Q2 2020 Contango Oil & Gas Co (Texas) Earnings Call

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Good day and welcome to can talk about second quarter 2020 results conference at this time I would love to turn the conference over to will be called here. Please go ahead Sir.

Thank you.

Good morning.

And welcome to Contango second quarter 2020 earnings call.

My name is walkie call your.

Chief Executive officer of can target.

I'm joined by far we've taken the company's president and your Grady the company's Chief Financial Officer.

I hope everyone at that time to read through yesterday heard this morning's earnings press release, including the cautionary statement regarding forward looking information.

Non-GAAP measures that applied to the statements on this call.

And our last quarterly earnings call in late June we reiterated contango is internal organic goals for the year, which have not changed.

One free cash flow generation still our biggest focus and still expected over the course of this year and the current commodity price environment.

Two.

Hello. He reductions this has been a huge focus for us as evidenced by the beat this quarter on operating costs.

Partially this was due to our reduction and workover rigs during the quarter, what we were still able to beat the high end of production guidance Inspite of the Workover reduction.

Yeah, I did benefit for L., we reductions is an increase in reserve value, none of which is reflected in our year end 2019.

Our values.

Three hedges.

Our hedge book remains valuable in core to our operating strategy.

Importantly, because we came into the pandemic well hedged you were able to avoid incremental hedging at the low prices experienced in the second quarter.

We are 70, and 67% hedged unforecasted well PDP this year and next.

For storage or latent storage capacity in central Oklahoma allowed us to avoid selling well hedged barrels into a very weak crude market in Q2.

We are now selling those barrels this quarter at a materially higher spot crude price.

Okay.

During Q2 and subsequent to the quarter, we've been working diligently integrating them they try to energy partners assets and human capital into our platform.

We are proud to enhance our management team via the appointment of too much on executives, Chad roller and Chad Mccall horn to the positions of Chief operating officer, and General Counsel, respectively.

In addition, we've hired several technical professionals from that John.

I have relationships with these people dating back several years and we're excited to add their expertise and enhanced oil recovery assets to contango.

Which is the nish asset class in upstream that we have interest in pursuing.

Enhanced oil recovery assets are typically very low decline and long lived making them ideal assets in a rising crude environment.

Now I'd like to spend some time talking about our pipeline of opportunities.

In the last several months, we've evaluated a pre reorganization distressed mid John player.

First lien loan or outright purchase at a discount.

Bond purchases in court reorganizations, 363 sales as well as M&A.

We are less concerned with the existing structure of the investment and more concerned with the underlying asset value how to get to it and how to maximize that value for our shareholders.

The number of opportunities has increased substantially over the past quarter, and we are actively tracking bankruptcies mess interest payments and debt default.

On July 31st 2020, there have been 32 bankruptcies with an aggregate debt balance of $49 billion.

Each one of these situations is unique and we believe our flexible mandate permanent and supportive capital structure and long term investment horizon gives us a competitive advantage in these types of situations.

For our Counterparties, our ability to be flexible with how we transact coupled with the elimination of Standalone, Ginny and restructuring expenses make us an attractive option.

In certain cases, we may elect to wait until post reorganization to transact to minimize friction cost any unpredictable Billy of the outcome for contango.

Either case, we believe that the contango platform is well positioned to capitalize on these opportunities.

I'd also like to comment on the recent share registration statements filed by the company on behalf of certain inside or individuals including myself.

These registration statements relate to the issuance of preferred stock from the private placement capital raises and 29 chief.

Although the phrase selling shareholders is used to describe the holders of stock covered by these statements. It does not necessarily mean that those individuals weren't entities are selling or will sell any stock and none of the insiders, meaning golf taken or Collier have sold any shares of stock dating back.

Back to our active involvement with contango as we believe in the strategy in the direction of the company.

These preferred shares were parapets, sue and right of liquidation what the common shares paid no dividend and given the illiquid nature of the security would probably be considered inferior securities relative to common shares.

We issued them because it allowed us to raise equity capital when our authorized share count wouldn't allow us to issue incremental common shares and in a way so as not disadvantaged minority shareholders.

