UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2008
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-16317
CONTANGO OIL & GAS COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
95-4079863
(IRS Employer Identification No.)
3700 Buffalo Speedway, Suite 960
Houston, Texas 77098
(Address of principal executive offices)
(713) 960-1901
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.04 per share
American Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained , to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes [ ] No [X]
At December 31, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates
(based upon the closing sale price of shares of such common stock as reported on the American Stock Exchange) was
$649,840,517. As of August 22, 2008, there were 16,824,246 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference
Items 10, 11, 12, 13 and 14 of Part III have been omitted from this report since registrant will file with the
Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy
statement, pursuant to Regulation 14A. The information required by Items 10, 11, 12, 13 and 14 of this report, which
will appear in the definitive proxy statement, is incorporated by reference into this Form 10-K.
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2008
TABLE OF CONTENTS
PART I
Page
Item 1.
Business
1
Overview .....................................................................................................................................
1
Our Strategy ................................................................................................................................
2
Exploration Alliance with JEX....................................................................................................
2
Offshore Gulf of Mexico Exploration Joint Ventures .................................................................
3
Contango Operators, Inc.……………………………………………………………….. ...........
4
Contango Resources Company....................................................................................................
5
Offshore Properties .....................................................................................................................
8
Contango Venture Capital Corporation.......................................................................................
8
Property Sales and Discontinued Operations……………………………………………………
9
Marketing and Pricing .................................................................................................................
9
Competition.................................................................................................................................
Governmental Regulations ..........................................................................................................
9
Employees ................................................................................................................................... 11
Directors and Executive Officers ................................................................................................ 11
Corporate Offices ........................................................................................................................ 13
Code of Ethics ............................................................................................................................. 13
Available Information ................................................................................................................. 14
Item 1A. Risk Factors........................................................................................................................................ 14
Item 1B. Unresolved Staff Comments............................................................................................................... 22
Item 2.
Properties
Production, Prices and Operating Expenses ................................................................................ 22
Development, Exploration and Acquisition Capital Expenditures .............................................. 22
Drilling Activity .......................................................................................................................... 23
Exploration and Development Acreage....................................................................................... 23
Productive Wells ......................................................................................................................... 24
Natural Gas and Oil Reserves ..................................................................................................... 24
Legal Proceedings .............................................................................................................................. 25
Submission of Matters to a Vote of Security Holders ........................................................................ 25
Item 3.
Item 4.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities................................................................................................................................. 25
Selected Financial Data ...................................................................................................................... 28
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview ..................................................................................................................................... 29
Results of Operations .................................................................................................................. 29
Capital Resources and Liquidity ................................................................................................. 33
Off Balance Sheet Arrangements ................................................................................................ 34
Contractual Obligations............................................................................................................... 34
Credit Facility.............................................................................................................................. 34
Application of Critical Accounting Policies and Management’s Estimate ................................. 35
Recent Accounting Pronouncements........................................................................................... 36
Item 7A. Quantitative and Qualitative Disclosure about Market Risk .............................................................. 37
Financial Statements and Supplementary Data .................................................................................. 37
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............. 38
Item 9A. Controls and Procedures..................................................................................................................... 38
Item 9B. Other Information............................................................................................................................... 39
ii
PART III
Item 10. Directors, Executive Officers and Corporate Governance ................................................................ 39
Item 11. Executive Compensation .................................................................................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters .............................................................................................................. 40
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................... 40
Item 14. Principal Accountant Fees and Services............................................................................................. 40
Item 15. Exhibits and Financial Statement Schedules ...................................................................................... 40
PART IV
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements made in this report may contain “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, as amended. The words and phrases “should be”, “will be”, “believe”, “expect”, “anticipate”, “estimate”,
“forecast”, “goal” and similar expressions identify forward-looking statements and express our expectations
about future events. These include such matters as:
• Our financial position
• Business strategy, including outsourcing
• Meeting our forecasts and budgets
• Anticipated capital expenditures
• Drilling of wells
• Natural gas and oil production and reserves
• Timing and amount of future discoveries (if any) and production of natural gas and oil
• Operating costs and other expenses
• Cash flow and anticipated liquidity
• Prospect development
• Property acquisitions and sales
Although we believe the expectations reflected in such forward-looking statements are reasonable,
such expectations may not occur. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance or achievements to be materially
different from actual future results expressed or implied by the forward-looking statements. These factors
include among others:
• Low and/or declining prices for natural gas and oil
• Natural gas and oil price volatility
• Operational constraints, start-up delays and production shut-ins at both operated and non-
operated production platforms, pipelines and gas processing facilities
• The risks associated with acting as the operator in drilling deep high pressure wells in the Gulf
of Mexico
• The risks associated with exploration, including cost overruns and the drilling of non-economic
wells or dry holes, especially in prospects in which the Company has made a large capital
commitment relative to the size of the Company’s capitalization structure
• The timing and successful drilling and completion of natural gas and oil wells
• Availability of capital and the ability to repay indebtedness when due
• Availability of rigs and other operating equipment
• Ability to raise capital to fund capital expenditures
• Timely and full receipt of sale proceeds from the sale of our production
• The ability to find, acquire, market, develop and produce new natural gas and oil properties
iii
Interest rate volatility
•
• Uncertainties in the estimation of proved reserves and in the projection of future rates of
production and timing of development expenditures
• Operating hazards attendant to the natural gas and oil business
• Downhole drilling and completion risks that are generally not recoverable from third parties or
insurance
• Potential mechanical failure or under-performance of significant wells, production facilities,
processing plants or pipeline mishaps
• Weather
• Availability and cost of material and equipment
• Delays in anticipated start-up dates
• Actions or inactions of third-party operators of our properties
• Actions or inactions of third-party operators of pipelines or processing facilities
• Ability to find and retain skilled personnel
• Strength and financial resources of competitors
• Federal and state regulatory developments and approvals
• Environmental risks
• Worldwide economic conditions
• Successful commercialization of alternative energy technologies
• Drilling and operating costs, production rates and ultimate reserve recoveries in our Eugene
Island 10 (“Dutch”) and State of Louisiana (“Mary Rose”) acreage.
You should not unduly rely on these forward-looking statements in this report, as they speak only as
of the date of this report. Except as required by law, we undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this
report or to reflect the occurrence of unanticipated events. See the information under the heading “Risk
Factors” referred to on page 14 of this report for some of the important factors that could affect our financial
performance or could cause actual results to differ materially from estimates contained in forward-looking
statements.
iv
All references in this Form 10-K to the “Company”, “Contango”, “we”, “us” or “our” are to
Contango Oil & Gas Company and wholly-owned Subsidiaries. Unless otherwise noted, all information in this
Form 10-K relating to natural gas and oil reserves and the estimated future net cash flows attributable to those
reserves are based on estimates prepared by independent engineers and are net to our interest.
PART I
Item 1. Business
Overview
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. Contango Operators, Inc. (“COI”) and Contango Resources Company (“CRC”), our wholly-owned
subsidiaries, act as operator on certain offshore prospects.
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 totally 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. Exploration prospects
are inherently risky as they require large amounts of capital with no guarantee of success. COI and CRC drill
and operate 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.
Operating in the Gulf of Mexico. COI and CRC were formed for the purpose of drilling and operating
exploration wells in the Gulf of Mexico. Assuming the role of an operator represents a significant increase in
the risk profile of the Company since the Company has limited operating experience. While the Company has
historically drilled turnkey wells, adverse weather conditions as well as difficulties encountered while drilling
our offshore wells could cause our contracts to come off turnkey and thus lead to significantly higher drilling
costs.
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 offshore exploration activities. Since its inception, the
Company has sold approximately $484 million worth of natural gas and oil properties, and 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 onshore prospects, we plan to continue outsourcing our
geological, geophysical, and reservoir engineering and land functions, and partnering with cost efficient
operators. We have six employees.
Structuring transactions to share risk. JEX, our alliance partner, shares in the upfront costs and the
risk of our exploration prospects.
1
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 23.1% of our common stock.
Exploration Alliance with JEX
JEX is a private company formed for the purpose of assembling domestic natural gas and oil prospects.
Under our agreement with JEX, JEX generates natural gas and oil prospects and evaluates exploration
prospects generated by others. JEX focuses on the Gulf of Mexico, and generates offshore exploration
prospects via our affiliated companies, Republic Exploration, LLC (“REX”) and Contango Offshore
Exploration, LLC (“COE”) (see “Offshore Gulf of Mexico Exploration Joint Ventures” below).
Offshore Gulf of Mexico Exploration Joint Ventures
Contango directly and through REX and COE conducts exploration activities in the Gulf of Mexico.
As of August 22, 2008, Contango, through its wholly-owned subsidiaries, COI and CRC, and its partially-
owned subsidiaries, REX and COE, had an interest in 67 offshore leases. See “Offshore Properties” below for
additional information on our offshore properties.
As of June 30, 2008, Contango owned a 32.3% equity interest in REX and a 65.6% equity interest in
COE, both of which were formed for the purpose of generating exploration opportunities in the Gulf of
Mexico. See Exhibit 21.2 for an organizational chart of our subsidiaries. These companies focus on
identifying prospects, acquiring leases at federal and state lease sales and then selling the prospects to third
parties, including Contango, subject to timed drilling obligations plus retained reversionary interests in favor of
REX and COE.
Republic Exploration LLC (REX)
Effective April 1, 2008, the Company sold a portion of its ownership interest in REX to an existing
member of REX for approximately $0.8 million. As a result of the sale, the Company’s equity ownership
interest in REX has decreased to 32.3%.
On April 3, 2008, the members of REX entered into an Amended and Restated Limited Liability
Company Agreement (the “REX LLC Agreement”), effective as of April 1, 2008, to, among other things,
distribute REX’s interest in Dutch and Mary Rose to the individual members of REX or their designees. In
connection with this distribution, REX repaid in full all amounts owing by REX to a private investment firm
under a $50.0 million demand promissory note with such private investment firm (the “REX Demand Note”),
and all security interests and other liens granted in favor of such private investment firm as security for the
obligations under the REX Demand Note have been released and terminated. The Company’s portion of such
repayment was approximately $22.5 million.
On March 12, 2008, the Company announced that its wildcat exploration well at High Island A198, a
REX prospect, was determined to be a dry hole, at a cost of approximately $4.2 million. The well has been
plugged and abandoned.
West Delta 36 and Eugene Island 113-B, two REX prospects, are operated by a third party. The
Company depends on third-party operators for the operation and maintenance of these production platforms.
On March 7, 2008, REX elected to convert its 3.67% overriding royalty interest in West Delta 36 to an
undivided 25% working interest, sometimes referred to herein as “WI”. As of August 21, 2008, West Delta 36,
in which REX has a 20.0% net revenue interest, sometimes referred to herein as “NRI”, was producing at a rate
of approximately 9.7 million cubic feet equivalent per day (“Mmcfed”), and Eugene Island 113-B, in which
REX has a 3.3% NRI, was temporarily shut-in.
2
During the past twelve months, REX has been awarded the following leases:
Date
Lease
Amount
Lease Sale
•
•
•
July 2008
Eugene Island 56
$310,999
Central GOM Lease Sale #206
Jan 2008
High Island 263
$1.75 million Western GOM Lease Sale #204
Jan 2008
High Island A38
$1.1 million
Western GOM Lease Sale #204
• Dec 2007
Eugene Island 11
$ 94,673
Central GOM Lease Sale #205
Contango Offshore Exploration LLC (COE)
Effective April 1, 2008, the Company sold a portion of its ownership interest in COE to an existing
member or COE for approximately $0.9 million. As a result of the sale, the Company’s equity ownership
interest in COE has decreased to 65.6%.
Grand Isle 72 (“Liberty”), a COE prospect operated by COI, began producing in March 2007 and as
of August 22, 2008 was producing at a rate of approximately 0.2 Mmcfed. COE has invested approximately
$5.5 million ($3.6 million net to the Company) in drilling, completion, pipeline and production facility costs as
of June 30, 2008. COE has a 50% WI and a 40% NRI in this well. As of June 30, 2008, COE had borrowed
$4.3 million from the Company under a promissory note (the “Note”) to fund a portion of its share of
development costs at Grand Isle 72. The Note bears interest at a per annum rate of 10% and is payable upon
demand. As of June 30, 2008, accrued interest thereon was $668,816.
Grand Isle 70, another COE prospect, was drilled by COI in July 2006 and proved to be a discovery.
The well has been temporarily abandoned while alternative development scenarios are being evaluated. COE
has a 45.1% WI before completion of the well and a 52.6% WI after completion of the well, while COI has a
3.6% WI before and after completion of the well. As of June 30, 2008, COE and COI had invested
approximately $3.6 million to drill Grand Isle 70.
Ship Shoal 358, a COE prospect, is operated by a third party. The Company depends on third-party
operators for the operation and maintenance of non-operated production platforms. As of August 12, 2008,
Ship Shoal 358, in which COE has a 10.0% WI and 7.7% NRI, was producing at an 8/8ths rate of
approximately 2.1 Mmcfed.
Contango Operators, Inc
COI, a wholly-owned subsidiary of the Company, was formed for the purpose of drilling exploration
and development wells in the Gulf of Mexico. COI operates and acquires significant working interests in
offshore exploration and development opportunities in the Gulf of Mexico, usually under a farm-out
agreement, or similar agreement, with either REX or COE. COI expects to take working interests in these
prospects under the same arms-length terms offered to industry third-party participants. In exchange for acting
as operator, COI will receive a 10% ground floor working interest in all future wells. COI will pay the
remaining 90% working interest and carry the owner of the lease (either REX or COE) for a 10% working
interest through the tanks until initial production is achieved. Following a casing point election, the lease
owner (either REX or COE) shall have an option to acquire a 25% working interest from COI. COI may also
operate and acquire significant working interests in offshore exploration and development opportunities under
farm-in agreements with third parties.
COI has recently drilled a well (“Eloise #1) on State of Louisiana leases at a depth below our Mary
Rose discovery. The Company, through REX and COI participation, subject to elections for certain carried
interests, has an approximate 54.17% WI in this well and is responsible for approximately $12.5 million of
drilling costs. COI has agreed to provide REX with a carried interest in this well through the tanks. At casing
point, REX “backed-in” for an additional working interest from COI and COI’s WI was reduced to
approximately 36.90%. The Company expects to invest an additional $3.8 million to complete the well.
3
Effective February 1, 2008, the Company sold COI’s overriding royalty interest in Eugene Island 113-
B, Ship Shoal 358 and Grand Isle 72 to JEX for $164,400.
Contango Resources Company
CRC is a wholly-owned subsidiary of Contango formed for the sole purpose of drilling and operating
exploration and development wells in our Dutch and Mary Rose leases in the Gulf of Mexico. Unlike COI,
CRC will not acquire additional working interests in offshore exploration and development opportunities in the
Gulf of Mexico.
Current Activities.
The Company’s financial advisor, Merrill Lynch & Co., has begun meeting with parties interested in
potentially purchasing the Company’s Dutch and Mary Rose discoveries in the Gulf of Mexico. Any possible
sale or restructuring is subject to mutually acceptable terms and conditions, mutually satisfactory
documentation, the consent and approval of third parties and governmental authorities, the approval of
Contango’s board of directors and, if necessary, Contango’s shareholders. If Contango obtains an acceptable
proposal to acquire its Dutch and Mary Rose discoveries, the disposition would likely be structured through the
sale of Contango by its shareholders, with the potential purchaser acquiring the stock of Contango Oil & Gas
Company and CRC. The Company’s remaining assets would be simultaneously spun-off to our shareholders
through our subsidiary, Contango Energy Company. This structure would allow Contango shareholders to
maintain an interest in any future exploration efforts at our other Gulf of Mexico leases.
A data room for the possible sale opened in July 2008. The Company anticipates receiving proposals
in September 2008. If no acceptable proposals are received, the Company will terminate the sale and
restructuring process and continue to develop and operate the Dutch and Mary Rose discoveries.
As of August 20, 2008, our three Dutch wells were flowing at a combined 8/8ths production rate of
approximately 108.8 Mmcfed (approximately 41.5 Mmcfed net to Contango). The Company has invested
approximately $33.8 million to drill and complete these three Dutch wells, including pipeline and production
facility costs. The three Dutch wells flow to a third-party owned and operated production platform at Eugene
Island 24. This platform has a capacity of 100 million cubic feet per day (“Mmcfd”) and 3,000 barrels of oil
per day (“bopd”).
As of August 22, 2008, our four Mary Rose wells were flowing at a combined 8/8ths production rate
of approximately 193.8 Mmcfed (approximately 71.4 Mmcfed net to Contango). The Company has invested
approximately $69.1 million to drill and complete these four Mary Rose wells, including pipeline and
production facility costs. The four Mary Rose wells flow into the Company’s recently completed production
platform at Eugene Island 11, and through its associated pipeline into the ANR Pipeline Company facilities at
Eugene Island 63. The gas is then processed on-shore near Patterson, Louisiana. The platform has been
designed with a capacity of 500 Mmcfd and 6,000 bopd and the pipeline has been designed with a capacity of
330 Mmcfd and 6,000 bopd.
On April 3, 2008, the Company acquired additional working interests in the Eugene Island 10
(“Dutch”) and State of Louisiana (“Mary Rose”) discoveries in a like-kind exchange, using funds from the sale
of its Eastern core Arkansas Fayetteville Shale properties held by a qualified intermediary. The Company
purchased an additional 4.17% working interest and 3.33% net revenue interest in Dutch and an additional
average 4.56% working interest and 3.33% net revenue interest in Mary Rose from three different companies
for $100 million. The effective date of the transaction was January 1, 2008. On February 8, 2008, the
Company purchased an additional 0.3% overriding royalty interest in the Dutch and Mary Rose discoveries for
$9.0 million in a like-kind exchange, using funds from the sale of its Eastern core Arkansas Fayetteville Shale
properties held by a qualified intermediary.
On January 3, 2008, the Company acquired an additional 8.33% working interest and 6.67% net
revenue interest in Dutch and an additional average 9.11% working interest and 6.67% net revenue interest in
Mary Rose from three different companies for $200 million, in a like-kind exchange, using funds from the sale
of its Western core Arkansas Fayetteville Shale properties held by a qualified intermediary. The effective date
4
of the transaction was January 1, 2008. As of August 22, 2008, the Company had a 47.05% working interest
and 38.12% net revenue interest in Dutch, and an average 53.21% working interest and 37.00% net revenue
interest in Mary Rose.
The Company’s independent third party engineer estimates the Dutch and Mary Rose discoveries to
have total proved 8/8ths reserves as at June 30, 2008 of approximately 948 billion cubic feet equivalent
(“Bcfe”) (366 Bcfe net to Contango). The Company has budgeted approximately $7.1 million to drill its first
rate acceleration well (“Dutch #4”) in this field beginning September 2008, and may drill additional rate
acceleration wells to fully exploit its Dutch and Mary Rose discoveries.
The Minerals Management Service (“MMS”) has implemented a rule on royalty relief for shallow
water, deep shelf natural gas production from certain Gulf of Mexico leases. “Deep shelf gas” refers to natural
gas produced from depths greater than 15,000 feet in waters of 200 meters or less. Royalty relief is available on
the first 15 billion cubic feet (“Bcf”) of natural gas production if produced from an interval between 15,000 to
less than 18,000 feet. Royalty relief is available on the first 25 Bcf of natural gas production if produced from
an interval between 18,000 to less than 20,000 feet. Royalty relief is available on the first 35 Bcf of natural gas
production if produced from well depths at or greater than 20,000 feet. This royalty relief is expected to have a
positive impact on the economics of deep gas wells drilled on the shelf of the Gulf of Mexico. The Company
fully utilized its available MMS deep gas royalty relief in December 2007.
