Q4 2020 Contango Oil & Gas Co (Texas) Earnings Call

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You are currently on hold for the Contango is Q4 2020 earnings call. At this time, we are assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain.

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Good day and welcome to the Contango Q4 2020 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Wilkie Colyer. Please go ahead.

Good morning, and thank you for joining us for our fourth quarter and full year 2020 earnings call.

My name is Wilkie colyer.

On the Chief Executive Officer of Contango.

Joining me this morning on the call or Farley Dagan, the Companys President.

Chad roller the company's Chief operating officer, Joe Grady, the company's Chief Financial Officer and Chad.

Chad Mclawhorn, the company's general counsel.

Hopefully everyone has had an opportunity to read through this morning's press release, including the cautionary statements regarding forward looking information on non-GAAP measures that apply to the statements on this call.

Also I will make reference to a presentation posted to our website.

Tango investor presentation on the header on that his company overview on March 2021.

So please have that handy if you'd like to follow along.

Last time, we spoke with you in late November we announced our acquisition of silver on this.

Yields on the merger announcement with mid Con energy partners.

These acquisitions are low decline oily assets proved to be very timely given the recent rise in commodity prices.

And our ability to cut field level operating expenses on that.

It's further enhanced our baseline return expectations.

I will review our acquisition history later on the call.

Well, we are building a track record of asset purchases at attractive prices, which are complemented by cost cutting and then low risk capital development.

As always we remain diligent on the hedging front.

For the last three quarters of this year, we have 67% from our forecasted PDP oil production hedged at $54 97, and 60% of forecasted PDP gas production hedged at $2 62.

Next year, we are 47% hedged on oil PDP at $50, 24, and 57% hedged on gas PDP $2 60.

Lastly, we are 50% and 60% of oil and gas hedged in the first two months of 2023.

We expect our realization on oil hedges this year to be moderately higher than that.

Then what I just mentioned given that a portion of our oil hedges our callers.

Keep in mind that our forecasted PDP percentage hedge does not include the production, we expect to bring online via our high return capital projects, which I'll discuss in a moment on.

Or incremental acquisitions.

Expect us to continue using <unk> as a way to protect our downside in this volatile commodity price environment.

In terms of results.

We came in within guidance on production and LOE and.

And G&A for the fourth quarter.

While we are certainly proud of that this quarter was really all about inorganic growth and integration of those assets on to the contango platform.

We are materially larger company today than we were even a few short months ago.

I'd like to take this opportunity to now turn to the presentation.

Walk through some slides on our company strategy and outlook now that the <unk> and <unk> transactions have closed.

We'll stick around a little bit, but starting on slide six and that company evergreen presentation. If we talked about alignment of incentives 100 times.

Now that's really.

The key tenant on.

On the way we run this company.

Insider ownership is paramount.

As you can see we're peer leading in terms of our wins that leadership on that I would think.

At or near the top across the entire industry and that's really really important to have insider ownership.

In terms of knowing the right way to create long term value for shareholders.

And there is really no better way to do it and having high insider ownership.

On recurring cash G&A.

As you know, we always think about salaries on G&A is going on.

We want to minimize it.

And so you can see copyright salaries are on average about 50% of our peer group.

And that helps us keep our G&A.

That drives value low as you can see that number is one 4% we think on a percentage basis. We can continue to drive that down as we continue to make acquisitions.

As a percentage of our enterprise value just because of the platform that we have allows us to manage incremental assets.

Much more efficiently than than somewhat with less scale or debt standing up an operating platform with a single asset. So we expect to be able to continue to drive that down.

And really the way that the management team and our employee base, we'd like to get paid over time are not yet paid is going to be based on.

The performance of our stock so our executive compensation is heavily weighted towards <unk> and more specifically psus, which are performance share units.

100% of my checks have been in the form of Psus and those can be ultimately grants of anywhere from zero to three times the.

On the PSU grants and Thats based on our performance in the stock the stock performance versus our peers.

And on an absolute basis over a multiyear period. So we think we've got the proper alignment.

Incentives between us managing these assets and the folks who are on them.

Turning now to slide seven.

As you can see we've got now a very diversified asset base.

Our focus is predominantly on longer lives conventional assets, although we do look at.

On the unconventional assets and we will look at other basins other than where we are now but.

Really our Q3 focus areas will be the mid continent in Oklahoma.

Rockies specific rate, Wyoming, and then the Permian basin.

These are areas that.

That's been probably the most prolific conventional oil fields in the country over a long period of time and we believe in the old adage, if the best price to find out what it was where you can find it before so.

That's not to say, we won't look at other areas again.

We have and will continue to look at other areas, but I think.

Our main focus areas will continue to be these three areas.

And we think there's lots of opportunities to bulk up around those areas.

