Latest News and Analysis
Deals and Transactions
Track Drilling (Rigs by operator) | Completions (Frac Spreads)

Drilling & Completions | Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Capital Markets | Capital Expenditure | Drilling Activity

Contango Oil & Gas Second Quarter 2021 Results

emailEmail    |    printPrint    |    bookmarkBookmark
   |    Monday,August 16,2021

Contango Oil & Gas Co. reported its Q2 2021 results ahead of the closing of its pending merger with Independence Energy.

Q2 Highlights:

  • Production sales of 2,196 MBoe for the second quarter of 2021, or 24.1 MBoe per day, an increase from 1,469 MBoe, or 16.1 MBoe per day in the prior year quarter, primarily due to new production from the Mid-Con Acquisition and the Silvertip Acquisition (each as defined in our recently filed Form 10-Q for the second quarter of 2021), which closed on January 21, 2021 and February 1, 2021, respectively. Production sales volumes were also slightly higher than the upper end of production guidance provided by the Company for the quarter.

  • Total operating expenses of $36.5 million for the current year quarter, and operating expenses, exclusive of production and ad valorem taxes, of $30.2 million, were slightly higher than the upper end of guidance provided by the Company for the quarter, primarily due to the acceleration of a planned production-enhancing workover program due to higher commodity prices.

  • Net loss was $32.6 million for the current year quarter, compared to a net loss of $28.0 million in the prior year quarter. Adjusting both quarters for pre-tax, non-cash mark-to-market losses related to our commodity price derivatives of $47.1 million and $20.2 million, respectively, and dry hole costs of $10.9 million for the 2020 quarter, net income before income taxes would have been approximately $14.3 million for the current year quarter compared to net income before income taxes of $3.4 million for the comparable 2020 quarter.

  • Adjusted EBITDAX (a non-GAAP measure, as defined and presented herein) for the current year quarter of $31.1 million, compared to $7.0 million in the prior year quarter, an increase primarily due to contributions from the Mid-Con Acquisition and the Silvertip Acquisition.

  • On May 3, 2021, the Company entered into the Fifth Amendment to the Credit Agreement (the "Fifth Amendment"), which provided for, among other things, an increase in the Company's borrowing base from $120.0 million to $250.0 million and expanded the bank group from nine to eleven banks. The Fifth Amendment also includes less restrictive hedge requirements and certain modifications to financial covenants. As of June 30, 2021, the Company had availability under its Credit Agreement of $178.1 million. See Note 10 "Long-Term Debt" in our recently filed Form 10-Q for the second quarter of 2021 for further information.

  • On June 7, 2021, the Company entered into a definitive agreement to merge with Independence Energy, LLC ("Independence") in an all-stock transaction (the "Pending Independence Merger"). The closing of the Pending Independence Merger is conditioned upon approval by a majority of Contango's shareholders, among certain other closing conditions. Upon completion of the Pending Independence Merger, Independence shareholders are expected to own approximately 76% and Contango shareholders are expected to own approximately 24% of the combined company. If approved, the Pending Independence Merger is expected to close in the fourth quarter of 2021. See Note 3 "Acquisitions and Dispositions" in our recently filed Form 10-Q for the second quarter of 2021 for further information.

  • On July 7, 2021, the Company entered into a purchase and sale agreement with ConocoPhillips to acquire low decline, conventional gas assets in the Wind River Basin of Wyoming (the "Pending Wind River Basin Acquisition"). Upon closing, Contango will acquire an estimated 446 Bcfe of PDP reserves for a total purchase price of $67.0 million in cash, subject to customary closing adjustments. The Pending Wind River Basin Acquisition is expected to close in the third quarter of 2021 and will be funded with cash on hand and borrowings under our senior credit facility. See Note 13 "Subsequent Events" in our recently filed Form 10-Q for the second quarter of 2021 for further information.

Wilkie S. Colyer, the Company's Chief Executive Officer, said, "We were able to build on the momentum from the first quarter to turn in a very successful second quarter, in terms of our operations, integration of first quarter acquisitions, and corporate activity. We more than doubled our credit facility borrowing base in May, which is no small feat in the current bank environment. Subsequent to quarter end, we announced yet another acquisition at a very attractive price, as our consolidation strategy continues to bear fruit. Our success in closing attractive, PDP-heavy acquisitions, cutting costs on both legacy and acquired properties, and increasing cash flow through low risk, high return capital spending, has allowed us to greatly expand our financial flexibility and acquisition dry powder, and increase the value of our reserves.

