Contango Announces Second Quarter 2021 Financial Results and Capital Program Update
Second Quarter 2021 Highlights and Recent Developments
- Production sales of 2,196 MBoe for the second quarter of 2021, or 24.1 MBoe per day, an increase from 1,469 MBoe, or 16.1 MBoe per day in the prior year quarter, primarily due to new production from the Mid-Con Acquisition and the Silvertip Acquisition (each as defined in our recently filed Form 10-Q for the second quarter of 2021), which closed on
January 21, 2021and February 1, 2021, respectively. Production sales volumes were also slightly higher than the upper end of production guidance provided by the Company for the quarter.
- Total operating expenses of
$36.5 millionfor the current year quarter, and operating expenses, exclusive of production and ad valorem taxes, of $30.2 million, were slightly higher than the upper end of guidance provided by the Company for the quarter, primarily due to the acceleration of a planned production-enhancing workover program due to higher commodity prices.
- Net loss was
$32.6 millionfor the current year quarter, compared to a net loss of $28.0 millionin the prior year quarter. Adjusting both quarters for pre-tax, non-cash mark-to-market losses related to our commodity price derivatives of $47.1 millionand $20.2 million, respectively, and dry hole costs of $10.9 millionfor the 2020 quarter, net income before income taxes would have been approximately $14.3 millionfor the current year quarter compared to net income before income taxes of $3.4 millionfor the comparable 2020 quarter.
- Adjusted EBITDAX (a non-GAAP measure, as defined and presented herein) for the current year quarter of
$31.1 million, compared to $7.0 millionin the prior year quarter, an increase primarily due to contributions from the Mid-Con Acquisition and the Silvertip Acquisition.
May 3, 2021, the Company entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”), which provided for, among other things, an increase in the Company’s borrowing base from $120.0 millionto $250.0 millionand expanded the bank group from nine to eleven banks. The Fifth Amendment also includes less restrictive hedge requirements and certain modifications to financial covenants. As of June 30, 2021, the Company had availability under its Credit Agreement of $178.1 million. See Note 10 – “Long-Term Debt” in our recently filed Form 10-Q for the second quarter of 2021 for further information.
June 7, 2021, the Company entered into a definitive agreement to merge with Independence Energy, LLC(“Independence”) in an all-stock transaction (the “Pending Independence Merger”). The closing of the Pending Independence Merger is conditioned upon approval by a majority of Contango’s shareholders, among certain other closing conditions. Upon completion of the Pending Independence Merger, Independence shareholders are expected to own approximately 76% and Contango shareholders are expected to own approximately 24% of the combined company. If approved, the Pending Independence Merger is expected to close in the fourth quarter of 2021. See Note 3 – “Acquisitions and Dispositions” in our recently filed Form 10-Q for the second quarter of 2021 for further information.
July 7, 2021, the Company entered into a purchase and sale agreement with ConocoPhillips to acquire low decline, conventional gas assets in the Wind River Basinof Wyoming(the “Pending Wind River Basin Acquisition”). Upon closing, Contango will acquire an estimated 446 Bcfe of PDP reserves for a total purchase price of $67.0 millionin cash, subject to customary closing adjustments. The Pending Wind River Basin Acquisition is expected to close in the third quarter of 2021 and will be funded with cash on hand and borrowings under our senior credit facility. See Note 13 – “Subsequent Events” in our recently filed Form 10-Q for the second quarter of 2021 for further information.
