contango oil and gas company enercom2010 final
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ContangoOil & Gas Company
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Lawyer StuffThispresentationcontainsforwardlookingstatementsregardingContangothatareintendedtobecoveredbythesafeharbor forwardlookingstatementsprovidedbyofthePrivateSecuritiesLitigationReformActof1995,basedonContangoscurrentexpectationsandincludesstatementsregardingacquisitionsanddivestitures,estimatesoffutureproduction,futureresults ofoperations,qualityandnatureoftheassetbase,theassumptionsuponwhich estimatesarebasedandotherexpectations,beliefs,plans,objectives,assumptions,strategiesorstatementsaboutfutureeventsorperformance(often,butnotalways,usingwordssuchas expects ,projects, anticipates , plans , estimates , potential ,possible
,
probable
,or
intends
,or
stating
that
certain
actions,
events
or
results
may , will , should ,or couldbetaken,occurorbeachieved).Statementsconcerningoilandgasreservesalsomaybedeemedtobeforward lookingstatementsinthattheyreflectestimatesbasedoncertainassumptionsthattheresourcesinvolvedcanbeeconomicallyexploited.Forwardlookingstatementsarebasedoncurrentexpectations,estimatesandprojectionsthatinvolveanumberofrisksanduncertainties,whichcouldcauseactualresultstodiffermateriallyfromthose,reflectedinthestatements.Theserisksinclude,butarenotlimitedto:therisksoftheoilandgasindustry(forexample,operationalrisksinexploringfor,developingandproducingcrudeoilandnaturalgas;risksanduncertaintiesinvolvinggeologyofoilandgasdeposits;theuncertaintyofreserve
estimates;theuncertaintyofestimatesandprojectionsrelating tofutureproduction,costsandexpenses;
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.More Lawyer Stuffpotentialdelaysorchangesinplanswithrespecttoexploration ordevelopmentprojectsorcapitalexpenditures;health,safetyandenvironmentalrisksandrisks
relatedto
weather
such
as
hurricanes
and
other
natural
disasters);
uncertainties
astotheavailabilityandcostoffinancing;fluctuationsinoilandgasprices;risksassociatedwithderivativepositions;inabilitytorealizeexpectedvaluefromacquisitions,inabilityofourmanagementteamtoexecuteitsplanstomeetitsgoals,shortagesofdrillingequipment,oilfieldpersonnelandservices,
unavailabilityof
gathering
systems,
pipelines
and
processing
facilities
and
the
possibilitythatgovernmentpoliciesmaychangeorgovernmentalapprovalsmaybedelayedorwithheld.AdditionalinformationontheseandotherfactorswhichcouldaffectContangosoperationsorfinancialresultsareincludedinContangosotherreportsonfilewiththeSecuritiesandExchangeCommission. Investorsare
cautionedthat
any
forward
looking
statements
are
not
guarantees
of
future
performanceandactualresultsordevelopmentsmaydiffermateriallyfromtheprojectionsintheforwardlookingstatements.Forwardlookingstatementsarebasedontheestimatesandopinionsofmanagementatthetimethestatementsaremade.Contangodoesnotassumeanyobligationtoupdateforwardlooking
statementsshouldcircumstancesormanagementsestimatesoropinionschange.
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. And More Lawyer StuffThere are three reasons why lawyers are replacing
rats as laboratory research animals. One is that theyreplentiful, another is that lab assistants dont get
attached to them, and the third is that there are some
things rats just wont do
-Unknown
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CONTANGO a natural gas centric,
non crude oil oriented never to beconfused with anything remotely related to
manufacturing - company with a businessmodel focused on drilling wildcat exploration
wells with a minimum of debt and
shareholder dilution
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Contangos Core BeliefsFrom Inception
The
only
competitive
advantage
in
the
natural
gas
and
oil
business
istobeamongtheLOWESTCOST producers VirtuallyalltheexplorationandproductionindustrysVALUE
CREATIONoccurs
through
the
drilling
of
successful
exploration
wells
Thewholepointofabusinessisonlyandalwaystoincrease
SHAREHOLDERWEALTHwith
conditions
Beliefs are optional, Results are mandatory and the only result that
matters is total return to shareholders
-Kenneth R. Peak5
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Lowest Cost
CONTANGO
Three Months Ended 3/31/10DD & A $1.24
LOE $0.66
G&A $0.22
Interest $0.02
TOTAL $2.14 / Mcfe
Vs
42 Company Average
$5.74 / Mcfe
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Value Creation
7
Forthe12monthsended3/31/10*BasedonJune1,2010ReserveReport
Measure 9 times, cut once Tevye Fiddler on the Roof
PER SHARE PER MCFE PRODUCED PER EMPLOYEE
Revenue $9.64 Revenue $5.20 Revenue $19,476,677
LOE $1.25 LOE $0.68 LOE $2,530,620
G & A $0.49 G & A $0.26 G & A $981,648Interest $0.04 Interest $0.02 Interest $71,439
Cash Costs $1.78 Cash Costs $0.96 Cash Costs $3,583,707
DD & A $2.21 DD & A $1.19 DD & A $4,461,035
Operating Prof it $5.65 Operating Profit $3.05 Operating Prof it $11,431,935
EBITDAX $7.88 EBITDAX $4.25 EBITDAX $15,912,234
Market Cap $103,324,375
Debt $0.00 Debt $0.00 Debt $0.00
Production (Mcfe) 1.85 Production (Mcfe) 3.7 Bcfe
Reserves (Mcfe)* 19.15 Reserves* 38.7 Bcfe
Book Value $23.69 Book Value $47,800,000
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Maximize ShareholderWealth .With Conditions
Ourfirst
priority
is
to
always
put
the
safety
of
our
employees, partners
and
contractors
first.
