HOUSTON Aug 7, 2015 (Thomson StreetEvents) -- Edited Transcript of Contango Oil & Gas Co earnings conference call or presentation Friday, August 7, 2015 at 3:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Joe Grady Contango Oil & Gas Co. - SVP & CFO * Allan Keel Contango Oil and Gas Co. - President & CEO * Carl Isaac Contango Oil and Gas Co. - SVP of Operations ================================================================================ Conference Call Participants ================================================================================ * Kyle Rhodes RBC Capital Markets - Analyst * Neal Dingmann SunTrust Robinson Humphrey - Analyst * Sameer Uplenchwar GMP Securities - Analyst * Ron Mills Johnson Rice & Company - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Contango's results for the second-quarter 2015 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joe Grady. Please go ahead, sir. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [2] -------------------------------------------------------------------------------- Thank you. I'd like to welcome everyone to Contango's earnings call for the quarter ended June 30, 2015. On the call today are myself; Allan Keel, our President and CEO; Steve Mengle, our VP of Engineering; Tommy Atkins, our VP of Exploration; and Carl Isaac, our VP of -- I mean, yes. Carl Isaac, our VP of Operations. I'll give you an overview of the financial results and then you'll hear comments on our operations from Allan Keel. And then we'll turn it back into a Q&A after Allan's comments. As is typical for most companies and our past precedence, we'll limit our questions to those from analysts who follow our stock closely, as we believe that that is the most constructive and productive use of everyone's time. But before we begin, I want to remind everyone that the earnings release and the related discussion this morning may contain forward-looking statements as defined by the Securities and Exchange Commission, which may include comments and assumptions concerning Contango's strategic plans, expectations and objectives for future operations. Such statements are based on assumptions we believe to be appropriate under the circumstances. However, those statements are just estimates, are not guarantees of future performance or results, and therefore should be considered in that context. Onto the financial results, we reported a net loss of $19.5 million for the quarter or $1.03 per basic diluted share compared to net income of $4.6 million or $0.24 per share for the prior year quarter. Contributing to this variance were lower revenues resulting from lower prices and production in the current period, offset in part by lower operating expenses in G&A and lower expiration expenses. Each of which I will touch on briefly in a few minutes. Adjusted EBITDAX as we define in our release was approximately $19.9 million or $1.05 per basic share for the current quarter, compared to approximately $57 million or $2.97 per share for the prior year quarter, a decline also attributable to the same factors I just mentioned for the change in net income and loss. Production for the current quarter was approximately 9 Bcfe, or 98.4 million cubic feet equivalent per day, compared to 10.6 Bcfe or 116 million per day in the prior year quarter. This was toward the upper end of guidance previously given and slightly above analyst consensus (inaudible). As discussed in our release for the first quarter of this year, we reacted quickly to the dramatic decline in and uncertain outlook for commodity prices in the fourth quarter of 2014 and to date in 2015 by significantly reducing our capital program to that which we considered strategic and/or necessary. We have focused our CapEx on testing new plays in our portfolio and new strategies on existing positions, all designed more for de-risking our inventory of unproven resource potential rather than emphasizing production growth in this low-priced environment. Most of these projects also contemplated that commencement of full production would not incur -- occur until the first half of 2015. Examples of that are the multi-well pad drilling in Madison and Grimes Counties and the exploratory tests in our new plays in Wyoming. Accordingly, new production commencing over the last two quarters has not been sufficient to offset higher rate gas production from our GOM properties period over period. We have provided guidance of 90 million cubic feet to 95 million cubic feet equivalent per day for the third quarter as new production added during the current quarter is again expected to fall a little short of offsetting the Gulf of Mexico production. During the month of July, our production has averaged approximately 98 million cubic feet a day equivalent. Commodity prices during the quarter were significantly below prior year levels. Our weighted average equivalent price declined to $3.94 per Mcfe, compared to $7.43 per Mcfe in the prior year quarter, due primarily to declines of 43%, 42% and 40 -- and 53% in oil, natural gas and natural gas liquids respectively. Lower prices contributed to a $28 million price-related revenue variance, compared with the prior year quarter which was 65% of the total decrease in revenue. We have 35,000 barrels per month of oil production hedge for the remainder of this year of onshore production hedged for the remainder of this year through costless collars with a cu-- per