Organization and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and summary of significant accounting policies

Note 1. Organization and Summary of Significant Accounting Policies

Description of the Company

Continental Resources, Inc. (the “Company”) was formed in 1967 and is incorporated under the laws of the State of Oklahoma. The Company’s principal business is the exploration, development, management, and production of crude oil and natural gas and associated products with properties primarily located in four leading basins in the United States – the Bakken field of North Dakota and Montana, the Anadarko Basin of Oklahoma, the Permian Basin of Texas, and the Powder River Basin of Wyoming. Additionally, the Company pursues the acquisition and management of perpetually owned minerals located in certain of its key operating areas.

2022 Take-Private Transaction

On November 22, 2022, the Company completed a series of take-private transactions with Omega Acquisition, Inc, an entity owned by the Company’s founder, Harold G. Hamm, pursuant to which the Company became wholly owned by Mr. Hamm, certain members of his family and their affiliated entities (the “Hamm Family”). A total of approximately 58.1 million shares of Continental’s common stock were purchased pursuant to the take-private transaction for total cash consideration of approximately $4.31 billion. The 2022 purchase of outstanding shares was funded by Continental through the use of approximately $2.2 billion of cash on hand, $1.3 billion of credit facility borrowings, and the execution of a $750 million three-year term loan. See the Consolidated Statements of Equity for the year ended December 31, 2022 for the impact on the components of Shareholders’ Equity resulting from the take-private transaction. The Company incurred $32 million of legal and advisory fees in 2022 in connection with the take-private transaction which are included in the caption “Transaction costs” in the Consolidated Statements of Income for the year ended December 31, 2022.

Following the consummation of the transactions in November 2022: (i) our common stock ceased to be listed on the New York Stock Exchange, (ii) our common stock was deregistered under Section 12(b) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), and (iii) we suspended our reporting obligations under Section 15(d) of the Exchange Act. As a result, certain of the corporate governance, disclosure, and other provisions applicable to a company with listed equity securities and reporting obligations under the Exchange Act no longer apply to us. We will continue to furnish Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K with the SEC as required by our senior note indentures.

Basis of presentation of consolidated financial statements

The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a controlling financial interest. Intercompany accounts and transactions have been eliminated upon consolidation. Noncontrolling interests reflected herein represent third party ownership in the net assets of consolidated subsidiaries. The portions of consolidated net income and equity attributable to the noncontrolling interests are presented separately in the Company’s financial statements. For financial reporting purposes, the Company has one reportable segment due to the similar nature of its business, which is the exploration, development, and production of crude oil, natural gas, and natural gas liquids in the United States.

Investments in entities in which the Company has the ability to exercise significant influence, but does not control, are accounted for using the equity method of accounting. In applying the equity method, the investments are initially recognized at cost and are subsequently adjusted for the Company’s proportionate share of earnings, losses, contributions, and distributions as applicable.

The Company evaluated its December 31, 2023 financial statements for subsequent events through February 22, 2024, the date the financial statements were available to be issued.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure and estimation of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. The most significant estimates and assumptions impacting reported results are estimates of the Company’s crude oil and natural gas reserves, which are used to compute depreciation, depletion, amortization and impairment of proved crude oil and natural gas properties.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in accounts that may not be federally insured. As of December 31, 2023, the Company had cash deposits in excess of federally insured amounts of approximately $24.7 million. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk in this area.

Accounts receivable

Receivables arising from crude oil and natural gas sales and joint interest receivables are generally unsecured. Accounts receivable are due within 30 days and are considered delinquent after 60 days. The Company writes off specific receivables when they become noncollectable and any payments subsequently received on those receivables are credited to the allowance for credit losses. Write-offs of noncollectable receivables have historically not been material. The Company’s allowance for credit losses totaled $3.2 million and $5.5 million as of December 31, 2023 and 2022, respectively. See Note 10. Allowance for Credit Losses for additional information.

Concentration of credit risk

The Company is subject to credit risk resulting from the concentration of its crude oil and natural gas receivables with significant purchasers. For the year ended December 31, 2023, no purchaser accounted for more than 10% of the Company’s total crude oil, natural gas, and natural gas liquids sales for 2023. The Company generally does not require collateral and does not believe the loss of any single purchaser would materially impact its operating results, as crude oil and natural gas are fungible products with well-established markets and numerous purchasers in various regions.

Inventories

Inventory is comprised of crude oil held in storage or as line fill in pipelines, pipeline imbalances, and tubular goods and equipment to be used in the Company’s exploration and development activities. Crude oil inventories are valued at the lower of cost or net realizable value primarily using the first-in, first-out inventory method. Tubular goods and equipment are valued primarily using a weighted average cost method applied to specific classes of inventory items.

