MCF - Contango Oil & Gas

[compoundinglife]

Very sad. Ken Peak had a great combination of calculated risk taking and capital management. To build Contango with such a small team is an amazing accomplishment.

[Guest deepValue]

Here's his obit for those interested: http://www.legacy.com/obituaries/houstonchronicle/obituary.aspx?page=lifestory&pid=164343842#fbLoggedOut

[ItsAValueTrap]

Um... Contango recently announced a merger with Crimson.

 

---

 

Here's what I wrote on my blog:

Contango recently announced a merger with Crimson Exploration.  It’s crazy.  I think that the late Ken Peak chose the wrong person to be Contango’s CEO.

 

Crimson’s CEO is going to take over as the new CEO of the combined Contango/Crimson entity.  (!!!)  Ken Peak used to talk about how debt would always get companies into trouble.  Crimson has debt.  Ken Peak also talked about using the Peak ratio as a measure of value creation.  Again, Crimson fails on this measure.  He also talked about creating value by teaming up with the superstar explorationists.  The combined Contango/Crimson anticipates spending most of its capex on Crimson’s projects, not with prospects generated by Brad Juneau and his team of explorationists.

 

The new board of directors will be 8 people- 5 from Contango and 3 from Crimson.  I believe Contango’s current board is 6 people so that means somebody is leaving.  I wouldn’t be surprised if Juneau leaves on his own volition.  Then he can sell his stock (without the restrictions of being an insider) and figure out what to do next with his exploration business.  I think that he is privately extremely opposed to the merger and that he isn’t pleased that Joe Romano was trying to pay him less.  Presumably he will continue to have a business relationship with Contango to pay the bills but it won’t be the same anymore.  It will be awkward because Crimson’s CEO may try to pay him as little as possible and there will be politics involved in their negotiations.

 

The politics will hurt the business because Contango is best off if it can receive reliable advice from its explorationists.  Explorationists normally have an incentive to recommend that the company go drillbit-crazy.  More activity will likely increase their pay.  (You know, incentives drive behaviour.)  Brad Juneau and Ken Peak worked well together because sometimes Contango didn’t go drillbit crazy and sat on cash.  You need your explorationists to tell you when NOT to overbid on leases and when NOT to drill.  I think that relationship of trust is extremely important.  But now it’s gone.  I don’t think that Juneau wants to become a salesman to compete against Crimson’s explorationists, but he might do it anyways to pay his employees and to cover his business’ IT expenses (Juneau exploration has millions of dollars in computer equipment that loses value quickly).

 

This is awful and a sad ending to Contango.

 

*Disclosure:  I own MCF and will be selling my stock sometime.  Hopefully I get out at a good price.

[thomcapital]

Um... Contango recently announced a merger with Crimson.

 

---

 

Here's what I wrote on my blog:

Contango recently announced a merger with Crimson Exploration.  It’s crazy.  I think that the late Ken Peak chose the wrong person to be Contango’s CEO.

 

Crimson’s CEO is going to take over as the new CEO of the combined Contango/Crimson entity.  (!!!)  Ken Peak used to talk about how debt would always get companies into trouble.  Crimson has debt.  Ken Peak also talked about using the Peak ratio as a measure of value creation.  Again, Crimson fails on this measure.  He also talked about creating value by teaming up with the superstar explorationists.  The combined Contango/Crimson anticipates spending most of its capex on Crimson’s projects, not with prospects generated by Brad Juneau and his team of explorationists.

 

The new board of directors will be 8 people- 5 from Contango and 3 from Crimson.  I believe Contango’s current board is 6 people so that means somebody is leaving.  I wouldn’t be surprised if Juneau leaves on his own volition.  Then he can sell his stock (without the restrictions of being an insider) and figure out what to do next with his exploration business.  I think that he is privately extremely opposed to the merger and that he isn’t pleased that Joe Romano was trying to pay him less.  Presumably he will continue to have a business relationship with Contango to pay the bills but it won’t be the same anymore.  It will be awkward because Crimson’s CEO may try to pay him as little as possible and there will be politics involved in their negotiations.

