Continental Resources made a strong start in 2009, announcing increased year-end 2008 proved reserves and continued growth in production in the face of weakness in crude oil and natural gas prices. Even better, as I write this letter in June 2009, crude oil prices have strengthened to the $65-to-$70 range, and we are starting to see some signs of hope for a modest economic recovery, and thus increased demand.
For the first quarter of 2009, we reported a net loss of $26.6 million, or $0.16 per diluted share, compared with net income of $88.0 million, or $0.52 per share, for the first quarter of 2008.
Net income included a pre-tax property impairment charge of $35.4 million for the first quarter of 2009, compared with a $4.5 million pre-tax property impairment charge for the first quarter of 2008. Excluding the $35.4 million charge, Continental’s net loss was $4.6 million, or $0.03 per diluted share, for the first quarter of 2009.
We continued to increase crude oil and natural gas production in the first quarter of 2009, with average daily production of 36,808 Boepd, a 22% increase over the first quarter of 2008 and a 2% increase over the fourth quarter of 2008. Production grew despite the continued reduction in drilling activity. Continental is currently operating four drilling rigs, compared with 32 operated rigs in October 2008 and 13 at the beginning of the first quarter of 2009.
Our focus in early 2009 has been to conserve cash and preserve the strength of our balance sheet as commodity prices recover. A significant part of this effort is reducing operating costs. Industry service costs have declined due to the drastic cuts in U.S. drilling activity in the past six months. In the first quarter, we reduced production expense by 13 percent to $7.24 per Boe, compared with $8.33 in the first quarter of 2008. In addition, we expect further reductions in drilling and completion costs.
Continental generated its strongest production growth in the North Dakota Bakken and the Arkoma Woodford plays in early 2009. North Dakota Bakken production was three times higher than production in the first quarter of 2008, while production in the Arkoma Woodford of Southeast Oklahoma was 2.5 times higher than the first quarter last year.
A more thorough discussion of our first quarter results is available in our quarterly report on Form 10-Q (LINK), but I’d like to provide just a quick summary of some first quarter highlights.
We increased production in the Red River Units to 14,162 Boepd in the first quarter of 2009, where we continued to convert producing wells to injector wells as part of our water-flood, secondary recovery program. Under this program, the Company expects production in the Units to peak in 2010 at approximately 17,000 Boepd. The Red River Units accounted for 39% of our production in then first quarter.
Production in the Bakken Shale of North Dakota and Montana was 10,951 Boepd in the first quarter of 2009, a 33% increase over the first quarter last year. Bakken production in the first quarter of 2009 accounted for 30% of the Company’s total production.
Increased Bakken production was concentrated in North Dakota, where production grew 9% from the fourth quarter of 2008 to the first quarter of 2009. On the same sequential basis, Montana Bakken production declined slightly, as expect, due to reduced drilling activity in Montana in the last 12 months and normal well production declines. The Company currently has two operated rigs in North Dakota and none in Montana, compared with the October 2008 peak of 10 rigs in North Dakota and three rigs in Montana.
Continental participated in completing 26 gross wells (7.4 net) in North Dakota during the first three months of 2009.
In terms of Company-operated wells, Continental completed 12 gross wells (5.3 net) in the North Dakota Bakken in the first quarter of 2009, with all but one targeting the Three Forks/Sanish (TFS) zone in the play. Initial production for the TFS wells averaged 503 Boepd in seven-day test periods.
Among these wells, notable completions are shown below with production period test results in gross barrels:
-- Parrish 1-31H (46% WI) in McKenzie Co. – 795 Boepd;
-- Jerome 1-15H (25%WI) in McKenzie Co. – 783 Boepd;
-- Landblom 1-35H (30% WI) in Divide Co. – 648 Boepd;
-- Lawrence 1-24H (53% WI) in Williams Co. – 645 Boepd;
-- Mack 1-2H (77% WI) in McKenzie Co. – 644 Boepd;
-- Myrtle 1-7H (57% WI) in Williams Co. – 603 Boepd; and
-- Rhonda 1-28H (48% WI) in Dunn Co. – 508 Boepd.
In early May, Continental announced five notable wells in McKenzie County after the close of the first quarter. Two were Company-operated wells that targeted the TFS zone:
-- Merton 1-3H (45% WI) – 912 Boepd;
-- George 1-18H (44% WI) – 896 Boepd.
Three other wells were drilled by AMI-partner ConocoPhillips and targeted the MB zone. The following production rates also indicate Continental’s working interests and seven-day test periods:
-- Iron Horse 31-2H (25% WI) – 1,085 Boepd;
-- Sunline 31-12H (25% WI) – 927 Boepd;
-- Waterton 34-32H (20% WI) – 886 Boepd.
As we noted in our first quarter report, Continental has also drilled its first Middle Bakken “companion well” to a TFS producing well. The companion well, the Mathistad 2-35H, has been drilled with a lateral well bore in the MB zone approximately 60 feet above the existing Mathistad 1-35H well bore, which we completed in mid-2008, producing 1,260 Boepd from the TFS zone during its initial seven-day test period.
There is a great deal of anticipation as we frac and complete the Mathistad 2-35. The Company will monitor pressures and performance of both wells during and after completion of the new well to determine whether the MB and TFS zones act as separate producing reservoirs in that part of the play. We believe the two zones are separate and not communicating over most of the play, based on reservoir simulation and fracture modeling. If this proves to be true, it will likely increase our reserves in the play significantly. We plan to provide additional information on this test on our second quarter conference call in early August 2009.
As previously announced, we also commenced a pilot carbon dioxide injection project during the first quarter of 2009 to evaluate the potential for enhanced recovery of oil in Richland County, Montana. Utilizing the huff-and-puff technique, carbon dioxide was injected, and the carbon dioxide and associated fluids are currently flowing back and being analyzed for performance and economics.
Finally, production in the Arkoma Woodford shale play was 4,799 Boepd in the first quarter of 2009, accounting for 13% of Continental’s total production. The Arkoma production volume was 153% higher than that for the first quarter of 2008 and 47% higher than fourth quarter 2008 production. The Company participated in 27 gross wells (4.4 net) during the first quarter of 2009. Continental currently has one operated rig in the Arkoma and one operated rig drilling in the Anadarko Woodford.
In summary, we’ve made a strong start in a challenging environment in the early part of 2009, benefiting from conservative fiscal management as we adapted to low crude oil and natural gas prices.
Today, our outlook for the remainder of the year is increasingly positive as we see crude oil prices strengthening. If the positive trend in oil prices continues to hold, we will likely use our increased cash flow to pay down debt and to ramp drilling activity back up, focusing primarily on the Bakken in North Dakota.
We are positioned for strong growth as the competitive environment improves and look forward to reporting additional successes to our shareholders, employees and friends after the second quarter.
Harold Hamm, CEO