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.”
Mr. Peak continued, “In addition to our Eagle prospect we have another four exploration ideas that we believe will mature into drillable prospects over the next 18 - 24 months. We are preparing an EP on our South Timbalier 75 farm-in prospect (Fang) which we plan to submit to the BOEMRE and, upon receiving all regulatory approvals, would expect to drill in early 2012. This prospect has an estimated $25.0 million in dry hole costs to the 100% working interest. Of our remaining three prospects, one is our Birdy prospect (Ship Shoal 121), and the other two are exploration ideas we are hopeful will mature and drill in 2012. The preliminary estimated dry hole costs of these remaining three prospect ideas are an estimated combined $50.0 million. Thus, we are managing our cash position in preparation to commit approximately $100 million to wildcat exploration ideas, or a net $60 million in after-tax risk capital, over the next 18 - 24 months. Should we have exploration success on any of our prospects, we will have the opportunity to invest significantly more capital to bring any discoveries to full production.The investment thesis for Contango is easy to summarize: Approximately 300 Bcfe in reserves as at June 30, 2011, 15.7 million shares both outstanding and fully diluted, $120 million in cash, no debt, 12 producing wells, five prospect ideas, no hedges and eight employees.” Contango is a Houston-based, independent natural gas and oil company. The Company’s business is to explore, develop, produce and acquire natural gas and oil properties primarily offshore in the Gulf of Mexico. Additional information can be found on our web page at www.contango.com. This press release contains forward-looking statements regarding Contango that are intended to be covered by the safe harbor "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995, based on Contango’s current expectations and includes statements regarding acquisitions and divestitures, estimates of future production, future results of operations, quality and nature of the asset base, the assumptions upon which estimates are based and other expectations, beliefs, plans, objectives, assumptions, strategies or statements about future events or performance (often, but not always, using words such as "expects", “projects”, "anticipates", "plans", "estimates", "potential", "possible", "probable", or "intends", or stating that certain actions, events or results "may", "will", "should", or "could" be taken, occur or be achieved). Statements concerning oil and gas reserves also may be deemed to be forward looking statements in that they reflect estimates based on certain assumptions that the resources involved can be economically exploited. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those, reflected in the statements. These risks include, but are not limited to: the risks of the oil and gas industry (for example, operational risks in exploring for, developing and producing crude oil and natural gas; risks and uncertainties involving geology of oil and gas deposits; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to future production, costs and expenses; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; health, safety and environmental risks and risks related to weather such as hurricanes and other natural disasters); uncertainties as to the availability and cost of financing; fluctuations in oil and gas prices; risks associated with derivative positions; inability to realize expected value from acquisitions, inability of our management team to execute its plans to meet its goals, shortages of drilling equipment, oil field personnel and services, unavailability of gathering systems, pipelines and processing facilities and the possibility that government policies may change or governmental approvals may be delayed or withheld. Additional information on these and other factors which could affect Contango’s operations or financial results are included in Contango’s other reports on file with the Securities and Exchange Commission. Investors are cautioned that any forward-looking statements are not guarantees of future performance and actual results or developments may differ materially from the projections in the forward-looking statements. Forward-looking statements are based on the estimates and opinions of management at the time the statements are made. Contango does not assume any obligation to update forward-looking statements should circumstances or management's estimates or opinions change.