Contango Oil & Gas Company
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Good day, and welcome to the Contango’s Q4 2020 Earnings 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 Colyer:]

Good morning, and thank you for joining us for our fourth quarter and full year 2020 earnings call. My name is Wilkie Colyer, and I’m the Chief Executive Officer of Contango. Joining me this morning 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 morning’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 Contango investor presentation and the header on that is company overview, March 2021. So please have that handy, if you’d like to follow along.

[Operator:]

And we’ll take our first question. Caller, please go ahead.

[Jeff Robertson:]

Good morning, Wilkie. It’s Jeff Robertson. A question on the – two things. One on the – are you seeing any upward pressure on service prices that affects the capital you’ve outlined for work over projects? And secondly, as the rise in commodity prices created any more urgency with sellers of distressed assets to maybe go ahead and move assets now that prices are higher?

[Wilkie Colyer:]

Thanks for the question, Jeff. So on the first one, we have not seen much service cost inflation. And our view is a lot of that work-over-work we can do in-house. And when you think about it, we really feel like the smaller the job, the more we can protect ourselves against service cost inflation. We certainly do expect to see it. But I think that’s why a big focus of ours is on proved develop reserves just because I think those are going to see the biggest benefit from the increase in oil prices without seeing the increases in service costs.

[Jeff Robertson:]

Has the rise in commodity prices maybe caused the owners of some of the assets you all target the distressed assets, does it cause them to accelerate their plans to divest those properties now that they can obviously get a theoretically or price based on a higher strip?

[Wilkie Colyer:]

Yes. Good question. I mean, we certainly – we think so. I think that owners – non-natural owners of assets that weren’t designed on those things, we certainly think are more likely to divest now that the strip is a little bit higher, and we’ve made it through COVID. I certainly think that’s the case, but just – we’ll have to see. We obviously haven’t executed anything since this fairly materialized in oil prices, but that’s certainly our expectation, Jeff.

[Jeff Robertson:]

Last question, if I can. Financing for incremental acquisitions. How do you think about the right use of equity and debt for opportunities?

[Wilkie Colyer:]

Yes. It’s a very fair question. I mean, the first thing we will have is or we expect to have is a fair amount of liquidity on our revolver post our redetermination. So that’s one use of capital. And as we’ve shown in the past, we’re not afraid to use equity to acquire assets. Really, at the end of the day, we’re trying to analyze whether or not the acquisition is accretive to the intrinsic value per share for our shareholders. And so if we think it is, we’re going to do the deal. And if it’s not, then we won’t. And it’s really kind of a relative value proposition there. So we are, again, not afraid to issue equity, but certainly think that at the moment, we are over equitized and we’re comfortable with a little bit more debt on the balance sheet probably just given that. As we stated in the press release, we anticipate year-end leverage at the end of 2021 to be sub half a turn. And we would anticipate, assuming we do no new deals, being debt-free by Q3 of next year and then a net cash position. So we’re in a really good spot, given our liquidity profile to execute on further incremental acquisitions.

[Jeff Robertson:]

Thanks for taking my question, Wilkie.

[Wilkie Colyer:]

Thanks, Jeff.

[Operator:]

We’ll now take our next question. Caller, please go ahead.

[Unidentified Analyst:]

Good morning. This is can you hear me, Wilkie?

[Wilkie Colyer:]

Yes, I can. Good morning.

[Unidentified Analyst:]

Good morning. Thank you for doing this call and best of luck with your acquisition efforts. Question number one, I understand the company has a new profile in light of the recent acquisitions that is closed. Could I just kind of confirm some of the numbers I’m looking at in the appendix in terms of the new expected production going forward for 2021. It seems to be about 20,000 barrels a day, approximately 60% oil mix. Just want to confirm how far off I am? And then just the other basic numbers in terms of the expected production cost per barrel and what kind of CapEx you have planned to use on these properties?

[Wilkie Colyer:]

Yes. So I don’t think we have given guidance on production for this year. We have given guidance on capital spending. As you could see in the presentation, we’ll have about $10 million of capital spending that’s expected to create that $108 million of proved developed reserves off of the recent acquisitions. I believe our midpoint of guidance is, what, $14 million or $15 million. So you’ve got another $4 million or $5 million in there that is also a high return, but it’s from legacy Contango assets. And those are largely the – it’s about half from non-operated wells in Grimes and Zavala counties that are really about the highest rate of return inventory we have in our portfolio. But obviously, we don’t control the timing of that given that it’s non-op. We just signed the AFE when we get it. And then the other couple of million will be, I believe, some additional projects that we’ve identified on Grizzly’s assets. So very low capital spending, but expect to create a significant amount of reserves to replace the reserves that will be rolling off during the year, and that’s really before we think our teeth into additional LOE savings at Grizzly, which we think will be additive.

[Unidentified Analyst:]

Okay. And just a follow-up, this is a people-related question. You’re suggesting that the operations of the assets have been acquired have been under managed to an extent. Can you just kind of explain how – what portion of the operating and production staff and geology staff you’re retaining when you’re acquiring these companies because clearly, they need to be operated. And I’m just wondering what portion of people are being retained and what your – and how effectively are you able to get them to, in essence, change their operation practices to be more return on capital-oriented versus how they were basically overseen beforehand?

[Wilkie Colyer:]

Yes. It’s a good question. What I would say is that we tend to keep very much a majority of the field staff. And what we really try to do with them is just listen to their ideas. They’ve usually got pretty good ones, and in many cases, these have been neglected assets. So there’s just not a lot of focus on them from headquarters for various reasons. I mean, it might just be a very small asset for a much larger company, where, in our case, it’s a much more meaningful asset so we can focus more time and attention on it. And then I think more broadly, I think a lot of these companies got into a program of being really focused on two things

[Unidentified Analyst:]

Okay. And just finally, when looking at acquisitions, are there any sort of hidden assets you’re looking for? What I’m alluding to is, at your time at Resolute Energy, one of the benefits you realized there was you took old fields that had been conventionally drilled and you started doing horizontal drilling, which led to a much better realization of higher production reserves. What I’m wondering is, as you look at new properties, what ways are you looking at them differently in an effort to try and realize additional value that the old or prior owners maybe have not done?

[Wilkie Colyer:]

Yes. I mean, that’s a little bit of the secret sauce. But I do think that we really kind of look at what it is and then try and be not too exacting on what it can be, but I have a decent idea of that when you go in and the number one focus is cutting cost. And once you do that, we tend to find that it opens up a lot of opportunities that maybe you weren’t even sure existed because you’ve lowered that cost structure in the field. So we – that’s kind of how we approach it.

[Unidentified Analyst:]

Great. Listen, best of luck, thank you.

[Wilkie Colyer:]

Thank you very much for the call.

[Operator:]

And we currently have no further questions.

[Wilkie Colyer:]

Great. Well, really appreciate everybody’s time this morning and for your interest in Contango. And if anyone has any follow-up questions, please don’t hesitate to reach out to our team. And we look forward to speaking to you again in May, when we report our first quarter earnings. Everybody, have a great day.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.