Continued from part 1…
Elsewhere, the majority of Contango Oil & Gas Company (NYSEMKT:MCF)’s main onshore reserves are located within the Eagle Ford play. There is also a play in the Jonah Field up in Wyoming and the DJ Basin in Colorado. However, one of Contango’s more interesting plays is the Buda reserve located within/under Eagle Ford. Buda is an oil formation that lies around 100 feet below the Eagle Ford. Unlike the Eagle Ford, the Buda has natural fractures and does not require expensive fracture stimulation jobs to complete the well. Contango owns 5,700 net acres in the Buda play and has 19 gross wells planned for 2014, costing $33 million net. At present, Contango has five wells producing in the region; 90% oil. Total costs per Buda well has fallen to $3 to $4 million, down from $3.5 to $5 million making Buda Contango’s cheapest drilling play in the company’s portfolio.
Contango Oil & Gas Company (NYSEMKT:MCF)’s onshore plays are believed to contain 70% liquids, making them highly attractive for the company considering most of the company’s current production is gas. Still, for the most part reserves are unproved – as highlighted above, the company’s onshore unproved PV-10 value could be worth up to $2.2 billion, most of which is liquids. Q4 onshore production was 42% liquids, 44% natural gas and 14% NGL.
The company’s other assets include an 37% WI in select EnCana-operated Jonah Field acreage through Exaro Energy, giving the company 41.8 Bcfe, net per annum of gas.
The future of Contango Oil & Gas
[drizzle]Throughout 2014 Contango aims to spend $216 million developing 47 gross wells, or 27.9 on a net basis. The majority of this spending will be in the Woodbine play where management are targeting 19 wells at a total cost of $83 million. As covered above, there are also 19 Buda wells planned but these will be at a lower cost of $3 million to $4 million per well, a total of $76 million at the high end.
Based on numbers supplied over the past four or five quarters, around half of this development capex will be funded with cash flow from operations. Cash from operations has averaged $25 million per quarter during the last year or so. In addition, Contango Oil & Gas Company (NYSEMKT:MCF) has $134 million of cash and short-term investments on its balance sheet as well as $165 million of headroom on borrowing facilities. All in all, this development programs should be well funded.
Overall this is a somewhat rushed analysis of Contango Oil & Gas Company (NYSEMKT:MCF) and the company definitely deserves further research. Nonetheless, it is quite easy to see the opportunity on offer here. In particular, Contango’s discount to its proven net asset value and well-funded exploration and development program which should boost production over the next year or so. All in all, Contango could be a risk worth taking, although as mentioned at the beginning, investors should be prepared for volatility.