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Contango Oil & Gas Third Quarter 2021 Results

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   |    Monday,November 15,2021

Contango Oil & Gas Co. reported its third quarter 2021 results.

Highlights and Recent Developments:

• Production sales of 2,426 MBoe for the third quarter of 2021, or 26.4 MBoe per day, compared to 1,587 MBoe, or 17.2 MBoe per day in the prior year quarter.
  
  
• Net loss was $15.2 million for the current year quarter, compared to a net loss of $6.8 million in the prior year quarter. Adjusting both quarters to exclude pre-tax, non-cash mark-to-market losses related to our commodity price derivatives of $35.5 million and $13.0 million, respectively, net income before income taxes would have been approximately $19.2 million and $6.9 million for the current and prior year quarters, respectively.
  
  
• Adjusted EBITDAX (a non-GAAP measure, as defined and presented herein) for the current year quarter of $31.6 million, compared to $15.8 million in the prior year quarter.
  
  
• On August 31, 2021, the Company closed on the acquisition from ConocoPhillips of low decline, conventional gas assets in the Wind River Basin of Wyoming (the "Wind River Basin Acquisition"). Upon closing, Contango acquired an estimated 446 Bcfe of PDP reserves for a net consideration paid, after customary closing adjustments, of approximately $62.6 million. See Note 3 "Acquisitions and Dispositions" in our recently filed Form 10-Q for the third quarter of 2021 for further information.
  
  
• In light of the Pending Independence Merger (defined below), on October 28, 2021, the Company and the lenders under its credit agreement entered into a waiver letter which, among other things, postpones the November scheduled redetermination of the Company's borrowing base until on or about February 1, 2022. As of September 30, 2021, the Company had availability under its credit agreement of $129.1 million. See Note 10 "Long-Term Debt" and Note 13 "Subsequent Events" in our recently filed Form 10-Q for the third quarter of 2021 for further information.
  
  
• On November 3, 2021, the Company filed and mailed its definitive proxy statement for the Special Meeting of the Stockholders of the Company in connection with the definitive agreement to combine with Independence Energy, LLC ("Independence") in an all-stock transaction (the "Pending Independence Merger"). The Special Meeting of the Stockholders to vote on the approval of the Pending Independence Merger has been scheduled for December 6, 2021. In light of the Pending Independence Merger, Contango no longer plans to update financial guidance. See Note 3 "Acquisitions and Dispositions" and Note 13 "Subsequent Events" in our recently filed Form 10-Q for the third quarter of 2021 for further information.

Wilkie S. Colyer, the Company's Chief Executive Officer, said, "Our team has been very busy in identifying, closing and integrating acquisitions during the current year, as evidenced by the closing of the Mid-Con and Silvertip acquisitions in the first quarter, the signing and closing of the acquisition of the Wind River Basin assets from ConocoPhillips in the third quarter and the signing of the transaction agreement for the Company's pending merger with Independence Energy LLC, a subsidiary of KKR, in the second quarter. Assuming the Pending Independence Merger is approved by Contango stockholders at the Special Meeting of the Stockholders on December 6, 2021, the Pending Independence Merger is expected to close the following day, and the combined team will be strategically and financially positioned to continue a very active role in the consolidation of the energy sector. Contango's 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 it to greatly expand our financial flexibility and acquisition dry powder, and increase the value of our reserves. Through the pending combination of Contango and Independence, Contango shareholders are positioned to participate in the combined company's ability to pursue its consolidation strategy on a much larger scale and at a meaningfully lower cost of capital. 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."

Q3 Financial Results

Net loss for the three months ended September 30, 2021 was $15.2 million, or $(0.08) per basic and diluted share, compared to a net loss of $6.8 million, or $(0.05) per basic and diluted share, for the prior year quarter. Pre-tax net loss for the three months ended September 30, 2021 was $16.3 million, compared to a pre-tax net loss of $6.1 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 $35.5 million and $13.0 million, respectively, net income before income taxes would have been approximately $19.2 million for the current year quarter compared to net income before income taxes of $6.9 million for the comparable 2020 quarter.

Average weighted shares outstanding were approximately 199.1 million and 131.7 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 the 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 $31.6 million for the three months ended September 30, 2021, compared to $15.8 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 and the Wind River Basin Acquisition in the third quarter of 2021. Recurring Adjusted EBITDAX (defined below as Adjusted EBITDAX exclusive of non-recurring business combination expenses and strategic advisory fees and legal judgments) was $35.2 million for the 2021 quarter, compared to $16.2 million for the 2020 quarter.

Revenues for the third quarter of 2021 were approximately $99.9 million compared to $31.3 million for the third quarter of 2020, an increase attributable primarily to higher commodity prices and an approximate 53% increase in production sales resulting from the properties acquired in the Mid-Con Acquisition, the Silvertip Acquisition, and the Wind River Basin Acquisition.

