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Contango Oil & Gas First Quarter 2020 Results

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   |    Monday,June 22,2020

Contango Oil & Gas Co. reported its financial results for the first quarter ended March 31, 2020.

First Quarter 2020 Highlights

• Production of 1,720 Mboe for the quarter, or 18.9 Mboe per day, a 216% increase from the 6.0 Mboe per day in the prior year quarter, primarily due to additional production from the properties acquired from White Star Petroleum, LLC and certain affiliates (collectively, "White Star") and Will Energy Corporation ("Will Energy") in the fourth quarter of 2019.
  
  
• Initiated flowback from the State Spearhead #1H well in Pecos County, Texas, in the Southern Delaware Basin, in January 2020.

• Net loss of $105.3 million (including $145.9 million in pre-tax impairments), compared to a net loss of $8.6 million in the prior year quarter (including $0.5 million in pre-tax impairments).

• Recurring Adjusted EBITDAX (a non-GAAP measure, as defined and presented herein) of $14.9 million, compared to $6.2 million in the prior year quarter.

Wilkie S. Colyer, the Company's President and Chief Executive Officer, said, "The first quarter of 2020 presented numerous challenges for most people and businesses in the United States, as well as around the world. For the energy sector specifically, the adverse impact that the COVID-19 pandemic has had on global demand for oil and gas, along with the inability of OPEC and Russia to agree on production quotas in March 2020 and the resulting influx of production into the global market, have put tremendous pressure on many companies with respect to oil, natural gas and natural gas liquids prices, cash flow and balance sheets. We believe we have fared better than most of our peers as our conservative view on capital spending, our simple capital structure, our aggressive hedging program, our focus on cost reduction and our commitment to maintaining our liquidity and balance sheet flexibility have positioned us to manage through this difficult time. We continue to pursue ways to generate/maximize our cash flow at a relatively low cost of capital, such as through our occasional use of excess oil storage capacity to store unhedged production on a short term basis to capitalize on a contango price curve, and our entering into a management services agreement with Mid-Con Energy Partners, LP whereby we plan to utilize our technical operating and administrative support groups, to generate a fee for service cash flow stream that also benefits the counterparty through G&A cost reduction.

We added hedges during the fourth quarter of 2019 and March of 2020, prior to the dramatic collapse in oil prices, and currently have approximately 70% of our total forecasted PDP oil production for 2020 hedged with swaps at an average floor price of $55.13 per barrel and 68% of our total forecasted PDP gas production for 2020 hedged at an average price of $2.57 per mmbtu. In 2021, we have approximately 67% of total forecasted PDP oil production hedged at $51.71 per barrel. We anticipate that this price environment will continue to put immense pressure on our already distressed industry, and we will be on the lookout for other ways to take advantage of the dislocation. We appreciate the support of our lenders and shareholders and look forward to continuing to execute our business plan in 2020."

Impact of COVID-19 and 2020 Plan Changes

The COVID-19 pandemic has resulted in a severe worldwide economic downturn, significantly disrupting the demand for oil throughout the world, and has created significant volatility, uncertainty and turmoil in the oil and gas industry. This has led to a significant global oversupply of oil and a subsequent substantial decrease in oil prices. While global oil producers, including the Organization of Petroleum Exporting Countries ("OPEC") and other oil producing nations reached an agreement to cut oil production in April 2020, downward pressure on commodity prices has remained and could continue for the foreseeable future, particularly given concerns over available storage capacity for oil. We have certain commodity derivative instruments in place to mitigate the effects of such price declines; however, derivatives will not entirely mitigate lower oil prices. The length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand, which will ultimately depend on various factors and consequences beyond the Company's control, such as the duration and scope of the pandemic, the length and severity of the worldwide economic downturn, additional actions by businesses and governments in response to both the pandemic and the decrease in oil prices, the speed and effectiveness of responses to combat the virus, and the time necessary to equalize oil supply and demand to restore oil pricing. In response to these developments, we have implemented measures to mitigate the impact of the COVID-19 pandemic on our employees, operations and financial position. These measures include, but are not limited to, the following:

• implemented work from home initiatives for all but critical staff and put in place social distancing measures;
• implemented a company wide effort to cut costs throughout our operations;
• developed a plan to utilize our available storage capacity where possible to temporarily store a portion of our production in order to market that oil in the near future and capitalize on the contango in the commodity price curve; and
• suspended any further plans for onshore drilling in 2020.