collar spread of $55 by $65.15. We have no gas hedges in place and currently have no production hedge for 2016. Total lease operating costs were $11 million for the quarter, compared to $11.6 million in the prior year quarter. Excluding production and ad valorem taxes, operating costs were $9.2 million, or $1.02 per Mcfe, compared to $8.5 million, or $0.80 per Mcfe, for the prior year quarter. Exclusive of expense workover cost, direct operating costs were flat with the 2014 quarter despite incremental expenses from new fields and wells added since the 2014 quarter, which is approximately 18 more wells on shore. And also including new fields of operation in Wyoming, Elm Hill and South Timbalier 17. We also had increased operating costs associated with compression facilities added at Eugene Island during the third quarter of 2014. So despite all of that incremental cost coming from those new fields or new operations, we were still flat for the quarter. So you can see, we've been successful in reducing direct LOE on our legacy properties by an estimated 10%. A large portion of monthly lease operating expenses are fixed costs, therefore, the increase in per unit cost can be attributed primarily to the higher workover expenses and the lower productions. Guidance for the second quarter is $9 million to $9.5 million, which is in line with the current quarter and also includes an estimated $1.1 million in total for a pipeline repair at Eugene Island 11 and a number of onshore workovers designed to improve production. Expiration expense for the current quarter was approximately $7 million with $6.5 million of that attributable to the unsuccessful exploratory test of the Mowry Shale and our France prostet-- prospect in Natrona County, Wyoming. And approximately $11 million in 2014 quarter, with substantially all of that attributable to the unsuccessful Ship Shoal 255 exploratory well. Exclusive of the Wyoming well, our per share results that I mentioned earlier for the current quarter would have been right on consensus estimates. Total depreciation expense was slightly lower than the prior year quarter, due to lower production. However, the higher per unit rate for the current year quarter reflects specific field rate increases associated with price-related year-end reserve revisions. General administrative expense was $7.4 million for the current year quarter, or $0.82 per Mcfe, compared to $9.2 million, or $0.87 per Mcfe, for the prior year quarter. Excluding non-cash stock compensation for both periods and merger-related costs reflected in the 2014 quarter, cash G&A expense was $6 million for this quarter, compared to $6.9 million for the prior year quarter, a decrease reflecting our efforts to reduce administrative costs. On the liquidity side, as of the end of the current quarter, we had approximately $111 million outstanding on our credit facility. And had additional borrowing capacity of $112 million under our $225 million borrowing base. Due to a less active CapEx program planned for the remainder of the year, we expect that our year-end debt level will be similar to current levels but expect to reflect an overall reduction in total Company obligations due to reductions in working capital deficit. Our next regular scheduled borrowing base redetermination is November 1. Despite the slight increase in our debt level, we still maintain one of the healthiest balance sheets and liquidity profiles in our peer group. At the end of the quarter, we had a debt to total booked cap ratio of 17%, a debt to last 12 months EBITDA leverage ratio of of one to one, and 120 -- and $112 million of availability under our revolver. So we have a strong financial position that we will continue to maintain throughout 2015. And with that, we'll switch over to comments from Allan on our operations. -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Joe. And good morning to everyone. And thank you for being with us today. I'd like to share a few highlights with you this morning about the progress we have made on a number of strategic goals we set for ourselves at the beginning of the year. And where useful, elaborate on some of the related results mentioned in our release. From a general perspective, as we specified at the beginning of the year, our priorities for 2015 in this low and uncertain commodity-priced environment would be one, to preserve our excellent financial condition including staying within cash flow on our CapEx program. Two, to focus our drilling efforts on strategic projects that would enhance our portfolio and position us to quickly increase capital activity when prices improve and/or cause decline. Three, to focus on reducing costs in each and every aspect of our business. And four, where possible to do so prudently, take advantage of stressed or distressed acquisition opportunities in the market. We believe that attaining these goals should provide a foundation for meaningful future value appreciation for all shareholders, Contango employees included, as the industry rebounds. We feel pretty good about the progress we have made this year toward these goals. Specifically, we have preserved our financial condition by staying within the plan and schedule we set at the beginning of the year. While our debt level's higher than it was at year-end, the increase was not unexpected, due to the front end loaded CapEx program and the expected decrease in working capital that