Q1 2021 Contango Oil & Gas Co (Texas) Earnings Call

And ladies and gentlemen, you're currently holding it for their contango first quarter 2021 results conference call will be starting here in a couple of minutes. Thank you for your patience. Please remain online.

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And ladies and gentlemen, please stand by good day and welcome to the Contango first quarter 2021 results Conference call. Today's conference is being recorded and now at this time I would like to turn the conference over to Mr. Wilkie Colyer. Please go ahead Sir.

Thank you Jay.

Good morning.

Thank you for joining us for our first quarter 2021 earnings conference call.

My name is Wilkie, Colyer and I'm, the Chief Executive Officer of Contango.

Joining me this morning on the call are Farley Dagan, the Companys President Chad roller the Companys Chief operating officer, Joe Grady, The company's Chief Financial Officer, and 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 and non-GAAP measures that apply to the statements on this call.

The last time, we spoke with you in mid March we discussed our latest two acquisitions mid Con energy partners and silvertip.

Now that we have more fully digested these acquisitions I'm happy to report that we have identified opportunities to further enhance our returns beyond our underwriting.

The cost savings are coming in at or above expectations, and our RTP or returned to production program is well underway on both sets of assets.

We have also continued investing capital at attractive rates of return and our pine tree asset, which was acquired via the mid Con energy deal.

These types of low risk high multiple on investment programs for our bread and butter and we anticipate converting the capital projects to proved developed reserves by the end of this year.

We believe these types of capital programs are repeatable on the vast majority of assets in our acquisition pipeline.

In addition, we are modestly increasing our capital budget guidance in response to the recent strength in oil prices and continued decrease in service cost since we completed our capital budgeting process.

We still expect to generate significant free cash flow off of our peer leading LOE PDP decline rate.

Since we last spoke.

We have signed an amendment to our credit agreement, which resets our borrowing base to $250 million effective may 3rd.

In spite of the recent move in front month oil prices.

A more than doubling our borrowing base and loan commitments is a substantial accomplishment in this environment and is indicative of the quality of the bank group we have.

I'd like to take a moment to thank all of our lending partners, both old and new for helping support contango is growth over the past 18 months during which time, we have completed for highly accretive transaction.

As noted in our prior press release adjusted for our borrowing base increase we had total liquidity of $163.3 million as of April 30th.

To put this in perspective that amount of liquidity is over three times the size of cash that was required at closing for the silvertip transaction.

And it will position us to add significant additional producing reserves before incurring any incremental dilution to shareholders.

Keep in mind that any additional transactions like silvertip would be additions to our bank collateral value and should flow through to further increase our borrowing base.

This dramatic enhancement and liquidity.

UGG minute by our ongoing free cash flow generation.

Should signal to you that we are in a prime position to capitalize on the target rich environment, we still find ourselves in today.

On that note, we will move on to the pipeline.

While prices have moved up since our last acquisition in the market feels more competitive than it was late last year we.

We have never been busier on potential acquisition targets in our tenure at contango than we are right now.

The types of assets, we are targeting largely lower decline longer lived ones have seen more modest increases in value due to the shape of the futures curve.

As seen in high decline unconventional properties.

In addition, our focus on non natural owners means we are typically negotiating with counterparties, who have no intention of being long term owners.

Thus, we believe we will be able to continue to acquire assets at attractive prices cut cost and then execute on our low risk high multiple on investment programs that I mentioned earlier in this call.

We believe our competition in pursuit of these opportunities is largely private equity backed companies, who have both a higher cost of capital and shorter runway then contango.

We also believe that the private equity industry is woefully under capitalized to take advantage of what we think will be a $20 billion plus dollar opportunity to acquire these lower decline neglected assets over the next few years.

We will remain patient and our pursuit of additional assets because our performance will ultimately be measured by the returns we generate on the capital we invest rather than on how quickly or how much capital we can deploy.

The sheer size of the opportunity makes us extremely confident that we can continue to buy assets at attractive prices for years to come but our focus must remain on getting good value for our investment and will mean being aggressive at certain times and patient at others.

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

That operator, I will open up the line for questions.

