Contango Announces New Production; May Pay Special Dividend

Contango Oil & Gas Company issued a press release today that announced new production from recent discoveries in the Gulf of Mexico.  In addition, the company announced new production from eight onshore wells in Texas that are part of a joint venture.  Five additional onshore wells are planned through the joint venture.

The company also announced that purchases have continued under a previously approved $100 million share repurchase program.  In addition, the company may declare a one-time dividend depending on liquidity conditions.  Here is an excerpt from the press release:

Kenneth R. Peak, Contango’s Chairman and Chief Executive Officer, said, “With current natural gas prices of around $4.50/Mcf and production of approximately 92 Mmcfd and crude oil at $75.00/bbl and production of approximately 2,500 bopd, our projected revenues are approximately $600,000 per day when all of our wells are online and producing. Our preliminary capital expenditure budget for fiscal year 2011 is approximately $50 million, consisting of one well per month under our Conterra JV, and two offshore prospects we plan to spud in the November 2010/January 2011 time frame.

“Our capital expenditure budget will likely increase throughout the year as we generate new prospects and various drilling opportunities become available to us. We also plan to continue to opportunistically use our cash to purchase our stock and depending upon our liquidity, may also decide to pay a one-time dividend.”

We previously posted an article regarding the challenges facing small exploration firms in the Gulf of Mexico and what appears to be an explicit government policy to encourage smaller firms to leave the Gulf.  Included in that article is a quote from Mr. Peak regarding the difficulties of operating in an environment of unlimited financial and criminal liability for errors of judgment or equipment failure.

Contango’s production from past exploration in the Gulf is now coming online and producing at satisfactory rates.  Whether future exploration occurs depends greatly on the regulatory climate.  The fact that the company is repurchasing shares is likely due to Contango’s depressed valuation since its stock has been punished along with most other exploration firms in the Gulf of Mexico.  Payment of a special dividend could signal a more negative view regarding the longer term regulatory climate.  Given management’s past history of shareholder friendly actions, if a dividend is paid, it will likely occur this year since dividend tax rates are almost certain to increase in 2011.

Disclosure:  The author owns shares of Contango Oil & Gas.