8-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 8–K

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported): April 9, 2021

 

 

CONTANGO OIL & GAS COMPANY

(Exact Name of Registrant as Specified in Charter)

 

 

 

Texas   001-16317   95-4079863
(State or Other Jurisdiction
of Incorporation)
  (Commission
File Number)
  (IRS Employer
Identification No.)

111 E. 5th Street, Suite 300

Fort Worth, Texas 76102

(Address of Principal Executive Offices)

(817) 529-0059

(Registrant’s telephone number, including area code)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, Par Value $0.04 per share   MCF   NYSE American

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


Item 8.01

Other Events.

On February 1, 2021, Contango Oil & Gas Company (the “Company”) completed the previously announced acquisition of certain oil and natural gas properties of Grizzly Operating, LLC, referred to by Contango as the “Silvertip Acquisition” in previous SEC filings and press releases (the “Properties”). This Current Report is filed to provide the financial statements of the Properties and the pro forma financial information of the Company for the acquisition of the Properties, the acquisition of Mid-Con Energy Partners, LP and related transactions described therein. This Current Report is filed to provide the historical audited statement of revenues and direct operating expenses of the Properties and pro forma financial information of the Company, for purposes of incorporation into Contango’s registration statements filed under the Securities Act of 1933.

 

Item 9.01

Financial Statements and Exhibits.

 

(a)

Financial Statements.

Historical audited statement of revenues and direct operating expenses of the Properties for the year ended December 31, 2020, together with the related notes to the financial statements, a copy of which is filed as Exhibit 99.1 hereto and incorporated by reference herein.

 

(b)

Pro Forma Financial Information.

Unaudited pro forma consolidated combined financial statements of the Company as of and for the year ended December 31, 2020, a copy of which is filed as Exhibit 99.2 hereto and incorporated herein by reference.

 

(d)

Exhibits.

 

23.1    Consent of BDO USA, LLP.
99.1    Historical audited statement of revenues and direct operating expenses of the Properties for the year ended December 31, 2020, together with the related notes to the financial statements.
99.2    Unaudited pro forma consolidated combined financial statements of Contango Oil & Gas Company as of and for the year ended December 31, 2020.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Current Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    CONTANGO OIL & GAS COMPANY
Date: April 9, 2021    

/s/ E. Joseph Grady

    E. Joseph Grady
    Senior Vice President and
    Chief Financial and Accounting Officer
EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Contango Oil & Gas Company

Fort Worth, Texas

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-238209, 333-235934, 333-239091, 333-250931, and 333-251499) and Form S-8 (No. 333-248866, 333-229336, 333-189302 and 333-170236) of Contango Oil & Gas Company of our report dated April 1, 2021, relating to the statement of revenues and direct operating expenses for the year ended December 31, 2020 of the oil and natural gas properties acquired by Contango Oil & Gas Company on February 1, 2021 from Grizzly Operating, LLC, which appears in this Form 8-K.

/s/ BDO USA, LLP

Houston, Texas

April 9, 2021

EX-99.1

Exhibit 99.1

STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

FOR THE YEAR ENDED DECEMBER 31, 2020 OF THE OIL AND NATURAL GAS

PROPERTIES ACQUIRED BY CONTANGO OIL & GAS COMPANY

ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC


Independent Auditor’s Report

Board of Directors and Members

Grizzly Energy, LLC

Houston, Texas

Opinion

We have audited the statement of revenues and direct operating expenses of the oil and natural gas properties (the “Properties”), as defined in Note 1, acquired on February 1, 2021 by Contango Oil & Gas Company, from Grizzly Operating, LLC, a wholly-owned subsidiary of Grizzly Energy, LLC (the “Company”), for the year ended December 31, 2020, and the related notes to the statement of revenues and direct operating expenses.

In our opinion, the accompanying statement of revenues and direct operating expenses present fairly, in all material respects, the revenues and direct operating expenses of the Properties for the year ended December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Statement of Revenues and Direct Operating Expenses section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Emphasis of Matter

As described in Note 2, the accompanying statement of revenues and direct operating expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and are not intended to be a complete presentation of the results of the operations of the Properties. Our opinion is not modified with respect to this matter.

Responsibilities of Management for the Statement of Revenues and Direct Operating Expenses

Management is responsible for the preparation and fair presentation of the statement of revenues and direct operating expenses in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the statement of revenues and direct operating expenses that are free from material misstatement, whether due to fraud or error.


Auditor’s Responsibilities for the Audit of the Statement of Revenues and Direct Operating Expenses

Our objectives are to obtain reasonable assurance about whether the statement of revenues and direct operating expense as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the statement of revenues and direct operating expenses.

In performing an audit in accordance with GAAS, we:

 

   

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

   

Identify and assess the risks of material misstatement of the statement of revenues and direct operating expenses, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the statement of revenues and direct operating expenses.

 

   

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed.

 

   

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the statement of revenues and direct operating expenses.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

 

/s/ BDO USA, LLP
Houston, Texas
April 1, 2021


STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY CONTANGO OIL &

GAS COMPANY ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC

(in thousands)

 

     For the
Year Ended
December 31, 2020
 

Oil and condensate sales

   $ 42,705

Natural gas sales

     3,788

Natural gas liquids (NGLs) sales

     5,380
  

 

 

 

Total revenues

     51,873

Direct operating expenses:

  

Lease operating expense

     35,948

Production taxes

     4,868

Transportation, gathering, processing and compression expense

     286
  

 

 

 

Total direct operating expenses

     41,102
  

 

 

 

Excess of revenues over direct operating expenses

   $ 10,771
  

 

 

 

The accompanying notes are an integral part of the statement of revenues and direct operating expenses.


STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY CONTANGO OIL &

GAS COMPANY ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC

 

Notes to the Financial Statement

Note 1: THE PROPERTIES

On November 30, 2020, Grizzly Operating, LLC (“Seller” or the “Company”) entered into a Purchase and Sale Agreement, dated November 27, 2020, with Contango Oil & Gas Company (“Contango”) (the “Purchase Agreement”) to sell certain oil and natural gas assets located in the Big Horn Basin in Wyoming and Montana, Powder River Basin in Wyoming and Permian Basin in Texas and New Mexico (the “Properties”) for approximately $58.0 million in cash, subject to adjustments for operations during the period between the effective date of August 1, 2020 and the closing date and other customary purchase price adjustments. The closing of this transaction was completed on February 1, 2021 for an aggregate adjusted purchase price of $53.3 million, subject to customary post-closing adjustments.

Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)

Basis of Presentation:

The Properties were not accounted for or operated as a separate division by the Seller. Certain costs, such as depreciation, depletion and amortization, interest, accretion, general and administrative expenses, and corporate income taxes were not allocated to the individual properties. Grizzly’s management believes historical expenses of this nature associated with the Properties are not indicative of the costs to be incurred by Contango. Accordingly, a full separate set of financial statements reflecting the financial position, results of operations, and cash flows prepared in accordance with accounting principles generally accepted in the United States of America are not available for the Properties and are not practicable to obtain in these circumstances.

Revenues and direct operating expenses included in the accompanying financial statement represent the Company’s net working interest in the Properties and are presented on the accrual basis of accounting. The revenues and direct operating expenses presented herein relate only to the interests in the Properties sold and do not represent all the oil and natural gas operations of the Seller, the other owners, or other third party working interest owners. Depreciation, depletion and amortization, interest, accretion, general and administrative expenses and corporate income taxes have been excluded. The financial statement does not include the effects of realized derivative hedging gains and losses associated with the Properties. The financial statement presented is not intended to be a complete presentation of the financial condition or results of operations of the Properties and may not be indicative of the results of operations of the Properties going forward due to changes in the business and inclusion of the above mentioned expenses.

Historical financial information reflecting financial position, results of operations, and cash flows of the Properties is not presented because it would be impractical and costly to obtain since such financial information was not historically prepared by the Company. In addition, the Properties were a part of a larger enterprise prior to the sale to Contango, and representative amounts of indirect general and administrative expenses, depreciation, depletion and amortization, interest and other indirect costs were not necessarily allocated to the Properties, nor would such allocated historical costs be relevant to future operations of the Properties. The historical statements of revenues and direct operating expenses of the Properties are presented in order to substantially comply with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for businesses acquired.


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The Company reviewed events occurring after the date of the financial statement which could affect the Properties financial position and/or results of operations for the period. The Company reviewed and evaluated events through April 1, 2021, the date this financial statement was available to be issued.

 

(b)

Concentrations of Credit Risk

The following purchasers accounted for 10% or more of the oil, natural gas and NGLs sales from the Properties during the year ended December 31, 2020:

 

Exxon Mobil Corporation

     31

Phillips 66 Company

     13

 

(c)

Revenue from Contracts with Customers:

Sales of oil, natural gas and NGLs are recognized at the point control of the product is transferred to the customer and collectability is reasonably assured. Virtually all of the contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, quality of the oil or natural gas, and prevailing supply and demand conditions. As a result, the price of the oil, natural gas, and NGLs fluctuates to remain competitive with other available oil, natural gas, and NGLs supplies.

Oil sales

Oil sales contracts are generally structured in one of the following ways:

 

  i.

Oil production is sold at the wellhead and an agreed-upon index price is collected, net of pricing differentials. In this scenario, revenue is recognized when control transfers to the purchaser at the wellhead at the net price received.

 

  ii.

Oil is delivered to the purchaser at a contractually agreed-upon delivery point at which the purchaser takes custody, title, and risk of loss of the product. Under this arrangement, a third party is paid to transport the product and receive a specified index price from the purchaser with no deduction. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the price received from the purchaser. Oil revenues are recorded net of these third-party transportation fees in statement of revenues and direct operating expenses.

Natural gas and NGLs Sales

Under most of the natural gas processing contracts related to the Properties, natural gas is delivered to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity gathers and processes the natural gas and remits proceeds for the resulting sales of NGLs and residue gas. In these scenarios, an evaluation is made as to whether the seller is a principal or


an agent in the transaction. For those contracts where the seller is the principal and the ultimate third party is the customer, revenue is recognized on a gross basis, with transportation, gathering, processing and compression fees presented as an expense in the statement of revenues and direct operating expenses. Alternatively, for those contracts where it is concluded the seller is the agent and the midstream processing entity is the customer, natural gas and NGLs revenues is recognized based on the net amount of the proceeds received from the midstream processing.

In certain natural gas processing agreements, it may be elected to take the residue gas and/or NGLs in-kind at the tailgate of the midstream entity’s processing plant and subsequently market the product. Through the marketing process, product is delivered to the ultimate third-party purchaser at a contractually agreed-upon delivery point and a specified index price is received from the purchaser. In this scenario, revenue is recognized when control transfers to the purchaser at the delivery point based on the index price received from the purchaser. The gathering, processing and compression fees attributable to the gas processing contract, as well as any transportation fees incurred to deliver the product to the purchaser, are presented as transportation, gathering, processing and compression expense in the statement of revenues and direct operating expenses.

Transaction price allocated to remaining performance obligations

A significant number of product sales are short-term in nature with a contract term of one year or less. For those contracts, the practical expedient in ASC 606-10-50-14 has been utilized providing an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For product sales that have a contract term greater than one year, the practical expedient in ASC 606-10-50-14(a) is utilized which eliminates the requirement to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

Prior-period performance obligations

Revenue is recorded in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and NGLs sales may not be received for 30 to 90 days after the date production is delivered, and as a result, estimation is required of the amount of production delivered to the purchaser and the price that will be received for the sale of the product. Differences are recorded between the estimates and the actual amounts received for product sales in the month that payment is received from the purchaser.

 

(d)

Direct operating expenses:

Direct operating expenses are recognized when incurred and consist of direct expenses of the Properties. The direct operating expenses include lease operating expenses, production taxes and transportation, gathering, processing and compression expense. Lease operating expenses include lifting costs, well repair expenses, facility maintenance expenses, well workover costs, and other field-related expenses. Lease operating expenses also include expenses directly associated with support personnel, support services, equipment, and facilities directly related to oil and natural gas production activities.


STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY CONTANGO OIL &

GAS COMPANY ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC

SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION

(UNAUDITED)

OIL AND NATURAL GAS RESERVE INFORMATION

Proved oil and gas reserve quantities are based on internal estimates prepared by the Company in accordance with guidelines established by the Securities and Exchange Commission based on the 12-month unweighted first-day-of-the-month average prices as of December 31, 2020, with appropriate adjustments by property for location, quality, gathering and marketing adjustments..

There are numerous uncertainties inherent in estimating quantities of proved reserves and projecting future rates of production and timing of development expenditures. The following reserve data represents estimates only and should not be construed as being exact.

 

     Crude Oil     Natural Gas     NGLs     Total  
     (Mbbl)     (MMcf)     (Mbbl)     (Mboe)  

Net Proved Reserves as of:

        

December 31, 2019

     22,666     38,864     5,513     34,656

Revisions of previous estimates

     (8,698     (13,310     (2,355     (13,271

Extensions, discoveries, and other

     40     99     16     72

Production

     (1,242     (6,998     (408     (2,816
  

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2020

     12,766     18,655     2,766     18,641
  

 

 

   

 

 

   

 

 

   

 

 

 

Proved Developed Reserves as of:

        

December 31, 2019

     18,343     31,999     4,140     27,816

December 31, 2020

     12,766     18,655     2,766     18,641

Proved Undeveloped Reserves as of:

        

December 31, 2019

     4,323     6,865     1,373     6,840

December 31, 2020

     —         —         —         —    

During the year ended December 31, 2020, the Company removed all proved undeveloped reserves related to the Properties that became uneconomic due to the decline in commodity prices.


STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY CONTANGO OIL &

GAS COMPANY ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC

SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION

(UNAUDITED)

 

FUTURE NET CASH FLOWS EXCLUDING INCOME TAXES

The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves (Standardized Measure) is a disclosure requirement under Accounting Standards Codification (ASC) 932. The Standardized Measure does not purport to be, nor should it be interpreted to present, the fair market value of the proved oil and natural gas reserves of the Properties, but does present a standardized disclosure concerning possible future net cash flows that would result under the assumptions used. An estimate of fair market value would also take into account, among other things, the recovery of reserves not presently classified as proved, the value of unproved properties, and consideration of expected future economic and operating conditions. Additionally, the standardized measure and changes in standardized measure presented here excludes income taxes as the tax basis of the properties is not applicable on a go forward basis.

For the December 31, 2020 calculation in the following table, estimated future cash inflows were computed using 2020 12-month unweighted average first-day-of-the-month prices of $39.57 per barrel of oil and $1.99 per Mcf for natural gas with no escalation in future years. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation in future years. As mentioned above, the standardized measure presented here excludes the effects of income taxes as the tax basis for the properties is not applicable on a going forward basis. The estimated future net cash flows are then discounted at a rate of 10%. No deduction has been made for general and administrative expenses, interest expense, depreciation, depletion and amortization or for federal or state income taxes.

The following table sets forth unaudited information concerning future net cash flows excluding income taxes for oil and natural gas reserves associated with the Properties.

 

(in thousands)    At December 31,
2020
 

Future cash inflows

   $ 460,730

Future production costs

     (288,270

Future development costs

     (50,563
  

 

 

 

Future net cash flows

     121,897

10 percent annual discount for estimated timing of cash flows

     (54,304
  

 

 

 

Discounted future net cash flows

   $ 67,593
  

 

 

 


STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

OF THE OIL AND NATURAL GAS PROPERTIES ACQUIRED BY CONTANGO OIL &

GAS COMPANY ON FEBRUARY 1, 2021 FROM GRIZZLY OPERATING, LLC

SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION

(UNAUDITED)

 

The following table sets forth the principal sources of change in discounted future net cash flows excluding income taxes associated with the Properties for the year ended December 31, 2020 (in thousands).

 

Beginning of Year

   $ 201,230

Sales, net of production costs

     (10,771

Net change in prices and production costs

     (143,226

Extensions, discoveries and improved recovery, net of costs

     1,588

Change in future development costs

     58,739

Accretion of discount

     20,123

Revision of quantity estimates

     (54,902

Change in production rates, timing and other

     (5,188
  

 

 

 

End of Year

   $ 67,593
  

 

 

 
EX-99.2

Exhibit 99.2

UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated combined financial statements present the historical consolidated financial statements of Contango Oil & Gas Company and subsidiaries (“Contango”), the historical consolidated financial statements of Michael Merger Sub LLC (successor to Mid-Con Energy Partners, LP) and subsidiaries (“Mid-Con”), and the historical statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired on February 1, 2021 from Grizzly Operating, LLC, referred to by Contango as the “Silvertip Acquisition” in previous SEC filings and press releases (“Grizzly”), adjusted to give effect to the following transactions (collectively, the “Transactions”):

 

   

Contango’s acquisition of Mid-Con, which closed on January 21, 2021, in which each Mid-Con unitholder received 1.75 shares of Contango’s common stock (a total of 25,409,164 shares of Contango common stock were issued at closing) (the “Mid-Con Acquisition”);

 

   

Contango’s acquisition of oil and natural gas properties from Grizzly, which closed on February 1, 2021 for a total purchase price of $58.0 million adjusted for the results of operations for the period between the effective and closing dates, and other customary closing adjustments, (the “Grizzly Acquisition”);

 

   

the issuance and sale of 26,451,988 shares of Contango common stock in a private placement completed on October 27, 2020, at a price of $1.50 per common share (the “October Private Placement”);

 

   

the issuance and sale of 14,193,903 shares of Contango common stock in a private placement completed on December 1, 2020, at a price of $1.55 per common share (the “December Private Placement”); and

 

   

additional borrowings under Contango’s credit facility in connection with consummation of the Mid-Con Acquisition, Grizzly Acquisition, and repayment of outstanding borrowings under Mid-Con’s credit facility.

