contango oil and gas company enercom2010 final

8/8/2019 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 ..

16

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



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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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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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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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contango oil and gas company enercom2010 final

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