Offshore Properties
Producing Properties. The following table sets forth the interests owned by Contango through CRC
and its REX and COE affiliates in the Gulf of Mexico which are producing natural gas or oil as of August 22,
2008:
Area/Block
WI
NRI
Status
Notes
Contango Resources Company:
Eugene Island 10 #1 (Dutch #1)
Eugene Island 10 #2 (Dutch #2)
Eugene Island 10 #3 (Dutch #3)
S-L 18640 #1 (Mary Rose #1)
S-L 19266 #1 (Mary Rose #2)
S-L 19266 #2 (Mary Rose #3)
S-L 18860 #1 (Mary Rose #4)
47.05%
47.05%
47.05%
53.21%
53.21%
53.21%
34.58%
38.1%
38.1%
38.1%
40.5%
38.7%
38.7%
25.5%
Producing
Producing
Producing
Producing
Producing
Producing
Producing
Republic Exploration LLC
Eugene Island 113B………………………… 0.00%
West Delta 36……………………………… 25.00%
3.3%
20.0%
Producing
Producing
Farmed out
Farmed out
Contango Offshore Exploration LLC:
Grand Isle 72………………………………… 50.00%
Ship Shoal 358, A-3 well…………………… 10.00%
40.0%
7.7%
Producing
Producing
Leases. The following table sets forth the working interests and status of the leases owned by
Contango through CRC and COI, and its REX and COE affiliates in the Gulf of Mexico as of August 22, 2008:
5
Area/Block
WI
Lease Date
Expiration Date
Status
Notes
Completing
Dry Hole
Dry Hole
Depleted
Farmed out
Dry Hole
Farmed out
Contango Resources Company:
S-L 19266 #3 (Eloise North #1)…………… 54.17%
S-L 19261…………………………………… 53.21%
S-L 19396…………………………………… 53.21%
Eugene Island 11…………………………… 53.21%
Contango Operators, Inc.:
Grand Isle 63… …...……………………… 25.00%
Grand Isle 73… …...……………………… 25.00%
West Delta 43... . …..……………………..
35.00%
Ship Shoal 14 ……………………………… 37.50%
Ship Shoal 25 ……………………………… 37.50%
South Marsh Island 57 ……………………… 37.50%
South Marsh Island 59 ……………………. 37.50%
South Marsh Island 75 ……………………… 37.50%
South Marsh Island 282 …………………… 37.50%
Grand Isle 70… .. …...……………………… 3.65%
West Delta 77 ……………………………… 25.00%
Vermilion 194…………… ………………… 37.50%
Republic Exploration LLC
High Island 113 …………………………… 100.00%
South Timbalier 191 …………………………50.00%
Vermilion 36 …………………………………100.00%
Vermilion 109 ……………………………… 100.00%
Vermilion 134 ……………………………… 100.00%
West Cameron 179 ………………………… 100.00%
West Cameron 185 ………………………… 100.00%
West Cameron 200 ……………………….. 100.00%
West Delta 18 ……………………………… 100.00%
West Delta 33 ……………………………… 100.00%
West Delta 34 ……………………………… 100.00%
West Delta 43 ……………………………… 30.00%
Ship Shoal 220 ……………………………… 50.00%
South Timbalier 240 …………………………50.00%
West Cameron 133 ………………………… 100.00%
West Cameron 80 ……………………………100.00%
West Cameron 167 ………………………… 100.00%
Eugene Island 76 …………………………… 0.00%
Vermilion 130 ……………………………… 100.00%
West Cameron 107 ………………………… 100.00%
Eugene Island 168 ………………………… 50.00%
Vermilion 73………………………………… 0.00%
High Island A243 …………………………… 75.00%
South Marsh Island 57 ……………………. 50.00%
South Marsh Island 59 ……………………… 50.00%
South Marsh Island 75 …………………… 50.00%
Feb-07
Feb-07
Jun-07
Dec-07
May-04
May-04
May-04
May-06
May-06
May-06
May-06
May-06
May-06
Jun-06
Jun-06
Jul-06
Oct-03
May-04
May-04
May-04
May-04
May-04
May-04
May-04
May-04
May-04
May-04
May-04
Jun-04
Jun-04
Jun-04
Jun-04
Jun-04
Jul-04
Jul-04
May-05
Jun-05
Jul-05
Jan-06
May-06
May-06
May-06
Feb-12
Feb-12
Jun-12
(1)
May-09
May-09
May-09
May-11
May-11
May-11
May-11
May-11
May-11
Jun-11
Jun-11
Jul-11
Oct-08
May-09
May-09
May-09
May-09
May-09
May-09
May-09
May-09
May-09
May-09
May-09
Jun-09
Jun-09
Jun-09
Jun-09
Jun-09
Jul-09
Jul-09
May-10
Jun-10
Jul-10
Jan-11
May-11
May-11
May-11
6
Area/Block
WI
Lease Date
Expiration Date
Status
Notes
(3)
Farmed out
Dry Hole
Dry Hole
(4)
Farmed out
Farmed out
(3)
Farmed out
Republic Exploration LLC (continued)
South Marsh Island 282 …………………… 50.00%
Ship Shoal 14 ……………………………… 50.00%
Ship Shoal 25 ……………………………… 50.00%
West Delta 77 ……………………………… 50.00%
Vermilion 154……………………………… (2)
Vermilion 194 ……………………………… 50.00%
High Island A196 ……………………………100.00%
High Island A197 ……………………………100.00%
High Island A198 ……………………………100.00%
High Island 263………………………………100.00%
High Island A38………………...……………100.00%
Eugene Island 56…………………………… 100.00%
Contango Offshore Exploration LLC:
East Breaks 283 …………………………… 100.00%
East Breaks 369……………......................... 0.00%
East Breaks 370……………......................... 0.00%
High Island A16 …………………………… 100.00%
South Timbalier 191 …………………………50.00%
Grand Isle 63 ……………………………… 50.00%
Grand Isle 73 ……………………………… 50.00%
Ship Shoal 220 ……………………………… 50.00%
South Timbalier 240 …………………………50.00%
Viosca Knoll 118 …………………………… 50.00%
Vermilion 154……………………………… (2)
Viosca Knoll 475 ……………………………100.00%
Eugene Island 168 ………………………… 50.00%
East Breaks 366 …………………………… 100.00%
East Breaks 410 …………………………… 100.00%
East Breaks 167 …………………………… 75.00%
High Island A311 …………………………… 75.00%
East Breaks 166……………......................... 75.00%
High Island A342………….......................... 75.00%
Ship Shoal 263 ……………………………… 75.00%
Viosca Knoll 383 ………………………….. 100.00%
Grand Isle 70 ……………………………… 45.10%
Viosca Knoll 119…………………………… 50.00%
May-06
May-06
May-06
Jun-06
Jul-06
Jul-06
Nov-06
Nov-06
Nov-06
Jan-08
Jan-08
Jul-08
Dec-03
Dec-03
Dec-03
Dec-03
May-04
May-04
May-04
Jun-04
Jun-04
Jun-04
Jul-04
May-05
Jun-05
Nov-05
Nov-05
Dec-05
Dec-05
Jan-06
Jan-06
Jan-06
Jan-06
Jun-06
Jun-06
May-11
May-11
May-11
Jun-11
Jul-11
Jul-11
Nov-11
Nov-11
Nov-11
Jan-13
Jan-13
Jul-13
Dec-11
Dec-08
Dec-08
Dec-08
May-09
May-09
May-09
Jun-09
Jun-09
Jun-09
Jul-09
May-10
Jun-10
Nov-15
Nov-15
Dec-10
Dec-10
Jan-11
Jan-11
Jan-11
Jan-11
Jun-11
Jun-11
(1) Held by Right-of-Use-and-Easement
(2) REX and COE will split a 25% back-in WI after payout
(3) Drilling expected by Summer 2008
(4) No drilling date determined yet. Farmee has until September 1, 2008 to decide if
East Breaks 370 will be drilled. COE will receive a 3.67% ORRI before project
payout and a 6.67% ORRI after project payout.
Contango Venture Capital Corporation
7
In March 2008, Contango Venture Capital Corporation (“CVCC”), our wholly-owned subsidiary, sold
its direct and indirect investments in Gridpoint, Inc., Trulite, Inc., Protonex Technology Corporation, Jadoo
Power Systems, Contango Capital Partners Fund, L.P. and Contango Capital Partnership Management, LLC
for $3.4 million, in the aggregate, recognizing a loss of approximately $2.9 million for the fiscal year ended
June 30, 2008. CVCC’s only remaining alternative energy investment is Moblize, Inc. (“Moblize”).
The Company originally invested $1.2 million in Moblize in exchange for 648,648 shares of Moblize
convertible preferred stock. In March 2008, the Company determined that Moblize was partially impaired, and
wrote down the investment to $0.6 million, recognizing a loss of $0.6 million for fiscal year ended June 30,
2008. In June 2008, CVCC sold 205,000 shares of convertible preferred stock of Moblize to a third party for
$410,000. As of August 22, 2008, CVCC owned 443,648 shares of Moblize convertible preferred stock,
valued at $0.2 million, which represents an approximate 19.5% ownership interest. Moblize develops real time
diagnostics and field optimization solutions for the oil and gas and other industries using open-standards based
technologies.
Property Sales and Discontinued Operations
Freeport LNG Development, L.P.
On February 5, 2008, the Company sold its ten percent (10%) limited partnership interest in Freeport
LNG Development L.P. (“Freeport LNG”) to Turbo LNG LLC, an affiliate of Osaka Gas Co., Ltd., for $68.0
million, and recognized a gain of approximately $63.4 million on the sale. Freeport LNG is a limited
partnership formed to develop, construct and operate a 1.75 billion cubic feet per day (“Bcfd”) liquefied
natural gas (“LNG”) receiving and gasification terminal on Quintana Island, near Freeport, Texas.
The Company used $20.3 million of the proceeds from the sale to pay off its debt with The Royal
Bank of Scotland plc, including principal, interest and fees. Another $20.0 million was used to pay off its debt
with a private investment firm. The remaining $27.7 million was used for working capital purposes.
Arkansas Fayetteville Shale
On December 21, 2007, the Company sold its Western core Arkansas Fayetteville Shale properties to
Petrohawk Energy Corporation for $199.2 million. The sale was effective October 1, 2007. The Company
sold approximately 14,200 acres with 6.4 Mmcfd of production, net to Contango. The Company recognized a
gain of approximately $155.9 million for the fiscal year ended June 30, 2008 as a result of this sale.
On January 30, 2008, the Company sold its Eastern core Arkansas Fayetteville Shale properties to
XTO Energy, Inc. for approximately $128.0 million. The sale was effective December 1, 2007. The Eastern
core consisted of approximately 11,200 acres with 3.0 Mmcfd of production, net to Contango. The Company
recognized a gain of approximately $106.4 million for the fiscal year ended June 30, 2008 as a result of this
sale.
Texas and Louisana
Effective February 1, 2008, the Company sold its interest in two on-shore wells to Alta Resources
LLC. The Alta-Ellis #1 in Texas and the Temple-Inland in Louisiana were sold for approximately $1.1
million.
8
Marketing and Pricing
The Company currently derives its revenue principally from the sale of natural gas and oil. As a
result, the Company’s revenues are determined, to a large degree, by prevailing natural gas and oil prices. The
Company currently sells its natural gas and oil on the open market at prevailing market prices. Market prices
are dictated by supply and demand, and the Company cannot predict or control the price it receives for its
natural gas and oil. The Company has outsourced the marketing of its offshore natural gas and oil production
volume to a privately-held third party marketing firm. The Company has a policy not to hedge its natural gas
and oil production.
Price decreases would adversely affect our revenues, profits and the value of our proved reserves.
Historically, the prices received for natural gas and oil have fluctuated widely. Among the factors that can
cause these fluctuations are:
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
(cid:121)
The domestic and foreign supply of natural gas and oil
Overall economic conditions
The level of consumer product demand
Adverse weather conditions and natural disasters
The price and availability of competitive fuels such as heating oil and coal
Political conditions in the Middle East and other natural gas and oil producing regions
The level of LNG imports
Domestic and foreign governmental regulations
Potential price controls and special taxes
Competition
The Company competes with numerous other companies in all facets of its business. Our competitors
in the exploration, development, acquisition and production business include major integrated oil and gas
companies as well as numerous independents, including many that have significantly greater financial
resources and in-house technical expertise.
Governmental Regulations
Federal Income Tax. Federal income tax laws significantly affect the Company’s operations. The
principal provisions affecting the Company are those that permit the Company, subject to certain limitations, to
deduct as incurred, rather than to capitalize and amortize, its domestic “intangible drilling and development
costs” and to claim depletion on a portion of its domestic natural gas and oil properties based on 15% of its
natural gas and oil gross income from such properties (up to an aggregate of 1,000 barrels per day of domestic
crude oil and/or equivalent units of domestic natural gas).
Environmental Matters. Domestic natural gas and oil operations are subject to extensive federal
regulation and, with respect to federal leases, to interruption or termination by governmental authorities on
account of environmental and other considerations such as the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) also known as the “Super Fund Law”. The trend towards
stricter standards in environmental legislation and regulation could increase costs to the Company and others in
the industry. Natural gas and oil lessees are subject to liability for the costs of clean-up of pollution resulting
from a lessee’s operations, and may also be subject to liability for pollution damages. The Company maintains
insurance against costs of clean-up operations, but is not fully insured against all such risks. A serious incident
of pollution may also result in the Department of the Interior requiring lessees under federal leases to suspend
or cease operation in the affected area.
The Oil Pollution Act of 1990 (the “OPA”) and regulations thereunder impose a variety of regulations
on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such
spills in U.S. waters. The OPA assigns liability to each responsible party for oil removal costs and a variety of
public and private damages. While liability limits apply in some circumstances, a party cannot take advantage
of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of
9
federal safety, construction or operating regulations. Few defenses exist to the liability imposed by the OPA.
In addition, to the extent the Company’s offshore lease operations affect state waters, the Company may be
subject to additional state and local clean-up requirements or incur liability under state and local laws. The
OPA also imposes ongoing requirements on responsible parties, including proof of financial responsibility to
cover at least some costs in a potential spill. The Company believes that it currently has established adequate
proof of financial responsibility for its offshore facilities. However, the Company cannot predict whether these
financial responsibility requirements under the OPA amendments will result in the imposition of substantial
additional annual costs to the Company in the future or otherwise materially adversely affect the Company.
The impact, however, should not be any more adverse to the Company than it will be to other similarly situated
or less capitalized owners or operators in the Gulf of Mexico.
The Company’s onshore operations are subject to numerous federal, state and local laws and
regulations controlling the discharge of materials into the environment or otherwise relating to the protection of
the environment. Such laws and regulations, among other things, impose absolute liability on the lessee for the
cost of clean-up of pollution resulting from a lessee’s operations, subject the lessee to liability for pollution
damages, may require suspension or cessation of operations in affected areas, and impose restrictions on the
injection of liquids into subsurface aquifers that may contaminate groundwater. Such laws could have a
significant impact on the operating costs of the Company, as well as the natural gas and oil industry in general.
Federal, state and local initiatives to further regulate the disposal of natural gas and oil wastes are also pending
in certain jurisdictions, and these initiatives could have a similar impact on the Company. The Company’s
operations are also subject to additional federal, state and local laws and regulations relating to protection of
human health, natural resources, and the environment pursuant to which the Company may incur compliance
costs or other liabilities.
Other Laws and Regulations. Various laws and regulations often require permits for drilling wells
and also cover spacing of wells, the prevention of waste of natural gas and oil including maintenance of certain
gas/oil ratios, rates of production and other matters. The effect of these laws and regulations, as well as other
regulations that could be promulgated by the jurisdictions in which the Company has production, could be to
limit the number of wells that could be drilled on the Company’s properties and to limit the allowable
production from the successful wells completed on the Company’s properties, thereby limiting the Company’s
revenues.
The MMS administers the natural gas and oil leases held by the Company on federal onshore lands
and offshore tracts in the Outer Continental Shelf. The MMS holds a royalty interest in these federal leases on
behalf of the federal government. While the royalty interest percentage is fixed at the time that the lease is
entered into, from time to time the MMS changes or reinterprets the applicable regulations governing its
royalty interests, and such action can indirectly affect the actual royalty obligation that the Company is
required to pay. However, the Company believes that the regulations generally do not impact the Company to
any greater extent than other similarly situated producers. At the end of lease operations, oil and gas lessees
must plug and abandon wells, remove platforms and other facilities, and clear the lease site sea floor. The
MMS requires companies operating on the Outer Continental Shelf to obtain surety bonds to ensure
performance of these obligations. Prior to the Company’s decision to act as the operator in the drilling of
offshore prospects, the Company was required by the MMS to obtain surety bonds, typically providing
$50,000 in coverage per lease, an amount of coverage that ensures a minimum level of performance. As an
operator, however, the Company is required to obtain surety bonds of $200,000 per lease for exploration and
$500,000 per lease for developmental activities.
10
The Federal Energy Regulatory Commission (the “FERC”) has embarked on wide-ranging regulatory
initiatives relating to natural gas transportation rates and services, including the availability of market-based
and other alternative rate mechanisms to pipelines for transmission and storage services. In addition, the
FERC has announced and implemented a policy allowing pipelines and transportation customers to negotiate
rates above the otherwise applicable maximum lawful cost-based rates on the condition that the pipelines
alternatively offer so-called recourse rates equal to the maximum lawful cost-based rates. With respect to
gathering services, the FERC has issued orders declaring that certain facilities owned by interstate pipelines
primarily perform a gathering function, and may be transferred to affiliated and non-affiliated entities that are
not subject to the FERC’s rate jurisdiction. The Company cannot predict the ultimate outcome of these
developments, or the effect of these developments on transportation rates. Inasmuch as the rates for these
pipeline services can affect the natural gas prices received by the Company for the sale of its production, the
FERC’s actions may have an impact on the Company. However, the impact should not be substantially
different on the Company than it will on other similarly situated natural gas producers and sellers.
Employees
We have six employees, all of whom are full time. We use the services of independent consultants
and contractors to perform various professional services, including reservoir engineering, land, legal,
environmental and tax services. We are dependent on JEX for prospect generation, evaluation and prospect
leasing. As a working interest owner, we rely on outside operators to drill, produce and market our natural gas
and oil for our onshore prospects and certain offshore prospects where we are a non-operator. In the offshore
prospects where we are the operator, we rely on a turn-key contractor to drill and rely on independent
contractors to produce and market our natural gas and oil. In addition, we utilize the services of independent
contractors to perform field and on-site drilling and production operation services and independent third party
engineering firms to calculate our reserves.
Directors and Executive Officers
The following table sets forth the names, ages and positions of our directors and executive officers:
Name
Age
Position
63
Kenneth R. Peak........................................
Chairman, President, Chief Executive Officer,
Chief Financial Officer, Secretary and Director
Senior Vice President and Controller
37
Lesia Bautina ............................................
Vice President and Treasurer
38
Sergio Castro.............................................
President & Chief Operating Officer, Contango Operators, Inc.
Marc Duncan…………………………….
55
Director
B.A. Berilgen……………………………. 60
Jay D. Brehmer .........................................
Director
43
Charles M. Reimer………………………. 63 Director
Director
Steven L. Schoonover ...............................
Director
Darrell W. Williams ..................................
63
65
11
Kenneth R. Peak. Mr. Peak is the founder and has been Chairman, Chief Executive Officer and Chief
Financial Officer of Contango since its formation in September 1999. Mr. Peak entered the energy industry in
1972 as a commercial banker and held a variety of financial and executive positions in the oil and gas industry
prior to starting Contango in 1999. Mr. Peak served as an officer in the U.S. Navy from 1968 to 1971. Mr.
Peak received a BS in physics from Ohio University in 1967, and an MBA from Columbia University in 1972.
He currently serves as a director of Patterson-UTI Energy, Inc., a provider of onshore contract drilling services
to exploration and production companies in North America.
Lesia Bautina. Ms. Bautina joined Contango in November 2001 as Controller and was appointed Vice
President and Controller in August 2002. In July 2005, Ms. Bautina was promoted to Senior Vice President.
Prior to joining Contango, Ms. Bautina worked as an auditor for Arthur Andersen LLP from 1997 to 2001.
Her primary experience is accounting and financial reporting for exploration and production companies. Ms.
