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Contango Oil & Gas First Quarter 2021 Results

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   |    Thursday,May 13,2021

Contango Oil & Gas Co. reported its Q1 2021 results.

First Quarter 2021 Highlights:

• Production sales of 1,773 MBoe for the first quarter of 2021, or 19.7 MBoe per day, an increase from 1,720 MBoe, or 18.9 MBoe per day in the prior year quarter, primarily due to new production from the Mid-Con Acquisition and the Silvertip Acquisition (both as defined below) included in part of the first quarter of 2021. Production sales volumes were also within production guidance for the quarter previously given by the Company.
  
  
• Total operating expenses of $27.5 million for the quarter, and operating expenses exclusive of production and ad valorem taxes of $23.9 million, were at approximately the mid-point of guidance due to ongoing internal cost savings initiatives.
  
  
• Net loss was $4.3 million, compared to a net loss of $105.3 million (including $145.9 million in pre-tax impairments) in the prior year quarter. Net income before taxes, adjusted to exclude non-cash mark-to-market gains and losses from hedges and property impairments, was $9.9 million for the current year quarter compared to a $0.4 million loss for the same quarter last year.
  
  
• Recurring Adjusted EBITDAX (a non-GAAP measure, as defined and presented herein) of $23.8 million, compared to $14.9 million in the prior year quarter, an increase primarily due to contributions from the Mid-Con Acquisition and the Silvertip Acquisition.
  
  
• Completed previously announced acquisition of Mid-Con Energy Partners, LP ("Mid-Con") on January 21, 2021 (the "Mid-Con Acquisition"). A total of 25,409,164 shares of Contango common stock were issued as consideration in the Mid-Con Acquisition. See Note 3 "Acquisitions" in our recently filed Form 10-Q for the first quarter of 2021 for further information.
  
  
• Completed previously announced acquisition of certain properties in the Big Horn Basin in Wyoming and Montana, in the Powder River Basin in Wyoming, and in the Permian Basin in Texas and New Mexico (collectively the "Silvertip Acquisition) for consideration of $53.2 million, net of customary closing adjustments. The Silvertip Acquisition closed on February 1, 2021. See Note 3 "Acquisitions" in our recently filed Form 10-Q for the first quarter of 2021 for further information.
  
  
• On May 4, 2021, the Company entered into the Fifth Amendment to the Credit Agreement with JPMorgan Chase Bank N.A., as administrative agent, and the lenders party thereto (the "Credit Agreement") under which, among other things, the Company's borrowing base increased to $250 million as a result of the regularly scheduled borrowing base redetermination that incorporated the Mid-Con Acquisition and the Silvertip Acquisition, as well as cost savings realized by legacy and new assets.
  
  
• Subsequent to quarter end, the Company added Karen Simon and Janet Pasque to its Board of Directors.

Wilkie S. Colyer, the Company's Chief Executive Officer, said, "As noted in this release, and our related SEC filings, we had a very busy first quarter of 2021 that has been transformative for the Company. We closed two acquisitions in the first quarter and expanded our credit facility to greatly enhance our financial flexibility and acquisition dry powder. Through these long lived, lower decline acquisitions, we have increased our production sales volumes to 19.7 MBoe/d from 14.4 MBoe/d for Contango's legacy assets in the fourth quarter of 2020, to an estimated full quarter base of 22.6 MBoe/d for the first quarter 2021 (comprised of Contango legacy assets - 13.7 MBoe/d, Silvertip Acquisition properties - 6.2 MBoe/d and Mid-Con Acquisition properties - 2.7 MBoe/d.). We have also increased our reserves, and financial strength and financial flexibility that positions us well to continue our consolidation strategy while the window of opportunity still exists to acquire PDP-heavy assets, with associated development potential and at attractive prices. Our technical team's focus on operational efficiencies and cost reduction efforts across our asset base resulted in a 7.5 MMBoe addition to proved reserves in the form of positive performance revisions at SEC pricing. We believe that we will be equally successful in increasing the value of the reserves acquired in the Mid-Con and the Silvertip Acquisitions, and we believe this process to be repeatable on future acquisitions based on our existing track record. We believe our diversified portfolio provides us an inventory of very high return capital projects to execute on in 2021 and beyond.

Maintaining a strong financial profile is a priority for us as we look to potentially take advantage of more acquisition opportunities. We strive to maintain maximum flexibility in our capital structure for financing acquisitions, and we protect our liquidity and cash flow through our aggressive hedging program. For the remainder of 2021 (April through December) we have hedged, primarily through swaps, 1.6 MMBbls of our forecasted PDP production at an average floor price of $55.16 per barrel and 9.2 Bcf of our forecasted PDP natural gas production with an average floor price of $2.66 per MMBtu. For 2022, we have hedged 1.4 MMBbls of forecasted PDP crude production at an average floor price of $50.24 per barrel and 10.1 Bcf of forecasted PDP natural gas production at an average floor price of $2.60 per MMBtu. We also have hedged 0.2 MMBbls of forecasted oil production, with an average floor price of $49.72 per barrel and 1.5 Bcf of forecasted PDP gas production, with an average floor price of $2.72 per MMBtu, for the first two months of 2023. Lastly, I'd like to thank our shareholders and lenders, led by JPMorgan, for their continued support of our Company and our dedicated employees."