The unaudited pro forma consolidated combined statement of operations for the year ended December 31, 2020 combines the historical consolidated statement of operations of Contango, the historical consolidated statement of operations of Mid-Con and the historical statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired in the Grizzly Acquisition, giving effect to the Transactions as if they had been consummated on January 1, 2020, the beginning of the earliest period presented. The unaudited pro forma consolidated combined balance sheet combines the historical consolidated balance sheet of Contango and the historical consolidated balance sheet of Mid-Con as of December 31, 2020, giving effect to the Transactions as if they had been consummated on December 31, 2020. The historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated combined financial statements to give pro forma effect to events that are: (1) directly attributable to the Transactions; (2) factually supportable; and (3) with respect to the statement of operations, expected to have a continuing impact on Contango’s results following the completion of the Transactions.

The unaudited pro forma consolidated combined financial statements have been developed from and should be read in conjunction with:

 

   

the accompanying notes to the unaudited pro forma consolidated combined financial statements;

 

   

the historical audited consolidated financial statements and related notes of Contango as of and for the year ended December 31, 2020, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Contango’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “Contango Form 10-K”);

 

   

the historical audited consolidated financial statements of Mid-Con as of and for the year ended December 31, 2020, which are included in Exhibit 99.1 to Contango’s Current Report on Form 8-K filed on March 10, 2021; and

 

   

the historical audited statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired in the Grizzly Acquisition for the year ended December 31, 2020, which are included in Exhibit 99.1 to Contango’s Current Report on Form 8-K filed herewith.


Contango Oil & Gas Company and Subsidiaries

Unaudited Pro Forma Consolidated Combined Statement of Operations

Year Ended December 31, 2020

(in thousands, except per share amounts)

 

     Historical      Pro Forma  
     Contango     Mid-Con     Grizzly      Mid-Con
Accounting
Adjustments
    Grizzly
Accounting
Adjustments
    Financing
Adjustments
    Pro Forma
Combined
 
     (a)     (b)     (c)                           

REVENUES

               

Oil and condensate sales

   $ 62,461     $ 38,024     $   42,705      $ —       $ —       $ —       $ 143,190  

Natural gas sales

     31,381       877       3,788        —         —         —         36,046  

Natural gas liquids sales

     17,078       —         5,380        —         —         —         22,458  

Fee for service revenues

     2,000       —         —          (2,000 ) (d)      —         —         —    

Other operating revenues

     —         748       —          —         —         —         748  

Gain on derivative instruments

     —         16,036       —          (16,036 ) (e)      —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     112,920       55,685       51,873        (18,036     —         —         202,442  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES

               

Operating expenses

     72,847       —         —          28,176   (f)      41,102   (f)      —         142,125  

Lease operating expenses

     —         24,039       35,948        (24,039 ) (f)      (35,948 ) (f)      —         —    

Other operating expenses

     —         1,496       286        (1,496 ) (f)      (286 ) (f)      —         —    

Production and ad valorem taxes

     —         2,641       4,868        (2,641 ) (f)      (4,868 ) (f)      —         —    

Exploration expenses

     11,594       —         —          4,290   (g)      —         —         15,884  

Depreciation, depletion and amortization

     30,032       9,076       —          4,791  (h), (i)      13,117  (o)      —         57,016  

Impairment and abandonment of oil and gas properties

     168,802       19,647       —          —         —         —         188,449  

Dry holes and abandonments of unproved properties

     —         4,290       —          (4,290 ) (g)      —         —         —    

Accretion of discount on asset retirement obligations

     —         1,734       —          (1,734 ) (i)      —         —         —    

General and administrative expenses

     24,940       10,620       —          (2,000 ) (d)      —         —         33,560  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     308,215       73,543       41,102        1,057       13,117       —         437,034  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE)

               

Gain from investment in affiliates, net of income taxes

     27       —         —          —         —         —         27  

Gain from sale of assets

     4,501       —         —          —         —         —         4,501  

Interest income

     —         1       —          (1 ) (j)      —         —         —    

Interest expense

     (5,022     (5,137     —          —         —         1,803  (l)      (8,356

Gain on derivatives, net

     27,585       —         —          16,036  (e)      —         —         43,621  

Loss on settlements of asset retirement obligations

     —         (15     —          15  (i)      —         —         —    

Other expense

     —         (39     —          —         —         —         (39

Other income

     3,609       —         —          (j)      —         —         3,610  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     30,700       (5,190     —          16,051       —         1,803       43,364  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS BEFORE INCOME TAXES

     (164,595     (23,048     10,771        (3,042     (13,117     1,803       (191,228

INCOME TAX PROVISION

     (747     —         —          —    (n)      —    (n)      —         (747
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (165,342   $ (23,048   $ 10,771      $ (3,042   $ (13,117   $ 1,803     $ (191,975
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Less: Distributions to preferred unitholders

       1,172          (1,172 ) (k)        —         —    

Less: General partner’s interest in net loss

       —            —           —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Limited partners’ interest in net loss

       (24,220        (1,870       1,803       (191,975
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS PER SHARE

               

Basic

   $ (1.20              $ (0.97 ) (m) 

Diluted

   $ (1.20              $ (0.97 ) (m) 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

               

Basic

     137,522                  197,241  

Diluted

     137,522                  197,241  


Contango Oil & Gas Company and Subsidiaries

Unaudited Pro Forma Consolidated Combined Balance Sheet

As of December 31, 2020

(in thousands, except share and per share amounts)

 

    Historical     Pro Forma  
    Contango     Mid-Con     Mid-Con
Accounting
Adjustments
    Grizzly
Accounting
Adjustments
    Financing
Adjustments
    Pro Forma
Combined
 
    (a)     (b)                          

CURRENT ASSETS

           

Cash and cash equivalents

  $ 1,383     $ 776     $ —       $ (53,370 ) (n)    $ 57,516  (d)    $ 6,305  

Accounts receivable, net

    37,862       4,398       —         —         —         42,260  

Prepaid expenses

    3,360       162       —         —         —         3,522  

Current derivative asset

    2,996       3,141       —         —         —         6,137  

Inventory

    442       —         —         —         —         442  

Deposits and other

    763       —         —         —         —         763  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    46,806       8,477       —         (53,370     57,516       59,429  