 

The politics will hurt the business because Contango is best off if it can receive reliable advice from its explorationists.  Explorationists normally have an incentive to recommend that the company go drillbit-crazy.  More activity will likely increase their pay.  (You know, incentives drive behaviour.)  Brad Juneau and Ken Peak worked well together because sometimes Contango didn’t go drillbit crazy and sat on cash.  You need your explorationists to tell you when NOT to overbid on leases and when NOT to drill.  I think that relationship of trust is extremely important.  But now it’s gone.  I don’t think that Juneau wants to become a salesman to compete against Crimson’s explorationists, but he might do it anyways to pay his employees and to cover his business’ IT expenses (Juneau exploration has millions of dollars in computer equipment that loses value quickly).

 

This is awful and a sad ending to Contango.

 

*Disclosure:  I own MCF and will be selling my stock sometime.  Hopefully I get out at a good price.

 

Did you listen to the call? It sounds like Ken approved of the deal, although maybe I'm mis-reading this...

 

Hi. This is Joe Romano of Contango. We have thought about – I appreciate that you understand we are doing some things onshore in a non-op basis. And we have thought about this. Ken was thinking –had thought about this for some time and unfortunately Ken isn't here right with us; very familiar with the transaction of course, but this was in line with also his thinking and some of the things that we've been thinking about in the past.

[ItsAValueTrap]

Did you listen to the call?

No.

 

It sounds like Ken approved of the deal, although maybe I'm mis-reading this...

Well....

 

Crimson Exploration.

Employees:  69 full time.

Debt:  Yes.

Hedges:  Yes.

PUDs:  Yes.

Lots of regulators, landowners, wells:  Yes.

Growth in share count:  Yes.  (What Peak is getting at is per share performance.  Crimson is very mediocre in that regard.)

Lots of options:  1.7M, 46.06M shares outstanding.

Winner's curse:  N/A - they don't bid on GOM leases?

Drilling rig contracts:  Yes.

 

Compare this with:

http://files.shareholder.com/downloads/AMDA-1MMZX6/2382418070x0x642812/80ea4d76-d2b0-436f-88c9-b31b724bcd5f/Contango_IPAA2012.pdf

 

Not surprisingly, Crimson checks off many of the "what we don't have" boxes.

[thomcapital]

Did you listen to the call?

No.

 

It sounds like Ken approved of the deal, although maybe I'm mis-reading this...

Well....

 

Crimson Exploration.

Employees:  69 full time.

Debt:  Yes.

Hedges:  Yes.

PUDs:  Yes.

Lots of regulators, landowners, wells:  Yes.

Growth in share count:  Yes.  (What Peak is getting at is per share performance.  Crimson is very mediocre in that regard.)

Lots of options:  1.7M, 46.06M shares outstanding.

Winner's curse:  N/A - they don't bid on GOM leases?

Drilling rig contracts:  Yes.

 

Compare this with:

http://files.shareholder.com/downloads/AMDA-1MMZX6/2382418070x0x642812/80ea4d76-d2b0-436f-88c9-b31b724bcd5f/Contango_IPAA2012.pdf

 

Not surprisingly, Crimson checks off many of the "what we don't have" boxes.

 

So was Ken smoking something when he took a serious look at CXPO, or are we missing something? He has done okay to quite well with his onshore investments in the past.

[bathtime]

Hi. This is Joe Romano of Contango. We have thought about – I appreciate that you understand we are doing some things onshore in a non-op basis. And we have thought about this. Ken was thinking –had thought about this for some time and unfortunately Ken isn't here right with us; very familiar with the transaction of course, but this was in line with also his thinking and some of the things that we've been thinking about in the past.

 

Sure, MCF had been getting into onshore stuff on a non-op basis under Peak for a while. But the phrases "in line,""thought about," and "familiar with," aren't exactly a ringing endorsement. It sounds a bit like spin. If Peak was enthusiastic about the merger, I would think Romano could have answered this question more positively.

[ItsAValueTrap]

Ken Peak originally wanted his friend Brad Juneau to be the CEO.  Obviously the two trust each other and have worked very closely with each other over the years.

 

Ken allowed Juneau to make it on his own / run his own exploration business.  Presumably, Ken was good at making deals and found lots of clients for REX exploration.  And he gave good terms to Juneau... Ken and Juneau made each other rich.  Over the years, you see lots of little deals between Contango, REX, and Juneau exploration.  Contango bought oil&gas interests from Juneau (and other explorationists in his company), gave them short-term loans, etc. etc.

 

It turns out that Juneau doesn't want to be the CEO of a large-ish publicly-traded company.  So the job went over to Joe Romano.  It seemed like a good idea at the time... Romano was the CFO of Zilkha Energy, whose business model Contango ripped off.  Unfortunately, he chose the wrong guy.  :(  I really don't think Ken Peak would have wanted CXPO's CEO running Contango.  He chose Joe Romano.