Impact of the COVID-19 Pandemic

The COVID-19 pandemic continues to have an adverse impact on worldwide economic activity, significantly disrupting the demand for oil and natural gas throughout the world, and has created significant volatility, uncertainty and turmoil in the oil and natural gas industry. This 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 recently have shown a willingness to exercise more restraint on production levels, and while there has also been a decline in U.S. production due to a reduction in drilling activity, general downward pressure on, and volatility in, commodity prices has remained and could continue for the foreseeable future. We have commodity derivative instruments in place to mitigate the effects of such price declines; however, derivatives will not entirely mitigate lower oil and natural gas prices. While there has been modest recovery in oil prices in recent months, the length of this demand disruption is unknown, and there is significant uncertainty regarding the long-term impact to global oil demand. In response to these developments, we have implemented certain 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:

• work from home initiatives for all but critical staff and the implementation of social distancing measures;
• a company-wide effort to cut costs throughout our operations;
• utilization of our available storage capacity to temporarily store a portion of our production for later sale at higher prices when advantageous to do so;
• a continued reduction in our drilling program year over year to only that which provides a significant value add proposition to the Company's profile;
• suspension of all drilling from the second-half of 2020 through the quarter ended March 31, 2021, with the expectation to recommence value added drilling in 2021;
• pursuit of additional "fee for service" opportunities similar to the Management Services Agreement entered into in June 2020 with Mid-Con, which was terminated at the closing of the Mid-Con Acquisition on January 21, 2021; and
• potential acquisitions of additional PDP-heavy assets, with attractive, discounted valuations, in stressed/distressed scenarios or from non-natural owners like investment or lender firms that obtained ownership through a corporate restructuring.

Summary of First Quarter Financial Results

Net loss for the three months ended March 31, 2021 was $4.3 million, or $(0.02) per basic and diluted share, compared to a net loss of $105.3 million, or $(0.80) per basic and diluted share, for the prior year quarter. Pre-tax net loss for the three months ended March 31, 2021 was $3.8 million, compared to a pre-tax net loss of $104.9 million for the prior year quarter.

Average weighted shares outstanding were approximately 192.3 million and 131.3 million for the current and prior year quarters, respectively. Shares outstanding increased due to the sale of approximately 40.6 million shares of common stock of the Company in two offerings in the fourth quarter of 2020 in conjunction with the announcement of the Mid-Con Acquisition and Silvertip Acquisition in the fourth quarter of 2020, and the shares issued to Mid-Con shareholders at the close of the Mid-Con Acquisition in January 2021.

The Company reported Adjusted EBITDAX, a non-GAAP measure defined below, of approximately $22.0 million for the three months ended March 31, 2021, compared to $14.1 million for the same period last year, an increase attributable primarily to the incremental contribution from the properties we acquired in the Mid-Con Acquisition and the Silvertip Acquisition in the first quarter of 2021. Recurring Adjusted EBITDAX (defined below as Adjusted EBITDAX exclusive of non-recurring business combination expenses and strategic advisory fees) was $23.8 million for the 2021 quarter, compared to $14.9 million for the 2020 quarter.

Revenues for the first quarter of 2021 were approximately $60.0 million compared to $34.6 million for the first quarter of 2020, an increase primarily attributable to the increases in commodity prices, increased production sales from the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition, and the impact of the increase in the Company's percentage of oil/liquids sales as compared to total sales.

Production sales for the three months ended March 31, 2021 were approximately 1.8 MMBoe (53% liquids), or 19.7 MBoe per day, compared to approximately 1.7 MMBoe (50% liquids), or 18.9 MBoe per day in the prior year quarter. Net oil production sales were approximately 7,200 barrels per day for the three months ended March 31, 2021 compared to approximately 5,700 barrels per day in the prior year quarter, an increase attributable to the partial quarter of production from the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition. Net natural gas production sales decreased to approximately 55.4 MMcf per day during the three months ended March 31, 2021, compared with approximately 57.2 MMcf per day during the three months ended March 31, 2020, due to the harsh winter storms in February 2021 and the related downtime. Net NGL production sales decreased to approximately 3,300 barrels per day during the three months ended March 31, 2021 compared to approximately 3,700 barrels per day in the prior year quarter.

The weighted average equivalent sales price realized for the three months ended March 31, 2021 was $33.72 per Boe compared to $20.10 per Boe for the three months ended March 31, 2020. The lower prior year prices were attributable to the decline in realized commodity prices in early 2020, as a result of the initial spread of the COVID-19 pandemic and its negative impact on the global demand for oil and natural gas. The increase in domestic vaccination programs has helped reduce the spread of COVID-19 in the current year first quarter, which has contributed to an improvement in the economy and the demand for oil and natural gas, and higher realized prices for commodities. The realized price of crude oil averaged $56.95 per Bbl in the current year first quarter compared to an average $43.77 per Bbl in the prior year quarter. The realized price of natural gas averaged $2.91 per Mcf in the current year first quarter compared to an average of $1.57 per Mcf in the prior year quarter, and the realized price of NGLs averaged $28.31 per Bbl in the current year first quarter compared to an average $10.89 per Bbl in the prior year quarter.

