Contango to Invest in East Texas JV, Develop Cotton Valley Reserves

Contango's wholly-owned subsidiary, Conterra Company, has entered into a joint venture with Patara Oil & Gas LLC, a privately held oil and gas company, to develop proved undeveloped Cotton Valley gas reserves in Panola County, Texas.

Under the terms of the joint venture agreement (the “Agreement”), Conterra will fund 100% of the drilling and completion costs in exchange for 90% of the net revenues. The Agreement contemplates drilling up to 15 wells, at an estimated 8/8ths cost of approximately $1.5 million per well. The average 8/8ths reserves per well are expected to be approximately 1.5 Bcfe (1.125 net Bcfe after a 25% royalty) with an estimated five year Payout (defined below), assuming a NYMEX gas price of $6.00/Mcf. Patara, as operator, will have the ability to sell-forward or hedge gas production. The 2010 strip price for NYMEX gas is currently about $6.00/Mcf.

By paying all of the drilling and completion costs, the Company will be able to benefit from the associated tax deductions which are estimated to be about 75% of total drilling costs, or approximately $1.1 million per well. Upon the Company achieving a 15% per annum cash-on-cash rate of return on a basket of 15 wells ("Payout"), the Company's net revenue interest converts into a 5% overriding royalty interest. The Company has the option to enter into two additional 15 well baskets to drill up to a total of 45 wells. Drilling is expected to begin prior to the end of the year.

Kenneth R. Peak, the Company's Chairman and Chief Executive Officer, said, "This is an excellent investment opportunity for Contango with an extremely attractive reward/risk ratio. Our cash position, which is projected to reach approximately $50 million by the end of October 2009, is currently being invested at a rate of less than 0.5% in U.S. Treasury Bills. With this transaction we will be developing relatively low risk Cotton Valley proved undeveloped gas reserves, and expect to earn a 15% rate of return on our cash investment of approximately $20 to $25 million per 15 well basket. The objective of the basket is to prevent one or two potentially non-performing wells from impairing our ability to achieve our desired 15% rate of return. In addition, due to the deferral of an estimated $6 million in projected federal income taxes as a result of the associated intangible drilling costs, our rate of return is further enhanced."

Mr. Peak continued, "We have spud our Ship Shoal 263 ("Nautilus") prospect and expect to drill at least two more Gulf of Mexico wildcat exploration wells; Matagorda Island 617 ("Dude") and our Galveston Area prospect ("His Dudeness") prior to June 30, 2010.