Summary of Second Quarter Financial Results
Net loss for the three months ended
Average weighted shares outstanding were approximately 198.7 million and 131.4 million for the current and prior year quarters, respectively. Shares outstanding increased primarily due to the sale of approximately 40.6 million shares of common stock of the Company in two offerings in the fourth quarter of 2020 in conjunction with the announcement of the Mid-Con Acquisition and Silvertip Acquisition in that quarter and approximately 25.5 million shares of common stock issued to Mid-Con shareholders at the close of the Mid-Con Acquisition in
The Company reported Adjusted EBITDAX, a non-GAAP measure defined below, of approximately
Revenues for the second quarter of 2021 were approximately
Production sales for the three months ended
The weighted average equivalent sales price realized for the three months ended
Operating expenses for the three months ended
DD&A expense for the three months ended
Total G&A expenses were
Loss on derivatives for the three months ended
2021 Capital Program & Capital Resources
Due to strengthening oil prices in 2021, and our identification of more cost-efficient methods of drilling and completing our
Capital costs for the three months ended
We currently forecast our full year 2021 capital expenditure budget to be approximately
Subsequent to the end of the second quarter of 2021, we received notice from the
|Natural Gas||Q3 2021||Swap||3,140,000||MMBtus||$||2.71||(2)|
|Natural Gas||Q4 2021||Swap||3,000,000||MMBtus||$||2.63||(2)|
|Natural Gas||Q1 2022||Swap||3,090,000||MMBtus||$||2.69||(2)|
|Natural Gas||Q2 2022||Swap||2,425,000||MMBtus||$||2.51||(2)|
|Natural Gas||Q3 2022||Swap||2,300,000||MMBtus||$||2.51||(2)|
|Natural Gas||Q4 2022||Swap||2,250,000||MMBtus||$||2.65||(2)|
|Natural Gas||Q1 2023||Swap||1,500,000||MMBtus||$||2.72||(2)|
|Natural Gas||Q4 2021||Collar||400,000||MMBtus||$||3.00||-||3.41||(1)|
|Natural Gas||Q1 2022||Collar||510,000||MMBtus||$||3.00||-||3.41||(2)|
|Natural Gas||Q1 2023||Collar||550,000||MMBtus||$||2.63||-||3.01||(2)|
(1) Based on West Texas Intermediate crude oil prices.
(2) Based on Henry Hub NYMEX natural gas prices.
Subsequent to the end of the second quarter of 2021, we entered into the following additional derivative contracts:
|Natural Gas||Q3 2021||Swap||725,000||MMBtus||$||3.71||(1)|
|Natural Gas||Q4 2021||Swap||975,000||MMBtus||$||3.71||(1)|
|Natural Gas||Q1 2022||Swap||900,000||MMBtus||$||3.10||(1)|
|Natural Gas||Q2 2022||Swap||1,950,000||MMBtus||$||3.10||(1)|
|Natural Gas||Q3 2022||Swap||1,350,000||MMBtus||$||3.10||(1)|
|Natural Gas||Q4 2022||Swap||1,550,000||MMBtus||$||3.10||(1)|
|Natural Gas||Q1 2023||Swap||1,350,000||MMBtus||$||2.73||(1)|
|Natural Gas||Q2 2023||Swap||3,000,000||MMBtus||$||2.73||(1)|
(1) Based on Henry Hub NYMEX natural gas prices.
Selected Financial and Operating Data
The following table reflects certain comparative financial and operating data for the three and six months ended
|Three Months Ended
||Six Months Ended
|2021||2020||% Change||2021||2020||% Change|
|Total Volumes Sold:|
|Oil and condensate (MBbls)||892||346||158||%||1,541||866||78||%|
|Natural gas (MMcf)||5,043||4,913||3||%||10,025||10,115||(1||)%|
|Natural gas liquids (MBbls)||464||305||52||%||757||637||19||%|
|Thousand barrels of oil equivalent (MBoe)||2,196||1,469||49||%||3,969||3,189||24||%|
|Daily Sales Volumes:|
|Oil and condensate (MBbls)||9.8||3.7||165||%||8.5||4.8||77||%|
|Natural gas (MMcf)||55.4||54.0||3||%||55.4||55.6||(0||)%|
|Natural gas liquids (MBbls)||5.1||3.4||50||%||4.2||3.6||17||%|
|Thousand barrels of oil equivalent (MBoe)||24.1||16.1||50||%||21.9||17.6||24||%|
|Average Sales Price:|
|Oil and condensate (per Bbl)||$||63.03||$||22.94||175||%||$||60.47||$||35.46||71||%|
|Natural gas (per Mcf)||$||2.94||$||1.35||118||%||$||2.92||$||1.46||100||%|
|Natural gas liquids (per Bbl)||$||26.46||$||10.81||145||%||$||27.17||$||10.85||150||%|
|Total (per Boe)||$||37.93||$||12.14||212||%||$||36.05||$||16.43||119||%|
|Average Selected Costs ($ per Boe)|
|Operating expenses (1)||$||13.73||$||9.67||42||%||$||13.63||$||9.94||37||%|
|Production and ad valorem taxes||$||2.89||$||0.56||416||%||$||2.49||$||0.81||207||%|
|General and administrative expense (cash)||$||4.72||$||5.15||(8||)%||$||5.03||$||4.66||8||%|
|Net Loss (thousands)||$||(32,642||)||$||(28,034||)||$||(36,935||)||$||(133,289||)|
|Adjusted EBITDAX (2) (thousands)||$||31,140||$||6,982||$||53,124||$||21,112|
|Weighted Average Shares Outstanding (thousands)|
(1) Operating expense includes direct lease operating expenses, transportation, workover and other expense for plants and pipelines.