Operating expenses for the three months ended March 31, 2021 were approximately $27.5 million, compared to $19.3 million for the same period last year, an increase attributable primarily to the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition. Included in operating expenses are direct lease operating expenses, transportation and processing costs, workover expenses, production and ad valorem taxes and other expenses related to plants and pipelines. Operating expenses exclusive of production and ad valorem taxes of $3.5 million and $1.7 million, respectively, were approximately $23.9 million for the 2021 quarter, and above the high end of guidance, compared to approximately $17.5 million for the prior year quarter.

DD&A expense for the three months ended March 31, 2021 was $9.1 million, or $5.16 per Boe, compared to $12.9 million, or $7.47 per Boe, for the 2020 quarter. The lower depletion expense in the current year first quarter was a result of lower depletable property cost as a result of the proved property impairments recorded during the depressed commodity price environments in the first and fourth quarters of 2020, partially offset by depletion expense associated with the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition.

Total G&A expenses were $11.4 million, or $6.41 per Boe, for the three months ended March 31, 2021, compared to $7.7 million, or $4.45 per Boe, 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 $1.8 million for the current year first quarter) were $9.5 million, or $5.37 per Boe for the current year first quarter. Recurring G&A expenses exclusive of business combination expenses and non-recurring strategic advisory fees of $0.8 million for the prior year quarter were $6.9 million, or $3.99 per Boe. The increase from the prior year is primarily due to the costs of additional personnel, systems costs and other administrative expenses in conjunction with the Mid-Con Acquisition and the Silvertip Acquisition. Recurring Cash G&A expenses (defined as recurring G&A expenses exclusive of non-cash stock-based compensation of $1.8 million and $0.4 million for the respective 2021 and 2020 quarters) were $7.7 million for the current year first quarter, compared to $6.5 million for the prior year quarter.

Loss on derivatives for the three months ended March 31, 2021 was approximately $16.0 million. Of this amount, $13.6 million was non-cash mark-to-market losses attributable to improvement in benchmark commodity prices during the current year first quarter, and $2.4 million in realized losses on derivative settlements during the current year first quarter. Gain on derivatives for the three months ended March 31, 2020 was approximately $46.7 million, of which $41.4 million was non-cash mark-to-market gains, and the remaining $5.3 million were realized gains.

2021 Capital Program & Capital Resources

Capital costs for the three months ended March 31, 2021 were approximately $1.6 million, primarily related to redevelopment activities of newly acquired properties in our Midcontinent region.

Our 2021 planned capital expenditure budget has increased to $24 - $27 million from previous guidance of $13 - $16 million for recompletions, facility upgrades, waterflood development and select drilling in West Texas (1.5 net locations, 3 gross locations), among other things. The increase in planned capital expenditures reflects, in part, development opportunities in our recently acquired properties as part of the Mid-Con Acquisition and the Silvertip Acquisition coupled with recent strength in crude oil prices. The capital expenditure program will continue to be evaluated for revision throughout the year. We believe that we will have the financial resources to further increase the currently planned 2021 capital expenditure budget, when and if deemed appropriate, including as a result of changes in commodity prices, economic conditions or operational factors.

On January 21, 2021, we closed on the Mid-Con Acquisition and issued a total of 25,409,164 shares of Contango common stock and repaid all borrowings outstanding on Mid-Con's then current credit facility for $68.7 million. Effective upon the closing of the Mid-Con Acquisition, our borrowing base increased from $75.0 million to $130.0 million, with an automatic $10.0 million reduction in the borrowing base on March 31, 2021.

On February 1, 2021, we closed on the Silvertip Acquisition. In connection with the execution of the purchase agreement during the fourth quarter of 2020, we paid a $7.0 million as a deposit for the Company's obligations. A balance of $46.2 million was paid upon closing, after customary closing adjustments, including the results of operations during the period between the effective date of August 1, 2020 and the closing date.

As of March 31, 2021, we had approximately $98.6 million outstanding under the Company's Credit Agreement, $2.9 million in outstanding letters of credit and $1.6 million in cash. The Credit Agreement matures on September 17, 2024. The borrowing base was $120.0 million as of March 31, 2021, with a borrowing availability of $18.5 million.

On May 3, 2021, we entered into the Fifth Amendment to the Credit Agreement which provides for, among other things, an increase in the Company's borrowing base from $120 million to $250 million, effective May 3, 2021, expands the bank group from nine to eleven banks, and includes less restrictive hedge requirements and certain modifications to financial covenants. See Note 10 "Long-Term Debt" and Note 13 "Subsequent Events" in our recently filed Form 10-Q for the first quarter of 2021 for further information. Adjusted for the borrowing base increase to $250.0 million, effective on May 3, 2021, the Company had approximately $86.7 million outstanding under the Credit Agreement and $2.9 million in outstanding letters of credit, with borrowing availability of $160.4 million as of April 30, 2021.