We now have no outstanding preferred shares as all had been converted to common.

I'd like to in my prepared remarks by thanking all the employees of contango for their hard work dedication to the company. During these difficult times in our industry and country and welcome the new employees at contango, who came over from mid Con and elsewhere.

Thank you for your time this morning and for your interest in contango.

With that operator, we're ready to open up the line for questions from me analyst community.

Thank you.

Ladies and gentlemen, we had an opening the lines for questions from the analyst community <unk> signaled by pressing star one on your telephone keypad.

Ladies and show the mute function on your telephone switched off to love your signal to reach our equipment.

Oh, it's pumped on the phone line will indicate when your line is open again, Please press star one question.

Well, we will now take a first question. Please go ahead.

[noise], Hey, Wilkie it it's Mike DW at.

Greg your ability to get your debt below 75 million by September Thirtyth.

Her your revised borrowing base with your lending consortium.

Yeah, Hey, Mike. Thanks, So as you pointed out we do have a.

Borrowing base the drop down from 85 to 75 and the end of September.

I would just said it you know I'm the as you might imagine we worked with banks and sort of drafting needs. During the spring Redeterminations and no. We have every confidence that Ah you know those are.

Achievable Dropdowns and and a you know look forward to Ah you know hopefully a higher price decks. The next time, we will revisit the you know the borrowing base even here in the fall.

[noise] great Yep. Thank you.

We will now take our next question. Please go ahead.

Hi, This is Brian Hendrickson when the comments can you give your me.

Yes with Harry.

Hey, good morning. Thanks for taking my question can I was just curious in terms of plugging and abandonment cash needed to be spent on on that over the next 12 or 18 months is that does that very material the Atlanta side on that.

Yeah. Thank you for the question it is not.

And you know unlike a lot of guys who have.

[noise] dig well counts, especially when it's off shored, you can end up having pretty big P and K obligations, we have very little of those and I think you know offshore is really the place where you have to focus on at the most.

As you know we had single digit active well count offshore and so yeah, we have no off sharply and age scheduled this year and very minimal p. in a scheduled this year next.

Okay, and then do you have <unk>, if I'm just calculating your leverage ratio here I think it.

It's a I think obviously, you're hoping to get to EBITDA.

Some things with them, so you'd be and so forth, but if I just annualize. The 7.5 I think you're at about two 2.7 times Levered. So do you have plans to do.

Because it's either further action on the capital markets or some other action that gets worked out leverage ratio down I know I know, it's not going to be with the drill bit at least for the.

Next few quarters. So I was wondering what your plans are there.

Yeah, I know, it's a fair question look I just said it Q2, if you annualize that for a lot of people. It's it's a pretty ugly number just given the strip that you saw during that quarter. So.

Unfortunately, we use trailing 12 month or leverage ratios. The you know as we looked at as we looked at it internally and then what are our lending and an equity partners. So we don't see leverage as being an issue and and you know that that number is you know the number you just mentioned is materially higher than.

Anything that we'd be looking at on a on a rolling 12 month basis.

Good point and then.

Just wanted to understand the the borrowing base steps down to 75 million, but is there I was there any other I think I'd read in the release something implied there was a few million.

<unk>, it's the actual availability gonna be 75 million or is gonna be somewhat less of it or something else that calculation that we're missing.

Oh, there's a there's a small difference there I'm the only difference between sort of borrowing base availability and the actual borrowing base number is.

Letters of credit outstanding. So we have I believe it's about $1.9 million in a letter of credit outstanding across the company and that's the only thing that would would reduce that now that's lifted at some point you know that would be.

Incremental but it's it's relatively minor.

Okay, and you said that just a million in change right now.

Yes.

Okay. Okay. Thanks for your time.

Thank you.

There are no questions and telephone to at this time.

Awesome all thank everyone for taking the time and for your interest in contango. This morning, a anyone who has follow up questions. Please feel free to reach out to any of the three of us on the fun and otherwise we look forward to Ah talking to you again in November.

Yes.

Ladies and gentlemen, this concludes todays conference call you have been thank you for your participation you may now disconnect.

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