(2) Adjusted EBITDAX is a non-GAAP financial measure. See below for reconciliation to net loss.
CONDENSED CONSOLIDATED BALANCE SHEETS
|Cash and cash equivalents||$||2,177||$||1,383|
|Accounts receivable, net||65,937||37,862|
|Current derivative asset||—||2,996|
|Other current assets||6,673||4,565|
|Net property and equipment||348,850||101,903|
|LIABILITIES AND SHAREHOLDERS’ EQUITY|
|Accounts payable and accrued liabilities||132,527||83,970|
|Current derivative liability||41,176||1,317|
|Current asset retirement obligations||4,700||4,249|
|Long-term derivative liability||17,493||1,648|
|Asset retirement obligations||106,256||48,523|
|Total shareholders’ equity||64,371||15,567|
|TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY||$||442,697||$||170,267|
CONSOLIDATED STATEMENTS OF OPERATIONS
|Three Months Ended
||Six Months Ended
|Oil and condensate sales||$||56,209||$||7,930||$||93,202||$||30,712|
|Natural gas sales||14,823||6,618||29,315||14,789|
|Natural gas liquids sales||12,279||3,294||20,560||6,915|
|Other operating revenues||329||—||513||—|
|Depreciation, depletion and amortization||11,457||5,092||20,599||17,946|
|Impairment and abandonment of oil and natural gas properties||451||—||454||145,878|
|General and administrative expenses||13,483||7,836||24,842||15,487|
|OTHER INCOME (EXPENSE)|
|Gain (loss) from investment in affiliates, net of income taxes||(804||)||(173||)||(804||)||113|
|Gain from sale of assets||131||4,406||348||4,433|
|Gain (loss) on derivatives, net||(53,480||)||(8,804||)||(69,561||)||37,895|
|Total other income (expense)||(54,479||)||(6,390||)||(70,006||)||40,212|
|NET LOSS BEFORE INCOME TAXES||(32,826||)||(27,665||)||(36,580||)||(132,526||)|
|Income tax benefit (provision)||184||(369||)||(355||)||(763||)|
Non-GAAP Financial Measures
This news release includes certain non-GAAP financial information as defined by
Adjusted EBITDAX represents net income (loss) before interest expense, taxes, depreciation, depletion and amortization, impairment of properties and oil and gas exploration expenses (“EBITDAX”) as further adjusted to reflect the items set forth in the table below and is a measure required to be used in determining our compliance with financial covenants under our credit facility. Recurring Adjusted EBITDAX represents Adjusted EBITDAX exclusive of non-recurring business combination and strategic advisory fees and legal judgments.
