percent still undeveloped.

BIDING TIME WITH BROAD-BASED DEVELOPMENT

While properties in the Rocky Mountain region would eventually provide the foundation for significant growth at Continental, initial progress was slow. At the Willis-ton Basin, Continental successfully recompleted two wells at the Worland field in 1999, and vertical drilling at the Slick Creek Federal Well No. 2-1 increased production from three barrels per day to 45 barrels per day. Notably, horizontal drilling at the Nowater Creek Well No. 19 increased production from 18 barrels per day to 85 barrels per day. Continental expected the success at Nowater Creek to lead to further similar developments at the Worland field.

KEY DATES

1967:: The Shelly Dean Oil Company is founded.
1976:: The company becomes Hamm Production Company, with Harold Hamm as president.
1991:: Taking the name Continental Resources, the company makes its first acquisition outside of Oklahoma; experiment with horizontal drilling results in strategic emphasis on secondary recovery.
1993:: Continental ventures into Rocky Mountain region with acquisition of Williston Basin properties.
1996:: Continental acquires high-pressure air-injection technology and begins experimenting with its applications for horizontal drilling.
1998:: Continental acquires interests at Big Horn Basin in Wyoming.
2003:: Combination of horizontal drilling and air injection at the Cedar Hills field significantly increases oil reserves.
2007:: Initial public offering of stock garners $133 million in capital.

To offset risks in unconventional oil well development in the Rocky Mountains, Continental increased its activities in the Gulf Coast with the idea of increasing natural gas production in order to obtain a high rate of return on investment. Between 1993 and 1998, the company had identified 28 potential drilling locations. Through a joint venture with Challenger Minerals, Inc., Continental began drilling offshore in July 1999. Exploratory drilling continued, resulting in seven producing wells and seven dry holes. At the end of 2001, the activity totaled 22 locations in Texas and one in Louisiana. In 2002, Continental directed approximately three-quarters of its exploration budget to Gulf Coast interests.

Acquisitions outside of the Rocky Mountains continued to be a source of growth at Continental. In July 2000, the company concluded the acquisition of all assets from Farrar Oil Company, including Har-Ken Oil Company, for a total compensation of $33.7 million. The venture into southern Illinois, southern Indiana, and eastern Kentucky involved reserves, estimated at 4.6 million barrels of oil and seven billion cubic feet of natural gas. Hence, Continental increased production by 15 percent and reserves by 13 percent. With the addition of Farrar’s 568 producing wells, Continental’s total operated wells rose to 2,232. Farrar assets included 232 dormant wells. Also, Continental expanded its natural gas services with the $12 million acquisition of Carmen Gathering System in western Oklahoma in August 2003.

ROCKY MOUNTAIN SUCCESS LEADING TO INITIAL PUBLIC OFFERING

By 2003, project developments in the Rocky Mountain region progressed, particularly at the Cedar Hills field in North Dakota and Montana. A dense dolomite layer hindered full oil recovery with conventional, vertical drilling, and primary oil recovery had peaked at 9,000 barrels per day in the fall of 1997. After much study, in 2001, Continental concluded that the characteristics of the oil and reservoir would sustain an HPAI system in combination with horizontal drilling. Continental’s engineers estimated that the recovery rate of vertical wells would be approximately 48 percent, such as at the Buffalo field, compared to possible recovery up to 70 percent by using horizontal wells as air injectors. The project involved laying several hundred miles of steel pipe to deliver air into the well reservoir. The company constructed an automated air-compression plant which injects 29 million cubic feet of air into the reservoir on a daily basis. The plant provided water injection into outlying wells at a rate of 5,500 barrels per day; however, Continental was less satisfied with this method of secondary oil recovery. Nevertheless, the total system of unconventional extraction effectively increased oil recovery from a low of 2,619 barrels per day in late 2003 to 6,500 barrels per day in early 2005, with 57 horizontal HPAI wells, 14 water-injection wells, and 86 conventional oil wells in operation. Given the increased recovery rate of the unconventional methods, Continental estimated the field would be productive for 25 to 35 years. On the strength of the Red River B resource plays, the Cedar Hills field became Continental’s largest asset, accounting for nearly half of the company’s proved reserves and a quarter of its daily production.