Bautina received a degree in History from the University of Lvov in the Ukraine in 1990 and a BBA in
Accounting in 1996 from Sam Houston State University, where she graduated with honors. Ms. Bautina is a
Certified Public Accountant and member of the Petroleum Accounting Society of Houston.
Sergio Castro. Mr. Castro joined Contango in March 2006 as Treasurer and was appointed Vice
President and Treasurer in April 2006. Prior to joining Contango, Mr. Castro spent two years as a Consultant
for UHY Advisors TX, LP. From 2001 to 2004, Mr. Castro was a lead credit analyst for Dynegy Inc. From
1997 to 2001, Mr. Castro worked as an auditor for Arthur Andersen LLP, where he specialized in energy
companies. Mr. Castro was honorably discharged from the U.S. Navy in 1993 as an E-6, where he served
onboard a nuclear powered submarine. Mr. Castro received a BBA in Accounting in 1997 from the University
of Houston, graduating summa cum laude. Mr. Castro is a Certified Public Accountant and a Certified Fraud
Examiner.
Marc Duncan. Mr. Duncan joined Contango in June 2005 as President and Chief Operating Officer
of Contango Operators, Inc. Mr. Duncan has over 25 years of experience in the energy industry and has held a
variety of domestic and international engineering and senior-level operations management positions relating to
natural gas and oil exploration, project development, and drilling and production operations. Prior to joining
Contango, Mr. Duncan served in a senior executive position with USENCO International, Inc. and related
companies in China and Ukraine from 2000-2004 and as a senior project and drilling engineer for Hunt Oil
Company from 2004-2005. He holds an MBA in Engineering Management from the University of Dallas, an
MEd from the University of North Texas and a BS in Science and Education from Stephen F. Austin
University.
B.A. Berilgen. Mr. Berilgen was appointed a director of Contango in July 2007. Mr. Berilgen has
served in a variety of senior positions during his 38 year career. Currently, he is Chief Executive Officer of
Patara Oil & Gas LLC. Prior to that he was Chairman, Chief Executive Officer and President of Rosetta
Resources Inc., a company he founded in 2005. Mr. Berilgen was also previously the Executive Vice President
of Calpine Corp. and President of Calpine Natural Gas L.P. from October 1999 through June 2005. In June
1997, Mr. Berilgen joined Sheridan Energy, a public oil and gas company, as its President and Chief Executive
Officer. Mr. Berilgen attended the University of Oklahoma, receiving a B.S. in Petroleum Engineering in 1970
and a M.S. in Industrial Engineering / Management Science.
Jay D. Brehmer. Mr. Brehmer has been a director of Contango since October 2000. Mr. Brehmer is
currently a founding partner of Southplace LLC, a provider of private-company middle-market corporate
finance advisory services. Prior to that, he was Managing Director of Houston Capital Advisors LP, a boutique
financial advisory, merger and acquisition investment bank. From November 2002 until August 2004, he
advised various energy and energy-related companies on corporate finance and merger and acquisition
activities through Southplace, LLC. From May 1998 until November 2002, Mr. Brehmer was responsible for
structured-finance energy related transactions at Aquila Energy Capital Corporation. Prior to joining Aquila,
Mr. Brehmer founded Capital Financial Services, which provided mid-cap companies with strategic merger
and acquisition advice coupled with prudent financial capitalization structures. Mr. Brehmer holds a BBA
from Drake University in Des Moines, Iowa.
12
Charles M. Reimer. Mr. Reimer was elected a director of Contango in 2005. Mr. Reimer is President of
Freeport LNG Development, L.P, and has experience in exploration, production, liquefied natural gas (“LNG”)
and business development ventures, both domestically and abroad. From 1986 until 1998, Mr. Reimer served
as the senior executive responsible for the VICO joint venture that operated in Indonesia, and provided LNG
technical support to P. T. Badak. Additionally, during these years he served, along with Pertamina executives,
on the board of directors of the P.T. Badak LNG plant in Bontang, Indonesia. Mr. Reimer began his career
with Exxon Company USA in 1967 and held various professional and management positions in Texas and
Louisiana. Mr. Reimer was named President of Phoenix Resources Company in 1985 and relocated to Cairo,
Egypt, to begin eight years of international assignments in both Egypt and Indonesia. Prior to joining Freeport
LNG Development, L.P. in December 2002, Mr. Reimer was President and Chief Executive Officer of
Cheniere Energy, Inc.
Steven L. Schoonover. Mr. Schoonover was elected a director of Contango in 2005. Mr. Schoonover
was most recently Chief Executive Officer of Cellxion, L.L.C., a company specializing in construction and
installation of telecommunication buildings and towers, as well as the installation of high-tech
telecommunication equipment. From 1990 until its sale in November 1997 to Telephone Data Systems, Inc.,
Mr. Schoonover served as President of Blue Ridge Cellular, Inc., a full-service cellular telephone company he
co-founded. From 1983 to 1996, he served in various positions, including President and Chief Executive
Officer, with Fibrebond Corporation, a construction firm involved in cellular telecommunications buildings,
site development and tower construction. Mr. Schoonover has been awarded, on two occasions with two
different companies, Entrepreneur of the Year, sponsored by Ernst & Young, Inc Magazine and USA Today.
Darrell W. Williams. Mr. Williams has been a director of Contango since 1999. From 2005 through
2007, Mr. Williams was President and Chief Executive Officer of Porta-Kamp International LP, which
specializes in the manufacture, supply and construction of remote area housing, and Chief Executive Officer of
Clearwater Environmental Systems, a manufacturer of sewage and water treatment systems. From 2002 until
2005, Mr. Williams was Managing Director of Catalina Capital Advisors, LP. Prior to joining Catalina, Mr.
Williams was in senior executive positions with Deutug Drilling, GmbH (1993-2002), Nabors Drilling (1988-
1993), Pool Company (1985-1988), Baker Oil Tools (1980-1983), SEDCO (1970-1980), Tenneco (1966-
1970), and Humble Oil (1964-1966). Mr. Williams graduated from West Virginia University with a degree in
Petroleum Engineering in 1964. Mr. Williams is past Chairman of the Houston Chapter of International
Association of Drilling Contractors, a life member of the Society of Petroleum Engineers and a registered
professional engineer in Texas.
Directors of Contango serve as members of the board of directors until the next annual stockholders
meeting, until successors are elected and qualified or until their earlier resignation or removal. Officers of
Contango are elected by the board of directors and hold office until their successors are chosen and qualified,
until their death or until they resign or have been removed from office. All corporate officers serve at the
discretion of the board of directors. Each outside director of the Company receives a quarterly retainer of
$8,000 payable in cash and $36,000 payable annually in Company common stock. Each outside director also
receives a $1,000 cash payment for each board meeting and separately scheduled Audit Committee meeting
attended. The Chairman of the Audit Committee receives an additional quarterly cash payment of $3,000.
There are no family relationships between any of our directors or executive officers.
Corporate Offices
We lease our corporate offices at 3700 Buffalo Speedway, Suite 960, Houston, Texas 77098. On
September 30, 2006 we extended the term of our lease agreement for an additional 60 months, commencing
November 1, 2006, with a termination date of October 31, 2011.
Code of Ethics
We adopted a Code of Ethics for senior management in December 2002. A copy of our Code of
Ethics is filed as an exhibit to this Form 10-K and is also available on our Website at www.contango.com.
13
Available Information
General information about us can be found on our Website at www.contango.com. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any
amendments and exhibits to those reports, are available free of charge through our Website as soon as
reasonably practicable after we file or furnish them to the Securities and Exchange Commission.
Item 1A. Risk Factors
In addition to the other information set forth elsewhere in this Form 10-K, you should carefully
consider the following factors when evaluating the Company. An investment in the Company is subject to risks
inherent in our business. The trading price of the shares of the Company is affected by the performance of our
business relative to, among other things, competition, market conditions and general economic and industry
conditions. The value of an investment in the Company may decrease, resulting in a loss. The risk factors
listed below are not all inclusive.
We have no ability to control the prices that we receive for natural gas and oil. Natural gas and oil prices
fluctuate widely, and a substantial or extended decline in natural gas and oil prices would adversely affect
our revenues, profitability and growth and could have a material adverse effect on the business, the results
of operations and financial condition of the Company.
Our revenues, profitability and future growth depend significantly on natural gas and crude oil prices.
Prices received affect the amount of future cash flow available for capital expenditures and repayment of
indebtedness and our ability to raise additional capital. We do not expect to hedge our production to protect
against price decreases. Lower prices may also affect the amount of natural gas and oil that we can
economically produce. Factors that can cause price fluctuations include:
The domestic and foreign supply of natural gas and oil.
•
• Overall economic conditions.
• The level of consumer product demand.
The price and availability of competitive fuels such as heating oil and coal.
Political conditions in the Middle East and other natural gas and oil producing regions.
The level of LNG imports.
• Adverse weather conditions and natural disasters.
•
•
•
• Domestic and foreign governmental regulations.
Potential price controls and special taxes.
•
• Access to pipelines and gas processing plants.
A substantial or extended decline in natural gas and oil prices could have a material adverse effect on
our access to capital and the quantities of natural gas and oil that may be economically produced by us. A
significant decrease in price levels for an extended period would negatively affect us.
We depend on the services of our chairman, chief executive officer and chief financial officer, and
implementation of our business plan could be seriously harmed if we lost his services.
We depend heavily on the services of Kenneth R. Peak, our chairman, chief executive officer, and
chief financial officer. We do not have an employment agreement with Mr. Peak, and the proceeds from a
$10.0 million “key person” life insurance policy on Mr. Peak may not be adequate to cover our losses in the
event of Mr. Peak’s death.
We are highly dependent on the technical services provided by JEX and could be seriously harmed if JEX
terminated its services with us or became otherwise unavailable.
Because we have only six employees, none of whom are geoscientists or petroleum engineers, we are
dependent upon JEX for the success of our natural gas and oil exploration projects and expect to remain so for
the foreseeable future. We do not have a written agreement with JEX which contractually obligates them to
provide us with their services in the future. Highly qualified explorationists and engineers are difficult to
14
attract and retain. As a result, the loss of the services of JEX could have a material adverse effect on us and
could prevent us from pursuing our business plan. Additionally, the loss by JEX of certain explorationists
could have a material adverse effect on our operations as well.
Our ability to successfully execute our business plan is dependent on our ability to obtain adequate
financing.
Our business plan, which includes participation in 3-D seismic shoots, lease acquisitions, the drilling
of exploration prospects and producing property acquisitions, has required and is expected to continue to
require substantial capital expenditures. We may require additional financing to fund our planned growth. Our
ability to raise additional capital will depend on the results of our operations and the status of various capital
and industry markets at the time we seek such capital. Accordingly, additional financing may not be available
to us on acceptable terms, if at all. In the event additional capital resources are unavailable, we may be
required to curtail our exploration and development activities or be forced to sell some of our assets in an
untimely fashion or on less than favorable terms.
It is difficult to quantify the amount of financing we may need to fund our planned growth. The
amount of funding we may need in the future depends on various factors such as:
•
•
•
•
Our financial condition;
The prevailing market price of natural gas and oil;
The type of projects in which we are engaging; and
Lead time required to bring discoveries to production.
We frequently obtain capital through the sale of our producing properties.
The Company, since its inception in September 1999, has raised approximately $484.0 million from
various property sales. These sales bring forward future revenues and cash flows, but our longer term liquidity
could be impaired to the extent our exploration efforts are not successful in generating new discoveries,
production, revenues and cash flows. Additionally, our longer term liquidity could be impaired due to the
decrease in our inventory of producing properties that could be sold in future periods. Further, as a result of
these property sales the Company’s ability to collateralize bank borrowings is reduced which increases our
dependence on more expensive mezzanine debt and potential equity sales. The availability of such funds will
depend upon prevailing market conditions and other factors over which we have no control, as well as our
financial condition and results of operations.
We assume additional risk as Operator in drilling high pressure wells in the Gulf of Mexico.
COI and CRC are wholly-owned subsidiaries of the Company, formed for the purpose of drilling and
operating exploration wells in the Gulf of Mexico. COI is currently the operator of Eloise #1 and Grand Isle
72, and CRC is currently the operator for our Dutch and Mary Rose discoveries.
Drilling activities are subject to numerous risks, including the significant risk that no commercially
productive hydrocarbon reserves will be encountered. The cost of drilling, completing and operating wells and
of installing production facilities and pipelines is often uncertain. Drilling costs could be significantly higher if
we encounter difficulty in drilling offshore exploration wells. The Company’s drilling operations may be
curtailed, delayed, canceled or negatively impacted as a result of numerous factors, including inexperience as
an operator, title problems, weather conditions, compliance with governmental requirements and shortages or
delays in the delivery or availability of material, equipment and fabrication yards. In periods of increased
drilling activity resulting from high commodity prices, demand exceeds availability for drilling rigs, drilling
vessels, supply boats and personnel experienced in the oil and gas industry in general, and the offshore oil and
gas industry in particular. This may lead to difficulty and delays in consistently obtaining certain services and
equipment from vendors, obtaining drilling rigs and other equipment at favorable rates and scheduling
equipment fabrication at factories and fabrication yards. This, in turn, may lead to projects being delayed or
experiencing increased costs. The cost of drilling, completing, and operating wells is often uncertain, and new
wells may not be productive or we may not recover all or any of our investment. The risk of significant cost
overruns, curtailments, delays, inability to reach our target reservoir and other factors detrimental to drilling
and completion operations may be higher due to our inexperience as an operator.
15
Additionally, we use turnkey contracts that cost more, and under certain conditions, the turnkey
contract can be terminated by the turnkey drilling contractor, leading to higher risks and costs for the
Company.
We rely on third-party operators to operate and maintain some of our production pipelines and processing
facilities and as a result we have limited control over the operations of such facilities and the interests of an
operator may even differ from our interests.
We depend upon the services of third-party operators to operate production platforms, pipelines, gas
processing facilities and the infrastructure required to produce and market our natural gas, condensate and oil.
We have limited influence over the conduct of operations by third-party operators. As a result, we have little
control over how frequently and how long our production is shut-in when production problems, weather and
other production shut-ins occur. Poor performance on the part of, or errors or accidents attributable to, the
operator of a project in which we participate may have an adverse effect on our results of operations and
financial condition. Also, the interest of an operator may differ from our interests.
Repeated production shut-ins can possibly damage our well bores.
Our Dutch and Mary Rose well bores are required to be shut-in from time to time due to a
combination of weather, mechanical problems and shut-ins necessary to upgrade and increase the production
handling capacity at related downstream platform, gas processing and pipeline infrastructure. In addition to
negatively impacting our near term revenues and cash flow, repeated production shut-ins may damage our well
bores if repeated excessively or not executed properly. The loss of a well bore due to damage could require us
to drill additional wells to recover our reserves.
Concentrating our capital investment in the Gulf of Mexico increases our exposure to risk.
Our capital investments are focused in offshore Gulf of Mexico prospects. However, our exploration
prospects in the Gulf of Mexico may not lead to significant revenues. Furthermore, we may not be able to drill
productive wells at profitable finding and development costs.
Natural gas and oil reserves are depleting assets and the failure to replace our reserves would adversely
affect our production and cash flows.
Our future natural gas and oil production depends on our success in finding or acquiring new reserves.
If we fail to replace reserves, our level of production and cash flows would be adversely impacted. Production
from natural gas and oil properties decline as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Our total proved reserves will decline as reserves are produced unless we conduct
other successful exploration and development activities or acquire properties containing proved reserves, or
both. Further, the majority of our reserves are proved developed producing. Accordingly, we do not have
significant opportunities to increase our production from our existing proved reserves. Our ability to make the
necessary capital investment to maintain or expand our asset base of natural gas and oil reserves would be
impaired to the extent cash flow from operations is reduced and external sources of capital become limited or
unavailable. We may not be successful in exploring for, developing or acquiring additional reserves. If we are
not successful, our future production and revenues will be adversely affected.
Reserve estimates depend on many assumptions that may turn out to be inaccurate. Any material
inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and
present values of our reserves.
The process of estimating natural gas and oil reserves is complex. It requires interpretations of
available technical data and various assumptions, including assumptions relating to economic factors. Any
significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities
and present value of reserves shown in this report.
In order to prepare these estimates, our independent third-party petroleum engineers must project
production rates and timing of development expenditures as well as analyze available geological, geophysical,
16
production and engineering data, and the extent, quality and reliability of this data can vary. The process also
requires economic assumptions relating to matters such as natural gas and oil prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of natural gas and oil
reserves are inherently imprecise.
Actual future production, natural gas and oil prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from our
estimates. Any significant variance could materially affect the estimated quantities and pre-tax net present
value of reserves shown in this report. In addition, estimates of our proved reserves may be adjusted to reflect
production history, results of exploration and development, prevailing natural gas and oil prices and other
factors, many of which are beyond our control and may prove to be incorrect over time. As a result, our
estimates may require substantial upward or downward revisions if subsequent drilling, testing and production
reveal different results. Furthermore, some of the producing wells included in our reserve report have
produced for a relatively short period of time. Because some of our reserve estimates are not based on a
lengthy production history and are calculated using volumetric analysis, these estimates are less reliable than
estimates based on a more lengthy production history. Any downward adjustment could indicate lower future
production and thus adversely affect our financial condition, future prospects and market value.
You should not assume that the pre-tax net present value of our proved reserves prepared in
accordance with Securities and Exchange Commission guidelines referred to in this report is the current market
value of our estimated natural gas and oil reserves. We base the pre-tax net present value of future net cash
flows from our proved reserves on prices and costs on the date of the estimate. Actual future prices, costs,
taxes and the volume of produced reserves will likely differ materially from those used in the pre-tax net
present value estimate.
The Company’s revenue activities are significantly concentrated in one field.
The proved reserves assigned to our Dutch and Mary Rose discoveries have seven producing well
bores concentrated in one reservoir. As of August 29, 2008, this reservoir had only nineteen months of
production history, and was producing via two pipelines and two production platforms. Reserve assessments
based on only seven well bores in one reservoir with relatively limited production history are subject to greater
risk of downward revision than multiple well bores from several mature producing reservoirs.
We rely on the accuracy of the estimates in the reservoir engineering reports provided to us by our outside
engineers.
We have no in house reservoir engineering capability, and therefore rely on the accuracy of the
periodic reservoir reports provided to us by our independent third-party reservoir engineers. If those reports
prove to be inaccurate, our financial reports could have material misstatements. Further, we use the reports of
our independent reservoir engineers in our financial planning. If the reports of the outside reservoir engineers
prove to be inaccurate, we may make misjudgments in our financial planning.
Exploration is a high risk activity, and our participation in drilling activities may not be successful.
Our future success largely depends on the success of our exploration drilling program. Participation in
exploration drilling activities involves numerous risks, including the significant risk that no commercially
productive natural gas or oil reservoirs will be discovered. The cost of drilling, completing and operating wells
is uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors,
including:
• Unexpected drilling conditions.
• Blowouts, fires or explosions with resultant injury, death or environmental damage.
•
•
•
• Compliance with governmental requirements and laws, present and future.
•
Pressure or irregularities in formations.
Equipment failures or accidents.
Tropical storms, hurricanes and other adverse weather conditions.
Shortages or delays in the availability of drilling rigs and the delivery of equipment.
17
• Our turnkey drilling contracts reverting to a day rate contract which would significantly
•
increase the cost and risk to the Company.
Problems at third-party operated platforms, pipelines and gas processing facilities over
which we have no control.
Even when properly used and interpreted, 3-D seismic data and visualization techniques are only tools
used to assist geoscientists in identifying subsurface structures and hydrocarbon indicators. They do not allow
the interpreter to know conclusively if hydrocarbons are present or economically producible. Poor results from
our drilling activities would materially and adversely affect our future cash flows and results of operations.
In addition, as a “successful efforts” company, we choose to account for unsuccessful exploration
efforts (the drilling of “dry holes”) and seismic costs as a current expense of operations, which immediately
impacts our earnings. Significant expensed exploration charges in any period would materially adversely affect
our earnings for that period and cause our earnings to be volatile from period to period.
The natural gas and oil business involves many operating risks that can cause substantial losses.