PROPERTY, PLANT AND EQUIPMENT

           

Oil and natural gas properties, successful efforts method of accounting:

           

Proved properties

    1,274,508       265,144       (92,537 ) (c)      86,049  (n)      —         1,533,164  

Unproved properties

    16,201       —         —         —         —         16,201  

Other property and equipment

    1,669       916       (186 ) (c)      —         —         2,399  

Accumulated depreciation, depletion, amortization and impairment

    (1,190,475     (101,026     101,026  (c)      —         —         (1,190,475
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property, plant and equipment, net

    101,903       165,034       8,303       86,049       —         361,289  

OTHER NON-CURRENT ASSETS

           

Investments in affiliates

    6,793       —         —         —         —         6,793  

Long-term derivative asset

    497       —         —         —         —         497  

Right-of-use lease assets

    5,448       —         —         1,014  (n)      —         6,462  

Debt issuance costs

    1,782       —         —         —         962  (e)      2,744  

Deposits

    7,038       —         —         —         (7,000 ) (f)      38  

Other assets

    —         1,497       —         —         —         1,497  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other non-current assets

    21,558       1,497       —         1,014       (6,038     18,031  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

  $ 170,267     $ 175,008     $ 8,303     $ 33,693     $ 51,478     $ 438,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CURRENT LIABILITIES

           

Accounts payable and accrued liabilities

    83,970       —         5,596  (g)      424  (n)      4,255  (h)      94,245  

Accounts payable - trade

    —         648       (648 ) (g)      —         —         —    

Accounts payable - related parties

    —         3,392       (3,392 ) (g)      —         —         —    

Accrued liabilities and other

    —         1,556       (1,556 ) (g)      —         —         —    

Current derivative liability

    1,317       —         —         —         —         1,317  

Current asset retirement obligations

    4,249       —         —         —         —         4,249  

Other current liabilities

    —         457       —         —         —         457  

Current debt

    —         68,487       —         —         (68,487 ) (i)      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    89,536       74,540       —         424       (64,232     100,268  

NON-CURRENT LIABILITIES

           

Long-term debt

    12,369       —         —         —         119,003  (j)      131,372  

Long-term derivative liability

    1,648       —         —         —         —         1,648  

Asset retirement obligations

    48,523       32,630       (3,389 ) (c)      32,256  (n)      —         110,020  

Lease liabilities

    2,624       —         —         1,014  (n)      —         3,638  

Deferred tax liability

    —         —         —    (k)      —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

    65,164       32,630       (3,389     33,269       119,003       246,677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    154,700       107,170       (3,389     33,693       54,771       346,945  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

           

Common stock, $0.04 par value, 400 million shares authorized, 173,830,390 shares issued 173,737,816 shares outstanding

    6,941       —         1,016  (c)      —         —         7,957  

Equity, limited partners - 14,311,522 units issued and outstanding

    —         67,838       (67,838 ) (l)      —         —         —    

Additional paid-in capital

    535,192       —         78,514  (c)      —         —         613,706  

Treasury shares at cost (92,574 shares)

    (248     —         —         —         —         (248

Accumulated deficit

    (526,318     —         —         —         (3,293 ) (m)      (529,611
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    15,567       67,838       11,692       —         (3,293     91,804  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

  $ 170,267     $ 175,008     $ 8,303     $ 33,693     $ 51,478     $ 438,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


1.

Basis of Pro Forma Presentation

The unaudited pro forma consolidated combined financial statements have been prepared assuming the Mid-Con Acquisition is accounted for as a business combination using the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) ASC 805, Business Combinations (“ASC 805”) and assuming the Grizzly Acquisition is accounted for using the accounting for asset acquisitions under ASC 805. Under the acquisition method of accounting, the Mid-Con Acquisition will be recorded at fair value measured as of the acquisition date. Under the accounting for asset acquisitions, the Grizzly Acquisition will be recorded using a cost accumulation and allocation model under which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired and liabilities assumed. The pro forma adjustments have been prepared as if the Transactions had taken place on December 31, 2020 in the case of the unaudited pro forma consolidated combined balance sheet and January 1, 2020 in the case of the unaudited pro forma consolidated combined statement of operations.

ASC 805 uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements (“ASC 820”). ASC 820 defines the term “fair value,” sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined in ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and seller in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. Many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

For business combinations under ASC 805, acquisition-related transaction costs are not included as a component of consideration transferred but are accounted for as expenses in the periods in which such costs are incurred, or if related to the issuance of debt, capitalized as debt issuance costs. Acquisition-related transaction costs incurred as part of the Transactions include advisory, legal and credit facility amendment fees. Equity issuance costs are netted against the offering proceeds. For asset acquisitions under ASC 805, acquisition-related transaction costs are capitalized as a component of the cost of the assets acquired.

The unaudited pro forma consolidated combined financial statements have been developed from and should be read in conjunction with (i) the accompanying notes to the unaudited pro forma combined financial statements (ii) Contango’s historical audited consolidated financial statements and related notes for the year ended December 31, 2020, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Contango Form 10-K, (iii) Mid-Con’s historical audited consolidated financial statements and related notes for the year ended December 31, 2020, which are included in Exhibit 99.1 to Contango’s Current Report on Form 8-K filed on March 10, 2021, and (iv) the historical audited statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired in the Grizzly Acquisition for the year ended December 31, 2020, which are included in Exhibit 99.1 to Contango’s Current Report on Form 8-K filed herewith.