[thomcapital]

Ken Peak originally wanted his friend Brad Juneau to be the CEO.  Obviously the two trust each other and have worked very closely with each other over the years.

 

Ken allowed Juneau to make it on his own / run his own exploration business.  Presumably, Ken was good at making deals and found lots of clients for REX exploration.  And he gave good terms to Juneau... Ken and Juneau made each other rich.  Over the years, you see lots of little deals between Contango, REX, and Juneau exploration.  Contango bought oil&gas interests from Juneau (and other explorationists in his company), gave them short-term loans, etc. etc.

 

It turns out that Juneau doesn't want to be the CEO of a large-ish publicly-traded company.  So the job went over to Joe Romano.  It seemed like a good idea at the time... Romano was the CFO of Zilkha Energy, whose business model Contango ripped off.  Unfortunately, he chose the wrong guy.  :(  I really don't think Ken Peak would have wanted CXPO's CEO running Contango.  He chose Joe Romano.

 

Thanks for your thoughts - what do you (or others on the Board) know about Alan Keel? These oil guys seem to get pretty chummy, perhaps there's a connection to the Contango guys.

[muscleman]

Does any of you feel like this merger is a value destruction action?

[ItsAValueTrap]

The independent oil & gas companies tend to destroy capital.  Most of them check off all of the things that Contango doesn't have.  If you run an E&P company like all the other independents out there, you will probably lose money in the long run.

 

I don't feel like trying to value CXPO's assets since I will be trying to sell my Contango shares anyways.  Resource companies are really, really difficult to evaluate to begin with.  I seriously doubt that Contango has done a good amount of due diligence on this deal.  Contango has always relied mostly on Juneau and his team; it has little (or no) in-house engineering talent.  I'm sure that Juneau would say no to this deal based on the principle of it (e.g. defiling Ken Peak's company) and because this deal is bad for Juneau's exploration company.

[Packer16]

On the other hand, it does appear CXPO does have some good assets.  Do you know if Juneau was involved in the DD and might be involved in the drilling location selection?  If so, it may be a win-win.  According to the merger briefing, Juneau will still be involved in the site selection (unless I am reading the slide wrong).

 

Packer

[Packer16]

I dove deeper into this today and on the surface it appears that the deal was done so the CF generated from MCF could be used to fund the exploration of Crimson's properties.  Going forward exploration is going to be funded by CFs not additional debt as was done in the past.  Crimson is controlled by Oaktree Capital Management.  Crimson's delevering is consistent with Mark's view of reducing risk in portfolio companies as we get into later innings of this bull market.  It also provides a way to exploit the upside of Crimson without debt or further dilution. 

 

Keel was brought in by OCM to run Crimson after the previous team was shown the door by OCM.  Keel developed the GoM division of Westport (primarily shallow GoM) before it was sold to Kerr Mc Gee.  Although the plan does not appear to conform to Ken's approach the connection with OCM at least provides me some comfort.

 

Packer

[zippy1]

Contango gives update

http://finance.yahoo.com/news/contango-provides-operations-merger-120000819.html

HOUSTON--(BUSINESS WIRE)--

Contango Oil & Gas Company (NYSE MKT: MCF) announced today that the Company’s Vermilion 170 well has resumed production and as of June 12, 2013, was producing approximately 9.7 million cubic feet equivalent per day (“Mmcfed”), net to Contango. This well had been shut-in since late January 2013 for workover operations, which were recently successfully completed. The Company’s total offshore production is now approximately 66.9 Mmcfed.

Mr. Romano continued, “We are also making progress with our merger plans and are very excited about accelerating the drilling of Crimson Exploration’s significant inventory of well-defined prospects. The next several years will be very exciting for Contango as we blend Crimson’s quality plays with our offshore prospects. We presently have cash and future cash flows to aggressively develop a significant inventory of excellent opportunities to create shareholder value. The Company is also considering opportunities to significantly reduce the Crimson debt to be assumed through the merger. We presently have approximately $90 million in cash and no existing debt.”

The Company has submitted its Registration Statement on Form S-4 to the U.S. Securities and Exchange Commission and is awaiting their decision on whether to review the document.