Production sales for the three months ended September 30, 2021 were approximately 2.4 MMBoe (52% liquids), or 26.4 MBoe per day, compared to approximately 1.6 MMBoe (48% liquids), or 17.2 MBoe per day in the prior year quarter. The third quarter production sales were higher than the upper end of guidance provided by the Company for the quarter, primarily as a result of the properties acquired in the Wind River Basin Acquisition, which closed on August 31, 2021. Net oil production sales were approximately 9,000 barrels per day for the three months ended September 30, 2021, compared to approximately 4,800 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, which closed on January 21, 2021 and February 1, 2021, respectively. Net natural gas production sales increased to approximately 76.7 MMcf per day during the three months ended September 30, 2021, compared with approximately 53.8 MMcf per day during the three months ended September 30, 2020 primarily due to production from the properties acquired in the Wind River Basin Acquisition. Net natural gas liquids ("NGLs") production sales increased to approximately 4,500 barrels per day during the three months ended September 30, 2021, compared to approximately 3,500 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 September 30, 2021 was $40.18 per Boe compared to $19.13 per Boe for the three months ended September 30, 2020. The increase in the third quarter 2021 realized prices was primarily attributable to an improvement in the economy and higher realized commodity prices in 2021 brought about by domestic vaccination programs that have helped reduce the spread of COVID-19. The lower prior year prices were attributable to the decline in realized commodity prices in early 2020 as a result of the spread of the COVID-19 pandemic and its negative impact on the global demand for oil and natural gas. The realized price of crude oil averaged $67.39 per Bbl in the current year quarter compared to an average $39.30 per Bbl in the prior year quarter. The realized price of natural gas averaged $3.72 per Mcf in the current year quarter compared to an average of $1.60 per Mcf in the prior year quarter, and the realized price of NGLs averaged $36.30 per Bbl in the current year quarter compared to an average of $15.73 per Bbl in the prior year quarter.

Operating expenses for the three months ended September 30, 2021 were approximately $44.9 million, compared to $14.6 million for the same period last year, an increase attributable primarily to the properties acquired in the Mid-Con Acquisition, the Silvertip Acquisition, and the Wind River Basin 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 $6.9 million and $1.5 million for the respective 2021 and 2020 quarters, were approximately $38.0 million for the 2021 quarter compared to approximately $13.1 million for the prior year quarter. The third quarter operating expenses were higher than the upper end of guidance provided by the Company for the quarter, primarily as a result of the production enhancing workovers.

DD&A expense for the three months ended September 30, 2021 was $9.8 million, or $4.03 per Boe, compared to $6.2 million, or $3.90 per Boe, for the 2020 quarter. The higher depletion expense and rate per Boe in the current year quarter was primarily due to the liquids-heavy properties acquired in the Mid-Con Acquisition and the Silvertip Acquisition.

Total G&A expenses were $14.6 million, or $6.02 per Boe, for the three months ended September 30, 2021, compared to $8.7 million, or $5.48 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 $2.9 million and $0.3 million for the current year and prior year quarters, respectively, and legal judgments of $0.7 million and $0.1 million for the current year and prior year quarters, respectively) were $11.0 million, or $4.52 per Boe, for the current year quarter compared to Recurring G&A expenses of $8.3 million, or $5.22 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 growth related to 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 annual incentive grants being awarded to a larger employee base. Recurring Cash G&A expenses (defined as Recurring G&A expenses exclusive of non-cash stock-based compensation of $3.2 million and $1.8 million for the respective 2021 and 2020 quarters) were $7.8 million for the current year quarter, compared to $6.5 million for the prior year quarter.

Loss on derivatives for the three months ended September 30, 2021 was approximately $48.4 million. Of this amount, $35.5 million was attributable to a non-cash mark-to-market loss resulting from the reduction in the value of our hedges due to the improvement in benchmark commodity prices and to $12.9 million in realized losses on derivative settlements during the quarter. Loss on derivatives for the three months ended September 30, 2020 was approximately $7.4 million, of which $13.0 million was a non-cash mark-to-market loss, partially offset by $5.6 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, in the second quarter of 2021, we resumed a conservative, one-rig drilling program in the Southern Delaware Basin. In May 2021, we began drilling the first of three single-pad wells originally planned in the Permian region. Based on recent success by other operators adjacent to our position, we decided to drill one of the three wells in this first pad to the Second Bone Spring formation, which is 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. The first two wells, both drilled to the Wolfcamp A formation, were drilled to an average total measured depth of 20,440 feet with an average lateral length of 9,700 feet and 48 stages of fracture stimulation. The third well, drilled to the Second Bone Spring formation, was drilled to a total measured depth of 19,090 feet with a lateral length of 9,574 feet and 47 stages of fracture stimulation. These three wells were brought online in mid-October and are still being evaluated at this time. We plan to begin completion operations on the second three wells in late November, with first production expected in January 2022.

Capital costs for the three months ended September 30, 2021 were approximately $12.2 million and included $8.0 million in expenditures related to the drilling of the Southern Delaware Basin wells and $3.8 million in expenditures related to redevelopment activities on recently acquired properties in our Midcontinent, Permian and Rockies regions. We also incurred $0.4 million in expenditures in unproved offshore prospect costs during the third quarter of 2021.

We currently forecast our total 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, the Silvertip Acquisition, and the Wind River Basin 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. The capital expenditure program will continue to be evaluated for revision throughout the remainder of 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 August 6, 2021, we received notice from the Small Business Administration that our loan received from the Paycheck Protection Program in 2020 for approximately $3.4 million was forgiven in its entirety. For the three and nine months ended September 30, 2021, we recorded other income of $3.4 million for the loan forgiveness within "Gain on extinguishment of debt" on our consolidated statements of operations. See Note 10 "Long-Term Debt" in our recently filed Form 10-Q for the third quarter of 2021 for further information.

As of September 30, 2021, we had $118.0 million outstanding under the Company's Credit Agreement, $2.9 million in outstanding letters of credit and borrowing availability of approximately $129.1 million. The Credit Agreement matures on September 17, 2024. We were in compliance with the covenants to our Credit Agreement as of September 30, 2021.

In light of the Pending Independence Merger, on October 28, 2021, the Company and the lenders under its Credit Agreement entered into a waiver letter which, among other things, postpones the November scheduled redetermination of the Company's borrowing base until on or about February 1, 2022. See Note 10 "Long-Term Debt" and Note 13 "Subsequent Events" in our recently filed Form 10-Q for the third quarter of 2021 for further information.