Another significant resource play emerged in the Bakken field in North Dakota and Montana, where Continental acquired several leases covering 402,000 net acres during 2003 and 2004. The strategy at this location involved identifying a potential play early, then entering into lease agreements before the price increased, as occurred in 2005. Moreover, the Bakken shale formation, which had not been economically viable with conventional extraction, proved to be highly successful with a combination of horizontal drilling and advanced fracture stimulation. Fracture stimulation involved the hydraulic fracturing of the shale formation in order to gain access to the oil reservoir.

Acquisitions in other regions reflected Continental’s interest in unconventional extraction with advanced fracture stimulation as applied to natural gas production. The company acquired acreage at shale formations in Oklahoma, Illinois, and Texas. At these sites, the company combined horizontal drilling with fracture stimulation. At New Albany Shale in Illinois, Continental’s exploratory horizontal well revealed an uncommercial rate of flow. In April 2006, the company acquired a 50 percent interest in the Marfa Basin in southwest Texas. Continental discovered natural gas under a 600-foot-thick shale formation; however, the rate of flow required Continental to place further development on hold, until production would be commercially viable. Continental’s 30 percent ownership at the Woodford Shale in Oklahoma proved to be the most successful of the natural gas ventures. Between 2003 and early 2007, the company completed 110 horizontal natural gas wells, and initial production ranged from 125 to 8,700 Mcf of natural gas per day. Of the 110 wells, 34 were developed for continuing production, operating at an average flow rate of 3.3 Mcf per day.

Over the long run, oil proved to be Continental’s primary source of growth, as resource plays in the Rocky Mountains contributed to significant increases in revenues and net income between 2003 and 2006. In 2005 alone, oil production rose 55 percent, to 5.71 million barrels of oil. Moreover, the Red River B resource play accounted for 71 percent of oil and natural gas revenues which doubled from $181.4 million in 2004 to $361.8 million in 2005. From a total revenue base of $375.8 million, which included gas gathering service, Continental garnered net income of $194 million in 2005. High oil and gas prices facilitated the dramatic increases. Oil, which accounted for 79 percent of oil and gas sales, reaped an average price of $52.45 per barrel in 2005, in contrast to $38.85 in 2004. Natural gas sold at $6.03 per cubic foot in 2005, in contrast to $5.06 in 2004. Similar economic and resource conditions continued in 2006, which saw oil and gas sales increase by 30 percent to $468.6 million, for total revenues of $483.7 million and net income of $253.1 million.

Continental sought to capitalize on this success with an initial public offering (IPO) of stock. In March 2006 Continental announced plans for an initial public offering of stock, intending to raise $575 million. Continental and CEO Harold Hamm prepared a combined offering of 29.5 million shares on the New York Stock Exchange. Finally, in May 2007, Continental completed its offering. From 8.5 million company shares, priced at $15 per share, Continental raised $133 million. The sale of Hamm’s stock raised $310 million, making him a billionaire and the second wealthiest man in Oklahoma. Hamm retained a 61 percent ownership in the company and a family trust maintained another 9 percent interest.

The infusion of capital from the IPO provided funds for continued exploratory drilling and new well development. The company planned to drill an additional 123 wells at the Woodford Shale in 2007, an additional six wells in the long-productive Anadarko Basin, 22 wells at the Illinois Basin, four wells at Big Horn Basin, and three wells at Red River B in the Cedar Hills field. In addition, Continental anticipated drilling 127 horizontal wells and 36 horizontal extensions at existing wells in the Red River area between 2007 and 2010.

Mary Tradii