Free Annual Reports
Contango Oil And Gas
Contango Oil and Gas (NYSE:MCF) maintains a higher risk exploration program than some of its peers, but has successfully executed that program over time, and is moving through the recession and energy bear market with no debt. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)
Debt-Free and Low Costs
Contango Oil and Gas is one of few exploration and production companies that are debt free. This is fairly unusual, since the industry is highly capital intensive. Another company with no debt is Arena Resources (NYSE:ARD), a company focused on the Permian Basin and other onshore areas.
The company bills itself as one of the lowest-cost exploration and production companies in the industryd, with costs at about $2 per Mcf. Some of this low cost can be attributed to the lack of any interest expense. Also, the company only has seven employees, leading to much lower SG&A expense.
Contango Oil and Gas does not follow the business model of the independent exploration and production companies that many investors are familiar with. Operators like Chesapeake Energy (NYSE:CHK) and Petrohawk (NYSE:HK) will focus on established basins in North America, where the presence of oil and gas is already established. The model in these areas is to turn drilling into a manufacturing type of operation, where the operator will research the best technology to produce the formation efficiently, and then concentrate on doing this on a large scale while working on efficiencies to reduce costs.
Offshore Exploration
Contango Oil and Gas focuses on offshore exploration rather than development. This increases the risk for the company and investors, as the company can hit dry holes when conducting its operations. This occurred recently at the company's Eugene Island 56 #1 prospect which turned out not be commercially viable, forcing the company to expense $12.5 million in costs in the first quarter of 2009. These offshore wells, however, tend to be much larger that onshore wells.
This program can be seen in the 2009 drilling capital budget for Contango Oil and Gas. The company is drilling only three wells, all off shore. Since the company is a wildcatter, it also can be difficult to predict production growth, which might lead to more volatility for the stock.
This type of business model can tend to be difficult on smaller independent companies. Callon Petroleum Company (NYSE:CPE), which also explores offshore, lost 67% of its stock value in a matter of days after the company announced that it was suspending development of the Entrada field, located in the deepwater Gulf of Mexico.
Contango Oil and Gas has executed well, however, and according to the company has added 400 Bcfe of proved reserves using both drillbit and acquisitions for $544 million.
Contango Oil and Gas also has high insider ownership with 23% of the stock controlled by management. (Take a look at our article Keeping An Eye On The Activities of Insiders And Institutions to learn more.)
The Bottom Line
Investors need to be comfortable with the higher risk exploration profile of Contango Oil and Gas before getting involved with the stock, although they can take comfort that the company has executed well and has little financial risk due to its lack of debt.
Contango Oil and Gas is one of few exploration and production companies that are debt free. This is fairly unusual, since the industry is highly capital intensive. Another company with no debt is Arena Resources (NYSE:ARD), a company focused on the Permian Basin and other onshore areas.
The company bills itself as one of the lowest-cost exploration and production companies in the industryd, with costs at about $2 per Mcf. Some of this low cost can be attributed to the lack of any interest expense. Also, the company only has seven employees, leading to much lower SG&A expense.
Contango Oil and Gas does not follow the business model of the independent exploration and production companies that many investors are familiar with. Operators like Chesapeake Energy (NYSE:CHK) and Petrohawk (NYSE:HK) will focus on established basins in North America, where the presence of oil and gas is already established. The model in these areas is to turn drilling into a manufacturing type of operation, where the operator will research the best technology to produce the formation efficiently, and then concentrate on doing this on a large scale while working on efficiencies to reduce costs.
Offshore Exploration
Contango Oil and Gas focuses on offshore exploration rather than development. This increases the risk for the company and investors, as the company can hit dry holes when conducting its operations. This occurred recently at the company's Eugene Island 56 #1 prospect which turned out not be commercially viable, forcing the company to expense $12.5 million in costs in the first quarter of 2009. These offshore wells, however, tend to be much larger that onshore wells.
This type of business model can tend to be difficult on smaller independent companies. Callon Petroleum Company (NYSE:CPE), which also explores offshore, lost 67% of its stock value in a matter of days after the company announced that it was suspending development of the Entrada field, located in the deepwater Gulf of Mexico.
Contango Oil and Gas has executed well, however, and according to the company has added 400 Bcfe of proved reserves using both drillbit and acquisitions for $544 million.
Contango Oil and Gas also has high insider ownership with 23% of the stock controlled by management. (Take a look at our article Keeping An Eye On The Activities of Insiders And Institutions to learn more.)
The Bottom Line
Investors need to be comfortable with the higher risk exploration profile of Contango Oil and Gas before getting involved with the stock, although they can take comfort that the company has executed well and has little financial risk due to its lack of debt.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
Free Annual Reports
