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Contango Sees Dip in Reserves; Updates Crimson Acquisition Deal

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   |    Wednesday,September 04,2013

Contango Oil & Gas Company has reported that for the three months ended June 30, 2013, the Company had net income attributable to common stock of approximately $11.4 million, or $0.75 per basic and diluted share, compared to net income attributable to common stock for the three months ended June 30, 2012 of approximately $9.3 million, or $0.61 per basic and diluted share.

For the three months ended June 30, 2013, natural gas and oil sales from continuing operations were approximately $30.7 million, down from $39.8 million for the three months ended June 30, 2012.

Revenues for the quarter decreased by approximately $9.1 million when compared to the same period last year due to decreased production at our Vermilion 170 and Ship Shoal 263 wells. Our Vermilion 170 well was shut-in for approximately 60 days during the quarter for workover operations, which reduced our revenues for the quarter by approximately $6.2 million. This well resumed production in June and as of June 30, 2013 was producing at a rate of approximately 9.5 million cubic feet equivalent per day (Mmcfed), net to Contango. Our Ship Shoal 263 well began to water-out in August 2012, which reduced our revenues for the quarter by approximately $3.8 million when compared to the same period last year.

While net income for the three months ended June 30, 2013 increased when compared to the three months ended June 30, 2012, we still had some non-recurring expense items included in the period, such as higher workover costs and general and administrative expenses as follows:

  • We incurred approximately $7.7 million in workover costs for the quarter associated with our Vermilion 170 well.
  • We incurred approximately $2.3 million in expenditures associated with the merger with Crimson Exploration, Inc.

For the fiscal year ended June 30, 2013, the Company reported a net loss attributable to common stock of approximately $9.7 million, or $0.64 per basic and diluted share. This compares to net income attributable to common stock for the year ended June 30, 2012 of approximately $58.4 million, or $3.79 per basic and diluted share, which included a loss from discontinued operations of approximately $0.8 million or $0.05 per basic and diluted share, related to the sale of our Conterra Company and Rexer assets. This decrease of $68.1 million is mainly attributable to higher workover costs, exploration expenses, impairment expenses and general and administrative expenses.

  • Operating expenses increased by approximately $6.7 million, due to $12.0 million in workover costs for Vermilion 170, offset by lower lease operating costs.
  • Exploration expenses increased by approximately $51.4 million, mainly as a result of two dry holes the Company drilled at Eagle and Fang, at a cost of $50.0 million.
  • Impairment expenses increased by approximately $14.8 million. Of this amount approximately $12.0 million was a result of writing down our reserves at Ship Shoal 263, and $2.8 million was related to costs at the Eugene Island 24 platform and other properties.
  • General and administrative expenses increased by approximately $3.9 million, mainly as a result of $3.0 million in expenditures associated with the merger with Crimson.

Reserves Discussion

For the fiscal year ended June 30, 2013, our total proved reserves decreased by approximately 68.7 Bcfe. This decrease is attributable to production of 24.4 Bcfe during the period and a decrease of approximately 44.8 Bcfe in the estimated reserves at our Dutch and Mary Rose (20.9 Bcfe), Vermilion 170 (14.7 Bcfe) and Ship Shoal 263 (9.2 Bcfe) fields due to new information obtained by our reservoir engineer, offset by an increase of 0.5 Bcfe due to our onshore discovery at Crosby 12H-1 in the Tuscaloosa Marine Shale.

In addition to the above, the Company owns 30.2 Bcfe associated with its 37% ownership interest in Exaro Energy III, LLC (Exaro). With the inclusion of these Exaro reserves, the Company had a total of 218.0 Bcfe at June 30, 2013, which is a 40.3 Bcfe decrease from prior year.

Capital Resources and Liquidity

As of August 30, 2013, the Company had no debt, approximately $115.0 million in cash and cash equivalents, and $40.0 million of unused capacity available under its credit facility. The Company expects to use a significant portion of this cash to pay down debt once the merger with Crimson is complete.

Merger with Crimson Exploration, Inc.

On April 29, 2013, the Company and Crimson entered into an Agreement and Plan of Merger, pursuant to which Crimson will become a wholly owned subsidiary of the Company. Each share of Crimson common stock will be converted into 0.08288 shares of Company common stock.

The closing of the Merger is subject to the satisfaction or waiver of certain customary conditions, including, among others,

  1. the adoption of the Merger Agreement by Crimson's stockholders;
  2. the approval by the Company's stockholders of the issuance of Company common stock in the Merger to Crimson's stockholders;
  3. the approval for listing on the New York Stock Exchange of the Company common stock to be issued in the Merger;
  4. subject to specified materiality standards, the accuracy of the representations and warranties of, and the performance of all covenants by, the parties;
  5. the absence of a material adverse effect with respect to each of Crimson and the Company; and
  6. the delivery of tax opinions that the Merger will be treated as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code.

The Company has agreed that, upon the closing, it will cause the Board of Directors to consist of eight directors, three of whom will be appointed by the board of directors of Crimson and five of whom will be appointed by Contango's Board of Directors. Additionally, Joseph J. Romano (the current Chairman, President and Chief Executive Officer of the Company) will serve as Chairman of the Board, Allan D. Keel (the current President and Chief Executive Officer of Crimson) will serve as President and Chief Executive Officer of the Company, and E. Joseph Grady (the current Senior Vice President and Chief Financial Officer of Crimson) will serve as Senior Vice President and Chief Financial Officer of the Company. Messrs. Keel and Grady entered into employment agreements with the Company that become effective upon the consummation of the Merger.

The combined company will have its headquarters and principal corporate office in Houston, Texas. The foregoing descriptions of the Merger Agreement and related agreements are qualified in their entirety by reference to the full text of such agreements, which are attached as exhibits to the Company's report on Form 8-K, dated as of April 30, 2012, as filed with the SEC.