The components of inventory as of December 31, 2023 and 2022 consisted of the following:

	December 31,
In thousands	2023		2022
Tubular goods and equipment	$	65,205	$	38,636
Crude oil		125,557		130,192
Natural gas		—		4,436
Total	$	190,762	$	173,264

Crude oil and natural gas properties

The Company uses the successful efforts method of accounting for crude oil and natural gas properties whereby costs incurred to acquire interests in crude oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, to drill and equip development wells, and expenditures for enhanced recovery operations are capitalized. Geological and geophysical costs, seismic costs incurred for exploratory projects, lease rentals and costs associated with unsuccessful exploratory wells or projects are expensed as incurred. Costs of seismic studies that are utilized in development drilling within an area of proved reserves are capitalized as development costs. To the extent a seismic project covers areas of both developmental and exploratory drilling, those seismic costs are proportionately allocated between capitalized development costs and exploration expense. Maintenance and repairs are expensed as incurred.

Under the successful efforts method of accounting, the Company capitalizes exploratory drilling costs on the balance sheet pending determination of whether the well has found proved reserves in economically producible quantities. The Company capitalizes costs associated with the acquisition or construction of support equipment and facilities with the drilling and development costs to which they relate. If proved reserves are found by an exploratory well, the associated capitalized costs become part of well equipment and facilities. However, if proved reserves are not found, the capitalized costs associated with the well are expensed, net of any salvage value.

Production expenses are those costs incurred by the Company to operate and maintain its crude oil and natural gas properties and associated equipment and facilities. Production expenses include but are not limited to labor costs to operate the Company’s properties, repairs and maintenance, certain waste water disposal costs, utility costs, certain workover-related costs, and materials and supplies utilized in the Company’s operations.

Service property and equipment

Service property and equipment consist primarily of automobiles and aircraft; machinery and equipment; gathering and recycling systems; storage tanks; office and computer equipment, software, furniture and fixtures; and buildings and improvements. Major renewals and replacements are capitalized and stated at cost, while maintenance and repairs are expensed as incurred.

Depreciation and amortization of service property and equipment are provided in amounts sufficient to expense the cost of depreciable assets to operations over their estimated useful lives using the straight-line method. The estimated useful lives of service property and equipment are as follows:

Service property and equipment	Useful Lives In Years
Automobiles and aircraft	5-10
Machinery and equipment	6-30
Gathering and recycling systems	15-30
Storage tanks	10-30
Office and computer equipment, software, furniture and fixtures	3-25
Buildings and improvements	4-40

Depreciation, depletion and amortization

Depreciation, depletion and amortization of capitalized drilling and development costs of producing crude oil and natural gas properties, including related support equipment and facilities, are computed using the unit-of-production method on a field basis based on total estimated proved developed reserves. Amortization of producing leaseholds is based on the unit-of-production method using total estimated proved reserves. In arriving at rates under the unit-of-production method, the quantities of recoverable crude oil and natural gas reserves are established based on estimates made by the Company’s internal geologists and engineers and external independent reserve engineers. Upon sale or retirement of properties, the cost and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss, if any, is recognized. Sales of proved properties constituting a part of an amortization base are accounted for as normal retirements with no gain or loss recognized if doing so does not significantly affect the unit-of-production amortization rate. Unit-of-production rates are revised whenever there is an indication of a need, but at least in conjunction with semi-annual reserve reports. Revisions are accounted for prospectively as changes in accounting estimates.

Asset retirement obligations

The Company accounts for its asset retirement obligations by recording the fair value of a liability for an asset retirement obligation in the period in which a legal obligation is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the capitalized asset retirement costs are charged to expense through the depreciation, depletion and amortization of crude oil and natural gas properties and the liability is accreted to the expected future abandonment cost ratably over the related asset’s life.

The Company’s primary asset retirement obligations relate to future plugging and abandonment costs and related disposal of facilities on its crude oil and natural gas properties. The following table summarizes the changes in the Company’s future abandonment liabilities from January 1, 2021 through December 31, 2023:

In thousands	2023			2022			2021
Asset retirement obligations at January 1	$	261,087		$	219,824		$	179,676
Accretion expense		14,818			12,857			11,125
Revisions (1)		112,803			(6,672	)		(1,291	)
Plus: Additions for new assets		18,929			37,413			32,351
Less: Plugging costs and sold assets		(5,709	)		(2,335	)		(2,037	)
Total asset retirement obligations at December 31	$	401,928		$	261,087		$	219,824
Less: Current portion of asset retirement obligations at December 31 (2)		9,971			3,935			4,123
Non-current portion of asset retirement obligations at December 31	$	391,957		$	257,152		$	215,701

(1)Revisions primarily represent changes in the present value of liabilities resulting from changes in estimated costs and economic lives of producing properties.

(2)Balance is included in the caption “Accrued liabilities and other” in the consolidated balance sheets.

