Contango Oil & Gas (ticker: MCF) announced today its financial results for the fourth quarter and year ended December 31, 2016.
Fourth Quarter Highlights
- Production of 5.9 Bcfe for the quarter, or 64.3 Mmcfed
- Adjusted EBITDAX, on a recurring basis, of $8.2 million for the quarter
- Commenced drilling in our newly acquired Pecos County acreage in the Southern Delaware Basin, targeting the Upper Wolfcamp formation
- Reduced year-end debt outstanding to $54.4 million, a 13% decrease from the third quarter outstanding balance and a 53% decrease from the year-end 2015 outstanding balance
- Increased hedge position to approximately 50% of forecasted PDP natural gas production for 2017 and 54% of forecasted PDP crude production for 2017
- Sold non-core onshore Colorado assets for $5.0 million.
Management Commentary
Allan D. Keel, the Contango President and Chief Executive Officer, said “While our reduced capital expenditure program in 2016 led to lower production, which coupled with low commodity prices impacted our results for the quarter, we are excited about the commencement of the development of our Southern Delaware Basin position acquired during the third quarter. As previously disclosed, the results of our initial well are consistent with those producing in the vicinity, and based on our results on the first well, we have drilled two more wells that are awaiting completion, are currently drilling the fourth well and have exercised our rig option to drill our fifth well. We will continue to monitor our results, and make appropriate adjustments to the drilling program for the remainder of the year as we go along. As we noted at the beginning of the year, we possess the flexibility to be more aggressive in the area than our initial budget reflects, should our results and/or commodity prices make that strategy appropriate. The Delaware Basin is one of the few domestic plays that provide return-justified drilling opportunities in the current price environment; and we are optimistic that the increases in production, cash flow and reserves that could come from the development of our current 13,200 gross (6,600, net) operated Southern Delaware Basin position could be very impactful for our shareholders.”
Summary Fourth Quarter Financial Results
Net loss for the three months ended December 31, 2016 was $16.8 million, or $(0.69) per basic and diluted share, compared to a net loss of $111.3 million, or $(5.85) per basic and diluted share, for the same period last year, with both quarters impacted by commodity price driven impairment charges. For the fourth quarter 2016, we recorded $6.3 million in impairment charges for non-core undeveloped acreage that we are not likely to drill prior to expiration and $0.4 million in impairment charges related to our 37% equity investment in Exaro Energy III LLC. Fourth quarter 2015 results included a $48.2 million non-cash pre-tax impairment charge related to proved and unproved properties; a $30.0 million non-cash impairment related pre-tax loss related to Exaro and $5.6 million in other expense related to a forfeited deposit on an unsuccessful acquisition in the fourth quarter of 2015. Excluding the impairment charges for both periods and the forfeited deposit, the net loss before income tax benefit, was $10.3 million in 2016 compared to a pre-tax net loss of $11.5 million in 2015. Average weighted shares outstanding were approximately 24.6 million and 19.0 million for the current and prior year quarters, respectively.
Contango reported Adjusted EBITDAX, of approximately $8.2 million for the three months ended December 31, 2016, compared to $7.5 million for the same period last year. The 2015 quarter was negatively impacted by the $5.6 million acquisition-related charge incurred during the fourth quarter. The current year quarter reflects a $1.6 million decrease in operating expenses that was more than offset by a $3.7 million increase in current quarter cash G&A costs and a $2.7 million increase in realized loss on derivatives. Exclusive of the forfeited deposit, Adjusted EBITDAX would have been $13.1 million for the 2015 quarter.
Revenues for the three months ended December 31, 2016 were approximately $21.7 million compared to $21.5 million for the same period last year. Despite lower production during the current quarter, the 21%, 49% and 47% increases in crude oil, natural gas and natural gas liquids prices, respectively helped revenues remain relatively constant.
Production for the fourth quarter of 2016 was approximately 5.9 Bcfe, or 64.3 Mmcfe per day, compared to 86.7 Mmcfe per day for the fourth quarter of 2015, and within our previously provided guidance. This decrease in production can be attributed to minimal new production added during the year because of dramatically reduced 2015 and 2016 drilling programs in response to the low and uncertain commodity prices during that period, and to a 1.6 Mmcfed impact on the 2016 quarter from the shut-in of two wells in our conventional Liberty County area for workovers. Crude oil and natural gas liquids production during the fourth quarter of 2016 was approximately 3,080 barrels per day, or 28.8% of total production, compared to approximately 4,600 barrels per day, or 31.7% of total production, in the fourth quarter of 2015, a decline related to the lower capital expenditures in 2015 and 2016. In February 2017, the compressor on our Eugene Island 11 platform experienced a sudden engine failure resulting in a loss of compression and reduced production from our Dutch and Mary Rose wells for 24 days. Our first quarter 2017 production guidance of 57.4 – 62.4 Mmcfed reflects the estimated impact of the loss of compression.
The weighted average equivalent sales price during the three months ended December 31, 2016 was $3.66 per Mcfe, compared to $2.69 per Mcfe for the same period last year. As previously noted, stronger prices were realized for all commodities.
