Contango Oil & Gas Company (NYSE Amex:MCF) announced today that it is still on schedule for production to begin at its Vermilion 170 (Swimmy) discovery in September 2011 at an estimated rate of 15 million cubic feet equivalent per day (“Mmcfed”), net to Contango. We currently have 11 wells, producing approximately 77 Mmcfed, net to Contango.
The exploration plan (“EP”) for our Ship Shoal 121/134 (Eagle) prospect was submitted to the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) on March 3, 2011 and approved on July 11, 2011. We submitted our application for permit to drill on July 29, 2011 and are hopeful it will be approved in September 2011. Depending on permit approval and rig availability, we expect to spud this well in the September/October 2011 time frame. We will have a 100% working interest in this wildcat exploration prospect and have budgeted approximately $25.0 million to drill this well. We have also invested another $6.0 million in leases associated with Eagle. We have $120 million in net available cash, no debt, and $40 million of unused borrowing capacity.
Kenneth R. Peak, Contango’s Chairman and Chief Executive Officer, said, “We are preparing to expend a budgeted $31.0 million of dry hole risk capital on our Eagle prospect. This is a significant capital commitment and risk for the Company, but one we believe is justified, both by the potential of the prospect and our capital position. Contango is an approximate 40% tax payer and thus has a built-in partner – the Federal Government - that “shares” in our after-tax dry hole capital risk. Assuming a dry hole – and the probabilities are that Eagle will be a dry hole – we would incur a projected $31.0 million write off, both for GAAP accounting and income taxes. The income taxes that we would otherwise owe, however, would be reduced by approximately $12 million. Thus, a dry hole at Eagle would reduce our net, out of pocket, after-tax cash investment to $19 million. With an on-hand cash balance of $120 million and no debt, this is a financial loss - though painful – that we can afford to take. Should Eagle be a discovery, however, we will have a 65% net revenue interest in what we believe would likely be an oil discovery with a prospect size – net to Contango – of 7 to 10 million barrels.”
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