The natural gas and oil business involves a variety of operating risks, including:
Surface cratering.
• Blowouts, fires and explosions.
•
• Uncontrollable flows of underground natural gas, oil or formation water.
• Natural disasters.
•
• Casing collapses.
•
Stuck drilling and service tools.
• Abnormal pressure formations.
•
Pipe and cement failures.
Environmental hazards such as natural gas leaks, oil spills, pipeline ruptures or discharges of
toxic gases.
• Capacity constraints, equipment malfunctions and other problems at third-party operated
platforms, pipelines and gas processing plants over which we have no control.
• Repeated shut-ins of our well bores could significantly damage our well bores.
If any of the above events occur, we could incur substantial losses as a result of:
Severe damage to and destruction of property or equipment.
Pollution and other environmental damage.
Injury or loss of life.
•
• Reservoir damage.
•
•
• Clean-up responsibilities.
• Regulatory investigations and penalties.
•
Suspension of our operations or repairs necessary to resume operations.
Offshore operations are subject to a variety of operating risks peculiar to the marine environment,
such as capsizing and collisions. In addition, offshore operations, and in some instances, operations along the
Gulf Coast, are subject to damage or loss from hurricanes or other adverse weather conditions. These
conditions can cause substantial damage to facilities and interrupt production. As a result, we could incur
substantial liabilities that could reduce the funds available for exploration, development or leasehold
acquisitions, or result in loss of properties.
If we were to experience any of these problems, it could affect well bores, platforms, gathering
systems and processing facilities, any one of which could adversely affect our ability to conduct operations. In
accordance with customary industry practices, we maintain insurance against some, but not all, of these risks.
Losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage.
We may not be able to maintain adequate insurance in the future at rates we consider reasonable, and particular
types of coverage may not be available. An event that is not fully covered by insurance could have a material
adverse effect on our financial position and results of operations.
18
Not hedging our production may result in losses.
Due to the significant volatility in natural gas prices and the potential risk of significant hedging
losses if our production should be shut-in during a period when NYMEX natural gas prices increase, our policy
is to hedge only through the purchase of puts. By not hedging our production, we may be more adversely
affected by declines in natural gas and oil prices than our competitors who engage in hedging arrangements.
Our ability to market our natural gas and oil may be impaired by capacity constraints and equipment
malfunctions on the platforms, gathering systems, pipelines and gas plants that transport and process our
natural gas and oil.
All of our natural gas and oil is transported through gathering systems, pipelines, processing plants,
and offshore platforms. Transportation capacity on gathering system pipelines and platforms is occasionally
limited and at times unavailable due to repairs or improvements being made to these facilities or due to
capacity being utilized by other natural gas or oil shippers that may have priority transportation agreements. If
the gathering systems, processing plants, platforms or our transportation capacity is materially restricted or is
unavailable in the future, our ability to market our natural gas or oil could be impaired and cash flow from the
affected properties could be reduced, which could have a material adverse effect on our financial condition and
results of operations. Further, repeated shut-ins of our wells could result in damage to our well bores that
would impair our ability to produce from these wells and could result in additional wells being required to
produce our reserves.
We may not have title to our leased interests and if any lease is later rendered invalid, we may not be able to
proceed with our exploration and development of the lease site.
Our practice in acquiring exploration leases or undivided interests in natural gas and oil leases is to
not incur the expense of retaining title lawyers to examine the title to the mineral interest prior to executing the
lease. Instead, we rely upon the judgment of JEX and others to perform the field work in examining records in
the appropriate governmental, county or parish clerk’s office before leasing a specific mineral interest. This
practice is widely followed in the industry. Prior to the drilling of an exploration well the operator of the well
will typically obtain a preliminary title review of the drillsite lease and/or spacing unit within which the
proposed well is to be drilled to identify any obvious deficiencies in title to the well and, if there are
deficiencies, to identify measures necessary to cure those defects to the extent reasonably possible. However,
such deficiencies may not have been cured by the operator of such wells. It does happen, from time to time,
that the examination made by title lawyers reveals that the lease or leases are invalid, having been purchased in
error from a person who is not the rightful owner of the mineral interest desired. In these circumstances, we
may not be able to proceed with our exploration and development of the lease site or may incur costs to
remedy a defect. It may also happen, from time to time, that the operator may elect to proceed with a well
despite defects to the title identified in the preliminary title opinion.
Competition in the natural gas and oil industry is intense, and we are smaller and have a more limited
operating history than many of our competitors.
We compete with a broad range of natural gas and oil companies in our exploration and property
acquisition activities. We also compete for the equipment and labor required to operate and to develop these
properties. Most of our competitors have substantially greater financial resources than we do. These
competitors may be able to pay more for exploratory prospects and productive natural gas and oil properties.
Further, they may be able to evaluate, bid for and purchase a greater number of properties and prospects than
we can. Our ability to explore for natural gas and oil and to acquire additional properties in the future depends
on our ability to evaluate and select suitable properties and to consummate transactions in this highly
competitive environment. In addition, most of our competitors have been operating for a much longer time
than we have and have substantially larger staffs. We may not be able to compete effectively with these
companies or in such a highly competitive environment.
19
We are subject to complex laws and regulations, including environmental regulations that can adversely
affect the cost, manner or feasibility of doing business.
Our operations are subject to numerous laws and regulations governing the operation and maintenance
of our facilities and the discharge of materials into the environment. Failure to comply with such rules and
regulations could result in substantial penalties and have an adverse effect on us. These laws and regulations
may:
• Require that we obtain permits before commencing drilling.
• Restrict the substances that can be released into the environment in connection with drilling
and production activities.
Limit or prohibit drilling activities on protected areas, such as wetlands or wilderness areas.
•
• Require remedial measures to mitigate pollution from former operations, such as plugging
abandoned wells.
Under these laws and regulations, we could be liable for personal injury and clean-up costs and other
environmental and property damages, as well as administrative, civil and criminal penalties. We maintain only
limited insurance coverage for sudden and accidental environmental damages. Accordingly, we may be subject
to liability, or we may be required to cease production from properties in the event of environmental damages.
These laws and regulations have been changed frequently in the past. In general, these changes have imposed
more stringent requirements that increase operating costs or require capital expenditures in order to remain in
compliance. It is also possible that unanticipated factual developments could cause us to make environmental
expenditures that are significantly different from those we currently expect. Existing laws and regulations
could be changed and any such changes could have an adverse effect on our business and results of operations.
We cannot control the activities on properties we do not operate.
Other companies may from time to time drill, complete and operate properties in which we have an
interest. As a result, we have a limited ability to exercise influence over operations for these properties or their
associated costs. Our dependence on the operator and other working interest owners for these projects and our
limited ability to influence operations and associated costs could materially adversely affect the realization of
our targeted returns on capital in drilling or acquisition activities. The success and timing of our drilling and
development activities on properties operated by others therefore depend upon a number of factors that are
outside of our control, including:
Timing and amount of capital expenditures.
The operator’s expertise and financial resources.
•
•
• Approval of other participants in drilling wells.
•
Selection of technology.
20
We are highly dependent on our management team, JEX, exploration partners and third-party consultants
and any failure to retain the services of such parties could adversely affect our ability to effectively manage
our overall operations or successfully execute current or future business strategies.
The successful implementation of our business strategy and handling of other issues integral to the
fulfillment of our business strategy is highly dependent on our management team, as well as certain key
geoscientists, geologists, engineers and other professionals engaged by us. We are highly dependent on the
services provided by JEX and we do not have any written agreements contractually obligating them to provide
us with their services in the future. The loss of key members of our management team, JEX or other highly
qualified technical professionals could adversely affect our ability to effectively manage our overall operations
or successfully execute current or future business strategies which may have a material adverse effect on our
business, financial condition and operating results.
Acquisition prospects are difficult to assess and may pose additional risks to our operations.
We expect to evaluate and, where appropriate, pursue acquisition opportunities on terms our
management considers favorable. The successful acquisition of natural gas and oil properties requires an
assessment of:
• Recoverable reserves.
Exploration potential.
•
•
Future natural gas and oil prices.
• Operating costs.
•
•
Potential environmental and other liabilities and other factors.
Permitting and other environmental authorizations required for our operations.
In connection with such an assessment, we would expect to perform a review of the subject properties
that we believe to be generally consistent with industry practices. Nonetheless, the resulting conclusions are
necessarily inexact and their accuracy inherently uncertain and such an assessment may not reveal all existing
or potential problems, nor will it necessarily permit a buyer to become sufficiently familiar with the properties
to fully assess their merits and deficiencies. Inspections may not always be performed on every platform or
well, and structural and environmental problems are not necessarily observable even when an inspection is
undertaken.
Future acquisitions could pose additional risks to our operations and financial results, including:
Problems integrating the purchased operations, personnel or technologies.
•
• Unanticipated costs.
• Diversion of resources and management attention from our exploration business.
Entry into regions or markets in which we have limited or no prior experience.
•
Potential loss of key employees, particularly those of the acquired organization.
•
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law could adversely effect
a potential acquisition by third-parties that may ultimately be in the financial interests of our stockholders.
Our certificate of incorporation, bylaws and the Delaware General Corporation Law contain
provisions that may discourage unsolicited takeover proposals. These provisions could have the effect of
inhibiting fluctuations in the market price of our common stock that could result from actual or rumored
takeover attempts, preventing changes in our management or limiting the price that investors may be willing to
pay for shares of common stock. These provisions, among other things, authorize the board of directors to:
• Designate the terms of and issue new series of preferred stock.
•
•
•
•
Limit the personal liability of directors.
Limit the persons who may call special meetings of stockholders.
Prohibit stockholder action by written consent.
Establish advance notice requirements for nominations for election of the board of directors
and for proposing matters to be acted on by stockholders at stockholder meetings.
21
• Require us to indemnify directors and officers to the fullest extent permitted by applicable
law.
Impose restrictions on business combinations with some interested parties.
•
Our common stock is thinly traded.
Contango has approximately 16.8 million shares of common stock outstanding, held by approximately
92 holders of record. Directors and officers own or have voting control over approximately 3.4 million shares.
Since our common stock is thinly traded, the purchase or sale of relatively small common stock positions may
result in disproportionately large increases or decreases in the price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Production, Prices and Operating Expenses
The following table presents information from continuing operations regarding the production
volumes, average sales prices received and average production costs associated with our sales of natural gas,
oil and natural gas liquids (“NGLs”) for the periods indicated. Oil, condensate and NGLs are compared with
natural gas in terms of cubic feet of natural gas equivalents. One barrel of oil, condensate or NGL is the
energy equivalent of six thousand cubic feet (“Mcf”) of natural gas.
Year Ended June 30,
2008
2007
2006
Production:
Natural gas (million cubic feet)…………………………..………
Oil and condensate (thousand barrels)……………………………
Natural gas liquids (thousand gallons)…………………………
9,089
185
4,700
Total (million cubic feet equivalent)………………….………
10,870
Natural gas (thousand cubic feet per day)……………………...…
Oil and condensate (barrels per day)……………………………
Natural gas liquids (gallons per day)……………………………
Total (thousand cubic feet equivalent per day)…………………
24,833
505
12,842
29,698
1,792
34
187
2,023
4,910
93
512
5,541
72
4
96
-
197
11
-
263
Average sales price:
Natural gas (per thousand cubic feet)…………..………………
Oil and condensate (per barrel)……………………………..……
Natural gas liquids (per gallon)……………………………..……
Total (per thousand cubic feet equivalent)……………………
$
$
$
$
9.81
108.36
1.55
10.72
Selected data per Mcfe:
Total lease operating expenses………………………………...…
General and administrative expenses…………………..………
Depreciation, depletion and amortization of
$
$
0.62
1.51
$
$
$
$
6.62
59.60
0.94
6.91
7.05
$
$
61.53
$
-
$
8.08
$
$
0.44
3.38
$
$
(0.03)
48.44
natural gas and oil properties………………………...………
$
1.01
$
0.61
$
-
22
Development, Exploration and Acquisition Capital Expenditures
The following table presents information regarding our net costs incurred in the purchase of proved
and unproved properties and in exploration and development activities for the periods indicated:
Year Ended June 30,
2008
2007
2006
Property acquisition costs:
Unproved………………………………………………………
309,000,000
Proved…………………………………………………………
Exploration costs…………………………………………………
45,243,651
Developmental costs……………………………………………… 76,025,586
Capitalized interest………………………………………………
$
-
-
$
3,571,830
$
14,609,232
-
72,888,603
1,453,066
1,083,693
-
19,529,607
590,395
149,365
Total costs……………………………………………………… 430,269,237
$
$
78,997,192
$
34,878,599
Drilling Activity
The following table shows our drilling activity for the periods indicated. In the table, “gross” wells
refer to wells in which we have a working interest, and “net” wells refer to gross wells multiplied by our
working interest in such wells.
Year Ended June 30,
2008
2007
2006
Gross
Net
Gross
Net
Gross
Net
Exploratory Wells:
Productive (onshore)…………………
Productive (offshore)…………………
Non-productive (onshore)……………
Non-productive (offshore)……………
Total………………………………
34
4
19
1
58
2.2
2.0
3.9
1.0
9.1
60
4
4
1
69
9.9
1.6
0.6
0.4
12.5
11
1
3
2
17
2.0
0.6
2.8
0.9
6.3
The productive and non-productive onshore wells listed above relate strictly to our investment in the
Arkansas Fayetteville Shale. At the time the Company sold its interest in the Arkansas Fayetteville Shale
wells, the Company had 16 wells that were being drilled. We have classified those 16 wells as non-productive.
Exploration and Development Acreage
Our principal natural gas and oil properties consist of natural gas and oil leases. The following table
indicates our interests in developed and undeveloped acreage as of June 30, 2008:
Developed
Acreage (1)(2)
Undeveloped
Acreage (1)(3)
Gross (4)
Net (5)
Gross (4)
Net (5)
Onshore Texas………………………………………………
Offshore Gulf of Mexico………...………………………..
Total……………………………………………………
-
21,950
21,950
-
5,920
5,920
5,800
237,029
242,829
4,060
104,442
108,502
(1) Excludes any interest in acreage in which we have no working interest before payout or before initial production.
(2) Developed acreage consists of acres spaced or assignable to productive wells.
(3) Undeveloped acreage is considered to be those leased acres on which wells have not been drilled or completed to a
point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves.
23
(4) Gross acres refer to the number of acres in which we own a working interest.
(5) Net acres represent the number of acres attributable to an owner’s proportionate working interest in a lease (e.g., a
50% working interest in a lease covering 320 acres is equivalent to 160 net acres).
Included in the Offshore Gulf of Mexico acres shown in the table above are the beneficial interests
Contango has in the offshore acreage owned by its partially-owned subsidiaries. The above table includes (i)
our 32.3% interest in Republic Exploration LLC’s 1,163 net developed acres and 121,685 net undeveloped
acres, and (ii) our 65.6% interest in Contango Offshore Exploration LLC’s 3,000 net developed acres and
75,476 net undeveloped acres. In addition, the Company holds royalty interests in approximately 10,760 gross
undeveloped acres (484 net undeveloped acres) and 5,000 gross developed acres (71 net developed acres),
offshore in the Gulf of Mexico.
Productive Wells
The following table sets forth the number of gross and net productive natural gas and oil wells in
which we owned an interest as of June 30, 2008:
Total Productive
Wells (1)
Gross (2)
Net (3)
Natural gas (offshore)……………………………………………………
Oil………………………………………………………………………
Total…………………………………………………………………
11
-
11
3.8
-
3.8
(1) Productive wells are producing wells and wells capable of producing commercial quantities. Completed but
marginally producing wells are not considered here as a “productive” well.
(2) A gross well is a well in which we own an interest.
(3) The number of net wells is the sum of our fractional working interests owned in gross wells.
Natural Gas and Oil Reserves
The following table presents our estimated net proved natural gas and oil reserves and the pre-tax net
present value of our reserves at June 30, 2008, based on a reserve report generated by William M. Cobb &
Associates, Inc. The pre-tax net present value, discounted at 10%, is not intended to represent the current
market value of the estimated natural gas and oil reserves we own.
The pre-tax net present value of future cash flows attributable to our proved reserves prepared in
accordance with SEC guidelines as of June 30, 2008 was based on $13.095 per million British thermal units
(“MMbtu”) for natural gas at the NYMEX and $140.00 per barrel of oil at the West Texas Intermediate
Posting, in each case before adjusting for basis, transportation costs and British thermal unit (“Btu”) content.
For further information concerning the present value of future net cash flows from these proved reserves, see
“Supplemental Oil and Gas Disclosures”.
Total Proved Reserves as of June 30, 2008
Producing
Non-Producing
Total
Offshore
Natural gas (MMcf)…………………………...……
Oil and condensate (MBbls)…………...……………
Natural gas liquids (MBbls)…………………………
Total proved reserves (MMcfe)……………...………
262,502
5,161
6,759
334,022
29,066
318
680
35,054
291,568
5,479
7,439
369,076
Pre-tax net present value ($000) (Disc. @ 10%)……
$
2,983,433
$
200,410
3,183,843
24
The process of estimating natural gas and oil reserves is complex. It requires various assumptions,
including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability
of funds. Our third party engineers must project production rates, estimate timing and amount of development
expenditures, analyze available geological, geophysical, production and engineering data, and the extent,
quality and reliability of all of this data can vary. Therefore, estimates of natural gas and oil reserves are
inherently imprecise. Actual future production, natural gas and oil prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will
vary from estimates. Any significant variance could materially affect the estimated quantities and net present
value of reserves. In addition, estimates of proved reserves may be adjusted to reflect production history,
results of exploration and development, prevailing natural gas and oil prices and other factors, many of which
are beyond our control.
It should not be assumed that the pre-tax net present value is the current market value of our estimated
natural gas and oil reserves. In accordance with requirements of the Securities and Exchange Commission, we
base the estimated discounted future net cash flows from proved reserves on prices and costs on the date of the
estimate. Actual future prices and costs may differ materially from those used in the present value estimate.
Item 3. Legal Proceedings
As of the date of this Form 10-K, we are not a party to any material legal proceedings and we are not
aware of any material proceedings contemplated against us.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended June 30, 2008, no matters were submitted to a vote of security holders.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock was listed on the American Stock Exchange in January 2001 under the symbol
“MCF”. The table below shows the high and low closing prices of our common stock for the periods
indicated.
High
Low
Fiscal Year 2007:
Quarter ended September 30, 2006 ..................................................................... $ 14.45
Quarter ended December 31, 2006...................................................................... $ 24.09
Quarter ended March 31, 2007............................................................................ $ 22.49
Quarter ended June 30, 2007............................................................................... $ 39.35
Fiscal Year 2008:
Quarter ended September 30, 2007 ..................................................................... $ 40.20
Quarter ended December 31, 2007...................................................................... $ 52.70
Quarter ended March 31, 2008............................................................................ $ 69.15
Quarter ended June 30, 2008............................................................................... $ 94.40
$
$
$
$
$
$
$
$
11.47
10.46
19.74
21.38
32.05
36.75
49.52
69.25
On August 22, 2008, the closing price of our common stock on the American Stock Exchange was
$77.98 per share, and there were approximately 16.8 million shares of Contango common stock outstanding,
held by approximately 92 holders of record.
25
We have not declared or paid any dividends on our shares of common stock. Any future decision to
pay dividends on our common stock will be at the discretion of our board and will depend upon our financial
condition, results of operations, capital requirements, and other factors our board may deem relevant.
On May 17, 2007, we sold $30.0 million of our Series E preferred stock to a group of private
investors. The sale of the Series E preferred stock was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder, as a transaction not involving a public
offering. The Series E preferred stock was convertible at any time by the holder into shares of our common
stock at a price of $38.00 per share. The dividend on the Series E preferred stock was paid quarterly in cash at
a rate of 6.0% per annum. We used the net proceeds to repay $15.0 million in debt outstanding from the
Company’s $30.0 million term loan agreement and to fund the Company’s offshore Gulf of Mexico deep shelf
exploration program.
