Today, Deutsche Bank analyst Shannon Nome came out with a negative note on Continental Resources (CLR) stating in a note to clients that shares have seen a 167 percent jump year-to-date, which outpaces the average section gain of 37 percent during the same period. She also reiterated her target of $53 which is more than 20% below the current share price. Furthermore, she outlined the “downspacing potential” within the important Woodford Shale and North Dakota Bakken plays and stated that the stock discounts much of this potential.
So lets take a step back and analyze this risk by looking at downspacing. Downspacing is a spacing unit defined as the area which one well can effectively drain. If you put too many well close together, you could effectively drain a portion of your well and reduce the pressure of adjacent wells.
Now in looking at recent CLR reports, It appears they are using 640 acre spacing for ND Bakken
and 80 acre for Woodford Shale which look to be sufficient for that region and has not caused any saturation as yet. I don’t see any evidence that this spacing is a major concern given necessary adjustments can be made if they run into a problematic section. As conspiracy theorists and message boarders like to postulate, it looks like the Analyst is just trying to bring down the stock price so DB clients can load up. Or a more reasonable theory is that she simply thinks that the stock has gotten ahead of itself and needs to be put in the corner for a while with the Dunce cap on.
The important take away for any type of short or mid term CLR investor is that ANY analyst can bring this type of disaster to your holdings at any time. Expect a negative note or downgrade if one of your stocks has made a good run in a short period (0-3 months). Taking a good portion off the table may mitigate this risk and prevent you from throwing up a little in your mouth when you see a downgrade at 7:30 AM and there is nothing you can do about it.