The unaudited pro forma consolidated combined financial statements reflect adjustments, based on available information and certain assumptions that Contango believes are reasonable, attributable to the following:

 

   

the Mid-Con Acquisition, which is accounted for as a business combination, with Contango identified as the acquirer, and the issuance of shares of Contango common stock as merger consideration;

 

   

the Grizzly Acquisition, which is accounted for as an asset acquisition;

 

   

the conversion of vested and unvested Mid-Con phantom units through the issuance of shares of Contango common stock in accordance with the Mid-Con merger agreement;

 

   

the issuance of Contango common stock in the October Private Placement, the December Private Placement, additional borrowings under Contango’s credit facility in connection with consummation of the Mid-Con Acquisition and Grizzly Acquisition, and repayment of outstanding borrowings under Mid-Con’s credit facility;

 

   

adjustments to conform the classification of certain assets and liabilities in Mid-Con’s historical consolidated balance sheet to Contango’s classification for similar assets and liabilities;


   

adjustments to conform the classification of expenses in Mid-Con’s historical consolidated statement of operations and the historical statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired on February 1, 2021 from Grizzly to Contango’s classification for similar expenses;

 

   

the incurrence of acquisition-related expenses; and

 

   

the recognition of estimated tax impacts of the pro forma adjustments.

The pro forma adjustments represent management’s estimates based on information available as of the date of this filing and are subject to change as additional information becomes available and additional analyses are performed. The pro forma financial statements are provided for illustrative purposes only and are not intended to represent what Contango’s financial position or results of operations would have been had the Mid-Con Acquisition and Grizzly Acquisition actually been consummated on the assumed dates nor do they purport to project the future operating results or financial position of Contango following the Mid-Con Acquisition and Grizzly Acquisition. The pro forma financial statements do not reflect future events that may occur after the Mid-Con Acquisition and Grizzly Acquisition, including, but not limited to, the anticipated realization of ongoing savings from potential operating efficiencies, asset dispositions, cost savings, or economies of scale that Contango may achieve with respect to the combined operations. Specifically, the pro forma statements of operations do not include the synergies expected to be achieved as a result of the Mid-Con Acquisition and Grizzly Acquisition and any associated costs that may be incurred to achieve the identified synergies. Additionally, Contango cannot assure that charges will not be incurred in excess of those included in the pro forma total consideration related to the Mid-Con Acquisition and Grizzly Acquisition, Contango’s efforts to achieve operational synergies, or that management will be successful in its efforts to integrate the operations. The pro forma statement of operations also excludes the effects of costs associated with any restructuring, integration activities, and asset dispositions that may result from the Mid-Con Acquisition and Grizzly Acquisition. Further, the pro forma financial statements do not reflect the effect of any regulatory actions that may impact the results of Contango following the Mid-Con Acquisition and the Grizzly Acquisition.

Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma consolidated combined financial statements. In Contango’s opinion, all adjustments that are necessary to present fairly the pro forma information have been made. The historical financial statements have been adjusted in the unaudited pro forma consolidated combined financial statements to give effect to the Transactions. These adjustments are directly attributable to the Transactions, factually supportable and, with respect to the unaudited pro forma consolidated combined statements of operations, expected to have a continuing impact on Contango following the Mid-Con Acquisition and the Grizzly Acquisition.

 

2.

Pro Forma Adjustments and Assumptions

Pro Forma Adjustments to the Statement of Operations for the year ended December 31, 2020:

 

  a.

Represents Contango’s historical consolidated statement of operations for the year ended December 31, 2020.

 

  b.

Represents Mid-Con’s historical consolidated statement of operations for the year ended December 31, 2020.

 

  c.

Represents the historical statement of revenues and direct operating expenses of the oil and natural gas properties Contango acquired in the Grizzly Acquisition for the year ended December 31, 2020.

 

  d.

Reflects the removal of Contango’s fee for service revenues and Mid-Con’s general and administrative expenses associated with the management services agreement between Contango and Mid-Con.

 

  e.

Represents a reclassification of gain on derivative instruments from revenues to other income (expense).

 

  f.

Represents a reclassification of lease operating expenses, other operating expenses, and production taxes into operating expenses.

 

  g.

Represents a reclassification of dry holes and abandonments of unproved properties into exploration expenses.

 

  h.

Includes an increase in depreciation, depletion and amortization based on the allocated fair value of the Mid-Con properties and the reclass of accretion of discount on asset retirement obligations to depreciation, depletion and amortization.


  i.

Represents the reclassification of accretion of discount on asset retirement obligations and loss on settlements of asset retirement obligations to depreciation, depletion and amortization.

 

  j.

Represents the reclassification of interest income to other income.

 

  k.

Adjustment eliminates historical distributions to preferred unitholders given the Mid-Con Acquisition.

 

  l.

Adjustment to eliminate historical interest expense related to borrowings under Mid-Con’s credit facility that was not assumed by Contango and to recognize interest expense that would have been incurred with respect to borrowings under Contango’s credit facility in connection with the Mid-Con Acquisition and the Grizzly Acquisition, had such acquisitions occurred on January 1, 2020, as well as to recognize amortization of credit facility amendment fees associated with increasing Contango’s borrowing base in connection with the Mid-Con Acquisition, had such acquisition occurred on January 1, 2020.

 

  m.

The pro forma basic and diluted net loss per share was computed by dividing pro forma net loss attributable to Contango by the historical weighted average number of shares of common stock outstanding after giving effect to: (i) the issuance of 25,045,164 shares of Contango common stock in connection with the Mid-Con Acquisition, (ii) the issuance and sale of 26,451,988 shares of Contango common stock in the October Private Placement completed on October 27, 2020, and (iii) the issuance and sale of 14,193,903 shares of Contango common stock in the December Private Placement, as if those issuances had been completed on January 1, 2020.

 

  n.

No tax benefit is recognized in the pro forma statement of operations for the incremental pre-tax losses attributable to the Mid-Con Acquisition and the Grizzly Acquisition due to the valuation allowance against Contango’s deferred tax assets.

 

  o.

Represents an increase in depreciation, depletion and amortization based on the relative fair value of the Grizzly properties and the accretion of asset retirement obligations.

Pro Forma Adjustments to the Balance Sheet at December 31, 2020:

 

  a.

Represents Contango’s historical consolidated balance sheet as of December 31, 2020.

 

  b.

Represents Mid-Con’s historical consolidated balance sheet as of December 31, 2020.

 

  c.