Ladies and gentlemen, if you would like to ask a question you can think to by pressing star one on your telephone keypad do keep in mind. If you are using your speaker phone. Please make sure. Your mute function is released so your simple can reach our equipment.

Again for any questions today Star one we'll pause for just a moment to allow everyone an opportunity to signal.

And we will start Q&A with Gail Nicholson with Stephens. Please go ahead.

Hey, Good morning, guys hope everyone is doing well.

You guys have the drilling budget this year and then Jason West Texas. Your line can you just talk about the timing of this activity and what you guys are targeting.

Sure Good morning, Gail and thanks for the question.

Yes look we have modestly increased our drilling budget. This year roughly on the order of $10 million to $11 million and it will be to drill three gross one five net wells out in our northeast Bullseye area.

Yes, the timing of that is I.

I would say Q2 and Q3.

And that was really driven by a couple of things one and obviously the most important thing is that given the recent increase in oil prices and the.

Continued weakness in service costs.

The returns on capital the return on investment the mass all checks out in terms of.

Just the capital investment that will be generated from drilling those wells. The other thing. It does is we are drilling a bone spring as well.

And I think theres been a lot of success from some offset operators in the area.

But we've yet to explore that zone. So.

It does a lot of things for us it generates like I said return on that drilling capital, but also I think.

<unk> expands our inventory there.

As you guys know, we're not typically a company that does a lot of organic drilling and completions and development organically. So.

We don't take that decision lightly even though as a percentage of our enterprise or cash flow.

Relative relatively minor number.

But again, we try to look at things and just say what would we do if we owned 100% of the company in.

Net capital investment made sense. So we are we went ahead and green lighted.

Great and then do you think from a standpoint of bauxite. When you look at look at that piece in your portfolio more unconventional higher decline rate assets is that a potential.

Divesture candidate for you guys later down the road.

Okay.

Yes, that's a good point I mean, we.

Not really our.

Necessarily our cup of tea I mean, we do think that it's an interesting assets Thats got good inventory it's just.

Might not be we might not be the best suited company to execute on that development plan. So.

It's everything from the portfolio is for sale at a price but that.

That certainly I think is one that if we can get decent value for we feel like we can.

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Be more impactful in other areas of the energy industry in the upstream industry than perhaps.

Unconventional development, so I would agree with that.

Great and then just one last question on the operating expense side now.

Adjusted Silver Captain mid Con looking at the further potential reductions on Opex, where are you guys in that process and what kind of are you guys looking for potential reductions on the LOE side Windows Apple.

As we move through 'twenty one.

Yes, I'm going to kick that question over to Chad roller our chief operating officer, and let him answer Jeff.

Yes, so as we look into 2021 on the Opex side, we really look at two things we are in the process of restoring significant amount of production.

And the assets that we acquired.

The net effect is.

Total operating expenses May go up as we bring more production online.

But we do expect a pretty significant reduction in the unit cost.

For the cost total.

Let the barrel of oil so.

We do think the efficiencies will go up as well as production.

Help answer the question.

When you look at that reduction on the daily basis do you have any idea of the magnitude of like $25 $50 any thoughts there.

Okay.

We haven't released that yet and still in the process of digesting, but we do we do feel like it'll be a material number.

Okay, great well guys great quarter looking forward to what you guys give for Ses.

Thanks.

Thank you, Jeff Thanks, a lot Gail.

We will now hear from Jeff Robertson with water Tower research.

Thank you welcome I'm wondering if you can talk a little bit about how the return to production programs.

Somewhat Gail asked about will have an impact on your free cash flow generation from.

We ask that you recently acquired over the balance of 2021.

Yes, it's a great question and I'm going to kick that one over to Chad roller as well because I think Chad to really frame. This nicely internally in terms of how we think about it.

Thanks.

I understand can you repeat the question for me.

Yes, you returned to production program that you talked about which sounds like it's workover heavy I'm just curious if you can talk about.

About how that will impact.

Tangos free cash flow generation over the course of this year.

Yes.

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If oil prices stay high it will have.

And impact on free cash flow. This year, because we are on average the payout for this work is on the order of three to four months.

And we are accelerating that work in the first half of this year essentially.

