Quarterly / Earnings Reports | Third Quarter (3Q) Update

Contango Oil & Gas Reports Q3 2019 Results

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Contango Oil & Gas Co. reported its Q3 2019 results.

Third Quarter Highlights

• Replaced our maturing credit agreement with a new five-year revolving credit agreement with JPMorgan Chase Bank and other lenders
  
  
• Completed an underwritten public offering of 51,447,368 common shares for net proceeds of approximately $46.2 million

• Completed a private placement of 789,474 preferred shares for net proceeds of approximately $7.5 million
  
  
• Entered into a purchase agreement with Will Energy Corporation ("Will Energy") and a purchase agreement with White Star Petroleum, LLC ("White Star") to acquire certain producing assets and undeveloped acreage, primarily in Oklahoma, for $23 million and $132.5 million, respectively. The Will Energy and White Star acquisitions closed on October 25^th and November 1^st, respectively.
  
  
• Outstanding debt of $28.1 million at September 30, 2019, compared to $60 million at December 31, 2018
  
  
• Production of 3.1 Bcfe for the quarter, or 33.7 Mmcfe per day, towards the higher end of guidance. If we were to include the impact of the Will Energy and White Star acquisitions from effective date (July 1^st), we estimate pro forma consolidated production for the quarter of approximately 12 Bcfe, or 4x our reported production for the current quarter.

• Net loss of $7.8 million and EBITDAX of $1.9 million for the quarter. Adjusted EBITDAX of $3.0 million for the quarter, or $5.2 million when excluding non-recurring items described herein
• 13% decrease in general and administrative ("G&A") costs for the quarter, or a 46% decrease when excluding non-recurring items described herein
• Completed four wells in Pecos County, TX in the Southern Delaware Basin and initiated flow back on two of them, with the other two initiating flow back in October 2019. Additional completion operations commenced on two wells during the fourth quarter which are expected to initiate flowback by the end of the year
• Subsequent to quarter-end, appointed our largest shareholder John Goff as Chairman of the Board and added Farley Dakan to the management team to lead our corporate development efforts

Wilkie S. Colyer, the Company's President and Chief Executive Officer, said, "We executed on several key initiatives during the third quarter, and have continued that momentum into the fourth quarter. We refinanced our credit facility, raised equity, and announced two very impactful acquisitions at cheap prices in a very tough market environment. We are also very encouraged by early results at NE Bullseye and think we will be able to add valuable PUD inventory there by year end. During the fourth quarter, we will focus on incorporating the recently acquired White Star and Will Energy assets into our operating plan. In general, we will continue to limit our organic capital expenditures to those necessary to meet leasehold obligations and focus on using cash flow to pay down debt and grow inorganically. Subsequent to closing the White Star and Will Energy transactions, we have hedged aggressively to de-risk cash flow and have now hedged approximately 75% of eligible forecasted PDP crude oil and natural gas production through 2020 and 64% of eligible forecasted PDP crude oil and natural gas production through 2021. We appreciate the support of our lenders and shareholders in closing Will Energy and White Star subsequent to quarter end, and we will be on the lookout for more accretive acquisitions in what is a very target rich environment."

2019 Capital Program

Capital costs incurred for the three months ended September 30, 2019 were approximately $19.6 million, including $18.3 million for our drilling program in the Southern Delaware Basin in Pecos County, Texas. Our capital expenditure forecast in the Southern Delaware Basin for the remainder of 2019 is approximately $6.5 million.

On September 17, 2019, the Company entered into a new five-year revolving credit agreement with JPMorgan Chase Bank and other lenders (the "Credit Agreement"), pursuant to which the Company obtained a borrowing base of $65 million. The Credit Agreement was amended in November 2019, in conjunction with the closing of the Will Energy and White Star acquisitions, to increase the borrowing base thereunder to $145 million. The next redetermination will occur on or about December 1, 2019. Beginning in 2020, the semi-annual redeterminations will occur on May 1st and November 1st of each year. In connection with the entry into the Credit Agreement, the Company repaid all obligations thereunder, and terminated its previous credit agreement with Royal Bank of Canada, which matured on October 1, 2019.

As of September 30, 2019, the Company had approximately $28.1 million outstanding under the Credit Agreement and $1.9 million in an outstanding letter of credit, with a borrowing availability of $35.0 million.

Operations Activity Update

During the quarter, we brought two wells online in the Southern Delaware Basin, the Ripper State #2H and the American Hornet #1H, which are located in our legacy Bullseye project area. In October 2019, we brought two more wells online, the Iron Snake #1H and the Breakthrough State #1H, which are located in our NE Bullseye project area. Both NE Bullseye wells are performing above our higher NE Bullseye type curves. NE Bullseye is a more productive and higher oil cut area and will be the primary focus of future capital spending in the area to the extent we decide to drill additional wells. Both Bullseye wells were delineation wells drilling in the Southeast and Southwest boundaries of the acreage, and both wells are performing below our Bullseye type curves.

In addition, we have recently finished fracking the Old Ironside #1H well in NE Bullseye and expect to begin production of that well in mid-November 2019. All wells mentioned above are approximately 50% working interest wells to Contango. Next, we will begin completion operations on the State Spearhead #1H well also in mid-November 2019, which is a 25% working interest well. The State Spearhead #1H is the final lease obligation well required until 2021.

Additionally, we are currently preparing to complete a drilled but uncompleted well we acquired in connection with the White Star acquisition. The Margaret 35-23N-5W #1MH is expected to be completed in early December and brought on production shortly thereafter. We own a 53% working interest in this well.