typically occurs as capital activity slows down. As Joe mentioned, our year-end financial profile is expected to be as good or a little better than it is today. Regarding our strategic project efforts, we feel very encouraged by the initial results in Weston County, Wyoming, where we drilled a very nice exploratory success that tested at a peak 24-hour rate of 907 barrels equivalent per day, and that was 98% oil. And an IP30 of 420 barrels equivalent per day while working through typical frontier area logistical issues. We are experimenting with various lift mechanisms to optimize production rate. We're viewing core data to optimize completion and other pertinent information that was not available at the time of the initial drilling and completion of the Elliot well. And we are very excited about the prospects for our 35,000 net acre position. We are waiting on permits for multiple wells and expect to drill one to two additional wells this year to further delineate our lease hold which would put us in good position to begin a development program in 2016 with one to two rigs, given success independent on the oil price environment. We believe that this play profile here is very similar to that of our Woodbine play in Madison County. Based on 160 acre space, 200 to 300 locations are possible on our acreage, given the current oil price environment, we will be disciplined in our development of this play, giving continuing success, focusing more on further delineating the extent of the play rather than on maximizing production growth. In our Elm Hill project in Fayette and Gonzales Counties, Texas, we and our partner have drilled five wells, testing three formations -- The Navarro, the Austin Chalk, and the Buda. We're currently completing two wells, one each in the Buda and the Austin Chalk, after which we will have a good indication about how we will likely proceed with a long-term plan. While results have been somewhat mixed to date, within reservoirs and between reservoirs, we feel like we have an economic play in at least one of the reservoirs mentioned. We will not be ready to articulate a strategy on a potential plan for another couple of months. In Madison Grimes Counties in Texas, our goals were to test the on space in the Upper Lewisville and Chalktown, perform initial tests of the lower Lewisville in that area, and test a longer lateral strategy to improve performance in the Grimes County area. You saw in the release that we are experiencing nice production results from the down space pads drilled in Chalktown. However, due to the low commodity price environment, the overall results do not appear to support a 500-foot spacing strategy from a return perspective. We will continue to develop the Upper Lewisville and the Madison County area, but the (inaudible) drilling will be done on a leased 1,000-foot spacing and in a better commodity price environment. We drilled a pilot hole in the Lower Lewisville -- in our Chalktown area and were encouraged by log results where debt analysis indicates that there is three times the amount of oil in place in the Upper Lewisville, which is currently being developed. We are currently awaiting the final core analysis to work into our overall evaluation prior to drilling the -- our Lower Lewisville horizontal well in late 2015 or 2016. During the second quarter in Grimes County, we tested a longer lateral with more frac stages and profit in the Upper Lewisville formation in the Norwood 1-H. The production results there were disappointing. However, we are still optimistic about the possibility of the Eagle Ford, Lower Lewisville and Middle Lewisville being prospective in Grimes. During 2014, we drilled the Stokes #1 well in Grimes County. Took a hole core of several formations and found the Eagle Ford exhibited rock properties similar to those in the Eagle Ford and Brazos County to the west where other industry-operators are experiencing success. In the Natrona County, Wyoming, over the course of the fourth and first quarters, we drilled and completed and tested our initial exploratory test of the Mowry Shale prospect, unfortunately, with no hydrocarbons being detected. We will not likely spend any more capital pursuing the Mowry Shale in this area. However, we did earn a 33% (technical difficulty) and approximately 70,000 acres by drilling the state number 1-H well under this drill-to-earn arrangement. And we'll study the possibility of testing other formations present in the area. Our next objective for this year was cost reduction. We have seen meaningful reductions in cost on the drilling and completion side and continue to analyze and pursue cost savings in the production, lease operating and administrative areas. While it was a bit difficult to give a (technical difficulty ) percentage reduction on drilling with a limited and sporadic rig schedule, we have seen a 30% decrease in rig rate and approximate 35% decrease in completion costs per stage, an estimated 10% savings on legacy field operating costs, and have tightened our belt on G&A costs. Regarding our acquisition efforts, at the beginning of the year we believed that our financial strength would position us to potentially capitalize on stressed or distressed companies needing to divest assets, find JV capital, or pursue other strategic alternatives. However, the tremendous amount of private and public equity capital available to distressed situations, a hot