During the quarter ended March 31, 2008, four Series E preferred stockholders voluntarily elected to
convert a total of 2,400 shares of Series E preferred stock to 315,786 shares of our common stock. The
converted shares of Series E preferred stock had a face value of $12.0 million. During the quarter ended June
30, 2008, the final three Series E preferred stockholders voluntarily elected to convert a total of 3,600 shares of
Series E preferred stock to 473,682 shares of our common stock. The converted shares of Series E preferred
stock had a face value of $18.0 million.
The following table sets forth information about our equity compensation plan at June 30, 2008:
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation
plans
1999 Stock Incentive Plan
855,667
$
11.57
568,666
On February 13, 2008, the Company’s board of directors approved the purchase of an aggregate of
99,333 stock options from three officers of the Company and one member of its board of directors for
approximately $5.9 million, in the aggregate. The board also approved the purchase of 10,000 shares of
common stock from one member of its board of directors for approximately $0.7 million. All purchases were
completed during the three months ended March 31, 2008. The Company does not have a program to
repurchase shares of our common stock.
26
The following graph compares the yearly percentage change from June 30, 2003 until June
30, 2008 in the cumulative total stockholder return on our common stock to the cumulative total return on the
Russell 2000 Stock Index and a peer group of five independent oil and gas exploration companies selected by
us. The companies in our selected peer group are Brigham Exploration Company, Carrizo Oil & Gas, Inc.,
Edge Petroleum Corp., Goodrich Petroleum Corp. and PetroQuest Energy, Inc. Our common stock began
trading on the American Stock Exchange on January 19, 2001 and previously traded on the Nasdaq over-the-
counter Bulletin Board. The graph assumes that a $100 investment was made in our common stock and each
index on June 30, 2003 and that all dividends were reinvested. The stock performance for our common stock is
not necessarily indicative of future performance.
Comparison of Fiscal Year 2008 Cumulative Total Return
2,550
2,050
1,550
1,050
550
199
280
2,272
808
887
449
186
154
405
162
346
50
100
163
132
225
143
Peer Group Composite
06/30/03
06/30/04
Russell 2000 Stock Index
06/30/05
6/30/2006
Contango Oil & Gas Co.
6/30/2007
6/30/2008
06/30/03
06/30/04
06/30/05
6/30/2006
6/30/2007
6/30/2008
Peer Group Composite
Russell 2000 Stock Index
Contango Oil & Gas Co.
100
100
100
280
143
225
405
162
346
449
186
887
808
154
2,272
199
132
163
27
Item 6. Selected Financial Data
Financial Data:
Revenues:
Year Ended June 30,
2008
2007
2006
2005
2004
(Dollar amounts in 000s, except per share amounts)
Natural gas and oil sales…………………………...
Gain from hedging activities………………………
$
116,498
-
$
14,140
-
$
776
-
$
1,051
-
$
28
58
Total revenues……………………………………
$
116,498
$
14,140
$
776
$
1,051
$
86
83,221
Income (loss) from continuing operations…………
Discontinued operations, net of income taxes……… 173,685
$
$
(1,078)
(1,617)
$
(6,888)
6,681
$
(3,191)
15,609
$
(340)
8,040
Net income (loss)……………………………………… 256,906
1,548
Preferred stock dividends……………………………
$
$
(2,695)
540
$
(207)
601
$
12,418
420
$
7,700
620
Net income (loss) attributable
to common stock……………………………………
$
255,358
$
(3,235)
$
(808)
$
11,998
$
7,080
Net income (loss) per share:
Basic
Continuing operations…………………………
Discontinued operations………………………
$
5.05
10.73
$
(0.03)
(0.18)
$
(0.50)
0.45
$
(0.27)
1.19
$
(0.09)
0.77
Total……………………………………………
$
15.78
$
(0.21)
$
(0.05)
$
0.92
$
0.68
Diluted
Continuing operations…………………………
Discontinued operations………………………
$
4.82
10.06
$
(0.03)
(0.18)
$
(0.50)
0.45
$
(0.27)
1.19
$
(0.09)
0.77
Total……………………………………………
$
14.88
$
(0.21)
$
(0.05)
$
0.92
$
0.68
Weighted average shares outstanding:
Basic…………………………………………………
Diluted………………………………………………
16,185
17,263
15,430
15,430
14,760
14,760
13,089
13,089
10,484
10,484
Working capital (deficit)………………………………
Capital expenditures…………………………………
Long term debt……………….………………………
Stockholders' equity…………….……………………
Total assets……...……………………..………………
$
$
$
$
$
29,913
430,269
15,000
341,998
599,974
$
$
$
$
$
(4,088)
78,997
20,000
90,804
153,936
$
$
$
$
$
18,333
34,879
10,000
62,540
89,385
28,839
$
$
9,677
$
-
$
50,979
$
53,353
$
$
$
$
$
3,032
12,384
7,089
36,117
45,511
Proved Reserve Data:
Total proved reserves (Mmcfe)……………………
369,076
Pre-tax net present value (SEC at 10%)…………… 3,183,843
$
84,876
329,179
$
3,430
8,852
$
1,373
7,081
$
17,422
59,767
$
28
PART II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be
read in conjunction with the financial statements and the related notes and other information included
elsewhere in this report.
Overview
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. COI and CRC, our wholly-owned subsidiaries, act as operator on certain offshore prospects.
Revenues and Profitability. Our revenues, profitability and future growth depend substantially on
prevailing prices for natural gas and oil and on our ability to find, develop and acquire natural gas and oil
reserves that are economically recoverable. The preparation of our financial statements in conformity with
generally accepted accounting principles requires us to make estimates and assumptions that affect our
reported results of operations and the amount of reported assets, liabilities and proved natural gas and oil
reserves. We use the successful efforts method of accounting for our natural gas and oil activities.
Reserve Replacement. Generally, our producing properties offshore in the Gulf of Mexico have high
initial production rates, followed by steep declines. As a result, we must locate and develop or acquire new
natural gas and oil reserves to replace those being depleted by production. Substantial capital expenditures are
required to find, develop and acquire natural gas and oil reserves.
Sale of proved properties. From time-to-time as part of our business strategy, we have sold, and in
the future may continue to sell some or a substantial portion of our proved reserves to capture current value,
using the sales proceeds to further our exploration activities.
Use of Estimates. The preparation of our financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Significant estimates with regard to these
financial statements include estimates of remaining proved natural gas and oil reserves and the timing and
costs of our future drilling, development and abandonment activities.
Please see “Risk Factors” on page 14 for a more detailed discussion of a number of other factors that
affect our business, financial condition and results of operations.
Results of Operations
The following is a discussion of the results of our continuing operations for the fiscal year ended June
30, 2008, compared to the fiscal year ended June 30, 2007, and for the fiscal year ended June 30, 2007,
compared to the fiscal year ended June 30, 2006.
Revenues. All of our revenues are from the sale of our natural gas and oil production. Our revenues
may vary significantly from year to year depending on changes in commodity prices, which fluctuate widely,
and production volumes. Our production volumes are subject to wide swings as a result of new discoveries
and ongoing geologic declines.
The table below sets forth revenue and production data for continuing operations for the fiscal years
ended June 30, 2008, 2007 and 2006.
29
Year ended June 30,
Year ended June 30,
2008
2007
%
2007
2006
%
Revenues:
($000)
($000)
Natural gas and oil sales………………...…………………… 116,498
$
$
14,140
724%
$
14,140
$
776
1722%
Total revenues…………………………………………… 116,498
$
$
14,140
$
14,140
$
776
Production:
Natural gas (million cubic feet)………………………………
Oil and condensate (thousand barrels)………………………
Natural gas liquids (thousand gallons)………………………
9,089
185
4,700
Total (million cubic feet equivalent)…………………..
10,870
Natural gas (thousand cubic feet per day)…………………… 24,833
Oil and condensate (barrels per day)…………………………
505
Natural gas liquids (gallons per day)………………………… 12,842
Total (thousand cubic feet per day equivalent)…………… 29,698
1,792
34
187
2,023
4,910
93
512
5,541
407%
444%
2413%
437%
406%
443%
2407%
436%
1,792
34
187
2,023
4,910
93
512
5,541
72
4
-
96
197
11
-
263
Average Sales Price:
Natural gas (per thousand cubic feet)………………………
9.81
Oil and condensate (per barrel)……………………………… 108.36
Natural gas liquids (per gallon)………………………………
1.55
$
$
$
$
$
$
6.62
59.60
0.94
48%
82%
65%
$
$
$
6.62
59.60
0.94
7.05
$
$
61.53
$
-
Operating expenses……………………………………………
6,777
Exploration expenses…………………………………………
5,729
Depreciation, depletion and amortization……………………… 11,900
Impairment of natural gas and oil properties……………..
642
16,929
General and administrative expenses…………………………
Interest expense, net of interest capitalized……………………
3,933
1,969
Interest income…………………………………………………
Gain (loss) on sale of assets and other………………………… 62,314
$
$
$
$
$
$
$
$
891
$
2,380
$
1,607
$
$
-
$
6,842
$
2,163
$
886
$
(2,684)
661%
141%
641%
100%
147%
82%
122%
2422%
891
$
2,380
$
1,607
$
$
-
$
6,842
$
2,163
$
886
$
(2,684)
$
(3)
$
6,816
$
202
$
708
$
4,761
$
54
$
826
$
250
2389%
750%
100%
2007%
2389%
750%
100%
2007%
-6%
-3%
100%
29800%
-65%
696%
-100%
44%
3906%
7%
-1174%
Natural Gas and Oil Sales. We reported natural gas and oil sales of approximately $116.5 million for
the year ended June 30, 2008, up from approximately $14.1 million reported for the year ended June 30, 2007.
This increase is attributable to our Dutch #2 discovery which began producing in July 2007, our Dutch #3
discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began
producing in April 2008, and our Mary Rose #2 discovery which began producing in June 2008. Another
reason for the large increase is the additional interest we purchased in our Dutch and Mary Rose discoveries,
effective January 1, 2008.
We reported natural gas and oil sales of approximately $14.1 million for the year ended June 30,
2007, up from approximately $0.8 million reported for the year ended June 30, 2006. This increase is mainly
attributable to our Dutch #1 discovery which began producing in January 2007 and our Liberty discovery
which began producing in March 2007.
30
Natural Gas and Oil Production and Average Sales Prices. Our net natural gas production for the
year ended June 30, 2008 was approximately 24.8 Mmcfd, up from approximately 4.9 Mmcfd for the year
ended June 30, 2007. Net oil production for the period was up from 93 bopd to 505 bopd, and NGL production
was up from 512 gallons per day to 12,842 gallons per day for the same period. The increase in natural gas, oil
and NGL production was the result of our Dutch #2 discovery which began producing in July 2007, our Dutch
#3 discovery which began producing in November 2007, our Mary Rose #1 and #3 discoveries which began
producing in April 2008, and our Mary Rose #2 discovery which began producing in June 2008. Another
reason for the large increase is the additional interest we purchased in our Dutch and Mary Rose discoveries,
effective January 1, 2008. For the year ended June 30, 2008, the price of natural gas was $9.81 per Mcf
while the price for oil and NGLs was $108.36 per barrel and $1.55 per gallon, respectively. For the year ended
June 30, 2007, the price of natural gas was $6.62 per Mcf while the price for oil and NGLs was $59.60 per
barrel and $0.94 per gallon, respectively.
Our net natural gas production for the year ended June 30, 2007 was approximately 4.9 Mmcfd, up
from approximately 0.2 Mmcfd for the year ended June 30, 2006. Net oil production for the period was up
from 11 bopd to 93 bopd, and NGL production increased from zero to 512 gallons per day for the same period.
The increase in natural gas, oil and NGL production was primarily the result of our Dutch #1 discovery which
began producing in January 2007 and our Liberty discovery which began producing in March 2007. For the
year ended June 30, 2007, the price of natural gas was $6.62 per Mcf while the price for oil and NGLs was
$59.60 per barrel and $0.94 per gallon, respectively. For the year ended June 30, 2006, the price of natural gas
was $7.05 per Mcf while the price for oil was $61.53 per barrel.
Operating Expenses. Operating expenses for the year ended June 30, 2008 were approximately $6.8
million which related mainly to continuing operations from our three Dutch wells and our first three Mary
Rose wells, compared to operating expenses for the year ended June 30, 2007 of approximately $0.9 million
which related mainly to only one Dutch well. Operating expenses for the year ended June 30, 2006 were
immaterial due to no significant producing discoveries during this time.
Exploration Expense. We reported approximately $5.7 million of exploration expenses for the year
ended June 30, 2008. Of this amount, approximately $4.2 million was related to the dry hole the Company
drilled at High Island A198, approximately $0.6 million was attributable to the cost to acquire and reprocess 3-
D seismic data offshore in the Gulf of Mexico, and approximately $0.9 million was attributable to the payment
of delay rentals.
We reported approximately $2.4 million of exploration expenses for the year ended June 30, 2007. Of
this amount, approximately $1.4 million was attributable to the cost to acquire and reprocess 3-D seismic data
in the Gulf of Mexico, and approximately $1.0 million was attributable to the payment of delay rentals.
We reported approximately $6.8 million of exploration expenses for the year ended June 30, 2006. Of
this amount, approximately $5.9 million was related to unsuccessful wells drilled in the Gulf of Mexico during
the period, approximately $0.3 million was attributable to the cost to acquire and reprocess 3-D seismic data
offshore in the Gulf of Mexico, and approximately $0.6 million was attributable to the cost of delay rentals.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the year
ended June 30, 2008 was approximately $11.9 million. For the year ended June 30, 2007, we recorded
approximately $1.6 million of depreciation, depletion and amortization. The increase in depreciation,
depletion and amortization was primarily attributable to added production from newly added reserves from our
Dutch #2, Dutch #3, Mary Rose #1, Mary Rose #2 and Mary Rose #3 discoveries, as well as from the
additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.
Depreciation, depletion and amortization for the year ended June 30, 2007 was approximately $1.6
million. For the year ended June 30, 2006, we recorded approximately $0.2 million of depreciation, depletion
and amortization. The increase in depreciation, depletion and amortization was primarily attributable to added
production from newly added reserves from our Dutch #1 and Liberty discoveries.
31
Impairment of Natural Gas and Oil Properties. We reported an impairment of natural gas and oil
properties of approximately $0.6 million for the year ended June 30, 2008, related to the expiration of Eugene
Island 209 and Viosca Knoll 161, two leases held by COE. The Company did not report an impairment charge
for the fiscal year ended June 30, 2007.
We reported an impairment of natural gas and oil properties of approximately $0.7 million for the year
ended June 30, 2006. These related to impairment of offshore properties held by REX and COE. When
Contango acquired an additional interest in REX and COE, the purchase price was allocated to several
prospects. Specifically, $0.3 million related to our Main Pass 221 prospect and $0.3 million related to our
West Delta 43 prospect were impaired because they were both determined to be dry holes during the period;
and $0.1 million relating to our East Cameron 107 prospect was impaired as a result of the expiration of its
lease.
General and Administrative Expenses. General and administrative expenses for the year ended June
30, 2008 were approximately $16.9 million, up from $6.8 million for the year ended June 30, 2007. Major
components of general and administrative expenses for the year ended June 30, 2008 included approximately
$1.0 million in salaries, $12.1 million in benefits and bonuses (includes $1.2 million in non-cash expenses
related to the cost of expensing stock options), $1.1 million in office administration and other expenses, $0.4
million in insurance costs, $0.9 million in accounting and tax services, and $1.4 million in legal and other
administrative expenses.
General and administrative expenses for the year ended June 30, 2007 were approximately $6.8
million, up from $4.8 million for the year ended June 30, 2006. Major components of general and
administrative expenses for the year ended June 30, 2007 included approximately $4.4 million in salaries,
benefits and bonuses (includes $1.5 million in non-cash expenses related to the cost of expensing stock
options), $1.2 million in office administration and other expenses, $0.3 million in insurance costs, $0.5 million
in accounting and tax services, and $0.4 million in legal and other administrative expenses.
General and administrative expenses for the year ended June 30, 2006 were approximately $4.8
million. Major components of general and administrative expenses for the year ended June 30, 2006 included
approximately $1.8 million in salaries, benefits and bonuses, $0.9 million in office administration and other
expenses, $0.3 million in insurance costs, $0.5 million in accounting and tax services, $0.4 million in legal and
other administrative expenses, and $0.9 million in non-cash expenses related to the cost of expensing stock
options.
Interest Expense. Interest expense for the fiscal years ended June 30, 2008, 2007 and 2006 were
approximately $3.9 million, $2.2 million, and $54,488, respectively. The higher levels of interest expense for
fiscal year 2007 and 2008 were attributable to higher levels of bank debt outstanding during such period. The
lower level of interest expense in fiscal year 2006 was attributable to the Company retiring all of its long term
debt in the second quarter of fiscal year 2005. No interest was capitalized for unevaluated property for the
fiscal year ended June 30, 2008.
Interest Income. Interest income for the fiscal years ended June 30, 2008, 2007 and 2006 were
approximately $1.9 million, $0.9 million, and $0.8 million, respectively. The higher levels of interest income
for fiscal years 2008 and 2007 were attributable to loans made to related parties and interest earned on the
proceeds from our various property sales.
Gain on Sale of Assets and Other. We reported a gain on sale of assets and other of approximately
$62.3 million for the year ended June 30, 2008. Of this amount, approximately $63.4 million relates to the
gain on the sale of the Company’s 10% limited partnership interest in Freeport LNG, $2.1 relates to a payment
from a stockholder related to a short swing profit liability, $0.3 million relates to the gain on the sale of certain
overriding royalty interests and onshore properties, offset by a $2.9 million loss recognized on the sale of
certain assets held by CVCC and a $0.6 million loss attributable to the write-down of the Company’s
investment in Moblize.
32
We reported a loss on sale of assets and other of approximately $2.7 million for the year ended June
30, 2007, which consists of a $2.3 million loss on COI’s sale of Grand Isle 72 and a $0.4 million loss on equity
investments.
We reported a gain on sale of assets and other of approximately $0.3 million for the year ended June
30, 2006, which represents other income recognized by our partially-owned subsidiary, COE.
Discontinued Operations The table and discussions above, along with our financial statements,
discuss only continuing operations for all fiscal years presented. Not reflected are the Company’s sold
producing properties which generated 7.7%, 24.3% and 86.6% of combined revenues for the fiscal years ended
June 30, 2008, 2007 and 2006, respectively. Please see Note 5 – Sale of Properties – Discontinued Operations
of Notes to Consolidated Financial Statements included as part of this Form 10-K, for a discussion of our
discontinued operations.
Capital Resources and Liquidity
Cash From Operating Activities. Cash flow from operating activities provided approximately
$112.7 million in cash for the year ended June 30, 2008 compared to $4.1 million for the same period in 2007.
This increase in cash provided by operating activities is attributable to increased natural gas and oil sales from
our Dutch #2, Dutch #3, Mary Rose #1, Mary Rose #2 and Mary Rose #3 discoveries which began producing
during the year ended June 30, 2008. Another reason for the increase is the added sales attributable to the
additional interest we purchased in our Dutch and Mary Rose discoveries, effective January 1, 2008.
Cash flow from operating activities provided approximately $4.1 million in cash for the year ended
June 30, 2007 compared to $9.5 million for the same period in 2006. This decrease in cash from operating
activities is primarily attributable to higher general and administrative costs, higher operating expenses and
higher interest expense for the year ended June 30, 2007.
Cash From Investing Activities. Cash flows used in investing activities for the year ended June 30,
2008 were approximately $38.9 million, compared to $55.1 million used in investing activities for the year
ended June 30, 2007. This decrease in cash flows used in investing activities was due primarily to the proceeds
received from the sale of our Arkansas Fayetteville Shale properties and our 10% limited partnership interest in
Freeport LNG, partially offset by the acquisition of additional interests in our Dutch and Mary Rose leases.
Cash flows used in investing activities for the year ended June 30, 2007 were approximately $55.1
million, compared to $23.7 million used in investing activities for the year ended June 30, 2006. This increase
in cash flows used in investing activities was due primarily to $77.5 million used in natural gas and oil
exploration and development expenses, offset by selling approximately $16.0 million of short-term
investments and the sale of COI’s 25% interest in Grand Isle 72 for $7.0 million.