Reflects the issuance of 25,409,164 shares of Contango common stock at a price of $3.13 per share as consideration in the Mid-Con Acquisition and adjustments to state Mid-Con’s assets acquired and liabilities assumed at fair value. A summary of the consideration paid and the preliminary fair value of the assets acquired and liabilities assumed is as follows (in thousands):


Preliminary Consideration:

  

Mid-Con outstanding units

     14,520  

Exchange ratio of Contango shares for Mid-Con common units

     1.75  
  

 

 

 

Contango common stock issued to Mid-Con unitholders

     25,409  

Issued price

   $ 3.13  
  

 

 

 

Total consideration

   $ 79,530  

Preliminary fair value of assets acquired:

  

Current assets

  

Cash and cash equivalents

   $ 776  

Accounts receivable

     4,398  

Current derivative asset

     3,141  

Prepaid expenses

     162  

Oil and natural gas properties

  

Proved properties

   $ 172,607  

Other property and equipment

     730  

Other long-term assets

     1,497  
  

 

 

 

Total preliminary fair value of assets acquired

   $ 183,311  

Preliminary fair value of liabilities assumed:

  

Current liabilities

  

Accounts payable and accrued liabilities

   $ (5,596

Other current liabilities

     (457

Revolving credit facility

     (68,487

Asset retirement obligations assumed

     (29,241
  

 

 

 

Total preliminary fair value of liabilities assumed

   $ (103,781
  

 

 

 

Net Assets acquired and liabilities assumed

   $ 79,530  
  

 

 

 

 

  d.

Reflects net proceeds received by Contango from additional borrowings under Contango’s credit facility and repayment of outstanding borrowings under Mid-Con’s credit facility in connection with consummation of the Mid-Con Acquisition and the Grizzly Acquisition.

 

  e.

Represents credit facility amendment fees associated with increasing Contango’s borrowing base in connection with the Mid-Con Acquisition.

 

  f.

Represents the removal of Contango’s $7.0 million deposit with Grizzly as this deposit would be applied against the purchase price if the Grizzly Acquisition closed on December 31, 2020.

 

  g.

Represents the reclassification of accounts payable – trade, accounts payable – related parties, and accrued liabilities and other into accounts payable and accrued liabilities.

 

  h.

Represents the accrual of approximately $3.3 million in estimated legal and advisory fees and approximately $1.0 million in credit facility amendment fees that are payable as a result of the Mid-Con Acquisition, which were not reflected in either Contango’s or Mid-Con’s historical financial statements.

 

  i.

Represents the repayment of outstanding borrowings under Mid-Con’s credit facility by Contango in connection with consummation of the Mid-Con Acquisition.

 

  j.

Represents the receipt of proceeds from additional borrowings under Contango’s revolving credit facility.

 

  k.

No deferred tax benefit is recognized in the pro forma balance sheet due to the historical valuation allowance historically recognized against Contango’s deferred tax assets.

 

  l.

Represents the elimination of Mid-Con’s historical equity balances.


  m.

Represents the accrual of approximately $3.3 million in estimated legal and advisory fees that are payable as a result of the Mid-Con Acquisition, which were not reflected in either Contango’s or Mid-Con’s historical financial statements.

 

  n.

Reflects the cash payments made for the Grizzly Acquisition, including the deposits of $7.0 million, and the allocation of the cost of the Grizzly Acquisition on a relative fair value basis to the assets acquired and liabilities assumed. A summary of the consideration paid and the preliminary relative fair value of the assets acquired and liabilities assumed is as follows (in thousands):

 

Preliminary Consideration:

  

Purchase price

   $ 58,000  

Closing adjustments

     (4,739
  

 

 

 

Total consideration

   $ 53,261  

Acquisition transaction costs

     109  
  

 

 

 

Total cash paid

   $ 53,370  

Preliminary relative fair value of assets acquired:

  

Oil and natural gas properties

  

Proved properties

   $ 86,049  

Right-of-use lease assets

     1,014  
  

 

 

 

Total preliminary relative fair value of assets acquired

   $ 87,063  

Preliminary relative fair value of liabilities assumed:

  

Asset retirement obligations assumed

   $ (32,256

Lease liabilities

     (1,014

Suspended funds liability

     (424
  

 

 

 

Total preliminary relative fair value of liabilities assumed

   $ (33,693
  

 

 

 

Net Assets acquired and liabilities assumed

   $ 53,370  
  

 

 

 

 

3.

Supplementary Disclosure of Oil and Natural Gas Operations

Oil and Natural Gas Reserve Quantities

The following tables provide a pro forma rollforward of the crude oil, natural gas, natural gas liquids and total proved reserves for the year ended December 31, 2020, as well as pro forma proved developed and undeveloped reserves at the beginning and end of the year, as if the Mid-Con Acquisition and the Grizzly Acquisition occurred on January 1, 2020. Proved reserves are the estimated quantities of oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions and current regulatory practices. Proved developed reserves are proved reserves which are expected to be produced from existing completion intervals with existing equipment and operating methods. For Contango and Mid-Con, proved oil and natural gas reserve quantities at December 31, 2020 and January 1, 2020 are based on estimates prepared by independent petroleum engineering consultants, and for Grizzly, proved oil and natural gas reserve quantities at December 31, 2020 and January 1, 2020 are based on internal estimates prepared by Grizzly. All estimates have been prepared in accordance with guidelines established by the Securities and Exchange Commission, including prices based on the first-day-of-the-month prices for the previous 12 months.