We're really hitting that program hard in the second quarter.

Depending on those results.

Either expand the program in the third quarter or revisit it but.

We do expect it to have.

And impact on free cash flow this year with even a greater impact on free cash flow into 2022.

Yes, Jeff just to hop in there I mean, the way we've thought about it is you know like Chad said three to four month payouts in most of these things if he starts in Q2.

Our view is that it will be net.

Net neutral to free cash flow to slightly positive yet at the same time also adding a lot of reserves. So it's not impacting our free cash flow in a negative way, but it is adding adding reserves. So that's kind of how we thought about it like Chad said, depending on the results for the program early on we may amend that but that's how we've thought about it.

Kind of Frontloading that to Q2 and.

Making sure we're adding reserves without impacting our free cash flow in a negative way.

And a follow up Bill could you talked about with the expanded credit facility that you have and then.

Stronger liquidity as you think about funding future acquisitions can you just can you talk about the equity mix or the equity debt mix. It knows where you wanted to keep the balance sheet.

Okay.

Yes, it's a good question I mean.

I certainly think we're in a position right now where we're very much under levered or Overcapitalized whichever you want to call it.

We're still thinking will be debt free based on our existing.

Projects in scope of work by.

Later next year.

That puts us in a really good position I mean, I would say you know if we're going to pick a bogey that you know I would say moves a lot depending on the types of assets you have whether they're high decline our low decline.

We think we'd like to stay no more than one five times Levered, you know that being said we're going to be.

Half, a turn or thereabouts by the end of this year. So I think that should tell you that we've got a decent amount of room in there.

And so.

That coupled with the free cash.

The free cash flow, we're generating plus the liquidity we have.

I think we would feel comfortable with.

Pretty.

With with utilizing our credit facility for something let's say on the order of a grisly sized transaction.

Excuse me Silvertip transaction obviously.

We're looking at some things that are that are well in excess of our existing liquidity.

And so those would require external financing sources. So we always just got to make sure whether we're using debt or we're using equity to acquire something.

We've just got to make sure that.

We're staying prudent and that what we're giving up in terms of dilution or incremental leverage were more than getting that back in return in terms of the cash flow profile of the asset.

Okay. Thank you very much.

Thank you Jeff.

And once again, ladies and gentlemen for questions Star One we'll pause to see if there is any further questions today.

We'll hear from Matt Watson Austin Partners go ahead. Please.

Yes, I would just like to understand a little bit more about the.

About the hedging and how you guys are hedged for the remaining of the year and then going into 2022.

I'll come out with respect for you go ahead, you on price right now.

Okay.

Yes. So we are I would say very well hedged for the balance of this year and just talking about oil I think were somewhere in the order of a little north of 70%.

For the balance of this year next year, it's a little bit less than that it's I believe about 60%, but our view is that we're going to continue to hedge opportunistically I mean, we obviously want a baseline of hedges and we think about it kind of in 24 months increments.

24 month increments gives us a lot of visibility into that.

The capital will have available to deploy into other opportunities. So.

That feels like kind of the window that we look at typically.

Given the shape of the curve shape for the curve, where we are in contango right now I'd tell you that we would.

Be more aggressively hedging next year.

But right now given our leverage profile. We are we're comfortable with with the hedge book that we have right now, but thats subject to change and again.

Pretty dependent on the on the shape of the curve, although we always want to have kind of a baseline and I think we have minimum hedging requirements are about.

70% and 50% for 12 months to 24 months out. So you should always see us kind of around that.

ZIP code in terms of a minimum and then we try and flex that up opportunistically. So that's how we think about it.

Thank you.

And once again, ladies and gentlemen star one for any questions.

With no additional questions in the queue I will turn the call back over to your host for any additional or closing remarks.

Thanks, Jake and really appreciate everybody joining us this morning to review our first quarter earnings were really really excited about where we are as a company and what we're building here. So.

Look forward to continuing.

Our work and look forward to coming back in.

Reporting back with you all.

After we finish up Q2, thanks again for everybody's time and interest in contango.

Ladies and gentlemen, this will conclude your conference for today, we do thank you for your participation and you may now disconnect.

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