Cash From Financing Activities. Cash flows used in financing activities for the year ended June 30,
2008 were approximately $20.2 million, compared to $47.0 million provided by financing activities for the
same period in 2007. This decrease in cash flow is primarily attributable to $48.5 million of debt repayment by
the Company and its affiliates, $1.5 million of preferred stock dividends paid, and $6.6 million of stock and
options repurchased during the year ended June 30, 2008, partially offset by $35.0 million of borrowings under
credit facilities.
Cash flows provided by financing activities for the year ended June 30, 2007 were approximately
$47.0 million, compared to $20.5 million for the same period in 2006. This increase in cash flow is primarily
attributable to raising approximately $28.8 million from the issuance of our Series E convertible preferred
equity securities, net of issuance costs, and $8.5 million in borrowings by our affiliates.
Income Taxes. During the year ended June 30, 2008, we paid approximately $24.5 million in
estimated income taxes.
33
Capital Budget. For fiscal year 2009, our capital expenditure budget calls for us to invest a total of
approximately $116.3 million. Of the $116.3 million, our budget calls for us to invest approximately $16.3
million to drill and complete Eloise #1. We have also budgeted to invest approximately $100.0 million to
drill two rate acceleration wells at our Dutch and Mary Rose leases and four currently planned wildcat
exploration wells in the Gulf of Mexico.
As of August 26, 2008, we had approximately $75.3 million in cash and cash equivalents.
Discontinued Operations. The Company, since its inception in September 1999, has raised $484.0
million in proceeds from twelve separate property sales, and views periodic reserve sales as an opportunity to
capture value, reduce reserve and price risk, in addition to being a source of funds for potentially higher rate of
return natural gas and oil exploration investments. We believe these periodic natural gas and oil property sales
are an efficient strategy to meet our cash and liquidity needs by providing us with immediate cash, which
would otherwise take years to realize through the production lives of the fields sold. We have in the past and
expect to in the future to continue to rely heavily on the sales of assets to generate cash to fund our exploration
investments and operations.
These sales bring forward future revenues and cash flows, but our longer term liquidity could be
impaired to the extent our exploration efforts are not successful in generating new discoveries, production,
revenues and cash flows. Additionally, our longer term liquidity could be impaired due to the decrease in our
inventory of producing properties that could be sold in future periods. Further, as a result of these property
sales the Company’s ability to collateralize bank borrowings is reduced which increases our dependence on
more expensive mezzanine debt and potential equity sales. The availability of such funds will depend upon
prevailing market conditions and other factors over which we have no control, as well as our financial
condition and results of operations.
The table below sets forth the proceeds received from natural gas and oil property sales in each of the
fiscal years ended June 30, 2006, 2007 and 2008, the impact of these sales on our developed reserve quantities,
and a measure of our developed reserves held at the end of each such fiscal year. Please see the reserve
activity reported in the Supplemental Oil and Gas Disclosures on pages F-29 and F-30 for a more detailed
discussion regarding our standardized measure.
Fiscal Year of
Property Sale
Proceeds
Received
Reserves
Sold (Mmcfe)
Reserves at end of
Fiscal Year (Mmcfe)
Standardized Measure of
Discounted Future Net Cash
Flows at end of Fiscal Year
2006
2007
2008
$
$
$
12,892,916
7,000,000
328,300,000
2,294
426
13,789
3,430
84,876
369,076
$
$
$
7,734,106
252,297,275
2,233,918,129
For fiscal year 2008, the Company realized approximately $8.1 million in operating cash flows from
discontinued operations, approximately $319.0 million in investing cash flows from discontinued operations
and zero in financing cash flows from discontinued operations.
Off Balance Sheet Arrangements
None.
34
Contractual Obligations
The following table summarizes our known contractual obligations as of June 30, 2008:
Payment due by period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Long term debt………………… 15,000,000
625,182
Operating leases…………………
$
-
$
190,458
$
15,000,000
434,724
-
-
-
$
-
Total………………………… 15,625,182
$
$
190,458
$
15,434,724
$
-
$
-
Additionally, once we have completed drilling Eloise #1, we are committed to retain the drilling rig
for two more wells. The Company will use this rig to drill a rate acceleration well at Dutch #4 and then either
a second rate acceleration well or a wildcat exploration well.
Credit Facility
On August 26, 2008, the Company prepaid the $15.0 million it had outstanding under its $30.0
million loan agreement with a private investment firm (the “Term Loan Agreement”) and terminated the Term
Loan Agreement. The Company paid an additional $116,442 in accrued and unpaid interest and non-use fees.
As of June 30, 2008, the Company was in compliance with its financial covenants, ratios and other provisions
of the Term Loan Agreement.
On February 5, 2008, using the proceeds from our $68.0 million sale of Freeport LNG, the Company
prepaid the $20.0 million it had outstanding under its three-year $20.0 million secured term loan facility with
The Royal Bank of Scotland plc (the “RBS Facility”) and terminated the RBS Facility. The Company paid an
additional $342,292 in accrued and unpaid interest and prepayment fees.
Application of Critical Accounting Policies and Management’s Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based
upon the consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company’s significant accounting policies are described in Note 2 of Notes to Consolidated Financial
Statements included as part of this Form 10-K. We have identified below the policies that are of particular
importance to the portrayal of our financial position and results of operations and which require the application
of significant judgment by management. The Company analyzes its estimates, including those related to oil and
gas reserve estimates, on a periodic basis and bases its estimates on historical experience, independent third
party reservoir engineers and various other assumptions that management believes to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions. The
Company believes the following critical accounting policies affect its more significant judgments and estimates
used in the preparation of the Company’s financial statements:
Successful Efforts Method of Accounting. Our application of the successful efforts method of
accounting for our oil and gas business activities requires judgments as to whether particular wells are
developmental or exploratory, since exploratory costs and the costs related to exploratory wells that are
determined to not have proved reserves must be expensed whereas developmental costs are capitalized. The
results from a drilling operation can take considerable time to analyze, and the determination that commercial
reserves have been discovered requires both judgment and application of industry experience. Wells may be
completed that are assumed to be productive and actually deliver oil and gas in quantities insufficient to be
economic, which may result in the abandonment of the wells at a later date. On occasion, wells are drilled
which have targeted geologic structures that are both developmental and exploratory in nature, and in such
35
instances an allocation of costs is required to properly account for the results. Delineation seismic costs
incurred to select development locations within a productive oil and gas field are typically treated as
development costs and capitalized, but often these seismic programs extend beyond the proved reserve areas
and therefore management must estimate the portion of seismic costs to expense as exploratory. The evaluation
of oil and gas leasehold acquisition costs included in unproved properties requires management’s judgment to
estimate the fair value of exploratory costs related to drilling activity in a given area. Drilling activities in an
area by other companies may also effectively condemn leasehold positions.
Reserve Estimates. The Company’s estimates of oil and gas reserves are, by necessity, projections
based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data
as well as the projection of future rates of production and the timing of development expenditures. Reserve
engineering is a subjective process of estimating underground accumulations of oil and gas that are difficult to
measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and
geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future
net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical
production from the area compared with production from other producing areas, the assumed effect of
regulations by governmental agencies, and assumptions governing future oil and gas prices, future operating
costs, severance taxes, development costs and workover costs, all of which may in fact vary considerably from
actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations may
ultimately increase to the extent that these reserves are later determined to be uneconomic. For these reasons,
estimates of the economically recoverable quantities of expected oil and gas attributable to any particular group
of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash
flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated
quantity and value of the reserves, which could affect the carrying value of the Company’s oil and gas
properties and/or the rate of depletion of such oil and gas properties. Actual production, revenues and
expenditures with respect to the Company’s reserves will likely vary from estimates, and such variances may
be material. Holding all other factors constant, a reduction in the Company’s proved reserve estimate at June
30, 2008 of 1% would not have a material effect on depreciation, depletion and amortization expense.
Impairment of Oil and Gas Properties. The Company reviews its proved oil and gas properties for
impairment on an annual basis or whenever events and circumstances indicate a potential decline in the
recoverability of their carrying value. The Company compares expected undiscounted future net cash flows on
a cost center basis to the unamortized capitalized cost of the asset. If the future undiscounted net cash flows,
based on the Company’s estimate of future natural gas and oil prices and operating costs and anticipated
production from proved reserves, are lower than the unamortized capitalized cost, then the capitalized cost is
reduced to fair market value. The factors used to determine fair value include, but are not limited to, estimates
of reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and a
discount rate commensurate with the risk associated with realizing the expected cash flows projected.
Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value,
with any such impairment charged to expense in the period. Given the complexities associated with oil and gas
reserve estimates and the history of price volatility in the oil and gas markets, events may arise that will require
the Company to record an impairment of its oil and gas properties and there can be no assurance that such
impairments will not be required in the future nor that they will not be material.
Stock-Based Compensation. Effective July 1, 2006, we adopted Statement of Financial Accounting
Standard (“SFAS”) No. 123(R) (revised 2004) (“SFAS 123(R)”), “Share-Based Payment”, which requires
companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS
123(R) requires that management make assumptions including stock price volatility and employee turnover
that are utilized to measure compensation expense. The fair value of stock options granted is estimated at the
date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective
assumptions, which are set forth in Note 2 of Notes to Consolidated Financial Statements included as part of
this Form 10-K.
36
Recent Accounting Pronouncements
FASB Staff Position No. EITF 03-6-1 (EITF 03-6-1). EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to
be included in the earnings allocation in computing earnings per share (EPS) under the two-class method
described in SFAS No. 128, Earnings per Share. The provisions of EITF 03-6-1 are effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.
All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the provisions of EITF 03-6-1. Early
application is not permitted. We do not expect EITF 03-6-1 to have a material effect on our consolidated
financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162 (“SFAS
162”), “The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy).
SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” We are currently evaluating the provisions of
SFAS 162 and assessing the impact, if any, it may have on our financial position and results of operations.
Effective July 1, 2009, the FASB issued SFAS No. 157-2 (“SFAS 157-2”), “Effective Date of FASB
Statement No. 157”. This pronouncement defers the effective date of SFAS No. 157 (“SFAS 157”), “Fair
Value Measurements” to fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). An entity that has
issued interim or annual financial statements reflecting the application of the measurement and disclosure
provisions of SFAS 157 prior to February 12, 2008, must continue to apply all provisions of SFAS 157. We
are currently evaluating the impact of our adoption of SFAS 157-2 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), “Business Combinations”
and SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements”. These
statements require most identifiable assets, liabilities and noncontrolling interests to be recorded at full fair
value and require noncontrolling interests to be reported as a component of equity. Both statements are
effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141(R)
will be applied to business combinations occurring after the effective date and SFAS 160 will be applied
prospectively to all noncontrolling interests, including any that arose before the effective date. We are currently
evaluating the provisions of SFAS 141(R) and SFAS 160 and assessing the impact, if any, they may have on
our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” This
pronouncement permits entities to use the fair value method to measure certain financial assets and liabilities
by electing an irrevocable option to use the fair value method at specified election dates. After election of the
option, subsequent changes in fair value would result in the recognition of unrealized gains or losses as period
costs during the period the change occurred. SFAS 159 becomes effective as of the beginning of the first fiscal
year that begins after November 15, 2007, with early adoption permitted. However, entities may not
retroactively apply the provisions of SFAS 159 to fiscal years preceding the date of adoption. We are currently
evaluating the impact that SFAS 159 may have on our financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a
framework for measuring fair value under generally accepted accounting principles and requires enhanced
disclosures about fair value measurements. It does not require any new fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim
37
periods within those fiscal years. We are currently evaluating the impact that SFAS 157 may have on our
financial position, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Commodity Risk. Our major commodity price risk exposure is to the prices received for our natural
gas and oil production. Realized commodity prices received for our production are tied to the spot prices
applicable to natural gas and crude oil at the applicable delivery points. Prices received for natural gas and oil
are volatile, unpredictable and are beyond our control. For the year ended June 30, 2008, a 10% fluctuation in
the prices received for natural gas and oil production would have had an approximate $11.7 million impact on
our revenues.
Interest Rate Risk. As of August 26, 2008 we have no long-term debt subject to the risk of loss
associated with movements in interest rates.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplemental information required to be filed under Item 8 of Form 10-
K are presented on pages F-1 through F-27 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s
senior management of the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2008, the end
of the period covered by this report. Based on that evaluation, the Company’s management, including the
Chairman, Chief Executive Officer, Chief Financial Officer, Controller and Treasurer, concluded that the
Company’s disclosure controls and procedures were effective as of such date to ensure that information
required to be disclosed in the reports that the Company files under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and (ii) accumulated and communicated to the Company’s management,
including the Chairman, Chief Executive Officer and Chief Financial Officer, together with our Controller and
Treasurer, as appropriate, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and
with the participation of the Company’s management, including the Chairman, Chief Executive Officer and
Chief Financial Officer, together with our Controller and the Treasurer, the Company conducted an evaluation
of the effectiveness of its internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on the Company’s evaluation under the framework in Internal Control—Integrated
Framework, the Company’s management concluded that its internal control over financial reporting was
effective as of June 30, 2008.
Grant Thornton LLP, the independent registered public accounting firm that audited our consolidated
financial statements included in this Annual Report on Form 10-K, has audited the effectiveness of our internal
control over financial reporting as of June 30, 2008, as stated in their report which is included herein.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Contango Oil & Gas Company
We have audited Contango Oil & Gas Company (a Delaware Corporation) and subsidiaries’ internal control over
financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Contango Oil &
Gas Company's management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
management’s report on internal control over financial reporting. Our responsibility is to express an opinion on
Contango Oil & Gas Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Contango Oil & Gas Company and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Contango Oil & Gas Company and subsidiaries as of June 30, 2008 and
2007, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three
years in the period ended June 30, 2008 and our report dated August 29, 2008 expressed an unqualified opinion on
those financial statements.
/s/ GRANT THORNTON LLP
Houston, Texas
August 29, 2008
39
Changes in Internal Control Over Financial Reporting
There was no change in our internal controls over financial reporting during the period covered by
this annual report on Form 10-K that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information regarding directors, executive officers, promoters and control persons required under
Item 10 of Form 10-K will be contained in our Definitive Proxy Statement for our 2008 Annual Meeting of
Stockholders (the “Proxy Statement”) under the headings “Election of Directors”, “Executive Compensation”,
“Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” and is incorporated
herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission pursuant
to Regulation 14A of the Exchange Act of 1934, as amended, not later than 120 days after June 30, 2008.
Item 11. Executive Compensation
The information required under Item 11 of Form 10-K will be contained in the Proxy Statement under
the heading “Executive Compensation” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required under Item 12 of Form 10-K will be contained in the Proxy Statement under
the heading “Security Ownership of Certain Other Beneficial Owners and Management” and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under Item 13 of Form 10-K will be contained in the Proxy Statement under
the heading “Certain Relationships and Related Transactions, and Director Independence” and “Executive
Compensation” and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required under Item 14 of Form 10-K will be contained in the Proxy Statement under
the heading “Principal Accountant Fees ands Services” and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Schedules:
The financial statements are set forth in pages F-1 to F-27 of this Form 10-K. Financial statement
schedules have been omitted since they are either not required, not applicable, or the information is otherwise
included.
40
(b) Exhibits:
The following is a list of exhibits filed as part of this Form 10-K. Where so indicated by a
footnote, exhibits, which were previously filed, are incorporated herein by reference.
Exhibit
Number
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description
Purchase and Sale Agreement, by and between Juneau Exploration, L.P. and REX Offshore
Corporation, dated as of September 1, 2005. (17)
Purchase and Sale Agreement, by and between Juneau Exploration, L.P. and COE Offshore, LLC dated
as of September 1, 2005. (17)
Purchase and Sale Agreement between Contango STEP, LP and Rosetta Resources Operating LP, dated
April 28, 2006. (19)
Purchase and Sale Agreement between Contango Operators, Inc. and Rosetta Resources Offshore LLC,
dated December 14, 2006. (21)
Asset Purchase Agreement by and among Petrohawk Energy Corporation and Contango Operators Inc.
