Apr 22, 2012

Some notes about Contango (MCF)

Source: Company's site; E&P 101 - The Short Course - 31/01/2001 - contango.com/investor/events/E_P_101_The%20Short%20Course.ppt

MCF is in the UPSTREAM sector, exloration & production (E&P).

There are 3 types of costs in the E&P sector:
° F&D, finding and development costs. These are discovery costs: they include costs to
- acquire mineral lease
- acquire seismic data
- evaluate these data
- drill and develop a field
- 'dry hole' (costs generated and no reserve found)
- acquire proven/producing reserves
° LOE, lease operating costs. These are extraction costs, costs incurred to extract oil & gas from beneath the surface to a central gathering
° G&A, general & administrative, interest expense, income taxes
MCF is in the business of creating and drilling the best reward/risk oil & natural gas field at economically attractive prices
MCF's objective is to control F&D through an alliance with an exploration company Juneau Exploration (JEX). So MCF shift costs of having salaried employees to JEX while JEX is focused on having the best free lance professionals
MCF's competitive advantage is trying to be the low cost producer, the only strategy suitable for a commodity business. In order to do so, they are trying to minimize F&D, in a way they generate the best value added (shifting the day to day costs to the alliance) and keeping leverage modest so to have more financial flexibility when opportunity arises. LOE and G&D are outsourced: LOE incurred only when there is a revenue producing well and G&D incurred only for outsourced accounting, lawyers.
From "Thinking Inside the Box", a 2001 presentation in the company's site details well what objectives the company had (still valid, it seems):"(...) Contango is a leading edge energy independent structured to exploit outsourcing as a core business strategy. What makes us new and drives value is not what we do, but the way we do it (...)".
For a great investment thesis, here a Sec document sent by Sellers Capital during the lows of October '08 where Mark Sellers asks the Ceo to increase the share repurchase.
Lastly, for a check of how much they are able to compete on costs, you'll see here the last presentation (p.4) from MCF where they say to be able to produce at 2.68$/Mcfe and here the last presentation from Southwestern Energy Company (SWN) where at page 22 is provided an entire list of competitors and their costs: although the definitions are probably not the same, the best operators under 3$/Mcfe are maybe 3 or 4.

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