Summary Third Quarter Financial Results

Net loss for the three months ended September 30, 2019 was $7.8 million, or $0.19 per basic and diluted share, compared to a net loss of $81.5 million, or $3.26 per basic and diluted share, for the prior year quarter. Impacting earnings in the prior year quarter was $72.5 million in pre-tax, non-cash, impairment and abandonment charges, including the impairment of the carrying costs of our Gulf of Mexico properties due to revised proved reserve estimates and the impairment of the carrying costs of certain non-core properties in Southeast Texas to their fair value as a result of a planned sale. Excluding impairment and abandonment charges, our pre-tax net loss for the current quarter would have been $6.5 million, compared to a pre-tax loss of $9.0 million for the prior year quarter. This improvement was mainly attributable to a pre-tax $1.9 million gain on derivatives in the current quarter, compared to a $1.3 million loss for the prior year quarter. Lower operating, depreciation and G&A expenses also contributed to the improvement, offset in part by lower production and lower commodity prices. Average weighted shares outstanding were approximately 41.8 million and 25.0 million for the current and prior year quarters, respectively.

The Company reported Adjusted EBITDAX, as defined below, of approximately $3.0 million for the three months ended September 30, 2019, compared to $6.2 million for the same period last year, a decrease attributable primarily to lower revenues and $2.2 million in special costs associated with our pursuit of strategic initiatives and the accrual of an adverse judgement in a legal dispute, partially offset by lower headcount and related G&A costs during the quarter, as the prior year quarter included $1.8 million in costs related to the resignation of our former President and CEO in September 2018. Recurring Adjusted EBITDAX (defined below as Adjusted EBITDAX exclusive of non-recurring strategic advisory fees and legal judgements) was $5.2 million for the current quarter, compared to $6.2 million for the prior year quarter. Cash flow for the current quarter was $2.0 million, or $0.05 per share, compared to $4.8 million, or $0.19 per share for the prior year quarter.

Revenues for the current quarter were approximately $12.5 million compared to $19.5 million for the prior year quarter, a decrease attributable to lower production due to non-core asset sales, a natural decline in production from our offshore properties, and limited new production from drilling, as we reduced our drilling program to only that which was necessary to meet drilling obligations in this unstable commodity price environment. Also contributing to lower revenues were a 20% decrease in natural gas prices, a 10% decrease in crude oil prices, and a 59% decrease in natural gas liquids prices.

Production for the third quarter of 2019 was approximately 3.1 Bcfe, or 33.7 Mmcfe per day, towards the higher end of our previously provided guidance, compared to 43.6 Mmcfe per day for the third quarter of 2018. This overall decrease was largely due to a 0.5 Bcfe decrease in production attributable to non-core asset sales in 2018, normal offshore field decline and limited drilling. Crude oil and natural gas liquids production also declined during the quarter to approximately 2,200 barrels per day, compared to approximately 2,800 barrels per day in the prior year quarter. The percentage of production from higher-value oil and natural gas liquids increased slightly from 39% in the prior year quarter to 40% in the current quarter.

The weighted average equivalent sales price during the three months ended September 30, 2019 was $4.05 per Mcfe, compared to $4.86 per Mcfe for the same period last year, as we experienced a 20% decrease in natural gas prices, a 10% decrease in crude oil prices, and a 59% decrease in natural gas liquids prices.

Operating expenses for the three months ended September 30, 2019 were approximately $5.4 million, compared to $6.4 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 were approximately $4.8 million, and within our previously provided guidance, for the current quarter, compared to approximately $5.6 million for the prior year quarter, a decrease primarily attributable to the non-core asset sales.

DD&A expense for the three months ended September 30, 2019 was $8.5 million, or $2.74 per Mcfe, compared to $12.9 million, or $3.20 per Mcfe, for the prior year quarter, a result of lower production during the quarter and the lower unit expense on our offshore production in the current year.

Impairment and abandonment expense was $1.3 million for the current quarter, which related to unproved properties and expiring leases.

Total G&A expenses were $5.9 million for the three months ended September 30, 2019, compared to $6.7 million for the prior year quarter. Recurring G&A expenses (defined as G&A expenses exclusive of non-recurring strategic advisory fees of $0.1 million and legal judgements of $2.1 million) were $3.7 million, or $1.18 per Mcfe for the current quarter, compared to $6.7 million, or $1.67 per Mcfe for the prior year quarter, an approximate 46% decline. The decrease relates primarily employee and related costs due to a smaller administrative workforce and savings on office rent attained through a renewal of our corporate office lease. Recurring cash G&A (defined as G&A expenses exclusive of non-cash stock-based compensation of $0.6 million and non-recurring fees of $2.2 million) were $3.1 million for the current quarter, and below our previously provided guidance, compared to $6.0 million for the prior year quarter.

Loss from affiliates (i.e., Exaro Energy III) for the three months ended September 30, 2019 was approximately $0.6 million, compared to $0.3 million for the same period last year.

Gain from sale of assets for the three months ended September 30, 2019 was approximately $0.2 million, which related to the sale of non-core assets in Lavaca, Live Oak and McMullen counties, Texas, compared to $0.5 million for the same period last year, which was related to the sale of energy credits to a third party.

Gain on derivatives for the three months ended September 30, 2019 was approximately $1.9 million. Of this amount, $0.9 million were realized gains while the remaining $1.0 million were non-cash, unrealized mark-to-market gains. Loss on derivatives for the three months ended September 30, 2018 was approximately $1.3 million, of which $1.1 million were realized losses while the remaining $0.2 million were non-cash, unrealized mark-to-market losses.