[Packer16]

It looks like Juneau will remain on board and will vote his shares for the merger per the Proxy statement.  So it doesn't sound like Juneau is too upset or he would have left or not voted his shares for the deal unless his actions don't match what he feels.

 

In addition, it looks like Ken Peak was involved in the transaction discussion from Dec 2012 to early 2013 per the proxy.

 

Packer

[Phaceliacapital]

http://www.gwinvestors.com/Main/Blog/Entries/2013/11/18_MCF__From_Runoff_to_Run_Up_files/MCF-%20Runoff%20to%20Runup.pdf

[jay21]

I'm just starting to learn about different nat gas and resource plays and this one stood out.  Thanks for some of the links.  And thanks for the writeups ItsAValueTrap.

 

I'm going through some of their presentations that I could find and they are great.  Especially liked this disclaimer at the beginning:

 

Lawyer Stuff

 

The future is unknowable. We have good intentions but all of our projections and estimates will be wrong, and could be materially wrong. Wildcat exploration is expensive, speculative and potentially dangerous. An offshore spill or explosion would be enormously expensive. We have insurance but it may not be enough. You could lose your entire investment. Don’t be lazy – read our 10-Q’s, 10-K’s and press releases, and if you lose money - please no tears.

 

“Don’t forget about risk-free and return free T-bills in your portfolio…After inflation and taxes you’ll likely only lose 5-10% of your investment.”

 

 

Anyone have any good resources/advice to share for someone just getting up to speed?

[ItsAValueTrap]

I'm surprised you found the old presentations.  They took them down on the contango.com website.  :(  No respect for the dead.

 

*No position in MCF, long XOM calls, short a bunch of independent E&Ps, shorting CHK through put options.

[Pondside47]

Not sure if anyone is still following this. Allan Keel is out and John Goff, who used to work with Richard Rainwater, is controlling the company now with a nearly 20% stake. They just announced a 50% cut to CEO salary. Cale Smith mentioned Cantango in one of his presentations.

 

  starting at 37:22

 

 

[nkp007]

Think they'll try and sell it ASAP?

[Pondside47]

I don't think so otherwise why would they cut management salary by 50%?

 

https://globenewswire.com/news-release/2018/08/15/1552397/0/en/Contango-Oil-Gas-Company-Appoints-Two-Directors-Announces-Senior-Management-Change.html

[nkp007]

I mean will they try to sell the business to another E&P player?

[Williams406]

Owned MCF a long time ago and sold at various points before and during the Crimson merger--was never comfortable with that new management team and changes from Peak's Contango. Knowing nothing about the new shareholder's MO, I could easily see some asset sales to monetize certain assets here. If the company wants to be a Permian player, sell off everything else. Or vice versa.

[Pondside47]

It seems John Goff acquired his 18% stake around June at $4.25/share. However, on August 1st, the board announced a "tax loss preservation plan". The plan gives current stock holder the right to purchase 1 share of preferred every 1000 shares they own for a price of $33.72*1000=$33720 per share. Each preferred share is entitled to 1000x the dividend on a common share. I'm quite confused by this step. It seems at this step, the plan couldn't be put out by the board to prevent John Goff from acquiring significant stake since he already had 18% at that point. What's the point of this plan? Also does the $33720 per preferred share subscription price mean anything? These rights are supposed to be trading along the stock. I couldn't find them on my IB account.

 

Regarding the next step, since John Goff owns a significant stake in Resolute Energy, it seems the logical next step is to divest the legacy producing assets and plow the money into higher return Permian asset. That's what they have done at Resolute Energy, whose stock is up multiple folds the last several years. He could also try to get Resolute and Contango to merge. Thoughts?

 

 

[Williams406]

In reading the press release announcing the board and management changes, it seems clear the days of Contango in it's current form are numbered. Cost structure is too high, there are "decisive, short-term actions" envisioned well beyond cutting CEO salary by 50%. Too many disparate plays with likely in-house teams on staff contributing to high G&A. Re-establish relationship with Juneau Exploration? Sell Permian assets, pay off debt, and give the streamlined company a pristine balance sheet with tons of liquidity? Keep Permian and sell everything else? In several articles I read, Goff gushes about the Permian Basin as a transformative resource for Texas. His investments in Pioneer earlier and Resolute re-inforce that view. A lot of Permian players with higher multiples could swallow Contango's Permian assets easily.

 

Looking at Goff's background and statements made in the press release, I would be surprised if there isn't a transaction or series of them in the near future here.