We have included Adjusted EBITDAX in this release to provide investors with a supplemental measure of our operating performance and information about the calculation of some of the financial covenants that are contained in our credit agreement. We believe Adjusted EBITDAX is an important supplemental measure of operating performance because it eliminates items that have less bearing on our operating performance and therefore highlights trends in our core business that may not otherwise be apparent when relying solely on GAAP financial measures. We also believe that securities analysts, investors and other interested parties frequently use Adjusted EBITDAX in the evaluation of companies, many of which present Adjusted EBITDAX when reporting their results. Adjusted EBITDAX is a material component of the covenants that are imposed on us by our credit agreement. We are subject to financial covenant ratios that are calculated by reference to Adjusted EBITDAX. Non-compliance with the financial covenants contained in our credit agreement could result in a default, an acceleration in the repayment of amounts outstanding and a termination of lending commitments. Our management and external users of our financial statements, such as investors, commercial banks, research analysts and others, also use Adjusted EBITDAX to assess:
- the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
- the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;
- our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and
- the feasibility of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.
The following table reconciles net loss to EBITDAX, Adjusted EBITDAX and Recurring Adjusted EBITDAX for the periods presented:
|Three Months Ended
||Six Months Ended
|Income tax provision (benefit)||(184||)||369||355||763|
|Depreciation, depletion and amortization||11,457||5,092||20,599||17,946|
|Impairment of oil and natural gas properties||178||—||178||145,878|
|Non-cash mark-to-market loss (gain) on derivative instruments||$||47,100||$||20,198||$||60,740||$||(21,192||)|
|Non-cash stock-based compensation charges||3,110||266||4,889||616|
|Loss (gain) on sale of assets and investment in affiliates||673||(4,233||)||456||(4,546||)|
|Non-recurring business combination expenses and strategic fees||$||1,911||$||551||$||3,757||$||1,334|
|Recurring Adjusted EBITDAX||$||33,051||$||7,533||$||56,881||$||22,446|
In addition to Adjusted EBITDAX and Recurring Adjusted EBITDAX, we may provide additional non-GAAP financial measures, including Operating expenses exclusive of production and ad valorem taxes, Recurring G&A expenses, Recurring Cash G&A expenses, net income before income taxes adjusted for pre-tax, non-cash mark-to-market losses related to commodity price derivatives and dry hole costs, because our management believes providing investors with this information gives additional insights into our profitability, cash flows and expenses.
Adjusted EBITDAX, Recurring Adjusted EBITDAX and other non-GAAP measures in this release are not presentations made in accordance with generally accepted accounting principles, or GAAP. As discussed above, we believe that the presentation of non-GAAP financial measures in this release is appropriate. However, when evaluating our results, you should not consider the non-GAAP financial measures in isolation of, or as a substitute for, measures of our financial performance as determined in accordance with GAAP, such as net loss. For example, Adjusted EBITDAX has material limitations as a performance measure because it excludes items that are necessary elements of our costs and operations. Because other companies may calculate Adjusted EBITDAX differently than we do, Adjusted EBITDAX as presented in this release is not comparable to similarly-titled measures reported by other companies.
Guidance for the Third Quarter 2021
|Production sales||21,100 – 24,000 Boe per day|
|LOE (including transportation and workovers)|
|Recurring Cash G&A (non-GAAP)|
We do not provide guidance for Total G&A expense because we are unable to predict with reasonable certainty the non-cash stock based compensation expense and non-recurring expenses associated with our strategic initiatives without unreasonable effort. These items are uncertain and depend on various factors and are not expected to be material to the results computed in accordance with GAAP.
Contango management will hold a conference call to discuss the information described in this press release on
Impact of the COVID-19 Pandemic
The COVID-19 pandemic continues to have an adverse impact on worldwide economic activity, significantly disrupting the demand for oil and natural gas throughout the world, and has created significant volatility, uncertainty and turmoil in the oil and natural gas industry. While there has been an improvement in commodity prices since early 2020, prices remain volatile, and there is still significant uncertainty regarding the long-term impact of the COVID-19 pandemic on global oil demand and prices. Due to the extreme volatility in oil prices and the impact of the COVID-19 pandemic on the financial condition of our industry, we suspended our onshore drilling program in the
- a company-wide effort to cut costs throughout our operations;
- potential acquisitions of PDP-heavy assets, with attractive, discounted valuations, in stressed/distressed scenarios or from non-natural owners like investment or lender firms that obtained ownership through a corporate restructuring;
- the identification of more cost-efficient drilling and completion strategies by our technical teams and the possible commencement of a conservative drilling/completion program on undeveloped opportunities in our portfolio should oil prices, and market stability, continue to improve and provide appropriate risk-weighted returns; and
- the extensive review of assets acquired in recent transactions for cost reduction opportunities, as well as opportunities to return to production wells that had been shut-in by the previous owners due to limited capital resources.
