Contago Oil & Gas Reports Revenues of $35.6MM for 3Q

Contango Oil & Gas reported revenues from sales of natural gas, oil and natural gas liquids for the three months ended September 30, 2009 of approximately $35.6 million, compared to $72.7 million for the same period last year. The Company reported net income attributable to common stock for the three months ended September 30, 2009 of approximately $13.5 million, or $0.85 per basic share and $0.83 per diluted share. This compares to net income attributable to common stock for the three months ended September 30, 2008 of $30.9 million or $1.83 per basic share and $1.80 per diluted share.

Our capital expenditure budget calls for us to invest approximately $60 million to drill up to four wildcat exploration wells, at an estimated dry hole cost of approximately $15 million each, net to Contango. The Company will own approximately a 72% NRI in all four wells. In October 2009, we spud Nautilus, the first of these four wells. We expect to spud Dude in early 2010 and His Dudeness shortly thereafter. El Duderino may not be drilled, depending on the results from our Dude well.

Additionally, our capital expenditure budget calls for us to invest approximately $24 million to drill up to 15 Cotton Valley wells in Panola County, Texas. Of this $24 million, approximately $22.5 million is for tangible and intangible drilling costs ($1.5 million per well) and $1.5 million is for leasehold acquisition costs ($100,000 per well). We expect to spud our first well under this program in late November 2009.

Our production is currently approximately 90.0 Mmcfed, net to Contango. As of November 6, 2009, we had no debt and approximately $54.0 million in cash and cash equivalents. Using NYMEX strip pricing as of September 30, 2009, the Company’s natural gas and oil reserves are 348 Bcfe with a pre-tax PV-10 value of $1.4 billion.

Kenneth R. Peak, the Company's Chairman and Chief Executive Officer said, "We had an outstanding quarter. Even though our average natural gas sales price for the quarter was $3.40/Mcf, our Mcf equivalent price ("Mcfe"), which includes liquids prices at a 6:1 BTU energy parity, was $4.61/Mcfe. We had lease operating expenses ("LOE") of $0.45/Mcfe, G&A costs of $0.19/Mcfe, and interest expense of $0.00, for a total of "cash expenses" of $0.64/Mcfe. Our LOE is comprised of approximately $1.1 million in operating costs ($0.15/Mcfe), $1.0 million in transportation & processing costs ($0.13/Mcfe) and $1.3 million in severance taxes ($0.17/Mcfe). Our "cash margin" with natural gas prices of $3.40/Mcf is thus about $4.00/Mcfe."

Mr. Peak continued, "Industry supply trends together with my gleanings from a number of recent industry conference calls lead me to believe the industry may be on its way to drilling gas prices back to the $2.00 to $4.00/Mcf price level. Even though demand for natural gas is likely increasing, supply from the onshore lower 48 since November 2008 has been basically flat despite an approximate 50% drop in rigs drilling for natural gas. In essence the increase in production from shale wells has overcome ongoing industry-wide geologic decline while drilling significantly fewer wells. Thus, a second round of gas price declines may be in front of us. While painful, we believe our exploration program, even after the inevitable dry holes we know we will drill, has attractive rates of return (greater than 15% after tax) and a two-year payback at $3.50/Mcf natural gas. If I’m wrong about near-term natural gas prices -- and I hope I am -- Contango is not hedged and increased commodity prices flow straight to our bottom line."
 

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