second lien market that gives companies a temporary lifeline and a willingness by banks to modify revolver (inaudible) have landed a fewer than expected opportunities. And for those actually in the market to a large disparage in the bid ask spread. Consequently, we have been frustrated in our efforts to find such an opportunity on reasonable terms. We've been disappointed so far, but we'll continue to review opportunities. In summary, we believe that we have accomplished much in the first two quarters that should be meaningful to our Company when prices rebound and when we return to development mode when and where it makes economic sense to do so. Having said that, we, like most of our peers, have not yet gotten credit in our stock performance for what we have accomplished this year. Like the entire upstream sector, we have suffered through a dramatic decline in our stock price. We will stay focused on maintaining our financial strength, (inaudible) de-risk our portfolio and adding to our drilling inventory so as to be positioned to accelerate activity in an improved commodity price environment. That concludes our prepared remarks this morning. With that, operator, please open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions) Kyle Rhodes, RBC. -------------------------------------------------------------------------------- Kyle Rhodes, RBC Capital Markets - Analyst [2] -------------------------------------------------------------------------------- I know it's still a bit early for this, but I was just kind of curious of the types of sensitivities you're looking at with regards to a 2016 operating plan. Is spending within cash flow still kind of the key priority for next year at this point in time? -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [3] -------------------------------------------------------------------------------- Yes, Kyle, that'll be a priority for us. It is early. We'll normally start this process in September, October and this year won't be any different. And to a large extent, what we do in 2016 will be a function of prices as well as results that we see in the areas that we're active in right now. So it is a bit early but we'll be moving in that direction here in another month or two. -------------------------------------------------------------------------------- Kyle Rhodes, RBC Capital Markets - Analyst [4] -------------------------------------------------------------------------------- That makes sense. And I guess anything in the way of obligation wells required to hold acreage in 2016? -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [5] -------------------------------------------------------------------------------- We don't have any issues that we can't manage through lease extensions or strategic drilling that would I think be incorporated in our budget. So we don't feel like we're exposed to losing anything with the reduced capital budget. For instance, in Wyoming, we have the ability to exercise three- to five-year extensions on that acreage. So if the price environment doesn't -- isn't sufficient enough to encourage us to drill, then we'll handle it through extensions. -------------------------------------------------------------------------------- Kyle Rhodes, RBC Capital Markets - Analyst [6] -------------------------------------------------------------------------------- Makes sense. And I guess just in Wyoming, maybe you guys could give some more color on anything you guys are potentially thinking about doing differently on your upcoming one to two wells, given what you saw in the first well. Just any changes to the frac job? Or are you going to put it on pump quicker? Just kind of curious your thoughts and plans for those next two wells. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [7] -------------------------------------------------------------------------------- I'll let Carl handle that. -------------------------------------------------------------------------------- Carl Isaac, Contango Oil and Gas Co. - SVP of Operations [8] -------------------------------------------------------------------------------- Good morning. As far as our efforts in Weston County, Wyoming, go, I think we did learn a few lessons with our first well. Mostly related to GOR. We started out lifting the initial well with gas and -- or planning to lift it with gas and realized that the GORs weren't going to support that. We moved to hydraulic pump in the interim period while we got our rod pumps equipment ready. That equipment's actually being installed today. So we'll have a good feel for the performance kind of in our optimum set up going forward. As far as the drilling and completion of the initial well in Weston County goes, we'll do the same thing that we've done in any other place that we've entered over the last four, five years in terms of optimizing based on lessons learned. And putting ourselves in the best position to succeed. One of the things that we definitely have a strong appreciation for is the weather. And we're looking forward to getting out there while the weather hasn't deteriorated. And getting a well or two drilled here in the near future. Frac design, we're still looking at alternatives. But we're pretty comfortable from an IP standpoint and looking at things particularly from the shape of the curve standpoint as it relates to completion, it's very, very early. And a lot of that will be informed