Contango Oil &
ADDITIONAL INFORMATION AND WHERE TO FIND IT
This communication may be deemed to be offering or solicitation material in respect of the proposed merger between
The Proxy Statement/Prospectus, any amendments or supplements thereto and other relevant materials, may be obtained free of charge at the SEC’s website at www.sec.gov or free of charge by directing a request to the Company’s Investor Relations Department at firstname.lastname@example.org.
NO OFFER OR SOLICITATION
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities, or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
PARTICIPANTS IN THE SOLICITATION
The Company, Independence and certain of their respective executive officers, directors, other members of management and employees may, under the rules of the
Forward-Looking Statements and Cautionary Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on Contango’s current expectations and include statements regarding our estimates of future production and other guidance (including information regarding production, lease operating expenses, cash G&A expenses, and DD&A Rate), the Company’s Pending Independence Merger and Pending Wind River Basin Acquisition, the Company’s integration of and future plans for the Mid-Con Acquisition and the Silvertip Acquisition, the Company’s drilling program and capital expenditures and the potential timing and success related to those expenditures, including the timing of expected production and expected well lateral lengths, our liquidity and access to capital, expected overall drilling costs, lease operating cost and G&A costs, the potential impact of the COVID-19 pandemic including reduced demand for oil and natural gas, the volatile commodity price environment, the impact of our derivative instruments, the accuracy of our projections of future production, future results of operations, ability to identify, complete and integrate acquisitions, ability to realize expected benefits of acquisitions, the quality and nature of the asset base, the assumptions upon which estimates are based and other expectations, beliefs, plans, objectives, assumptions, strategies or statements about future events or performance. Words and phrases used to identify our forward-looking statements include terms such as “guidance”, “expects”, “projects”, “anticipates”, “believes”, “plans”, “estimates”, “potential”, “possible”, “probable”, “intends”, “forecasts”, “view”, “efforts”, “goal”, “positions”, “future” or words and phrases stating that certain actions, events or results “may”, “will”, “should”, or “could” be taken, occur or be achieved. Statements concerning oil and gas reserves also may be deemed to be forward-looking statements in that they reflect estimates based on certain assumptions that the resources involved can be economically exploited. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those reflected in the statements. These risks include, but are not limited to: the risks of the oil and gas industry (for example, operational risks in exploring for, developing and producing crude oil and natural gas; risks and uncertainties involving geology of oil and gas deposits; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to future production, costs and expenses; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; health, safety and environmental risks and risks related to weather such as hurricanes and other natural disasters); risks related to drilling into formations that are new to us; risks related to the recently announced Pending Independence Merger and Pending Wind River Basin Acquisition, including the risk that the transactions will not be completed on the timeline or terms currently contemplated, the businesses and assets will not be integrated successfully, that the anticipated cost savings, synergies, intrinsic value, access to capital and growth from the transactions may not be fully realized or may take longer to realize than expected, and that management attention will be diverted; potential liability resulting from any future litigation related to the Pending Independence Merger and the Pending Wind River Basin Acquisition; risks related to the Silvertip Acquisition and Mid-Con Acquisition, including the risk that the anticipated benefits from those acquisitions may not be fully realized or may take longer to realize than expected, and that management attention will be diverted to integration-related issues; risks related to the impact of the climate change initiative by President Biden’s administration and
|Senior Vice President and Chief Financial and Accounting Officer|
Source: Contango Oil & Gas