     Oil and Condensate (Mbbls)  
     Contango      Mid-Con      Grizzly      Pro Forma  

Proved developed and undeveloped reserves as of:

           

January 1, 2020

     19,085        24,943        22,666        66,694  

Sales of minerals in place

     (142      —          —          (142

Extensions and discoveries

     2,074        —          40        2,114  

Revisions of previous estimates

     (6,339      (6,973      (8,698      (22,010

Production

     (1,674      (1,017      (1,242      (3,933
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2020

     13,004        16,953        12,766        42,723  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved developed reserves as of:

           

January 1, 2020

     9,819        19,213        18,343        47,375  

December 31, 2020

     7,166        13,361        12,766        33,293  

Proved undeveloped reserves as of:

           

January 1, 2020

     9,266        5,730        4,323        19,319  

December 31, 2020

     5,838        3,592        —          9,430  

 

     Natural Gas (MMcf)  
     Contango      Mid-Con      Grizzly      Pro Forma  

Proved developed and undeveloped reserves as of:

           

January 1, 2020

     131,300        4,221        38,864        174,385  

Sales of minerals in place

     (4,754      —          —          (4,754

Extensions and discoveries

     423        —          99        522  

Revisions of previous estimates

     (23,520      (1,670      (13,310      (38,500

Production

     (18,967      (518      (6,998      (26,483
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2020

     84,482        2,033        18,655        105,170  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved developed reserves as of:

           

January 1, 2020

     122,691        3,965        31,999        158,655  

December 31, 2020

     82,788        2,033        18,655        103,476  

Proved undeveloped reserves as of:

           

January 1, 2020

     8,609        256        6,865        15,730  

December 31, 2020

     1,694        —          —          1,694  

 

     Natural Gas Liquids (Mbbls)  
     Contango      Mid-Con      Grizzly      Pro Forma  

Proved developed and undeveloped reserves as of:

           

January 1, 2020

     11,764        —          5,513        17,277  

Sales of minerals in place

     (238      —          —          (238

Extensions and discoveries

     184        —          16        200  

Revisions of previous estimates

     (3,294      —          (2,355      (5,649

Production

     (1,262      —          (408      (1,670
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2020

     7,154        —          2,766        9,920  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved developed reserves as of:

           

January 1, 2020

     10,484        —          4,140        14,624  

December 31, 2020

     6,595        —          2,766        9,361  

Proved undeveloped reserves as of:

           

January 1, 2020

     1,280        —          1,373        2,653  

December 31, 2020

     559        —          —          559  


     Total (Mboe)  
     Contango      Mid-Con      Grizzly      Pro Forma  

Proved developed and undeveloped reserves as of:

           

January 1, 2020

     52,731        25,647        34,656        113,034  

Sales of minerals in place

     (1,172      —          —          (1,172

Extensions and discoveries

     2,328        —          72        2,400  

Revisions of previous estimates

     (13,552      (7,252      (13,271      (34,075

Production

     (6,097      (1,103      (2,816      (10,016
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2020

     34,238        17,292        18,641        70,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved developed reserves as of:

           

January 1, 2020

     40,752        19,874        27,816        88,442  

December 31, 2020

     27,558        13,700        18,641        59,899  

Proved undeveloped reserves as of:

           

January 1, 2020

     11,979        5,773        6,840        24,592  

December 31, 2020

     6,680        3,592        —          10,272  

Standardized Measure of Discounted Future Net Cash Flows

The following pro forma standardized measure of the discounted net future cash flows and changes applicable to proved reserves reflect the effect of income taxes assuming Mid-Con and Grizzly had been subject to federal income tax. The future cash flows are discounted at 10% per year and assume continuation of existing economic conditions.

The standardized measure of discounted future net cash flows, in management’s opinion, should be examined with caution. The basis for this table is the reserve studies prepared by independent petroleum engineering consultants, which contain imprecise estimates of quantities and rates of production of reserves. Revisions of previous year estimates can have a significant impact on these results. Also, exploration costs in one year may lead to significant discoveries in later years and may significantly change previous estimates of proved reserves and their valuation. Therefore, the standardized measure of discounted future net cash flow is not necessarily indicative of the fair value of proved oil and gas properties.

The data presented should not be viewed as representing the expected cash flow from or current value of existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. Actual future prices and costs are likely to be substantially different from the prices and costs utilized in the computation of reported amounts.

The pro forma standardized measure of discounted estimated net cash flows related to proved oil and gas reserves was as follows as of December 31, 2020 (in thousands):

 

     Contango     Mid-Con     Grizzly     Adjustments     Pro Forma  

Future cash inflows

   $ 721,395     $ 629,774     $ 460,730     $ —       $ 1,811,899  

Future production costs

     (411,069     (360,315     (288,270     —         (1,059,654

Future development costs

     (101,723     (40,723     (50,563     —         (193,009

Future income tax expenses

     (18,901     —         —         (44,156 ) (a)      (63,057
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Future net cash flows

     189,702       228,736       121,897       (44,156     496,179  

10% annual discount for estimated timing of cash flows

     (74,115     (115,103     (54,304     21,021       (222,501
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Standardized measure of discounted future net cash flows

   $ 115,587     $ 113,633     $ 67,593     $ (23,134   $ 273,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Reflects the income tax effect associated with the Mid-Con Acquisition and the Grizzly Acquisition using an assumed combined federal and state statutory tax rate of approximately 24.3%.


The changes in the pro forma standardized measure of discounted estimated future net cash flows were as follows for the year ended December 31, 2020 (in thousands):

 

     Contango     Mid-Con     Grizzly     Adjustments     Pro Forma  

Balance at January 1, 2020

   $ 257,842     $ 241,204     $ 201,230     $ —       $ 700,276  

Changes in standardized measure due to current year operation:

          

Sales of oil and natural gas produced during the year, net of production expenses

     (68,787     (12,221     (10,771     —         (91,779

Extensions and discoveries

     4,729       —         1,588       —         6,317  

Net change in prices and production costs

     (78,046     (101,117     (143,226     —         (322,389

Changes in estimated future development costs

     9,360       21,721       58,739       —         89,820  

Revisions in quantity estimates

     (48,609     (60,774     (54,902     —         (164,285

Purchase of reserves

     —         —         —         —         —    

Sale of reserves

     (3,259     —         —         —         (3,259

Previously estimated development costs incurred

     —         3,773       —         —         3,773  

Accretion of discount

     28,655       24,120       20,123       —         72,898  

Change in income taxes

     17,922       —         —         (23,134 ) (a)      (5,212

Changes in the timing of production rates and other

     (4,220     (3,073     (5,188     —         (12,481
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

   $ 115,587     $ 113,633     $ 67,593     $ (23,134   $ 273,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Reflects the income tax effect associated with the Mid-Con Acquisition and the Grizzly Acquisition using an assumed combined federal and state statutory tax rate of approximately 24.3%.