Our Strategy

Our exploration strategy is predicated upon two core beliefs: (1) that the only competitive advantage in the commodity-based natural gas and oil business is to be among the lowest cost producers and (2) that virtually all the exploration and production industry's value creation occurs through the drilling of successful exploratory wells. As a result, our business strategy includes the following elements:

  • Funding exploration prospects generated by Juneau Exploration, L.P., our alliance partner. 

    We depend primarily upon our alliance partner, Juneau Exploration, L.P. ("JEX"), for prospect generation expertise. JEX is experienced and has a successful track record in exploration.

 

  • Using our limited capital availability to increase our reward/risk potential on selective prospects. 

    We have concentrated our risk investment capital in our offshore Gulf of Mexico prospects. Offshore exploration prospects are inherently risky as they require large amounts of capital with no guarantee of success. Contango Operators, Inc. ("COI"), our wholly owned subsidiary, drills and operates our offshore prospects. Should we be successful in any of our offshore prospects, we will have the opportunity to spend significantly more capital to complete development and bring the discovery to producing status.

 

  • Sale of proved properties.

    From time-to-time as part of our business strategy, we have sold and in the future expect to continue to sell some or a substantial portion of our proved reserves and assets to capture current value, using the sales proceeds to further our exploration, and investment activities. The Company views periodic reserve sales as an opportunity to capture value, reduce reserve and price risk, and as a source of funds for potentially higher rate of return natural gas and oil exploration opportunities.

 

  • Controlling general and administrative and geological and geophysical costs.

    Our goal is to be among the most efficient in the industry in revenue and profit per employee and among the lowest in general and administrative costs. With respect to our offshore and onshore prospects, we plan to continue outsourcing our geological, geophysical, and reservoir engineering and land functions, and partnering with cost efficient operators. We have twelve employees.

 

  • Structuring incentives to drive behavior.

    We believe that equity ownership aligns the interests of our partners, employees, and stockholders. Our directors and executive officers beneficially own or have voting control over approximately 13% of our common stock.

 

  • Value creation per share.

    Our goal is to maximize value creation per share. Since this is a ratio, the denominator is just as important as the numerator. Since creation of the Company in 1999 we have raised $60.5 million in equity capital. In this same time frame we have also repurchased $123.7 million in market value of our shares (5.1 million shares). We have 2.6 million less fully diluted shares in October 2012 than we did in June 2007.

Do More with Less

We built 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 partner, to whom we've outsourced the majority of our offshore prospect generating activities, is among the most talented individuals in the industry, and our partner's compensation is entirely tied to its 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.

Chain Link Gather Organize Select Drill Produce
Function { Sub-surface data Re-process 3-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.