Slide eight.

Okay.

It's really on liquidity and where existing liquidity is ample for our strategy being that we generate substantial free cash flow and we're not a company that's reliant on borrowing base increases per fund cash flow outspend.

But that being said, we do anticipate a significant increase in our borrowing base.

<unk> during the spring Redetermination and so net increase in liquidity that we anticipate in conjunction with our free cash flow.

<unk> will be used to acquire additional assets rather than being years too.

To find on cash flow outspend.

Slide nine.

So I'd point, you to the bottom left quadrant per PDP decline.

So we are forecasting a five year corporate oil decline at less than 10%, which we believe is a pure leading metric.

That decline importantly involves no capital spending so that 10% capex spend that you see on the reinvestment rate on the right.

Yeah.

Also peer leading but that will really be used to further arrest the decline profile that youre seeing on the bottom left.

And what that really allows us to do is generate continue to generate free cash flow without having to spend a lot in capital dollars to further consolidate and use that cash flow to acquire other assets rather than having to use it to keep our.

Production close to flat or EBITDA or whatever metric you want to use. So we think that's really important and that's really how we're trying to design the company.

Yes.

Slide 11.

Yes. This is really I think I think.

Probably the most important fly on our second most important slide of this presentation.

And Thats really we wanted to give everybody out on.

On the outline of our track record now that we've completed a free.

Transactions in the last day.

15, or 16 months.

So first on variety of transaction types as you can see on the M&A dynamic.

Well energy was a bank on.

Sale lifestyle was the $3 63 sale that we bought on the courthouse steps.

Midtown was a bilateral M&A deal and then silvertip Jose.

A company that had reorganized several times and then it was a banker and liquidation filing that.

Reasons.

Obviously, the regions that I talked about and again, while we'll look elsewhere. This will continue to be the.

Main focus for our company will be these these couple of regions.

And then announced purchase price. These are really the headline numbers and in many cases those are.

Yeah.

Involved backward back dated effective dates and things of that nature. So its pretty those in pre.

On purchase price adjustments.

But as you can see those numbers relative to PDP PV 10, and all these asset metrics are also effective day type numbers, so looking down to the acquisition metrics the TEP to PDP PV 10.

All below one and.

On average about seven times, but.

Very attractive and those are all based on the.

The cost structures of the companies when we acquired them, which is important because looking at the performance metrics. We've had a lot of success. Once we've acquired these assets at lowering LOE on those assets.

To make us more efficient and to maximize the value of that PDP and so.

So on average that's been at 21% decrease in LOE per Boe.

I would note that silvertip.

Which we've only.

<unk> been managing an earned for a matter of weeks now is obviously less of an L. OE drop than we've experienced or been able to achieve on the other three transactions.

But we expect to.

You know achieve further cost savings on that those assets as well so net.

Punch line down at the bottom with the adjusted purchase price.

As you know we spent $281 million on these acquisitions of cash at closing.

Cash flow of $48 million, which is lower than we would have anticipated because the acquisitions of will energy on White Star War, where prior to Covid. So we didn't have as much cash flow off of those assets as we otherwise would've expected, but even still.

At year end.

At the end of last year, we still had $572 million of PDP PV 10, the only asset that has any sort of time value. That's materially at all is that the midcon transaction. So that's really that 572 is very close to PDP PV 10. So.

We've been able to create about $620 million worth of value out of that $281 million of cash required at closing.

But that $2 two times discounted ROI is.

This is a very very attractive.

Metric to look at when Youre, not having to take any sort of geological risk or drilling risks that debt.

We're having to take if you are having to drill your way into a profit. So we think that's really important.

We think it's something that's repeatable.

I don't we're not aware of anybody that debt.

From the public realm that has that kind of on track record over over this period of time.

Slide 12.

Central Oklahoma was the largest asset acquired in the White Star package.

And we were able to kind of almost 50% of low out of the assets.

And the key here is really shifting the focus of the team from how many sticks or wells can we drill this year or two how do we maximize the value of the existing producing wells.

So the bottom right.

As we were actually able to more than replace production from last year, just with cost cuts and with no drilling one one note I'd make to this.

This is basically running 2019 reserves at March 3rd prices.

And I understand at a strip, which is pretty steep backwardation what that does is it really increases the cash.

Cash flow generation bar.

And so the near term pricing increases that discounted cash flow generated bar and it decreases really the shape of the curve being backward dated decreases that LOE reduction bar. So if you looked at this several months ago, but it would be much more pronounced in terms of the amount of.

Reserves, we were able to replace relative to cash flow generated but.

Nevertheless, a very very impressive number on one that we're really proud of and again one that we think we can continue to.

To replicate in the future.

Slide 13.

11 is not the most important slide this maybe but I would say a combination of the two and this is really we wanted to give everyone. A sense of how we think about organic development.

