By ERIN AILWORTH, GREGORY ZUCKERMAN and DANIEL GILBERT WSJ
Dec. 9, 2014 12:35 p.m. ET
Harold Hamm ’s willingness to make risky bets helped him build Continental Resources Inc. into the one of the biggest oil producers in North Dakota’s Bakken Shale and a symbol of the U.S. energy boom. But his latest gamble—a quick rebound in crude prices—is rubbing some investors and analysts the wrong way.
Mr. Hamm, who founded Continental and owns 68% of its shares, announced in early November that the company had cashed in almost all of its financial hedges that guaranteed it could sell millions of barrels of oil for about $100 apiece. The company said it had realized $433 million in cash from selling the hedges, some of which ran through 2016.
Oil Futures Arrest Slide
“We feel like we’re at the bottom rung here on prices and we’ll see them recover pretty drastically, pretty quick,” Mr. Hamm said on a Nov. 5 call with analysts. He said the Organization of the Petroleum Exporting Countries was pushing down oil prices to slow America’s expanding energy output.
Now, removing the hedges, known in the industry as “going naked,” looks misguided even to some of the company’s fans, after the recent tumble for oil prices. The benchmark price for U.S. oil has continued to slide, falling from $81 in late October to $63.82 on Tuesday.
If Continental had kept the contracts that insured it against lower crude prices, it could have reaped $52 million more for its oil in November, according to a Wall Street Journal review of company disclosures. And it might have received $75 million more this month, assuming current conditions continue.
The Journal’s calculation of about $127 million in forgone revenue is similar to projections by several Wall Street analysts, and those projections would continue to rise in the coming months if oil prices remain below $96 a barrel.
The company said it disagreed with the Journal’s figures but wouldn’t provide its own, except to say that after figuring in revenue it received for selling its hedges, it expects the “net negative effect” to be $25 million to $30 million in November and December. It sold nearly $1.2 billion of oil and gas in the third quarter and reported net income of $533 million.
“It was a bad move with terrible timing,” said Gregg Jacobson, a portfolio manager at Caymus Capital Partners LP, a $200 million Houston hedge fund manager that had about 4.5% of its portfolio in Continental shares as of the end of the third quarter. Though he thinks the hedging sale will prompt some investors to view the company as unusually risky, Mr. Jacobson said he remains a supporter because of its executives’ skill in finding and drilling for oil.
“In the long run, the stock will respond to how they perform in the field,” he said.
While shares of many U.S. energy producers have had double-digit percentage declines since oil prices began falling in late June, Continental’s stock has been hammered. Its shares, which closed up 7.2% at $36.18 on Tuesday, have fallen by more than half since the end of August, and more than 25% since Mr. Hamm disclosed on Nov. 5 that the company had sold the hedges.
Mr. Hamm said in an interview that he still believes his bet could pay off but that it might take as many as two years to tell. “You can’t condemn that as a bad decision,” he said. “You haven’t seen it play out.”
Companies like Continental can react quickly to market changes, he said, which gives them an advantage over OPEC’s members. The cartel is discounting “the resiliency of U.S. producers,” he said, adding that investors “need to look at Continental long-term.”
A wildcatter—he has called himself an “explorationist”—Mr. Hamm started the company that would become Continental in 1967 and first struck oil in 1971 in Oklahoma. More than two decades ago, he began focusing on exploring the then-little-known Williston Basin, which stretches from South Dakota to the Canadian province of Saskatchewan. Over time, his company became a leader in the Bakken formation in North Dakota, which has become one of the biggest oil fields in the U.S.
Continental produced nearly 35 million barrels of oil last year, almost four times what it was producing five years earlier. That growth has helped push U.S. oil output to more than 9 million barrels of crude a day, up from 5 million in 2008.
Though Continental has become a leader of the U.S. energy boom, it is unusual. Institutional and activist investors have curbed some of the risk-taking of wildcatters at other energy outfits, and few companies of Continental’s size remain controlled by their founders.
Continental said it had 5.2 million barrels insured in November and December at an average price of about $100.
When oil prices are falling, hedges—contracts that many energy companies buy to protect against declining prices by guaranteeing a minimum price for the oil and gas they produce—become much more valuable. Continental notes that several of its competitors aren’t hedged, including Apache Corp. , which has no hedges on the books in 2015. Apache said it does have some production insured through the end of this year.