Summary of First Quarter Financial Results

Net loss for the three months ended March 31, 2020 was $105.3 million, or $(0.80) per basic and diluted share, compared to a net loss of $8.6 million, or $(0.26) per basic and diluted share, for the prior year quarter. Pre-tax net loss for the three months ended March 31, 2020 was $104.9 million, compared to a pre-tax net loss of $8.6 million, for the prior year quarter. Impacting earnings in the current and prior year quarters were $145.9 million and $0.5 million, respectively, in pre-tax, non-cash, impairment charges as explained below. Excluding those impairment charges of $145.9 million and $0.5 million for the respective current and prior year quarters, our pre-tax net income for the current quarter would have been $41.0 million, compared to a pre-tax net loss of $8.1 million for the prior year quarter.

Average weighted shares outstanding were approximately 131.1 million and 33.8 million for the current and prior year quarters, respectively.

The Company reported Adjusted EBITDAX, a non-GAAP measure defined below, of approximately $14.1 million for the three months ended March 31, 2020, compared to $5.4 million for the same period last year, an increase attributable primarily to the incremental contribution from the properties we acquired from White Star and Will Energy in the fourth quarter of 2019. Recurring Adjusted EBITDAX (defined below as Adjusted EBITDAX exclusive of non-recurring business combination expenses and strategic advisory fees) was $14.9 million for the current quarter, compared to $6.2 million for the prior year quarter.

Revenues for the current quarter were approximately $34.6 million compared to $14.0 million for the prior year quarter, an increase also attributable to the addition of the Will Energy and White Star properties, and despite the 23% decrease in the weighted average equivalent sales price in production period over period.

Production for the first quarter was approximately 1,720 Mboe, or 18.9 Mboe per day, compared to 539 Mboe, or 6.0 Mboe per day for the first quarter of 2019. The properties acquired from White Star and Will Energy contributed 14.0 Mboe per day to the first quarter of 2020.

The weighted average equivalent sales price during the three months ended March 31, 2020 was $20.10 per Boe, compared to $25.98 per Boe for the same period last year, a decline attributable to the decrease in all realized commodity prices in the current year quarter as a result of the decrease in demand for commodity products due to the COVID-19 pandemic and the failure of OPEC and Russia to reach an agreement on oil production quotas in March 2020. In comparison to the first quarter of 2019, we experienced a 47% decline in natural gas prices, a 45% decline in natural gas liquids prices and a 14% decline in oil prices in the first quarter of 2020.

Operating expenses for the three months ended March 31, 2020 were approximately $21.5 million, compared to $5.2 million for the same period last year. Included in operating expenses are direct lease operating expenses, transportation and processing costs, workover expenses and production and ad valorem taxes. Operating expenses exclusive of production and ad valorem taxes of $1.7 million and $0.4 million, respectively, were approximately $19.7 million for the current quarter, compared to approximately $4.8 million for the prior year quarter. The properties acquired from White Star and Will Energy added an additional $16.8 million in operating expenses for the three months ended March 31, 2020.

DD&A expense for the three months ended March 31, 2020 was $12.9 million, or $7.47 per Boe, compared to $7.6 million, or $14.02 per Boe, for the prior year quarter. The higher depletion expense in the current quarter was attributable to $7.8 million of additional expense recognized for our acquired properties, while the lower overall unit rate incorporates the lower unit purchase price per barrel for our acquired properties ($6.08 per Boe) and a reduction in the Gulf of Mexico unit rate due to impairments recorded during the fourth quarter of 2019.

Impairment and abandonment expense was $145.9 million for the current quarter, of which $143.3 million related to non-cash impairment of proved onshore properties as a result of the dramatic decline in commodity prices, the "PV-10" (present value, discounted at a 10% rate) of our proved reserves, and the associated change in our current development plans for proved, undeveloped locations. The current year quarter also included $2.6 million in impairment expense related to expiring and near-term lease expirations, primarily in our acquired Central Oklahoma and Western Anadarko regions. The prior year quarter included $0.6 million of impairment and abandonment expense, substantially all of which was related to unproved impairment for lease expirations.