In a low risk way.

On.

We have one.

MTT in silvertip for just over a month.

And this is what we've decided to spend capital on this year, thus far as we've been.

Learning more about the assets. So as you can see a lot of this is returned to production activity on wells that we do not have booked into reserves.

Well as the Pine tree asset we acquired the <unk>.

CET.

And looking at the bottom table, we expect to be able to add $108 million of proved developed reserves for about $10 million of capital spending and these are either not sexy projects by any means.

You know, there's a lot of <unk> 75 on 101 hundred $50000.

Jobs, but they add up and they are highly capital efficient and that PV to investment is really.

I would say that the main return metric that we focus on as we think about our business.

On.

So.

This is really what we referenced when we talk about putting some TLC and the assets when we acquired them that may have been.

Either neglected or distress.

Slide 15.

Opportunity set.

While near term commodity prices have run some in the past few months.

We still see substantial opportunities to acquire distressed assets at attractive prices.

Banker on liquidations pre and post re org opportunities.

And bilateral M&A in A&D are still very large opportunities in the market.

We think the opportunity set for consolidation is in the tens of billions.

And it's our opinion that the best way to capitalize on that as a public company just because the opportunity is so large.

Feel like we have a good head start with the four transactions we've executed in the last 16 months and that in the middle of a pandemic, but we plan on keeping our head down and continuing to execute on inorganic and organic opportunities going forward.

Thanks for your time this morning and for your interest in contango and with that operator, I will open up the line for questions.

Certainly if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure you're on mute function is turned off to allow your signal to reach our equipment.

Pumps will indicate when your line is open. Please state your name before posing your questions again press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.

And as a reminder, that is star one to ask a question.

And we'll take our first question.

<unk>.

Colored.

Please go ahead.

Good morning, Jeff Robertson.

A question on.

Two things one on the are you seeing any upward pressure on service price does that affect the capital yet you've outlined for workover projects and secondly.

As the rise in commodity prices created anymore urgency with sellers of distressed assets to maybe go ahead and move assets now that prices are higher.

Thanks for the questions Jeff So on the first one we have not seen much service cost inflation.

Our view is a lot of that debt a.

A lot of that Workover work, we can do in house and when you think about it we really feel like the smaller the job.

The more we can protect ourselves against service cost inflation, we certainly do expect to see it but I think I think that's why a big focus of ours is on proved developed reserves just because I think those are going to see the biggest benefit from the increase in oil prices without seeing.

On the increases in service costs I think.

A bunch of leasehold that you want to go drill horizontal wells on.

We're just not sure youre going to get a lot better margins on on.

20, or $30 higher crude prices once once the fracking companies and drilling companies need debt.

Some of their costs.

That's that's a.

Not a definitive answer I guess, but that's how we think about it anyway.

And then I'm sorry, Jeff what was your second question again.

As the ryzen in commodity prices maybe caused.

Owners of some of the assets you will target the distressed assets is it caused them to.

To accelerate their plans to divest those properties now that they can obviously get a.

Radically a price based on a higher strip.

Yeah. Good question I mean, we certainly we think so.

On.

I think that.

Owners non natural owners of assets that Werent design and those things.

We certainly think are more likely to divest now that debt.

Strip's, a little bit higher and we've made it through Covid I certainly think that's the case, but.

Just we'll have to we'll have to see we obviously have an executed anything since.

Fairly material lag on oil prices, but.

That's certainly our expectation Jeff.

Last question, if I can financing for incremental acquisitions, how do you think about the right use of equity.

And debt for.

There are opportunities.

Yes, that's a very fair question.

First thing, we will have us or we expect to have as a.

A fair amount of liquidity on our R&R revolver post our per.

Redetermination. So that's that's one use of capital and as we've shown in the past, we're not afraid to use equity to <unk>.

To acquire assets.

Really.

At the end of the day, we're trying to analyze whether or not the acquisition is accretive to the intrinsic value per share for our shareholders and so if we think it is we're going to we're going to we're going to do the deal and if its not then we won't net.

It's really kind of a relative value proposition there.

So we're again not afraid to issue equity, but certainly think debt at the moment, we are over <unk> and we're comfortable with a little bit.

More.

Debt on the balance sheet, probably just given that as we stated in the press release.

We anticipate year end.

Leverage at the end of 2021 to be.

Half, a turn and we would anticipate assuming we do net new deals.

Debt free by.

Q3 of next year, and then a net cash position. So we're in a really good spot given our liquidity profile two to two two.

Further incremental acquisitions.

Thanks for taking my questions Wilkie.

Thanks, Jeff.

Okay.

And as a reminder, that is star one to ask a question and we will pause for another moment to allow everyone an opportunity to signal for questions.