"The announced merger with Independence Energy serves as a validation of our corporate strategy and the hard work of our team in transitioning Contango over the last three years. We analyzed the merger by asking several very important questions, including: one, do we expect the deal to increase intrinsic value per share for our shareholders? Two, is the transaction designed to drive down costs G&A and cost of capital via scale? Three, are we like minded in our investment approach with new management? Four, can we expect to do a better job for shareholders with a broader platform and bigger balance sheet? The answer to all those questions was yes. Upon closing, this combination will give current Contango shareholders the ability to continue to share in the future appreciation in value inherent in our asset base, as well as be positioned to participate in our future efforts to continue to build value, as an industry consolidator, through the corporate and financial support of KKR, one of the largest and most successful asset managers in the world. Our team at Contango is excited about playing a large part in that industry consolidator role on behalf of Contango and Independence shareholders as a subsidiary of the combined business."

Q2 Summary of Results

Net loss for the three months ended June 30, 2021 was $32.6 million, or $(0.16) per basic and diluted share, compared to a net loss of $28.0 million, or $(0.21) per basic and diluted share, for the prior year quarter. Pre-tax net loss for the three months ended June 30, 2021 was $32.8 million, compared to a pre-tax net loss of $27.7 million for the prior year quarter. Adjusting the comparable 2021 and 2020 quarters for pre-tax, non-cash mark-to-market losses related to our commodity price derivatives of $47.1 million and $20.2 million, respectively, and dry hole costs of $10.9 million for the 2020 quarter, net income before income taxes would have been approximately $14.3 million for the current year quarter compared to net income before income taxes of $3.4 million for the comparable 2020 quarter.

Average weighted shares outstanding were approximately 198.7 million and 131.4 million for the current and prior year quarters, respectively. Shares outstanding increased primarily 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 that quarter and approximately 25.5 million shares of common stock 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 $31.1 million for the three months ended June 30, 2021, compared to $7.0 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 $33.1 million for the 2021 quarter, compared to $7.5 million for the 2020 quarter.

Revenues for the second quarter of 2021 were approximately $83.6 million compared to $17.8 million for the second quarter of 2020, an increase attributable primarily to higher commodity prices and an approximate 50% increase in production sales resulting from the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition.

Production sales for the three months ended June 30, 2021 were approximately 2.2 MMBoe (62% liquids), or 24.1 MBoe per day, compared to approximately 1.5 MMBoe (44% liquids), or 16.1 MBoe per day in the prior year quarter. Net oil production sales were approximately 9,800 barrels per day for the three months ended June 30, 2021, compared to approximately 3,700 barrels per day in the prior year quarter, an increase attributable to the production from the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition. Net natural gas production sales increased slightly to approximately 55.4 MMcf per day during the three months ended June 30, 2021, compared with approximately 54.0 MMcf per day during the three months ended June 30, 2020. Net natural gas liquids ("NGLs") production sales increased to approximately 5,100 barrels per day during the three months ended June 30, 2021, compared to approximately 3,400 barrels per day in the prior year quarter due to the new, higher liquid content production acquired in the Silvertip Acquisition.

The weighted average equivalent sales price realized for the three months ended June 30, 2021 was $37.93 per Boe compared to $12.14 per Boe for the three months ended June 30, 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, combined with the failure by the Organization of Petroleum Exporting Countries and Russia to reach an agreement on lower production quotas until April 2020. The increase in domestic vaccination programs has helped reduce the spread of COVID-19 in the current year, which has contributed to an improvement in the economy and the demand for oil and natural gas, and higher realized prices for crude oil, natural gas and NGLs. The realized price of crude oil averaged $63.03 per Bbl in the current year quarter compared to an average $22.94 per Bbl in the prior year quarter. The realized price of natural gas averaged $2.94 per Mcf in the current year quarter compared to an average of $1.35 per Mcf in the prior year quarter, and the realized price of NGLs averaged $26.46 per Bbl in the current year quarter compared to an average of $10.81 per Bbl in the prior year quarter.

Operating expenses for the three months ended June 30, 2021 were approximately $36.5 million, compared to $15.0 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 $6.4 million and $0.8 million for the respective 2021 and 2020 quarters, were approximately $30.2 million for the 2021 quarter compared to approximately $14.2 million for the prior year quarter.

DD&A expense for the three months ended June 30, 2021 was $11.5 million, or $5.22 per Boe, compared to $5.1 million, or $3.47 per Boe, for the 2020 quarter. The higher depletion expense in the current year quarter was primarily due to the properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition.