by how we see our first well perform when we get it on rod pump here in the next week or so. -------------------------------------------------------------------------------- Kyle Rhodes, RBC Capital Markets - Analyst [9] -------------------------------------------------------------------------------- Got it. And have you guys picked out a location kind of for that second well? -------------------------------------------------------------------------------- Carl Isaac, Contango Oil and Gas Co. - SVP of Operations [10] -------------------------------------------------------------------------------- We do have multiple locations picked. And we have a specific location picked for the second well. And generally speaking, from a planning standpoint, we're approaching this project planning for success. And up in Wyoming, if you want to wait till you think you want to drill a well, you're probably going to be six to nine months if not longer before you can actually go out and drill it. So we're trying to put ourselves in a position to do exactly what Allan said, which is if we see a commodity price recovery, we'll be ready to respond right up quickly with permits in hand in 2016 to go out and pursue a successful development plan. -------------------------------------------------------------------------------- Kyle Rhodes, RBC Capital Markets - Analyst [11] -------------------------------------------------------------------------------- Got it. Thanks for the time, guys. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [12] -------------------------------------------------------------------------------- Thanks, Kyle. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Neal Dingmann, SunTrust. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [14] -------------------------------------------------------------------------------- Good morning, guys. Say, on that success you've seen in the Muddy, I guess I'm just looking at the slides. I saw the Elliot being kind of in that southeast corner. As you come back and start developing that, how do you -- kind of what's your plan of attack there? -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [15] -------------------------------------------------------------------------------- Well, I think what we'll do, Neal, is we'll -- we're going to drill these next two wells. Get the results from those two wells. Produce them for a while and see what the results are. See how it looks. And then from there, make our plan. We, as Carl just mentioned, we are planning for success, permitting multiple locations. So it's really, we've got to find the entire recipe, not just of completion. But the permitting and building locations. And just determining what the overall scope of this project is. So yes, we plan to drill two more wells before the end of the year. Put those online. As Carl just mentioned, try some different things with our frac methodology. And then just see how those -- yes, the completions work. And then we'll take it from there. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [16] -------------------------------------------------------------------------------- Got it. Got it. And then I guess just lastly, how do we think just from the offshore standpoint, I assume no new -- any thoughts of coming back, doing any type of recompletes? Or anything to think of there? And if not, just do we just kind of assume the same kind of typical depletion we've seen there? -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [17] -------------------------------------------------------------------------------- Yes, we're not planning on -- certainly we're not planning on doing any drilling out there. But we did do a workover not too long ago. Carl, you may just want to reference that quickly. -------------------------------------------------------------------------------- Carl Isaac, Contango Oil and Gas Co. - SVP of Operations [18] -------------------------------------------------------------------------------- Yes, we went out and we had an issue with well-producing sand at Eugene Island 10. And we went and did a sand control operation and -- successfully and the well's back online. And we got an incremental production gain out of it. So that was something, though, that I would put in the category of maintenance or regulatory compliance based on the sand that the well was making prior to the workover. -------------------------------------------------------------------------------- Neal Dingmann, SunTrust Robinson Humphrey - Analyst [19] -------------------------------------------------------------------------------- Makes sense. Thanks, guys. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [20] -------------------------------------------------------------------------------- Thanks, Neal. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [22] -------------------------------------------------------------------------------- Good morning, guys. You had about 4.5 million on lease acquisition in Q2. Was that all in one area? Or was it spread out across? Could you give us some color on that? -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [23] -------------------------------------------------------------------------------- Sameer, most of that was related to our Wyoming play. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [24] -------------------------------------------------------------------------------- Got it. Okay. (multiple speakers) Go ahead, sorry. