HOUSTON, March 12, 2020 (GLOBE NEWSWIRE) -- Contango Oil & Gas Company (NYSE American: MCF) (“Contango” or the “Company”), as a result of the decline in commodity prices in the last several days, and especially oil prices, today provides a brief update on its response to that decline.
The Company has consistently been diligent in protecting the vast majority of expected cash flow from such commodity price declines, as evidenced by the fact that it currently has hedges in place for 71% and 67% of currently forecasted hedgeable PDP oil production for 2020 and 2021, respectively, at average floor prices of $55.13 and $51.71 per barrel, respectively. The Company also has 72% and 54% of currently forecasted hedgeable PDP natural gas production for 2020 and 2021, respectively, hedged at average floor prices of $2.57 and $2.51 per Mcf. Approximately 98% of the Company’s hedges are swaps, and the Company has no three way collars or short puts. The “hedgeable PDP” does not include Gulf of Mexico production that the Company’s credit agreement precludes it from hedging during peak hurricane season (i.e., August through October), which is only one percent of current daily oil production. The Company currently forecasts product mix for 2020 production as approximately 47% natural gas, 27% oil and 26% natural gas liquids.
The Company is currently undertaking an extensive review of all of its producing areas to determine the economic or operational justification for continuing to produce unhedged barrels in this price environment, and where determined not justified, and operationally feasible, evaluate potentially shutting in or curtailing production. The Company is also reevaluating the economic justification in this price environment for proceeding with the production-enhancing workover program originally scheduled for the first half of 2020. The limited onshore development drilling the Company had planned for 2020 is also being reevaluated. Because of the Company’s low debt profile and borrowing cost of capital, the Company believes it is in the fortunate position of being able to temporarily shut in or curtail higher cost production when there is a decline in the commodity markets.
The Company’s exploratory test in the shallow waters off the Louisiana coast in Grand Isle will proceed as planned. While the Company does not expect to bring this project online at current prices, even at a $30 flat WTI price, the base forecasted success case for the prospect is 19.2 Mmboe (88% oil) of potential reserves, a 70% IRR, and a fully developed PV-10 of an estimated $178 million (2.7x PV/I). The Company believes this justifies the forecasted $6.3 million (net to the Company) investment to drill the first test well. If the test well is successful, production is not currently expected to commence until 2021.
The Company had already commenced a cost reduction program in its midcontinent region acquired in the fourth quarter last year, primarily the PDP-heavy Oklahoma properties, as well as cost-focused initiatives in its other core areas in the Southern Delaware Basin and Eugene Island 10/11. Those initiatives will continue to be a priority for the Company in 2020.
Wilkie S. Colyer, the Company’s President and Chief Executive Officer, commented, “This depressed and volatile price environment will be a difficult challenge to many in our industry, including ourselves, but our view is that the price protection we have put in place through our hedging program, our regular, ongoing efforts to reduce costs, and our commitment to justifying every capital investment we make through a rigorous return analysis, positions us better than most to weather this storm. We believe our low leverage and free cash flow profile for 2020, even in this price environment, puts us in a position to take advantage of the added stress in the sector and continue to be a consolidator.”
Contango Oil & Gas Company is a Houston, Texas based, independent oil and natural gas company whose business is to maximize production and cash flow from its offshore properties in the shallow waters of the Gulf of Mexico and onshore properties in Texas, Oklahoma and Wyoming and, when determined appropriate, to use that cash flow to explore, develop, exploit, increase production from its existing properties, to acquire additional PDP-heavy crude oil and natural gas properties or to pay down debt.
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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 the impact of the commodity price downturn on the Company and others in the industry, future liquidity, consolidation opportunities, estimates of future production, cash flows and return, the cost and results of test wells, the benefits of hedges, the results and extent of any review or analysis, the Company’s growth strategy, beliefs, plans, objectives, assumptions, strategies or statements about future events or performance. Words and phrases used to identify forward-looking statements include terms such as “expects,” “believes,” “anticipates,” “plans,” “estimates,” “potential,” “possible,” “efforts,” “forecast,” “view” or “intends,” or words and phrases stating that certain actions, events or results “may,” “will,” “should,” or “could” be taken, occur or be achieved. 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: heightened risks relating to prospective properties; increased costs and risks associated with development in the Gulf of Mexico; 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 related to reserves potential and future production, costs and expenses; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; and fluctuations and dramatic declines in oil and gas prices;) decline or volatility in market conditions and industry conditions; world pandemics; our ability to realize expected value from acquisitions; shortages of drilling equipment, oilfield personnel and services; unavailability of gathering systems, pipelines and processing facilities; the possibility that government policies may change or governmental approvals may be delayed or withheld; and other factors which could affect Contango’s operations or financial results (some of which are not known to the Company), including those described in Contango’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Investors are cautioned that any forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the projections in the forward-looking statements. Forward-looking statements speak only as of the date they were made and are based on the estimates and opinions of management at the time the statements are made. Contango does not assume any obligation to update forward-looking statements should circumstances or management’s estimates or opinions change, except as required by law. No reserves have been assigned to the prospect off the Louisiana coast in Grand Isle, and its development is speculative. Estimates of prospective reserves and future production, rates of return and other expectations regarding the prospect are estimated metrics based on Contango management’s current information, estimates and assumptions. Actual results may be materially adversely different than current expectations.
PV-10 for the prospect is a projected non-GAAP measure. PV-10 represents the present value, discounted at 10% per year, of estimated future cash inflows from proved natural gas and crude oil reserves, less future development and production costs using pricing assumptions in effect at the end of the period. PV-10 differs from Standardized Measure of Discounted Net Cash Flows, the most directly comparable GAAP measure, because it does not include the effects of income taxes on future net revenues. Neither PV-10 nor Standardized Measure of Discounted Net Cash Flows represents an estimate of fair market value of our natural gas and crude oil properties. PV-10 is used by the industry and by our management as an arbitrary reserve asset value measure to compare against past reserve bases and the reserve bases of other business entities that are not dependent on the taxpaying status of the entity. The Company is not able to provide a reconciliation of projected PV-10 of the prospect to Standardized Measure of Discounted Net Cash Flows because certain components of the GAAP measure are not reasonably estimable.
Contango Oil & Gas Company
E. Joseph Grady, 713-236-7400
Senior Vice President and Chief Financial Officer
Source: Contango Oil & Gas Company
Source: Contango Oil & Gas