Total G&A expenses were $13.5 million, or $6.14 per Boe, for the three months ended June 30, 2021, compared to $7.8 million, or $5.33 per Boe, for the prior year quarter. Recurring G&A expenses (defined as Total G&A expenses exclusive of business combination expenses and non-recurring strategic advisory fees of $1.9 million and $0.6 million for the current year and prior year quarters, respectively) were $11.6 million, or $5.27 per Boe, for the current year quarter compared to Recurring G&A expenses of $7.3 million, or $4.96 per Boe for the prior year quarter. The increase from the prior year is primarily due to the costs of additional personnel, systems costs and other administrative expenses resulting from the Mid-Con Acquisition and the Silvertip Acquisition, as well as higher non-cash stock-based compensation expense in the current year quarter due to stock grants being awarded in the second quarter of 2021, compared to the third quarter of 2020. Recurring Cash G&A expenses (defined as Recurring G&A expenses exclusive of non-cash stock-based compensation of $3.1 million and $0.3 million for the respective 2021 and 2020 quarters) were $8.5 million for the current year quarter, compared to $7.0 million for the prior year quarter.

Loss on derivatives for the three months ended June 30, 2021 was approximately $53.5 million. Of this amount, $47.1 million was attributable to a non-cash mark-to-market loss resulting from improvement in benchmark commodity prices and to $6.4 million in realized losses on derivative settlements during the quarter. Loss on derivatives for the three months ended June 30, 2020 was approximately $8.8 million, of which $20.2 million was a non-cash mark-to-market loss, partially offset by $11.4 million in realized gains.

2021 Capital Program & Capital Resources

Due to strengthening oil prices in 2021, and our identification of more cost-efficient methods of drilling and completing our Permian Basin wells, we resumed a conservative onshore drilling program in the Southern Delaware Basin in the second quarter of 2021. In May 2021, we began drilling the first three-well pad originally planned in the Permian region. Based on the recent success by operators offsetting our position, we decided to drill one of the three wells on this first pad to the Second Bone Spring formation, which will be our first well drilled to that formation. Due to the success and efficiency in the drilling of these first three wells and the improved oil price market, we commenced spudding a second three-well pad in July 2021 as part of our 2021 Permian drilling program. Drilling of the three wells on this second pad is expected to be completed in the middle of the third quarter. Completion operations on the first three wells are planned to commence in the beginning of September 2021, with initial production expected in October 2021. Completion operations on the second three wells are planned to commence in December 2021, with initial production expected in January 2022. Each of these six wells is expected to include an approximate 10,000 foot lateral with approximately 50 stages of fracture stimulation.

Capital costs for the three months ended June 30, 2021 were approximately $12.2 million and included $5.3 million in expenditures related to the drilling of the Southern Delaware Basin wells and $5.0 million in expenditures related to redevelopment activities on recently acquired properties in our Midcontinent, Permian and Rockies regions. We also incurred $1.9 million in expenditures in unproved offshore prospect costs during the second quarter of 2021.

We currently forecast our full year 2021 capital expenditure budget to be approximately $30.0 - $34.0 million, including planned expenditures for the recompletion and redevelopment of shut-in wells acquired in the Mid-Con Acquisition and the Silvertip Acquisition, facility upgrades in numerous areas, waterflood development in our Mid-Continent region and select drilling in the West Texas Permian (expected 3 net locations, 6 gross locations), among other things. This forecast does not account for the Pending Independence Merger or the Pending Wind River Basin Acquisition. 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 May 3, 2021, we entered into the Fifth Amendment to the Credit Agreement which provided for, among other things, an increase in the Company's borrowing base from $120.0 million to $250.0 million, effective May 3, 2021, an expansion of the bank group from nine to eleven banks, and the inclusion of less restrictive hedge requirements and certain modifications to financial covenants. See Note 10 "Long-Term Debt" in our recently filed Form 10-Q for the second quarter of 2021 for further information.

As of June 30, 2021, we had approximately $69.0 million outstanding under the Company's Credit Agreement, $2.9 million in outstanding letters of credit and borrowing availability of approximately $178.1 million. The Credit Agreement matures on September 17, 2024. We were in compliance with the covenants to our Credit Agreement as of June 30, 2021.


Related Categories :

Second Quarter (2Q) Update   

More    Second Quarter (2Q) Update News

Gulf Coast News >>>


Mid-Continent News >>>