Oursecondpriorityistoprotecttheenvironmentwhereweworkandlive.
OurthirdpriorityismaximizeShareholderearnings whichwedefineasretainedearningsplusdividends.Wearedilutionanddebtphobic.
PeakRatioDefined: ShareholderEarnings = R/E+DividendsNetInvestedCapital Equity (R/E+Dividends+ShareRepurchases)
ContangosPeakRatioCalculatedasat3/31/10: R/E+Dividends = $365.2+5.4 = $370.6 = 30.4X
Equity (R/E+Dividends) $443.1(365.2+5.4+60.3) $12.2
Past performance is no guarantee of future results but it is the way to bet
- Kenneth R. Peak8
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Negative Dilution
10,000,000
11,000,000
12,000,000
13,000,000
14,000,000
15,000,000
16,000,000
17,000,000
18,000,000
19,000,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
FullyDilutedSharesOutstandin
Series C
Series D
Series E
17.8 MM
16.7 MM
15.97 MM
2.6 MM
Share Repurchase
(SUIT)
Preferred Series Capital RaisedSeed Capital $5.0 Million
Series A $2.5 Million
Series B $5.0 Million
Series C $8.0 Million
Series D $10.0 Million
Series E $30.0 Million
Total $60.5 Million
Shares Purchased Amount
4,453,730 $89.0 Million
Average price paid is $19.98 / share
They say you cant do it, but sometimes it doesnt always work
-Casey Stengal 9
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Contangos OwnersJune 30, 2010
Holder Shares Held % S/O Cumulative %
1 TCW Asset Management Company 915,718 5.84% 5.84%
2 BlackRock Institutional Trust Company, N.A. 872,916 5.57% 11.40%
3 Sellers Capital Master Fund, Ltd. 761,821 4.86% 16.26%
4 Keeley Asset Management Corp. 683,600 4.36% 20.62%
5 Vanguard Group, Inc. 558,799 3.56% 24.18%
6 Dreman Value Management, L.L.C. 548,065 3.49% 27.68%7 Morgan Stanley Investment Management Inc. (US) 528,783 3.37% 31.05%
8 Deutsche Investment Management Americas, Inc. 413,825 2.64% 33.69%
9 Palo Alto Investors, LLC 310,000 1.98% 35.66%
10 State Street Global Advisors (US) 277,822 1.77% 37.43%
11 California Public Employees' Retirement System 218,421 1.39% 38.83%
12 Seizert Capital Partners, L.L.C. 214,095 1.36% 40.19%
13 Dimensional Fund Advisors, LP 212,228 1.35% 41.54%14 TIAA-CREF 204,637 1.30% 42.85%
15 Southpoint Capital Advisors, L.P. 200,000 1.28% 44.12%
16 Northern Trust Investments, N.A. 176,641 1.13% 45.25%
17 PNC Wealth Management 158,344 1.01% 46.26%
18 Brenner West Capital Advisors, LLC 150,210 0.96% 47.22%
19 Horan Capital Management, LLC 134,537 0.86% 48.08%
20 AQR Capital Management, LLC 120,268 0.77% 48.84%
21 Harbert Management Corporation 120,000 0.77% 49.61%
22 JPMorgan Private Bank (United States) 117,113 0.75% 50.35%
23 Bonanza Capital, Ltd. 104,176 0.66% 51.02%
Other (17) Institutions and Advisors 1,102,473 7.03% 58.05%
Contango Management and BOD 3,214,855 20.50% 78.54%
Source: Reuters
Writing a check separates a commitment from a conversation
- Warren Buffet 10
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We Dont Have
Lots of shares O/S
Lots of shareholders Lots of options O/S Lots of paid in capital vs R/E (SEE PEAK RATIO) Lots of PUDs Lots of employees
Lots of wells Lots of landowners Lots of regulators Near term leases expiring L-T rig contracts
Debt Severance taxes (in Federal offshore) Hedges
Sometimes what you dont have is more important than what you do have
-Kenneth R. Peak 11
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GOM In Chaos Independents are waiting to see what new regs, bonding requirements are in store for us
Regulations/bonding requirements so onerous as to discourage Independents from shallow water drilling (lessthan 500 feet) very unlikely in my opinion
Increased safety procedures, safer fail safes, more rigorous / lengthy permitting etc. very likely but I believe wecan manage through these
We are and have always been 100% responsible to clean-up any spill
Unlimited Economic Damages for spills few Independents would be willing or able - to take the risk of dealingwith the plaintiffs bar
The talk about criminalizing errors in judgment, or equipment failures reflects how out of touch with the real worldWashington is
There are too many jobs at risk in an already devastated region, too much in tax and royalty revenues, too manyvotes and too much production to just shut the GOM down. Plus Congress would be loathe to be seen helping
majors at the expense of the Independents
Two exploration permits have been approved but in no sense is it business as usual
We will be aggressive. We just hired an outstanding Drilling Engineer to augment our efforts
Projected percentage of GOM rigs stacked at end of October = 80%
Im from the government and Im here to help