Operating expenses for the three months ended December 31, 2016 were approximately $6.3 million, or $1.07 per Mcfe, compared to $7.9 million, or $0.99 per Mcfe, for the same period last year. Included in operating expenses are lease operating expenses, transportation and processing costs, workover expenses and production and ad valorem taxes. Operating expenses exclusive of production and ad valorem taxes for the three months ended December 31, 2016 were approximately $5.9 million, or $1.00 per Mcfe, compared to approximately $6.9 million, or $0.87 per Mcfe, for the same period last year. We continue to find ways to reduce costs in the field and operate more efficiently, as evidenced by the $1.0 million, or 14% reduction in operating costs quarter over quarter, a 20% decrease compared to the recurring third quarter 2016, and the fact that expenses were below our previously provided guidance for the quarter.
DD&A expense for the three months ended December 31, 2016 was $13.7 million, or $2.32 per Mcfe, compared to $21.1 million, or $2.65 per Mcfe, for the same period last year. This decrease is primarily attributable to the decrease in production during the quarter.
Impairment and abandonment expense from oil and gas properties was $6.3 million for the three months ended December 31, 2016, and was related primarily to the impairment of undeveloped leases in non-core areas. Impairment and abandonment expense from oil and gas properties for the three months ended December 31, 2015 was $48.2 million. Of this amount, $42.0 million was related to proved properties, primarily in Madison/Grimes and Zavala/Dimmit/Karnes counties in Texas and commodity price driven, $4.4 million was related to unproved properties primarily in South Texas, and $1.8 million was related to our Ship Shoal 263 platform that will be decommissioned in 2017.
G&A expenses for the three months ended December 31, 2016 were $8.0 million, or $1.36 per Mcfe, compared to $3.7 million, or $0.47 per Mcfe, for the prior year quarter. G&A expenses for the current and prior year quarters include $2.1 million and $1.5 million, respectively, in non-cash stock compensation expense. The increase in non-cash stock compensation expense is due in part to the issuance of 2016 long-term incentive compensation to employees during the current quarter (issuance of 2015 long term incentive compensation was made in April 2016). Other items contributing to the increase in G&A costs for the current quarter were a $1.5 million cumulative cash incentive bonus accrual for 2016 and prorata accrual of retention bonuses for certain non-executive employees. For the first quarter of 2017, we have provided guidance of $5.3 million to $5.9 million for general and administrative expenses, exclusive of non-cash stock compensation.
Loss from affiliates for the three months ended December 31, 2016 was approximately $0.3 million, compared to a loss from affiliates of $30.0 million for the same period last year. Included in the prior quarter results was a $43.6 million non-cash impairment associated with Exaro’s proved oil and gas properties as a result of the decline in commodity prices.
Other expense for the three months ended December 31, 2015 was primarily related to $5.6 million in costs incurred in the pursuit of an unsuccessful acquisition.
2016 Capital Program and Liquidity
Capital costs incurred for the three months ended December 31, 2016 were approximately $12.5 million, which was primarily related to the commencement of drilling in our Southern Delaware Basin acreage in Pecos County, Texas. We have previously reported a total capital budget for 2017 of approximately $46.3 million, including $36.6 million for drilling/completing wells in Pecos County, Texas. Consistent with our past philosophy, we plan to initially limit our 2017 capital expenditures to those that are generally funded by internally generated cash flow; however, to the extent that well performance exceeds our expectations, or commodity prices increase meaningfully, we possess the financial flexibility to expand our program during the year.
As of December 31, 2016, we had approximately $54.4 million of debt outstanding under our credit facility, a 13% decrease from the 2016 third quarter balance and a 53% decrease from the year-end 2015 balance. Effective October 28, 2016, our $140 million borrowing base under our facility was reaffirmed through May 1, 2017.
2016 Year End Reserves
As previously disclosed in our March 10, 2017 release on reserves and production, proved reserves at December 31, 2016, as estimated by William M. Cobb & Associates, Inc. and Netherland, Sewell & Associates, Inc., Contango’s independent petroleum engineering firms, in accordance with reserve reporting guidelines mandated by the Securities and Exchange Commission, were 151.8 Bcfe, a 19% decrease over our proved reserves as of December 31, 2015, consisting of 105.1 billion cubic feet of natural gas, 3.4 million barrels of crude oil, and 4.4 million barrels of natural gas liquids, with a present value of proved reserves discounted at 10% of $166 million. As of December 31, 2016, 69% of our proved reserves were natural gas and 85% were proved developed.
The following table summarizes Contango’s total proved reserves as of December 31, 2016 (1):
| Present Value | ||||||||||
| OIL | NGL | Gas | Total | Discounted | ||||||
| Category | (MBbl) | (MBbl) | (Mmcf) | (Mmcfe) | at 10% ($000) | |||||
| Developed | 2,158 | 3,509 | 95,396 | 129,399 | 154,007 | |||||
| Undeveloped | 1,266 | 850 | 9,657 | 22,351 | 12,221 | |||||
| Total Proved | 3,424 | 4,359 | 105,053 | 151,750 | 166,228 |
(1) These estimates do not include net reserves of approximately 32.6 Bcfe (PV-10 of approximately $20 million) attributable to our 37% equity ownership investment in Exaro as of December 31, 2016.