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

Good morning. This is <unk> call out can you hear me Wilkie.

Yes, I can good morning.

Good morning. Thank you for doing this call on best of luck with your acquisition efforts question number one I understand the company has a new profile in light of the recent acquisitions. We just closed because im just kind of confirm so on the numbers I'm looking at in the appendix in terms of the.

New expected production going forward from 2021, it seems to be about 20000 barrels a day approximately 60% oil mix just wanted to confirm how far off I am and then just the other basic numbers in terms of the <unk>.

<unk> production costs per barrel and what kind of Capex you have planned to.

To.

Use on these properties.

Yes, so I don't think we have given guidance on on production for this year.

We have given guidance on on capital spending.

As you can see on that.

Presentation.

About $10 million on capital spending thats expected to create that $108 million on proved developed reserves off of the recent acquisitions I believe on the midpoint of guidance is what 14 or $15 million. So you've got another.

$4 million to $5 million in there that is also high return, but it's from legacy contango assets and those are those are largely the.

It's about half from non operated wells in Zavala County that are real.

Really.

The highest the highest rate of return.

Inventory, we have on our portfolio, but obviously, we don't control the timing of that given that its non op. We just.

We just signed yet for you when we get it and then the other the other couple of million dollars will be I believe some some additional projects that we've identified on on <unk>.

With these assets.

Very low.

Capital spending, but expect to create a significant amount of reserves.

To replace the reserves that will be rolling off during the year and Thats really before we think our teeth into additional LOE savings at grizzly, which which we think will.

Ah.

B.

We can be additive.

Okay, and just a follow up.

This is a people related question.

You're suggesting that.

On the operations of the assets have been acquired have an under managed to an extent can you just kind of explain how.

What portion of the operating and production staff on geology staff you are retaining when youre acquiring these companies because clearly they need to be operated as I'm just wondering.

What portion of the people are being retained and what youre.

How effectively you are you able to get them to in essence change their operation practices to be more return on capital.

Oriented versus how they were basically overseen beforehand.

Yes, it's a good question.

What I would say is that we tend to keep.

Very much a majority of the field staff.

What we really tried to do with them is it just.

Listen to their ideas they have usually got pretty good wins and in many cases. These have been neglected asset. So theres just not a lot of focus on them from.

From headquarters for various reasons that made it might just be a very small asset for a much larger company, where in our case, it's a much more meaningful assets that we can.

Focus more time and attention on it.

And then I think more broadly I think a lot of these companies got into.

On a program of being really focused on two things.

How many wells can we drill this year and then related to that how do we maximize R. R.

Per day, our production and we really try to flip that on its head and say.

Not drill any wells until we're sure about.

Getting the cost structure as efficient as we can at the field.

And that's really a change in mindset.

But.

And when we're doing that.

When you think about development capital spending and drilling a bunch of wells you know theres a lot of.

Our geology.

Drilling design completion design, you know a lot of land work that goes around trading.

Trading acreage to block it up and we can really shifted our focus to making sure we're controlling costs as best we can on the field. So.

We tend to keep the majority of the field staff and really want to empower them to make decisions and pushed that push those decisions down as far as we can.

But in many cases, a lot of the G&A is duplicative and because of the change in strategy and the fact that we're not really a day.

Drilling and completion company.

We feel like our existing staff is usually pretty.

Pretty sufficient to manage the incremental assets really net.

That's a big part of the value of the platform. We think is as we already have all that infrastructure.

And so that really helps us grow without having a gross G&A commensurate with the increase in the assets.

Okay, and just finally when looking at acquisitions are there any sort of hidden assets youre looking for what I'm alluding to is at your time at Resolute energy one of the benefits you realize there was you took old fields that had been a conventionally drilled and you started doing.

Horizontal drilling, which led to a much better realization of higher production reserves. What I'm wondering is as you look at new properties. What ways. You are looking at them differently in an effort to try and realize additional.

Additional value that the old or prior owners, maybe had not done.

Yes, I mean thats.

A little bit.

The secret sauce, but.

I do think that we really kind of look at what it is and then try and be.

Not too exactly on what it can be but have a decent idea of that when you go in and.

We are the number one focus on cutting costs and once you do that we tend to find but it opens up a lot of.

Opportunities that maybe you werent even share exist because.

Lower debt cost structure on the field so.

We.

That's kind of how we approach it.

Okay, great well listen best of luck. Thank you.

Thank you very much for the call.

Okay.

Do we currently have no further questions.

Okay.

Great well really appreciate everybody's time this morning and for your interest in contango and if anyone has any follow up questions. Please don't hesitate to reach out to our team and we look forward to speaking to you again in May when we report our first quarter earnings everybody have a great day.

Okay.

This concludes today's call. Thank you for your participation you may.

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