Total G&A expenses were $5.4 million for the three months ended March 31, 2020, compared to $5.0 million for the prior year quarter. Recurring G&A expenses (defined as G&A expenses exclusive of business combination expenses and non-recurring strategic advisory fees of $0.8 million for each of the quarters) were $4.6 million, or $2.70 per Boe for the current quarter, compared to $4.3 million, or $7.89 per Boe for the prior year quarter. Recurring cash G&A (defined as Recurring G&A expenses exclusive of non-cash stock-based compensation of $0.4 million and $1.1 million for the respective current and prior-year quarters) were $4.3 million for the current quarter, compared to $3.2 million for the prior year quarter.

Gain from our investment in affiliates (i.e., Exaro Energy III ("Exaro")) for each of three months ended March 31, 2020 and March 31, 2019 was approximately $0.3 million

Gain on derivatives for the three months ended March 31, 2020 was approximately $46.7 million. Of this amount, $41.4 million were non-cash, unrealized mark-to-market gains, and the remaining $5.3 million were realized gains. Loss on derivatives for the three months ended March 31, 2019 was approximately $2.9 million, of which $3.6 million were non-cash, unrealized mark-to-market gains, and the remaining $0.7 million were realized gains.

Operations Activity Update

We brought one well online in the Southern Delaware Basin during the quarter, the State Spearhead #1H, located in our NE Bullseye project area, and commenced the drilling of a salt water disposal well in that same area. We have currently suspended any further plans for onshore drilling and completion operations in 2020 due to the low and volatile commodity price environment.

2020 Capital Program & Capital Resources

Capital costs incurred for the three months ended March 31, 2020 were approximately $4.0 million, of which $2.0 million was related to the drilling of the salt water disposal well and completion of the State Spearhead #1H well in the Southern Delaware Basin in Pecos County, Texas. We paid a $7.1 million deposit for the drilling of the offshore Iron Flea prospect, currently included in "Deposits and other" on our consolidated balance sheet. The current quarter also included approximately $0.9 million in leasehold acquisition costs, primarily related to our acreage in the NE Bullseye area. The remaining expenditures incurred were primarily related to capitalized workovers.

We anticipate that the remainder of our 2020 capital budget will be very limited and will be focused primarily on preserving our financial liquidity and flexibility and identifying opportunities for cost efficiencies in all areas of our operations and will also include the Iron Flea exploratory prospect in the shallow waters of the Gulf of Mexico. Our 2020 capital expenditure budget is currently estimated at approximately $16.4 million and is expected to include the following:

• Exploratory costs offshore: $8.7 million for the Iron Flea exploratory prospect. This well was spud in May 2020 and drilled to the total targeted depth in early June, but unfortunately was determined not successful. We escrowed the $7.1 million (net to the Company) turnkey cost for the drilling of the well in the first quarter, and incurred $1.1 million in additional costs for standby time incurred as a result of Tropical Storm Cristobal and other costs, all of which will be recognized as exploration expense in the second quarter of 2020 financial statements. We estimate an additional $0.5 million for plugging and abandonment costs.
• Drilling and completion onshore: $3.7 million to for the completion of the State Spearhead #1 H, the drilling and completion of the salt water disposal well and related infrastructure costs in our NE Bullseye area. We have currently suspended any other onshore drilling for the remainder of 2020.
• Workovers: $3.3 million for limited workovers which are intended to increase production and cash flow.
• Plugging and abandonment activity: $ 0.7 million for onshore wells.

We may revise our 2020 capital expenditure budget if deemed appropriate in light of changes in commodity prices or economic conditions.

As of March 31, 2020, the Company had approximately $82.8 million outstanding under the Company's credit agreement and $1.9 million in an outstanding letter of credit, with a borrowing availability of $60.4 million. Effective June 9, 2020, in conjunction with the regularly scheduled borrowing base redetermination process, we entered into a credit agreement amendment with the lending group that provided, among other things, a reduction of the borrowing base to $95.0 million on the effective date of the amendment, as well as further $10.0 million automatic borrowing base reductions on each of June 30, 2020 and September 30, 2020, and the suspension of testing the current ratio financial covenant until the fiscal quarter ending March 31, 2022.