- Anon12
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Capex Plans 4 Wildcat GOM wells at $15 million each
15 Conterra J/V wells at $1.5 million per well
Total Capex of about $85 million before any success capex
Cash on hand $40 million
Current monthly pre-tax cash flow about $15 million
Spud first GOM well offshore Texas (permit in hand) Mid October
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Economics
Acreage,G&Gandseismiccostslast4yearscombined: $17million NRItoContangoAFTER landownerORRIand
AFTER G&GPromote: 7072% SeveranceTax(1): 0% AdValoremTax(1): 0% Sales&UseTax(1): 0%
StateIncomeTax(1): 0% LOE(2) $.53 G&A(2) $.21 IfNATGAS@$4.42/Mcf ContangoReceives(2) $5.68/Mcfe IfContangoproduces58.4Mmcfd ContangoSells(2) 77.1Mmcfed ContangoisaTaxpayer:WehavenoNOLCarryForwards 35%RiskPartner
Intangibles
Rigcostsarelessthanhalfof2yearagolevels OneLandowner MMS(1)
Lotsofnearbyinfrastructure NoNimbystodealwith Yes,wewilldrilldryholes TheEinE&PstandsforExploration Yes,ourpermittingandbondingcostsaregoingup,butwewillfindaway
(1) FederalWaters(2) Averagefor9monthsendedMarch31,2010
The consensus opinion always sounds logical, is easily understood and is frequentlywrong
- Kenneth R. Peak
Why Does Contango STILL like the GOM?
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If this is right I believe we will make a bunch of money
- Kenneth R. Peak 15
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In Conclusion ..
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Whohaspositiveretainedearnings? WhohaslowerDD&A?
Whohas
lower
LOE?
Whohaslowerdebt? WhohaslowerG&A? WhohasmorePDPMcfes/Share? Whohasmoreexplorationupsidepershare? Whohasmorecommoditypriceupside? WhodoesnthaveanNOLcarryforward?i.e.a35%exploration
partner? Whohasfewersharestodaythan1,3,5,7,9yearsago?
WhichCEOs
havent
taken
options
or
restricted
stock
the
last
3
years?Incentivesdrivebehavior.
The further backward you look, the further forward you can see
- Winston Churchill
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The Upbeat Case for Natural Gas
The best cure for low prices is low prices
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Prices are set by the cost of the Marginal Mcf
Average cash cost is $3.00/Mcf absolute floor
Average production cost is $5.15/Mcf
The Marginal Mcf is a Canadian Mcf at $6.00/Mcf Query: How long will the Canadians subsidize U.S. Natural Gas prices?
Answer: Longer than you think
The Upbeat Case for Natural Gas
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The Upbeat Case for Natural Gas
Canadian imports are down 13% in the last 2 years Gas prices are higher in Europe & Asia thus U.S is the market of last resort for LNG Econ 101 works again
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The Upbeat Case for Natural GasGulf of Mexico represents 12% of US natural gas production
Production from the GOM shelf has been in steady decline since2001 now the deep shelf can only be going down.
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The Upbeat Case for Natural Gas
Increased Costs, Higher Gas PricesAhead?
Utilization levels for our equipment have now surpassed those at
the rig count peak in Q3 2008, and are fast approaching levelsnot seen since the fall of 2006.
-- Halliburton
In U.S. land, activity is likely to flatten out. We dont expect themarket to provide significant volume gains for a H2 10, but wedont expect any weakness either. High performers will beartificial lift, stimulation, directional, and completion. Pricingtrends will be selectively constructive.
-- Weatherford
Interest in liquids rich gas plays remain high because of therelative stability of oil prices and improved operator returns onthese resources. These plays account for 10 to 15% of total rig
count. And while they are typically counted as gas rigs, they aredependent economically on commodity prices for liquids.
-- Halliburton
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The Upbeat Case for Natural Gas
If Halliburton is right and who would have better information about 10-15% of rigs classified as gas rigs are drilling for liquids plays
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The Problem with the Upbeat Case
for Natural Gas
This is the Paladin Syndrome have money will drill For Credit Suisse 57 company survey, Capex to cash flow now running 152% for 2010 and 136%
for 2011. Dont forget Steins Law: That which cant continue Wont
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Americas Energy Company
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