Thursday, August 20, 2009

Contango Oil and Gas Update/Lease Bid

I saw this press release out from Contango Oil and Gas (MCF) regarding their apparent high bid in lease blocks in the Gulf of Mexico. I like the fact that they are using depressed prices to go out and find opportunities to pick up more assets. We also got some commentary from management in this release as well:

Kenneth R. Peak, Contango’s Chairman and Chief Executive Officer said, “We plan to spud our Ship Shoal 263 prospect (“Nautilus”) around November 2009, and our Matagorda Island 617 prospect (“Dude”) in early 2010. Our Matagorda Island 607/616 prospect (“El Duderino”) may or may not be drilled, depending on the results from our Matagorda Island 617 well. Each of these prospects has an estimated dry hole cost of approximately $15 million. Assuming we were to drill three prospects by June 30, 2010, our fiscal year-end, and all three wells were dry, our projected after-tax capital outlay would be about $30 million, or equal to our current cash on hand. Assuming one of these prospects was to be successful, our estimated all-in after-tax finding and development cost for these three prospects would be about $2.00/Mcfe and we would expect to add reserves approximately equal to our anticipated fiscal year 2010 production.”

Mr. Peak continued, “With the natural gas futures market trading at a seven year low, it is no surprise that this year’s Western Gulf of Mexico Lease Sale attracted half the bidders on half the number of blocks and half the dollar value of bids, as last year. This is really good news. Cheaper leases, rig rates, pipe and services are good if you are drilling and Contango will be drilling. If natural gas prices continue to decline, as many believe, we would expect to be presented with even better opportunities. Our strategy remains unchanged - we intend to continue to explore, protect our balance sheet and use periods of stock weakness to continue our share repurchase program. Since the Company first announced its $100 million share repurchase program in September 2008, we have purchased 1,224,354 shares of our common stock at an average cost per share of $42.30, for a total expenditure of approximately $51.8 million. Our fully diluted share count now stands at 16.5 million shares.”

These companies may well be the best way to play natural gas as they can make money even was gas at these prices, and make even more if prices rise. I'm still waiting until earnings from Contango before I make any move here. There are a lot of small to medium sized gas companies out there, but this was the only one I could find with net cash on the balance sheet. As I've discussed before, companies that have not gotten over-leveraged will come out of the recession stronger than their peers due to flexibility. They can buy assets at below market value and won't be at the mercy of creditors if conditions deteriorate and effect operations.

Disclosure: None, but taking a look.

1 comment:

samantha said...
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