(successor-in-interest to Contango Gas Solutions, L.P.), Alta Resources, L.L.C., GPM Energy, LLC,
MND Partners, L.P. and TePee Petroleum Company, Inc., dated as of November 26, 2007. (25)
Asset Purchase Agreement by and among XTO Energy Inc. and Contango Operators, Inc., Alta
Resources, L.L.C., GPM Energy, LLC, MND Partners, L.P. and TePee Petroleum Company, Inc., dated
as of January 4, 2008. (26)
Partnership Interest Purchase Agreement by and among Turbo LNG LLC, Contango Sundance, Inc. and
Osaka Gas Co., Ltd., as Guarantor, dated January 7, 2008. (27)
Certificate of Incorporation of Contango Oil & Gas Company. (6)
Bylaws of Contango Oil & Gas Company. (6)
Agreement of Plan of Merger of Contango Oil & Gas Company, a Delaware corporation, and Contango
Oil & Gas Company, a Nevada corporation. (6)
Amendment to the Certificate of Incorporation of Contango Oil & Gas Company. (11)
Facsimile of common stock certificate of Contango Oil & Gas Company. (1)
Certificate of Designations, Preferences and Relative Rights and Limitations for Series C Senior
Convertible Cumulative Preferred Stock of Contango Oil & Gas Company. (13)
Certificate of Designations, Preferences and Relative Rights and Limitations for Series D Perpetual
Cumulative Convertible Preferred Stock of Contango Oil & Gas Company. (16)
Securities Purchase Agreement, dated as of July 15, 2005, among Contango Oil & Gas Company and
the Purchasers Named Therein, relating to the Series D Perpetual Cumulative Convertible Preferred
Stock. (16)
Certificate of Designations, Preferences and Relative Rights and Limitations for Series E Perpetual
Cumulative Convertible Preferred Stock of Contango Oil & Gas Company. (22)
Securities Purchase Agreement, dated as of May 11, 2007, among Contango Oil & Gas Company and
the Purchasers Named Therein, relating to the Series E Perpetual Cumulative Convertible Preferred
Stock. (22)
Agreement, dated effective as of September 1, 1999, between Contango Oil & Gas Company and
Juneau Exploration, L.L.C. (2)
Securities Purchase Agreement between Contango Oil & Gas Company and Trust Company of the
West, dated December 29, 1999. (9)
Warrant to Purchase Common Stock between Contango Oil & Gas Company and Trust Company of the
West, dated December 29, 1999. (3)
Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company and Trust Company of the
West, dated December 29, 1999. (3)
Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company
and Trust Company of the West. (4)
Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company
and Fairfield Industries Incorporated. (4)
Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company
and Juneau Exploration Company, L.L.C. (4)
41
10.8
10.9
Amendment dated August 14, 2000 to agreement between Contango Oil & Gas Company and Juneau
Exploration Company, LLC. dated effective as of September 1, 1999. (5)
Asset Purchase Agreement by and among Juneau Exploration, L.P. and Contango Oil & Gas Company
dated January 4, 2002. (7)
10.10 Asset Purchase Agreement by and among Mark A. Stephens, John Miller, The Hunter Revocable Trust,
Linda G. Ferszt, Scott Archer and the Archer Revocable Trust and Contango Oil & Gas Company dated
January 9, 2002. (8)
10.11 Option Purchase Agreement between Contango Oil & Gas Company and Cheniere Energy, Inc. dated
10.12
10.13
10.14
10.15
June 4, 2002. (10)
Securities Purchase Agreement dated December 12, 2003 by and between Contango Oil & Gas
Company and the Purchasers Named Therein. (13)
Freeport LNG Development, L.P. Amended and Restated Limited Partnership Agreement dated
February 27, 2003. (14)
Partnership Purchase Agreement among Contango Sundance, Inc., Contango Oil & Gas, Cheniere LNG,
Inc. and Cheniere Energy, Inc. dated March 1, 2003. (14)
First Amendment, dated December 19, 2003, to Freeport LNG Development, L.P. Amended and
Restated Limited Partnership Agreement dated February 27, 2003. (14)
10.16 Asset Purchase Agreement, dated as of October 7, 2004, by and between Contango Oil & Gas
Company; Contango STEP, L.P.; Edge Petroleum Exploration Company; and Edge Petroleum
Corporation. (15)
Limited Liability Company Agreement of Republic Exploration LLC dated August 24, 2000. (17)
10.17
10.18 Amendment to Limited Liability Company Agreement and Additional Agreements of Republic
10.19
Exploration LLC dated as of September 1, 2005. (17)
Limited Liability Company Agreement of Contango Offshore Exploration LLC dated November 1,
2000. (17)
First Amendment to Limited Liability Company Agreement and Additional Agreements of Contango
Offshore Exploration LLC dated as of September 1, 2005. (17)
10.21* Contango Oil & Gas Company 1999 Stock Incentive Plan. (18)
10.22* Amendment No. 1 to Contango Oil & Gas Company 1999 Stock Incentive Plan dated as of March 1,
10.20
10.23
2001. (18)
Term Loan Agreement between Contango Oil & Gas Company and The Royal Bank of Scotland plc,
dated April 27, 2006. (20)
10.24 Demand Promissory Note dated October 26, 2006 with Schedules I, II and III. (23)
10.25
Term Loan Agreement between Contango Oil & Gas Company and Centaurus Capital LLC, dated
January 30, 2007. (24)
Form of Pledge Agreement. (24)
10.26
10.27 Assignment of Operating Rights Interest between CGM, LP and Contango Operators, Inc., dated as of
10.28
January 3, 2008. (28)
Partial Assignment of Oil and Gas Leases between CGM, LP and Contango Operators, Inc., dated as of
January 3, 2008. (28)
10.29 Assignment of Operating Rights Interest between CGM, LP and Contango Operators, Inc., dated as of
January 3, 2008. (28)
10.30 Assignment of Operating Rights Interest between Olympic Energy Partners, LLC and Contango
10.31
Operators, Inc., dated as of January 3, 2008. (28)
Partial Assignment of Oil and Gas Leases between Olympic Energy Partners, LLC and Contango
Operators, Inc. dated as of January 3, 2008. (28)
10.32 Assignment of Operating Rights Interest between Olympic Energy Partners, LLC and Contango
Operators, Inc., dated as of January 3, 2008. (28)
10.33 Assignment of Operating Rights Interest between Juneau Exploration, LP and Contango Operators, Inc.,
10.34
dated as of January 3, 2008. (28)
Partial Assignment of Oil and Gas Leases between Juneau Exploration, LP and Contango Operators,
Inc., dated as of January 3, 2008. (28)
10.35 Assignment of Operating Rights Interest between Juneau Exploration, LP and Contango Operators, Inc.,
dated as of January 3, 2008. (28)
10.36 Assignment of Operating Rights Interest between Juneau Exploration, LP and Contango Operators, Inc.,
dated as of April 3, 2008. (30)
42
10.37
Partial Assignment of Oil and Gas Leases between Juneau Exploration, LP and Contango Operators,
Inc., dated as of April 3, 2008. (30)
10.38 Assignment of Operating Rights Interest between Juneau Exploration, LP and Contango Operators, Inc.,
dated as of April 3, 2008. (30)
10.39 Assignment of Operating Rights Interest between Olympic Energy Partners, LLC and Contango
10.40
Operators, Inc., dated as of April 3, 2008. (30)
Partial Assignment of Oil and Gas Leases between Olympic Energy Partners, LLC and Contango
Operators, Inc. dated as of April 3, 2008. (30
10.41 Assignment of Operating Rights Interest between Olympic Energy Partners, LLC and Contango
Operators, Inc., dated as of April 3, 2008. (30)
10.42 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.43 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.44 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.45 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.46 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.47 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.48 Assignment of Overriding Royalty Interest between Dutch Royalty Investments, Land and Leasing, LP
and Contango Operators, Inc., dated as of February 8, 2008. †
10.49 Amended and Restated Limited Liability Company Agreement of Republic Exploration LLC, dated
April 1, 2008. (30)
10.50 Amended and Restated Limited Liability Company Agreement of Contango Offshore Exploration LLC,
10.51
10.52
dated April 1, 2008 †
Third Amendment to Term Loan Agreement, dated as of January 17, 2008, between Contango Oil &
Gas Company, as Borrower, and Centaurus Capital LLC, as Lender. (29)
Fourth Amendment to Term Loan Agreement, dated as of February 13, 2008, between Contango Oil &
Gas Company, as Borrower, and Centaurus Capital LLC, as Lender. (31)
10.53 Amended and Restated Term Loan Agreement, dated June 5, 2008, between Contango Oil & Gas
14.1
21.1
21.2
23.1
23.2
23.3
31.1
32.1
Company, as Borrower, and Centaurus Capital LLC, as Lender. †
Code of Ethics. (12)
List of Subsidiaries. †
Organizational Chart. †
Consent of William M. Cobb & Associates, Inc. †
Consent of Grant Thornton LLP. †
Consent of W.D. Von Gonten & Co. †
Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934. †
Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. †
__________
† Filed herewith.
* Indicates a management contract or compensatory plan or arrangement.
1. Filed as an exhibit to the Company’s Form 10-SB Registration Statement, as filed with the Securities and
Exchange Commission on October 16, 1998.
2. Filed as an exhibit to the Company’s report on Form 10-QSB for the quarter ended December 31, 1999, as filed
with the Securities and Exchange Commission on November 11, 1999.
3. Filed as an exhibit to the Company’s report on Form 10-QSB for the quarter ended December 31, 1999, as filed
with the Securities and Exchange Commission on February 14, 2000.
4. Filed as an exhibit to the Company’s report on Form 8-K, dated August 24, 2000, as filed with the Securities and
Exchange Commission of September 8, 2000.
5. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2000, as
filed with the Securities and Exchange Commission on September 27, 2000.
43
6. Filed as an exhibit to the Company’s report on Form 8-K, dated December 1, 2000, as filed with the Securities
and Exchange Commission on December 15, 2000.
7. Filed as an exhibit to the Company’s report on Form 8-K, dated January 4, 2002, as filed with the Securities and
Exchange Commission on January 8, 2002.
8. Filed as an exhibit to the Company’s report on Form 10-QSB for the quarter ended March 31, 2002, as filed with
the Securities and Exchange Commission on February 14, 2002.
9. Filed as an exhibit to the Company’s report on Form 10-QSB/A for the quarter ended December 31, 1999, as
filed with the Securities and Exchange Commission on June 4, 2002.
10. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (Registration No. 333-89900) as filed
with the Securities and Exchange Commission on June 14, 2002.
11. Filed as an exhibit to the Company’s report on Form 10-QSB for the quarter ended December 31, 2002, dated
November 14, 2002, as filed with the Securities and Exchange Commission.
12. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2003, as
filed with the Securities and Exchange Commission on September 22, 2003.
13. Filed as an exhibit to the Company’s report on Form 8-K, dated December 12, 2003, as filed with the Securities
and Exchange Commission on December 17, 2003.
14. Filed as an exhibit to the Company’s report on Form 8-K, dated December 19, 2003, as filed with the Securities
and Exchange Commission on December 23, 2003.
15. Filed as an exhibit to the Company’s report on Form 8-K, dated September 27, 2004, as filed with the Securities
and Exchange Commission on October 8, 2004.
16. Filed as an exhibit to the Company’s Registration Statement filed on Form S-3 as filed with the Securities
and Exchange Commission on August 2, 2005.
17. Filed as an exhibit to the Company’s report on Form 8-K, dated September 2, 2005, as filed with the
Securities and Exchange Commission on September 8, 2005.
18. Filed as an exhibit to the Company’s report on Form 10-K for the fiscal year ended June 30, 2005, as filed
with the Securities and Exchange Commission on September 13, 2005.
19. Filed as an exhibit to the Company’s report on Form 10-Q for the quarter ended March 31, 2006, dated May
15, 2006, as filed with the Securities and Exchange Commission.
20. Filed as Exhibit 10.1 to the Company’s report on Form 10-Q for the quarter ended March 31, 2006, dated
May 15, 2006, as filed with the Securities and Exchange Commission.
21. Filed as an exhibit to the Company’s report on Form 8-K, dated December 14, 2006, as filed with the
Securities and Exchange Commission on December 20, 2006.
22. Filed as an exhibit to the Company’s report on Form 8-K, dated May 11, 2007, as filed with the Securities and
Exchange Commission on May 17, 2007.
23. Filed as an exhibit to the Company’s report on Form 10-Q for the quarter ended September 30, 2006, dated
November 8, 2006, as filed with the Securities and Exchange Commission.
24. Filed as an exhibit to the Company’s report on Form 8-K, dated January 30, 2007, as filed with the Securities and
Exchange Commission on February 5, 2007.
25. Filed as an exhibit to the Company’s report on Form 8-K, dated November 26, 2007, as filed with the Securities
and Exchange Commission on November 29, 2007.
26. Filed as an exhibit to the Company’s report on Form 8-K, dated January 4, 2008, as filed with the Securities and
Exchange Commission on January 10, 2008.
27. Filed as an exhibit to the Company’s report on Form 8-K, dated February 5, 2008, as filed with the Securities and
Exchange Commission on February 8, 2008.
28. Filed as an exhibit to the Company’s report on Form 8-K, dated January 3, 2008, as filed with the Securities and
Exchange Commission on January 9, 2008.
29. Filed as an exhibit to the Company’s report on Form 8-K, dated January 17, 2008, as filed with the Securities and
Exchange Commission on January 24, 2008.
30. Filed as an exhibit to the Company’s report on Form 8-K, dated April 3, 2008, as filed with the Securities and
Exchange Commission on April 9, 2008.
31. Filed as an exhibit to the Company’s report on Form 10-Q for the quarter ended March 31, 2008, dated May 12,
2008, as filed with the Securities and Exchange Commission.
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
44
CONTANGO OIL & GAS COMPANY
/s/ KENNETH R. PEAK
Kenneth R. Peak
Chairman, Chief Executive Officer and Chief
Financial Officer (principal executive officer
and principal financial officer)
/s/ LESIA BAUTINA
Lesia Bautina
Senior Vice President and Controller
(principal accounting officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ KENNETH R. PEAK
Kenneth R. Peak
/s/ B.A. BERILGEN
B.A. Berilgen
/s/ JAY D. BREHMER
Jay D. Brehmer
/s/ CHARLES M. REIMER
Charles M. Reimer
/s/ STEVEN L. SCHOONOVER
Steven L. Schoonover
/s/ DARRELL W. WILLIAMS
Darrell W. Williams
Chairman of the Board
August 29, 2008
Director
August 29, 2008
Director
August 29, 2008
Director
August 29, 2008
Director
August 29, 2008
Director
August 29, 2008
45
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm....................................................................... F-2
Consolidated Balance Sheets, June 30, 2008 and 2007.............................................................................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 2008, 2007 and 2006 .................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and 2006................... F-6
Consolidated Statements of Shareholders’ Equity for the Years
Ended June 30, 2008, 2007 and 2006.................................................................................................. F-7
Notes to Consolidated Financial Statements .............................................................................................. F-8
Supplemental Oil and Gas Disclosures (Unaudited) .................................................................................. F-26
Quarterly Results of Operations (Unaudited)............................................................................................. F-30
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Contango Oil & Gas Company
We have audited the accompanying consolidated balance sheets of Contango Oil & Gas Company
(a Delaware corporation) and subsidiaries as of June 30, 2008 and 2007, and the related consolidated
statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended
June 30, 2008. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Contango Oil & Gas Company and subsidiaries as of June 30, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years in the period ended June 30,
2008 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Contango Oil & Gas Company and subsidiaries’ internal control over
financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated August 29, 2008 expressed an unqualified opinion on the internal control over
financial reporting.
/S/ GRANT THORNTON LLP
Houston, Texas
August 29, 2008
F-2
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2008
2007
CURRENT ASSETS:
$
Cash and cash equivalents…………………………………..……………………… 59,884,574
Short-term investments…………………………………..……………………………
Inventory tubulars……………………………………………………………………
Accounts receivable:
Trade receivable…………………………………………………………………… 72,343,761
Advances to affiliates……………………………………………………………… 5,754,516
Joint interest billings receivable…………………………………………………… 18,019,847
Prepaid capital costs…………………………………………………………………
1,264,278
Income tax receivable…………………………………………………………………
Other.………………………………………………………….……………………… 1,147,345
Total current assets……………………………………………….………………… 158,749,118
-
334,797
-
$
6,177,618
2,200,576
334,797
7,853,080
5,259,191
7,894,505
5,539,419
2,666,884
255,788
38,181,858
PROPERTY, PLANT AND EQUIPMENT:
Natural gas and oil properties, successful efforts method of accounting:
Proved properties………………………………………………...………………… 442,630,193
7,591,447
Unproved properties……………………………….………………………………
Furniture and equipment………………………………………….…………………
278,737
Accumulated depreciation, depletion and amortization……………………………… (13,134,511)
Total property, plant and equipment, net……………………….………………… 437,365,866
82,655,848
22,012,054
235,512
(3,584,618)
101,318,796
OTHER ASSETS:
Cash and other assets held by affiliates……...………...………………………..…… 3,299,002
Investment in Freeport LNG Project…..……………………………………….……
Investment in Contango Venture Capital Corporation………………………………
Deferred income tax asset……………………………………………………………
Facility fees and other assets…………………………………………………………
Total other assets………………………………………..…………………………
-
190,000
-
369,764
3,858,766
TOTAL ASSETS…………………………………………………….………………… 599,973,750
$
1,195,074
3,243,585
5,864,558
3,377,016
754,622
14,434,855
153,935,509
$
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
June 30,
2008
2007
CURRENT LIABILITIES:
Accounts payable………………………………………….…………………………… 22,990,887
Royalties and working interests payable……………………………………………… 66,606,414
Accrued liabilities……………………………………………………………………… 10,334,008
Joint interest advances………………………………………………………………… 15,666,389
Accrued exploration and development……………….………………………………… 3,082,399
2,965,022
Advances from affiliates………………………………………………………………
Debt of affiliates………………………………………………………………………… 3,261,177
Income tax payable……………………………………………………………………… 3,463,176
Other current liabilities…………………………………………………………………
466,232
Total current liabilities……………………………………...………………………… 128,835,704
$
LONG-TERM DEBT…………………………………………………………………… 15,000,000
DEFERRED TAX LIABILITY………………………………………………………… 112,189,684
ASSET RETIREMENT OBLIGATION………..……………………………………… 1,949,881
$
14,659,860
-
1,417,279
-
14,235,062
3,417,103
8,540,091
-
-
42,269,395
20,000,000
-
862,344
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, 6%, Series E, $0.04 par value, 10,000 shares
authorized, 6,000 shares issued and outstanding at June 30, 2007,
liquidation preference of $30,000,000 at $5,000 per share…………………………
Common stock, $0.04 par value, 50,000,000 shares authorized,
-
240
19,404,746 shares issued and 16,819,746 outstanding at June 30, 2008,
18,539,807 shares issued and 15,964,807 outstanding at June 30, 2007,
776,189
Additional paid-in capital…………………………………………..………………… 73,030,926
Accumulated other comprehensive income…………………………………………
Treasury stock at cost (2,585,000 and 2,575,000 shares, respectively)……………… (6,843,900)
Retained earnings…………..………………………………………...……………… 275,035,266
Total shareholders' equity………………………………………………………… 341,998,481
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY………………………… 599,973,750
$
-
741,591
75,849,506
715,659
(6,180,000)
19,676,774
90,803,770
153,935,509
$
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
2008
2007
2006
REVENUES:
Natural gas and oil sales…………………………..………… 116,497,713
Total revenues……………………………………….…… 116,497,713
$
$
14,140,161
14,140,161
$
776,331
776,331
EXPENSES:
6,776,757
Operating expenses……………………...…………………
5,728,600
Exploration expenses………………………………………
Depreciation, depletion and amortization…………………… 11,899,620
Impairment of natural gas and oil properties………………
642,374
General and administrative expense………….…………… 16,928,760
Total expenses…………………………………………… 41,976,111
891,116
2,380,071
1,607,319
-
6,841,721
11,720,227
(3,213)
6,815,750
201,684
707,523
4,760,662
12,482,406
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE OTHER INCOME AND INCOME TAXES……… 74,521,602
2,419,934
(11,706,075)
OTHER INCOME (EXPENSE):
Interest expense (net of interest capitalized)………………… (3,933,309)
Interest income……...………………………………………..
1,969,145
Gain (loss) on sale of assets and other………………………… 62,314,188
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES………………………………… 134,871,626
Benefit (provision) from income taxes…………………...…… (51,650,422)
INCOME (LOSS) FROM CONTINUING OPERATIONS… 83,221,204
DISCONTINUED OPERATIONS (Note 5)
Discontinued operations, net of income taxes…………… 173,685,065
NET INCOME (LOSS)……………………..………………..
Preferred stock dividends…………………………….………
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCK……………………………………… 255,358,492
256,906,269
1,547,777
$
(2,162,573)
886,420
(2,684,062)
(54,488)
826,399
249,611
(1,540,281)
462,569
(10,684,553)
3,797,038
(1,077,712)
(6,887,515)
(1,616,839)
6,680,552
(2,694,551)
539,722
(206,963)
601,000
$
(3,234,273)
$
(807,963)
NET INCOME (LOSS) PER SHARE:
Basic
Continuing operations……………………………………
Discontinued operations…………………………………
Total………………………………………………………
Diluted
Continuing operations……………………………………
Discontinued operations…………………………………
Total………………………………………………………
$
$
$
$
$
$
$
$
$
$
$
$
(0.11)
(0.10)
(0.21)
(0.11)
(0.10)
(0.21)
5.05
10.73
15.78
4.82
10.06
14.88
(0.50)
0.45
(0.05)
(0.50)
0.45
(0.05)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic……………………………………………………...… 16,184,517
Diluted…………………………………………..…………… 17,262,715
15,430,146
15,430,146
14,760,268
14,760,268
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations………………………………………………………………
83,221,204
Income (loss) from discontinued operations, net of income taxes……………………………………… 173,685,065
$
$
(1,077,712)
(1,616,839)
$
(6,887,515)
6,680,552
Net income (loss)………………………………………………………………………………………
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
256,906,269
(2,694,551)
(206,963)
Year Ended June 30,
2008
2007
2006
15,173,285
Depreciation, depletion and amortization………………………………………………………..…
Impairment of natural gas and oil properties…………………………………………..……………
1,234,111
Exploration expenditures………………………….……………………………………..…………
4,747,798
Deferred income taxes…………………………………………………………..…..……………… 115,952,055
Loss (gain) on sale of assets…………………………………………………………..…………… (326,337,749)
1,476,988
Stock-based compensation………………….……………………………………………………..
Tax benefit from exercise of stock options…………………………………………………………
(1,080,562)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other……………………………………………
Increase in notes receivable………………………………………………………………………
Increase in prepaid insurance………………………………………………..……………………
Increase in inventory……………………………………………………………………………
Increase in accounts payable and advances from joint owners…………………………………
Increase (decrease) in other accrued liabilities……………………………..……………………
Increase (decrease) in income taxes payable……………………………………………………
Other………………………………………………………...…………………...………………
(67,279,024)
(250,000)
(447,202)
-
26,152,482
75,997,351
7,210,622
3,286,631
Net cash provided by operating activities………………………………………………..…… 112,743,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Natural gas and oil exploration and development expenditures…………….………………………
Investment in Freeport LNG Project…………………………………………………………………
Sale of short-term investments, net……………………………………………………………………
Additions to furniture and equipment……………………………………………………………….