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [25] -------------------------------------------------------------------------------- And Elm Hill. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [26] -------------------------------------------------------------------------------- And, sorry, on the -- and then I'm just trying to understand. You were -- when we had met earlier, you had said that the idea was coming into this year that you wanted to use your strong balance sheet to get into an onshore play. Get an anchor asset kind of and build around it. So you have the -- off the Gulf of Mexico cash flow re-invested in onshore so you get the long-term visibility, everything else. But the bigger spread was wide in the first half. Could you give us more clarity? Like, what you're seeing before redetermination with the fall in the commodity pricing. How that has changed. And then if you're looking on shore, where are you looking on shore? Or was just gas agnostic location-wise? Just some color on that end. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [27] -------------------------------------------------------------------------------- Well, we were -- when we started the year, we were cautiously optimistic we'd be able to find a stressed or distressed situation where we could use our financial strength to add something to our portfolio. But because of the reasons that Allan articulated, it didn't happen. But we looked at a lot of deals. We're still looking at deals. We think that there might be some more opportunities and a better chance of finding one that we can do in the latter half of the year if prices stay low. The banking regulators are more active in reviewing loans. And Company's hedges start to fall off. And there are a lot of things that could contribute to an increase in the amount of deals that get done. So we're still out there looking. We're looking in our areas of current focus. We're looking in areas that could become another area of concentration for us. We're not looking too far north, it's mostly down sort of in our area. And we'll just see how it goes As it relates to borrowing base redetermination, we don't do that until November. So a lot can happen price wise between now and November. Price will have a dramatic impact on where we end up. I guess the way I would answer that is I don't know now but I can't imagine that if there's any change it's going to have any meaningful impact on our liquidity. And as it relates to (multiple speakers) being able to carry out our capital program or any aspect of our operations. -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [28] -------------------------------------------------------------------------------- Yes, Sameer, I would add that with our Wyoming project that we're focused on that. We think that could be a game-changer for us, for the Company. And we're going to drill two more wells later this year. And see how those results come out. And then in terms of just managing our balance sheet, we feel like and we have felt since the end of last year that increasing our CapEx or trying to get production growth in this commodity price environment just doesn't make a lot of sense. We think there are a lot of other companies that are envious of our financial position. So we're going to continue to wait and see what happens with the market. And try to take advantage of the opportunities when they become available. -------------------------------------------------------------------------------- Sameer Uplenchwar, GMP Securities - Analyst [29] -------------------------------------------------------------------------------- Perfect. Thank you. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [30] -------------------------------------------------------------------------------- Thanks, Sameer. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company. -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [32] -------------------------------------------------------------------------------- Good morning, Allan. Just one follow up on Sameer's question. In terms of, given your balance sheet, is there any particular appetite that you would have in terms of acquisition size? Or how would you approach it from that standpoint to make sure you continue to have that differentiated balance sheet? -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [33] -------------------------------------------------------------------------------- Well, I think what we would have to do is we'd have to find an opportunity that fits within our operational area. Or something similar to our operational footprint. And then be able to make sure that costs are in the -- you know, low enough that where we could go out and pursue drilling activity in that certain area. We -- you know, it's difficult to -- in the past, it's been difficult to buy or acquire anything without having a very active drilling program. But it's going to be cost driven as well as price driven. But I would say that it was -- we'll continue to look in and around the areas where we're active. Because that's where we think we can bring the most to the table in terms of economies of scale. -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [34] -------------------------------------------------------------------------------- Okay, good. And I may have missed some of your comments on the Muddy in terms of the