Mr. Hamm isn’t the first energy executive to abandon hedges. Under the leadership of former CEO Aubrey McClendon , Chesapeake Energy Corp. dropped its natural-gas hedges in 2011, leaving it exposed to a dismal gas market and dealing with a cash crunch the following year.
‘It was a bad move with terrible timing… In the long run, the stock will respond to how they perform in the field’
—Gregg Jacobson, a portfolio manager at Caymus Capital Partners
Continental isn’t likely to face a liquidity crisis—its debt is smaller than many of its competitors at about 1.7 times its cash flow, according to S&P Capital IQ. And the company has $1.75 billion in unused credit, recent financial filings show.
“They’ve built such a good balance sheet, they have the luxury of making this gamble,” said Jason Wangler, an analyst for Wunderlich Securities, who called the move a speculative bet. “They left money on the table in the short term.”
Mr. Hamm, he said, is “the guy you’re investing in, as much as the company.”
Since selling Continental’s hedges, Mr. Hamm has lost about $4.4 billion of his personal fortune as Continental’s shares have fallen—a loss that could be compounded by Mr. Hamm’s divorce. A judge recently awarded the former Mrs. Hamm, Sue Ann Arnall, a nearly $1 billion settlement; she appealed that decision on Friday. Mr. Hamm now owns about $9.2 billion of company stock.
Some investors say Continental’s primary acreage in the Bakken and elsewhere renders the hedging decision less important in the long-term.
“Cash flow next year will be lower and more volatile, assuming prices stay under pressure,” said Joe Chin, an analyst at Obermeyer Wood Investment Counsel LLLP, an Aspen, Colo., firm that owned 340,000 Continental shares at the end of the third quarter. “But we remain confident about management’s ability to deploy capital.”
Write to Erin Ailworth at Erin.Ailworth@wsj.com, Gregory Zuckerman at firstname.lastname@example.org and Daniel Gilbert at email@example.com
Four Days That Inspired Torre’s Four Rings
By TYLER KEPNER AUG. 21, 2014 NY Times
See Joe Torre’s Interview
The Yankees retired Joe Torre’s number in a ceremony at Yankee Stadium. The New York Times’s Tyler Kepner recently interviewed Torre about his long baseball career. Video Credit By Vijai Singh and Tyler Kepner on Publish Date August 21, 2014.
We measure greatness by championships, so the four that Joe Torre won as the manager of the Yankees are the cornerstones of his career, which the team celebrates on Saturday by retiring his No. 6 and unveiling a plaque in Monument Park.
But there is so much more to Torre, on the field and off. He reached the postseason in all 12 of his seasons with the Yankees, who now face the possibility of another dark October in the Bronx. If the standings hold, Joe Girardi’s Yankees will miss the playoffs for the third time in seven seasons.
This is less a reflection on Girardi than a commentary on the realities of the modern game. With more money to go around, fewer stars reach free agency in their primes. Fewer teams need to trade productive players to the Yankees for salary relief. Without a steady flow of dynamic homegrown talent, the Yankees have struggled to stand out from the pack.
Their consistent ability to do so under Torre was a happy coincidence of so many factors unlikely to be repeated: the suspension of a meddling owner in 1990; the development of four Hall of Fame candidates from the farm system who arrived in 1995; an economic system more favorable to the Yankees; and so on.
Joe Torre was inducted into the Baseball Hall of Fame in July. Credit Jim McIsaac/Getty Images
But it also had a lot to do with Torre, and the intersection of personal and professional factors that made him the right man at the right time — with the right players, of course.
The story arc of Torre’s life has been well told, by Torre himself and many others. Yet it is still staggering to remember where Torre was in the fall of 1995, when he replaced Buck Showalter after the Yankees’ playoff knockout by the Seattle Mariners.
Torre played for and managed three teams — the Atlanta Braves, the St. Louis Cardinals and the Mets — and all of them had fired him. He was 55 years old, between homes and jobs, living in Cincinnati because his wife, Ali, had family there. He was the new manager of the Yankees, the latest team to look to him for guidance.
It had been this way since Torre’s days on the sandlots of Brooklyn. People gravitated to him then, Torre said, simply because his brother Frank was a major leaguer, and that gave him credibility. But deep down he never really understood his appeal as a leader, not even when the Cardinals made it official when he was a player.
