About Contango

Contango – What's in a Name?

You won't find the word Contango in an American or Spanish dictionary, yet it is used daily by natural gas and oil traders and NYMEX floor brokers. Contango describes the futures market condition of expected rising prices. Expected declining prices are referred to as a backwardated market. Since your management prides itself as forward thinking, we thought Contango sounded better than Backwardated Oil & Gas Company!

“Do Less with More”

We intend to build Contango by outsourcing as much as possible and running the Company with literally a handful of employees. The continuing decline in computing power costs are revolutionizing business, lowering barriers to entry, leveling the competitive playing field between big and small companies, and allowing really talented people to freelance as never before.

Consolidation continues as the dominant natural gas and oil exploration industry theme with companies rationalizing their assets, and “downsizing” their staffs. “Do more with less” is the industry's credo. This creates opportunity for Contango by increasing the pool of talented people, as well as making available prospects and producing assets that no longer “fit” with the strategy of larger companies.

Our alliance partners, to whom we've outsourced our entire prospect generating activities, are among the most talented individuals in the industry, and their compensation is entirely tied to their ability to find natural gas and oil. This alignment of incentives, we believe, is the key to growing Contango's profitability. Thus, given our contrarian mindset, we've decided to adopt “do less with more” as our credo. By “less” we mean we are focused exclusively on only one small link in the value chain – the funding and drilling of an exploratory well for reserves (see “The E&P Value Chain - 80/20 at Work”). To the maximum extent possible, we'll outsource everything else. This one little link, however, of putting a drill bit in the ground and “turning it to the right” is the signal event in the value creation chain and where the bulk of the industry's created value – when successful – happens.

We believe what will set Contango apart from other companies, is not what we do – we explore for natural gas and oil, and there's nothing new about that – but the way we do it. We have organized ourselves and set goals that are simple, clear and audacious. Our goal is to build a profitable independent natural gas and oil company. We want to have the highest profit margin per equivalent unit of production (boe for oil or mcfe in the case of natural gas, we use mcfe since we produce more natural gas than oil), the lowest G&A per mcfe produced, the highest revenue dollar per employee, and the lowest finding and developing cost per mcfe.

In short, using successful efforts accounting, we expect to have earnings per share. The successful efforts accounting method, as opposed to the other widely used accounting method known as “full cost”, requires Contango to expense dry holes, seismic costs, G&A, and interest expenses as incurred. Thus, our quarterly income statements bear the brunt of unsuccessful exploration and seismic costs immediately, and since we don't capitalize any G&A or interest, our GAAP earnings are closer to actual cash generation than those of our full cost competitors.

We like the analogy of judging ourselves similar to a gymnastics competition. We are shooting for 10's for “originality” in our daily work. In those instances, where it's a “required routine”, i.e. we're doing what everybody else does, we intend to do it better. The exceptional execution of an ordinary task. If we can score mostly 10's, we believe we can build a fun, exciting, and profitable company.

The E&P Value Chain - 80/20 at Work

Chain Link	Gather	Organize	Select	Drill	Produce
Function	Sub-surface data 2-D seismic Shoot new 3-D	Generate prospects	Lease Farm-in AFE	FUND⁽¹⁾ Evaluate Complete Hook-up	Operate Sell Collect
Personnel needed	Geologist Geophysicist Geotech Landman	Geologist Geophysicist Geotech Landman	Geologist Geophysicist Geotech Landman Lawyer Accountant Engineer	Geologist Geophysicist Geotech Landman Lawyer Accountant Engineer	Geologist Geophysicist Geotech Landman Lawyer Accountant Engineer Field personnel Marketing
⁽¹⁾The riskiest, most expensive and most value added link. The goal of Contango is to focus on this link exclusively and outsource everything else.
Question:	What functions should a firm perform internally?
Contango's answer:	Only those activities that cannot be performed more efficiently and effectively by another entity.