inconsistent reservoir pressures, et cetera. In terms of the rod lift, in your opinion, maybe it's just for Carl. Is that really something that can fix it and fix it (multiple speakers) -- -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [35] -------------------------------------------------------------------------------- Ron, would you speak up a little louder, please? -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [36] -------------------------------------------------------------------------------- I guess what I was asking was on -- in the Muddy, given that well performance, is -- have you seen this before? Is the rod lift supposed -- is it likely to kind of fix that reservoir pressure inconsistencies? And then the second one up there, Carl, what are you looking for out of the next one or two wells? You're obviously planning for success, so are there some bogeys to -- that you want to hit bef-- to go full steam ahead next year? -------------------------------------------------------------------------------- Carl Isaac, Contango Oil and Gas Co. - SVP of Operations [37] -------------------------------------------------------------------------------- If I understand your question, based on the Elliott well, are there things that we're concerned about in terms of reservoir? And I guess the way I would respond to that is the pumping unit that we're installing has the capacity of over 700 barrels of fluid a day. If that gives you any kind of idea in terms of how we're getting rigged up to defend or support the decline curve that we've modeled. So as far as bogeys, I think it was bogeys, I don't know that we're far enough along to have seen them yet. The only thing that was enlightening to us was the low GOR. But most people would be happy to have more oil than gas. (inaudible) And -- -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [38] -------------------------------------------------------------------------------- Yes, the question was on the next two wells. Are there any -- what are you looking for out of those next two wells to continue along your -- and execute on your full development plans for next year? Bogeys may have been a bad word. -------------------------------------------------------------------------------- Carl Isaac, Contango Oil and Gas Co. - SVP of Operations [39] -------------------------------------------------------------------------------- Right, right. So speaking for the G&G guys in here, I think we're looking for delineation of the formation. And performance of the wells that support the same decline curve that I referred to a minute ago. -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [40] -------------------------------------------------------------------------------- Okay, great. And then, Allan, just strategically, if you look ahead to next year, obviously if you painted the picture today, you'd have a full development program in the Muddy. And then would Elm Hill probably be the second area? Or would the -- where would the Woodbine fit in there in terms of just strategically, given your current asset base? -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [41] -------------------------------------------------------------------------------- Yes, I would say that behind the Wyoming project, Madison Grimes would continue to be at the top of our list. Not to discount Elm Hill, but we still have a lot to do at -- in Madison Grimes. We have -- we waited a little bit on the development of the Eagle Ford. But we think in this commodity price environment, it certainly didn't make sense to cont-- you know, try to develop that this year. But if we get any kind of encouragement, whether it be cost reductions or price improvement, we would probably go back out there. We got Chalktown where we have multiple locations we could go drill. And then like I said, the Eagle Ford, Elm Hill is continuing to develop. We feel very confident with some of the things that we've seen yet out there. But we've just had some mechanical issues with the for-- these couple wells, last few wells that we've drilled. So and that would be the batting order as I would see it today. -------------------------------------------------------------------------------- Ron Mills, Johnson Rice & Company - Analyst [42] -------------------------------------------------------------------------------- Great. All right, thank you, guys. -------------------------------------------------------------------------------- Joe Grady, Contango Oil & Gas Co. - SVP & CFO [43] -------------------------------------------------------------------------------- Thanks, Ron. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- And at this time, there are no further questions in our queue. I'd like to turn the conference over to Allan Keel for closing and additional remarks. -------------------------------------------------------------------------------- Allan Keel, Contango Oil and Gas Co. - President & CEO [45] -------------------------------------------------------------------------------- Well, thanks for everybody joining our call today. I hope every -- it was informative to everyone. And we'll look forward to updating you as we progress throughout the year. So thanks again for your participation. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude today's conference. And we appreciate everyone's participation.
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