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Edited Transcript of MCF.A earnings conference call or presentation 16-Nov-20 10:00pm GMT

·6 min read

Q3 2020 Contango Oil & Gas Co (Texas) Earnings Call Nov 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Contango Oil & Gas Co (Texas) earnings conference call or presentation Monday, November 16, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Wilkie Schell Colyer Contango Oil & Gas Company - CEO & Director ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Contango Third Quarter 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Wilkie Colyer. Please go ahead. -------------------------------------------------------------------------------- Wilkie Schell Colyer, Contango Oil & Gas Company - CEO & Director [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, and thank you for joining us for our third quarter 2020 earnings conference call. My name is Wilkie Colyer, and I'm the Chief Executive Officer of Contango. Joining me this afternoon on the call are Farley Dakan, the company's President; Chad Roller, the company's Chief Operating Officer; Joe Grady, the company's Chief Financial Officer; and Chad McLawhorn, the company's General Counsel. Hopefully, everyone has had an opportunity to read through this afternoon's press release, including the cautionary statements regarding forward-looking information and non-GAAP measures that apply to the statements on this call. Also, I will make reference to a presentation posted to our website in the Events & Presentations tab called Central Oklahoma - LOE reductions. So please pull that up if you'd like to follow along. The last time we spoke with you just a few short weeks ago, we announced our merger with Mid-Con Energy Partners. This merger at scale, substantial long-lived and low decline of oil reserves, it increases our exposure to oil and what we consider to be an attractive forward strip. It rationalizes cost out of the combined entity, enhances liquidity and free cash flow generation, add the growth asset to our portfolio in pine tree and requires very little in the way of maintenance capital spending. We were able to structure this transaction in a manner it allows us to keep a simple capital structure comprised of only bank debt and equity, which allows us to maintain optionality as we continue to pursue additional opportunities. Our supportive lending group led by JPMorgan and supportive shareholder base are major competitive advantages in this environment. We continue to be diligent on the hedging front. For the balance of this year, we have 71% of our forecasted PDP oil production hedged at $55.12 and 67% of forecasted PDP gas production hedged at $2.57. Next year, we are 69% hedged on oil PDP at $51.71 and 58% hedged on gas PDP at $2.49. Recently, we entered into additional 2022 hedges, bringing us to 37% hedged on oil PDP at $42.04 through Q3 of 2022 and 65% hedged on gas PDP at $2.59 through Q3 of 2022. Not included in these numbers are the oil hedges we will inherit from Mid-Con when we close on that transaction late this year or early next. In terms of results, I think we did a great job of managing the business in a tough environment. And if you'd please open up the slide deck that I had mentioned Contango Central Oklahoma - LOE reductions and turn to Slide 3. So Slide 3, Executing Our Business Plan: Central Oklahoma Year-End 2020 Preview: We've been able to reduce LOE substantially during this year. And lease operating expenses are 48% lower than the previous year prior to taking over operations. So if you look at the top right chart, you'll see in March '19, when this was owned by White Star, the assets were running at about $4.5 million a month. In October of 2019, about $2.9 million a month, and that was the month before we took over operations. Since then, we've reduced LOE by 48% to about $1.5 million on a go-forward basis, and that's gross total production expenses on a dollar per month. That LOE reduction is expected to result in over 50% of a value increase or $41.7 million increase in PDP PV-10 for the Central Oklahoma region. By the way, this is a subset of assets that we purchased from White Star. So this is part of those assets. So year-end reserves, we would expect to exceed year-end 2019 reserves when normalized to the same pricing. So if you look at the bar chart diagram at the bottom, year-end '19, you see at $72.7 million. That's year-end '19 at basically today's strip. You see there's some roll-off from production, and that's free cash flow, essentially, some minor revisions, but look at that LOE reduction, it's about 3x the roll-off of production or free cash flow during that year. So very, very material increase to our reserve base just by going in and cost-cutting on these assets. So the White Star acquisition and specifically the subset of assets categorized in Central Oklahoma is a case study in how we approach inorganic growth. We were able to purchase the asset for a significant discount to PDP at then strip via 363 sales process. We then hedged that production to mitigate near-term price risk. Finally, we were able to cut significant costs out of the field level OpEx without any degradation in operating performance or production, further enhancing returns. While the price of stock is lower today than it was at closing, the price paid and actions taken post closing provide a margin of safety against downward price movements. We believe that this process is repeatable, particularly with regard to assets owned by nonnatural entities, such as banks, bondholders or other creditors, which continues to be a focus of ours. Our metrics all came in at or better than we guided to during our last earnings call, with production at the top end of guidance and costs, both LOE and G&A, below the low end of guidance. In short, we executed on the internal things we can control to either add value or at least not detract from value, while we continue to look for inorganic opportunities to grow accretively. On that front, the pipeline of opportunities we're evaluating continues to be as strong as it ever has been. It appears to us that WTI spreads have narrowed as volatility has subsided somewhat in the WTI forward curve. We are seeing almost unprecedented opportunities to add assets to our portfolio via banking on liquidations, pre and post reorganization combinations, bilateral trades and acquisition of credit securities. Our flexible mandate and multi-basin approach allows us to be value reactive to the best opportunities and our simple capital structure and low leverage, both now and in the future, give us the ability to play offense at a time when many of our competitors are unable to do so. Thanks for your time this afternoon and for your interest in Contango. With that, operator, I will open up the line for questions. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- (Operator Instructions) It appears we have no questions at this time. I would like to turn the conference back to your host for any additional or closing remarks. -------------------------------------------------------------------------------- Wilkie Schell Colyer, Contango Oil & Gas Company - CEO & Director [4] -------------------------------------------------------------------------------- Thank you, and thanks, everybody, for taking time to hop on the call and hear about our third quarter earnings. We continue to be really excited about where we're at in the current environment and look forward to updating you guys in the near future. Thank you again, and have a great evening. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- That concludes today's presentation. Thank you for your participation. You may now disconnect.