“They named me captain, along with Lou Brock, which really shocked me, because I didn’t have a great deal of confidence in myself,” Torre said recently in an interview at the offices of Major League Baseball, where he works as executive vice president for baseball operations.
He added: “And so when they named me captain it really got my attention, saying, somebody must see something in me that I didn’t really see in myself.”
People kept seeing it, so strongly that Torre was given his first managing job, with the Mets, before he was even done playing. But it was not until that off-season in 1995 that Torre could see himself for what he was, and allow his best version to be the one the Yankees got.
Torre grew up in fear of his abusive father. He is famous for baseball, but his transformation as a man triggered his greatest contribution. Torre is a master storyteller, so here is how it came about, in his words, edited just a bit for clarity:
“I felt in my early career as a player that I had to perform to feel validated,” Torre said. “If I didn’t get a hit, or if I made an error, my mind-set was, ‘I lost this game,’ or, ‘I didn’t do enough to help us win this game.’ And, trust me, I had a lot of guys slap me on the back of the head and say, ‘Come on, let’s go,’ ’cause if I had a bad day and we were going over to one of the player’s houses for dinner or something, I didn’t want to go, and they’d drag me by the arm. And when I did do well I felt good about myself. It was like hills and valleys.
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Joe Torre seems to be a class act…but am I the only one who thinks of Roy White when I think of #6?
A roll model, a leader, a Christian gentleman whose measure will be considerably broadened in history.
Tim Hunter Yesterday
Great Player, Great Manager….Greater Human Being!
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“And it wasn’t until ’95 — you know, for me, there’s a God up there — because my wife was pregnant with our daughter. And we were living in Cincinnati, temporarily, because I was looking for a job. And by the time December rolled around, I had one with the Yankees for the following year. And Ali said to me, ‘How about going to this seminar?’ And I said, ‘Sure.’ I had no clue what it was about. The only thing I know is your wife’s eight months pregnant and she said, ‘Do you want to do something?’ And I said, ‘Yeah.’
“So we go, and it’s a self-help thing. I was very uncomfortable walking in, because they’re a bunch of strangers. I’m a little self-conscious to begin with. And all of a sudden they split you up in groups, and I’m not with my wife’s group. And there were like four days, it was Thursday to Sunday, and I guess it was Day 3, I’m standing in front of perfect strangers crying my eyes out.
“I don’t even remember what caused it, but obviously, one of the speakers was speaking on the subject. And it wasn’t only about domestic violence or whatever. I mean, if people wanted to go there to quit smoking, it was whatever you wanted to improve your life with. And this came out of left field for me. And I started crying, because at this point in time I realized a lot of my insecurities — low self-esteem, a lot of nervousness when I was a kid growing up — seemed to be caused by what was going on in my home with my dad abusing my mom. And I was witness when I was like 9 years old or something, him going for his gun. He was a cop, going for his gun and threatening my mom and my sister.
“So I started talking about it, which people don’t do, even to this day. Once I realized I wasn’t born with these feelings of being inferior, which is the way I categorized them, I was excited. Because now I found out that, ‘O.K., I’m normal like everybody else.’ I just had something that — and not that I’m blaming my father — but at least I knew that this was created as I was a kid growing up. So it was a freedom to talk about it because I could just say, ‘Hey, yeah, this went on in my life.’ ”
Torre added, later: “I had friends growing up who had no clue what was going on in my house. And I didn’t want to share it. I was embarrassed by it, and I thought I caused it because there was a lot of whispering in my house. So finding out all these things weren’t true, it was sort of like you wanted to shout it from the rooftops.”
Torre would go on to do that, figuratively, by using his platform as the Yankees’ manager to start a foundation, Safe at Home, in 2002, to help victims of domestic violence. There are 10 safe rooms, named for Torre’s mother, at schools in New York, New Jersey, Westchester County and Los Angeles. He said 50,000 children have come through the Safe at Home programs.
The calming presence in the corner of the dugout, the master clubhouse communicator, the charming public figure, all of those roles were hard-earned for Torre. The steward of baseball’s last true dynasty has a permanent place in Yankees lore and a deeper, more important legacy than he ever could have imagined in 1995.