As of December 31, 2023 and 2022, net property and equipment on the consolidated balance sheets included $204.2 million and $96.5 million, respectively, of net asset retirement costs.

Asset impairment

Proved crude oil and natural gas properties are reviewed for impairment on a field-by-field basis each quarter. The estimated future cash flows expected in connection with the field are compared to the carrying amount of the field to determine if the carrying amount is recoverable. If the carrying amount of the field exceeds its estimated undiscounted future cash flows, the carrying amount of the field is reduced to its estimated fair value.

Impairment losses for unproved properties are generally recognized by amortizing the portion of the properties’ costs which management estimates will not be transferred to proved properties over the lives of the leases based on drilling plans, experience of successful drilling, and the average holding period. The Company’s impairment assessments are affected by economic factors such as the results of exploration activities, commodity price outlooks, anticipated drilling programs, remaining lease terms, and potential shifts in business strategy employed by management.

Debt issuance costs

Costs incurred in connection with the execution of the Company’s notes payable, revolving credit facility, term loan and any amendments thereto are capitalized and amortized over the terms of the arrangements on a straight-line basis, the use of which approximates the effective interest method. Costs incurred upon the issuances of the Company’s various senior notes (collectively, the “Notes”) were capitalized and are being amortized over the terms of the Notes using the effective interest method.

The Company had aggregate capitalized costs of $46.5 million and $56.3 million (net of accumulated amortization of $37.3 million and $46.3 million) relating to its long-term debt at December 31, 2023 and 2022, respectively.

Unamortized capitalized costs associated with the Company’s Notes, note payable, and term loan totaled $39.4 million and $46.8 million at December 31, 2023 and 2022, respectively, and are reflected as a reduction of “Long-term debt, net of current portion” on the consolidated balance sheets.

Unamortized capitalized costs associated with the Company’s revolving credit facility totaled $7.1 million and $9.4 million at December 31, 2023 and 2022, respectively, and are reflected in “Other noncurrent assets” on the consolidated balance sheets.

For the years ended December 31, 2023, 2022 and 2021, the Company recognized amortization expense associated with capitalized debt issuance costs of $10.0 million, $9.3 million, and $7.2 million, respectively, which are reflected in “Interest expense” on the consolidated statements of income.

Derivative instruments

The Company recognizes its derivative instruments on the balance sheet as either assets or liabilities measured at fair value with such amounts classified as current or long-term based on contractual settlement dates. The accounting for the changes in fair value of a derivative depends on the intended use of the derivative and resulting designation. The Company has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the changes in fair value in the consolidated statements of income under the caption “Gain (loss) on derivative instruments, net.” See Note 6. Derivative Instruments for additional information.

Fair value of financial instruments

The Company’s financial instruments consist primarily of cash, trade receivables, trade payables, derivative instruments and long-term debt. See Note 7. Fair Value Measurements for a discussion of the methods used to determine fair value for the Company’s financial instruments and the quantification of fair value for its derivatives and long-term debt obligations at December 31, 2023 and 2022.

Income taxes

Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the future tax effects of temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at period-end. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. The Company’s policy is to recognize penalties and interest related to unrecognized tax benefits, if any, in income tax expense.

The Company establishes a valuation allowance if it believes it is more likely than not that some or all of its deferred tax assets will not be realized. Significant judgment is applied in evaluating the need for and the magnitude of appropriate valuation allowances against deferred tax assets. See Note 11. Income Taxes for additional information.

Earnings per share attributable to Continental Resources

Basic net income per share is computed by dividing net income attributable to the Company by the weighted-average number of shares outstanding for the period. Prior to the Hamm Family’s take-private transaction, in periods where the Company had net income, diluted earnings per share reflected the potential dilution of non-vested restricted stock awards, which was calculated using the treasury stock method. The following table presents the calculation of basic and diluted weighted average shares outstanding and net income per share attributable to the Company for the years ended December 31, 2023, 2022, and 2021.

	Year ended December 31,
In thousands, except per share data	2023		2022		2021
Net income attributable to Continental Resources (numerator)	$	3,095,827	$	4,024,558	$	1,660,968
Weighted average shares (denominator):
Weighted average shares - basic		299,610		351,392		360,434
Non-vested restricted stock and restricted stock units (1)		—		—		4,019
Weighted average shares - diluted		299,610		351,392		364,453
Net income per share attributable to Continental Resources:
Basic	$	10.33	$	11.45	$	4.61
Diluted	$	10.33	$	11.45	$	4.56

(1)For the years ended December 31, 2023 and 2022, the Company’s outstanding long-term incentive awards are expected to be paid in cash, not common stock, upon vesting, and are classified as liability awards pursuant to ASC Topic 718, Compensation—Stock Compensation. As a result, no potential dilutive effect for the awards is presented for the years ended December 31, 2023 and 2022.