Decrease in advances to operators………………………………………………………..……………
Investment in Contango Venture Capital Corporation………………………………………………
Acquisition of overriding royalty interests……………………………………………………………
Acquisition of Republic Exploration LLC and Contango Offshore Exploration LLC interests………
(309,000,000)
Acquisition of natural gas and oil producing properties…………………………………….………
Sale/Acquisition costs…………………………………………………………………………………
(7,847,613)
Proceeds from the sale of assets……………..…………………………………………..…………… 396,925,821
2,200,576
(43,225)
-
(119,928,546)
(1,166,624)
-
-
-
3,267,252
192,109
5,473,218
692,818
2,313,334
1,492,765
(188,897)
(7,599,816)
(1,005,000)
(205,904)
(139,972)
4,570,213
(87,286)
(2,377,988)
370,723
4,073,018
(77,688,085)
-
16,271,751
(26,659)
-
(681,244)
-
-
-
-
7,000,000
1,199,436
707,523
8,221,045
7,139
(7,232,351)
856,412
(359,772)
947,586
-
(20,640)
(194,825)
6,219,698
792,025
(1,398,776)
(64,921)
9,472,616
(33,804,518)
(236,834)
7,027,542
(20,425)
1,137,056
(2,156,447)
(1,000,000)
(7,500,000)
-
(7,170)
12,892,916
Net cash used in investing activities…………………………………………..……………………
(38,859,611)
(55,124,237)
(23,667,880)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility………………………………………………………………..……
Repayments under credit facility………………………………………………………………..……
Borrowings (repayments) by affiliates………………………………………………………………
Proceeds from preferred equity issuances, net of issuance costs……………………………………
Preferred stock dividends……………………………………………………………………...………
Repurchase/cancellation of stock options……………………………………………………………
Purchase of shares……………………………………………………………………………………
Proceeds from exercise of options and warrants………………………………………………………
Tax benefit from exercise of stock options……………………………………………………………
Debt issue costs…………………………………………………………………………..……………
35,000,000
(40,000,000)
(8,540,091)
-
(1,547,777)
(5,922,532)
(663,900)
580,760
1,080,562
(163,510)
25,000,000
(15,000,000)
8,540,091
28,783,936
(539,722)
(202,521)
-
519,715
188,897
(336,509)
10,000,000
-
-
9,616,438
(601,000)
-
-
1,535,880
359,772
(426,651)
Net cash provided by (used in) financing activities…………………………………...…………… (20,176,488)
46,953,887
20,484,439
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS……………………………
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD……………………………………
53,706,956
6,177,618
(4,097,332)
10,274,950
6,289,175
3,985,775
CASH AND CASH EQUIVALENTS, END OF PERIOD……………………………………………
$
59,884,574
$
6,177,618
$
10,274,950
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes, net of cash received……………………………………………………………
Cash paid for interest…………………………………………………………………………………
$
$
21,974,825
4,305,336
$
$
451,993
2,702,672
$
$
1,045,816
125,582
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Paid-in
Capital
Comprehensive
Treasury
Income
Stock
Retained
Earnings
Shareholders'
Comprehensive
Equity
Income
Accumulated
Other
Total
Balance at June 30, 2005………….……… ……………………………… 1,400
$
56
13,422,809
$
639,910
$
32,800,077
Exercise of stock options and warrants……………………………………
Tax benefit from exercise of stock options………………………………
Cashless exercise of stock options………………………………….
-
-
-
Conversion of Series C preferred stock
to common stock……………………………………………………… (1,400)
Issuance of Series D preferred stock……………………………………… 2,000
Expense of stock options …………………………………………………
Net loss…………………………………….………………………………
Preferred stock dividends…………….……………………………………
Comprehensive income……………………………………………………
-
-
-
-
-
-
-
(56)
80
-
-
-
-
406,500
16,260
-
3,114
-
125
1,166,662
46,666
-
-
-
-
-
-
-
-
-
-
1,519,620
359,772
(125)
(46,610)
9,616,358
856,412
-
-
-
-
-
-
-
-
-
-
-
-
-
$
(6,180,000)
$
23,719,010
$
50,979,053
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(206,963)
(601,000)
-
1,535,880
359,772
-
-
9,616,438
856,412
(206,963)
(601,000)
-
$
-
Balance at June 30, 2006………….……… ……………………………… 2,000
$
80
14,999,085
$
702,961
$
45,105,504
$
-
$
(6,180,000)
$
22,911,047
$
62,539,592
Exercise of stock options…………………………………………………
Tax benefit from exercise of stock options………………………………
Cancellation of stock options, net of tax benefit of $33,894 ……………
Cashless exercise of stock options………………………………….
Amortization of Restricted Stock…………………………………………
-
-
-
-
-
Conversion of Series D preferred stock
to common stock……………………………………………………… (2,000)
Issuance of Series E preferred stock……………………………………… 6,000
Expense of stock options …………………………………………………
Net loss…………………………………….………………………………
Preferred stock dividends…………….……………………………………
Unrealized gain on available for sale securities, net of tax………………
Comprehensive income……………………………………………………
-
-
-
-
-
-
-
-
-
-
(80)
240
-
-
-
-
-
106,500
4,260
-
-
726
25,166
-
-
29
1,007
515,455
155,003
(168,627)
(29)
152,972
833,330
33,334
(33,254)
-
-
-
-
-
-
-
-
-
-
-
-
28,783,696
1,338,786
-
-
-
-
-
-
-
-
-
-
-
-
-
-
715,659
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,694,551)
(539,722)
-
-
519,715
155,003
(168,627)
-
153,979
-
28,783,936
1,338,786
(2,694,551)
(539,722)
715,659
(2,694,551)
715,659
-
$
(1,978,892)
Balance at June 30, 2007………….……… ……………………………… 6,000
$
240
15,964,807
$
741,591
$
75,849,506
$
715,659
$
(6,180,000)
$
19,676,774
$
90,803,770
Exercise of stock options…………………………………………………
Tax benefit from exercise of stock options………………………………
Cancellation of stock options, net of tax benefit of $468,836 ……………
Treasury shares at cost……………………………………….
Amortization of restricted stock…………………………………………
-
-
-
-
-
Conversion of Series E preferred stock
-
-
-
-
-
71,000
2,840
-
-
(10,000)
4,471
-
-
-
179
252,257
to common stock……………………………………………………… (6,000)
(240)
789,468
31,579
Expense of stock options …………………………………………………
Net income…………………………………….…………………………
Preferred stock dividends…………….……………………………………
Unrealized gain on available for sale securities, net of tax………………
Comprehensive income……………………………………………………
Balance at June 30, 2008………….……… ………………………………
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
577,920
611,726
(5,453,696)
-
(31,339)
1,224,552
-
-
-
-
-
-
-
-
-
-
-
-
-
(715,659)
-
-
-
-
(663,900)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
580,760
611,726
(5,453,696)
(663,900)
252,436
-
1,224,552
256,906,269
256,906,269
256,906,269
(1,547,777)
-
-
(1,547,777)
(715,659)
(715,659)
-
$
254,211,718
$
-
16,819,746
$
776,189
$
73,030,926
$
-
$
(6,843,900)
$
275,035,266
$
341,998,481
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Contango Oil & Gas Company (collectively with its subsidiaries, “Contango” or “the Company”) 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.
2. Summary of Significant Accounting Policies
The application of generally accepted accounting principles involves certain assumptions, judgments,
choices and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the
application of these principles can result in varying results from company to company. Contango’s critical
accounting principles, which are described below, relate to the successful efforts method for costs related to natural
gas and oil activities, consolidation principles and stock based compensation, cash and cash equivalents, and short-
term investments.
Use of Estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Revenue Recognition. Revenues from the sale of natural gas and oil produced are recognized upon the
passage of title, net of royalties. Revenues from natural gas production are recorded using the sales method. When
sales volumes exceed the Company’s entitled share, an overproduced imbalance occurs. To the extent the
overproduced imbalance exceeds the Company’s share of the remaining estimated proved natural gas reserves for a
given property, the Company records a liability. At June 30, 2008 and 2007, the Company had no overproduced
imbalances.
Cash Equivalents. Cash equivalents are considered to be highly liquid investment grade debt investments
having an original maturity of 90 days or less. As of June 30, 2008, the Company had $59.9 million in cash and
cash equivalents, of which $25.1 million was invested in highly liquid AAA-rated money market funds.
Short Term Investments. As of June 30, 2007, the Company had $2,200,576 invested in a portfolio of
periodic auction reset (“PAR”) securities, which have coupons that periodically reset to market interest rates at
intervals ranging from 7 to 35 days. These PAR securities are being classified as short term investments and consist
of AAA-rated tax-exempt municipal bonds. The Company had no funds invested in PAR securities as of June 30,
2008.
Accounts Receivable. The Company sells natural gas and crude oil to a limited number of customers. In
addition, the Company participates with other parties in the operation of natural gas and crude oil wells.
Substantially all of the Company’s accounts receivables are due from either purchasers of natural gas and crude oil
or participants in natural gas and crude oil wells for which the Company serves as the operator. Generally, operators
of natural gas and crude oil properties have the right to offset future revenues against unpaid charges related to
operated wells. A portion of our natural gas and crude oil sales are secured with letters of credit.
The allowance for doubtful accounts is an estimate of the losses in the Company’s accounts receivable. The
Company periodically reviews the accounts receivable from customers for any collectability issues. An allowance
for doubtful accounts is established based on reviews of individual customer accounts, recent loss experience,
current economic conditions, and other pertinent factors. Accounts deemed uncollectible are charged to the
allowance. Provisions for bad debts and recoveries on accounts previously charged-off are added to the allowance.
Accounts receivable allowance for bad debt was $0 at June 30, 2008 and 2007. At June 30, 2008 and 2007,
the carrying value of the Company’s accounts receivable approximates fair value.
F-8
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Impairment of Long-Lived Assets. The Company follows Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which
requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those assets are less than the asset’s carrying
amount. In the evaluation of the fair value and future benefits of long-lived assets, the Company performs an
analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of
the related asset exceeds the undiscounted cash flows, the carrying value is reduced to its fair value.
Net Income (Loss) per Common Share. Basic and diluted net income (loss) per common share have been
computed in accordance with SFAS No. 128, “Earnings per Share”. Basic net income (loss) per common share is
computed by dividing income (loss) attributable to common stock by the weighted average number of common
shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock. See
Note 7 – Net Income (Loss) Per Common Share for the calculations of basic and diluted net income (loss) per
common share.
Income Taxes. The Company follows the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences
between the tax basis of assets and liabilities and their reported amounts in the financial statements and (ii) operating
loss and tax credit carryforwards for tax purposes. Deferred tax assets are reduced by a valuation allowance when,
based upon management’s estimates, it is more likely than not that a portion of the deferred tax assets will not be
realized in a future period. In accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109”, the Company reviews its tax position for tax uncertainties.
Concentration of Credit Risk. Substantially all of the Company’s accounts receivable result from natural
gas and oil sales or joint interest billings to a limited number of third parties in the natural gas and oil industry. This
concentration of customers and joint interest owners may impact the Company’s overall credit risk in that these
entities may be similarly affected by changes in economic and other conditions.
Consolidated Statements of Cash Flows. For the purpose of cash flows, the Company considers all highly
liquid investments with a maturity date of three months or less when purchased to be cash equivalents. Significant
transactions may occur that do not directly affect cash balances and, as such, are not disclosed in the Consolidated
Statements of Cash Flows. Certain such non-cash transactions are disclosed in the Consolidated Statements of
Shareholders’ Equity, including shares issued as compensation and issuance of stock options.
Fair Value of Financial Instruments. The carrying amounts of the Company’s short-term financial
instruments, including cash equivalents, short-term investments, trade accounts receivable and trade accounts
payable, approximate their fair values based on the short maturities of those instruments. The Company’s long-term
debt is variable rate debt and, as such, approximates fair value, as interest rates are variable based on prevailing
market rates.
Successful Efforts Method of Accounting. The Company follows the successful efforts method of
accounting for its natural gas and oil activities. Under the successful efforts method, lease acquisition costs and all
development costs are capitalized. Unproved properties are reviewed quarterly to determine if there has been
impairment of the carrying value, and any such impairment is charged to expense in the period. Exploratory drilling
costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling
costs are expensed. Other exploratory costs, such as seismic costs and other geological and geophysical expenses,
are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized
costs as determined above. Depreciation, depletion and amortization is on a cost center by cost center basis using
the unit of production method, with lease acquisition costs amortized over total proved reserves and other costs
amortized over proved developed reserves.
F-9
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
When circumstances indicate that proved properties may be impaired, the Company compares expected
undiscounted future cash flows on a cost center basis to the unamortized capitalized cost of the asset. If the future
undiscounted cash flows, based on the Company’s estimate of future natural gas and oil prices and operating costs
and anticipated production from proved reserves, are lower than the unamortized capitalized cost, then the
capitalized cost is reduced to fair market value.
The Company amortizes and impairs natural gas and oil properties on a field-by-field cost center basis.
Management believes this policy provides greater comparability with other successful efforts natural gas and oil
companies by conforming to predominant industry practice. In addition, the field level is consistent with the
Company’s operational and strategic assessment of its natural gas and oil investments.
In accordance with SFAS 144, the Company classified the following asset sales as discontinued operations:
its $128.0 million Western core Arkansas Fayetteville Shale sale effective October 1, 2007, its $199.2 million
Eastern core Arkansas Fayetteville Shale sale effective December 1, 2007, its $1.1 million Alta-Ellis #1 and Temple
Inland sale effective February 1, 2008, its $11.6 million property sale effective April 1, 2006 and its $2.0 million
property sale effective February 1, 2006. An integral and on-going part of our business strategy is to sell our proved
reserves from time to time in order to generate additional capital to reinvest in our onshore and offshore exploration
programs. Thus, it is our intent to remain an independent natural gas and oil company engaged in the exploration,
production, and acquisition of natural gas and oil.
Principles of Consolidation. The Company’s consolidated financial statements include the accounts of
Contango Oil & Gas Company and its wholly and partially-owned subsidiaries, after elimination of all intercompany
balances and transactions. Wholly-owned subsidiaries are fully consolidated. Exploration and development
subsidiaries not wholly owned, such as 32.3% owned Republic Exploration LLC (“REX”) and 65.6% owned
Contango Offshore Exploration LLC (“COE”), each as of June 30, 2008, are not controlled by the Company and are
proportionately consolidated.
Upon the formation of REX, Contango was the only owner that contributed cash, and under the terms of
the respective limited liability company agreements, was entitled to all of the ventures’ assets and liabilities until the
ventures expended all of the Company’s initial cash contribution. The Company therefore consolidated 100% of the
ventures’ net assets and results of operations. During the quarter ended December 31, 2002, REX completed
exploration activities to fully expend the Company’s initial cash contribution, thereby enabling each owner to share
in the net assets of REX based on their stated ownership percentages. Commencing with the quarter ended
December 31, 2002, the Company began consolidating 33.3% of the net assets and results of operations of REX.
The reduction of our ownership in the net assets of REX resulted in a non-cash exploration expense of
approximately $4.2 million and $0.2 million, respectively in 2002. The other owners of REX contributed seismic
data and related geological and geophysical services in exchange for its ownership interest.
Upon the formation of COE, Contango was the only owner that contributed cash, but by agreement, the
owners in COE immediately shared in the net assets of COE, including the Company’s initial cash contribution,
based on their stated ownership percentages. The Company therefore consolidated 66.6% of the venture’s net assets
and results of operations. The other owner of COE contributed geological and geophysical services in exchange for
its ownership interest.
On September 2, 2005, the Company purchased an additional 9.4% ownership interest in each of REX and
COE. Both interests were purchased from an existing owner, which prior to the sale, owned 33.3% of each of the
two subsidiaries. As a result of these two purchases, the Company’s equity ownership interest in REX increased
from 33.3% to 42.7% and in COE from 66.6% to 76.0%. On September 2, 2005, an independent third party also
purchased a 9.4% interest in each of REX and COE and the selling owner’s ownership interest thus decreased from
33.3% to 14.6% in each such entity.
Effective April 1, 2008, the Company sold a portion of its ownership interest in REX and COE to an
F-10
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
existing owner for approximately $0.8 million and $0.9 million, respectively. As a result of the sale, the Company’s
equity ownership interest in REX and COE has decreased to 32.3% and 65.6%, respectively.
Contango’s 19.5% ownership of Moblize Inc. (“Moblize”) is accounted for using the cost method. Under
the cost method, Contango records an investment in the stock of an investee at cost, and recognizes dividends
received as income. Dividends received in excess of earnings subsequent to the date of investment are considered a
return of investment and are recorded as reductions of cost of the investment.
Recent Accounting Pronouncements. FASB Staff Position No. EITF 03-6-1 (EITF 03-6-1). EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under
the two-class method described in SFAS No. 128, Earnings per Share. The provisions of EITF 03-6-1 are effective
for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those
years. All prior-period EPS data presented shall be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the provisions of EITF 03-6-1. Early application
is not permitted. We do not expect EITF 03-6-1 to have a material effect on our consolidated financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162 (“SFAS 162”),
“The Hierarchy of Generally Accepted Accounting Principles”. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). SFAS 162 is effective
60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting
Oversight Board amendments to AU section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” We are currently evaluating the provisions of SFAS 162 and assessing the impact,
if any, it may have on our financial position and results of operations.
Effective July 1, 2009, the FASB issued SFAS No. 157-2 (“SFAS 157-2”), “Effective Date of FASB
Statement No. 157”. This pronouncement defers the effective date of SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements” to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for
all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). An entity that has issued interim or annual financial
statements reflecting the application of the measurement and disclosure provisions of SFAS 157 prior to February
12, 2008, must continue to apply all provisions of SFAS 157. We are currently evaluating the impact of our
adoption of SFAS 157-2 on our consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R) (“SFAS
141(R)”), “Business Combinations” and SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated
Financial Statements”. These statements require most identifiable assets, liabilities and noncontrolling interests to be
recorded at full fair value and require noncontrolling interests to be reported as a component of equity. Both
statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited.
SFAS 141(R) will be applied to business combinations occurring after the effective date and SFAS 160 will be
applied prospectively to all noncontrolling interests, including any that arose before the effective date. We are
currently evaluating the provisions of SFAS 141(R) and SFAS 160 and assessing the impact, if any, they may have
on our financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” This pronouncement
permits entities to use the fair value method to measure certain financial assets and liabilities by electing an
irrevocable option to use the fair value method at specified election dates. After election of the option, subsequent
changes in fair value would result in the recognition of unrealized gains or losses as period costs during the period
the change occurred. SFAS 159 becomes effective as of the beginning of the first fiscal year that begins after
November 15, 2007, with early adoption permitted. However, entities may not retroactively apply the provisions of
F-11
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
SFAS 159 to fiscal years preceding the date of adoption. We are currently evaluating the impact that SFAS 159 may
have on our financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS 157. SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and requires enhanced disclosures about fair
value measurements. It does not require any new fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.
We are currently evaluating the impact that SFAS 157 may have on our financial position, results of operations and
cash flows.
Stock-Based Compensation. Effective July 1, 2001, the Company adopted the fair value based method
prescribed in SFAS No. 123 (“SFAS 123”), “Accounting for Stock Based Compensation”. Under the fair value
based method, compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the award vesting period. The fair value of each award is estimated as of the date of grant using the
Black-Scholes options-pricing model. Effective July 1, 2005, the Company adopted SFAS No. 123 (revised 2004)
(“SFAS 123(R)”), “Share-Based Payment”. Prior to the adoption of SFAS 123(R), the Company presented all
benefits from the exercise of share-based compensation as operating cash flows in the statement of cash flows.
SFAS 123(R) requires the benefits of tax deductions in excess of the compensation cost recognized for the options
(excess tax benefit) to be classified as financing cash flows. The fair value of each option is estimated as of the date
of grant using the Black-Scholes option-pricing model. No options were granted for the fiscal year ended June 30,
2008. For the fiscal years ended June 30, 2007 and 2006, the following weighted-average assumptions were used:
(i) risk-free interest rate of 5.0 percent and 5.1 percent, respectively; (ii) expected lives of five years; (iii) expected
volatility of 56 percent and 40 percent, respectively; and (iv) expected dividend yield of zero percent.
Under the Company’s 1999 Stock Incentive Plan, as amended (the “1999 Plan” or the “Option Plan”), the
Company’s board of directors may also grant restricted stock awards to officers or other employees of the Company.
Restricted stock awards made under the 1999 Plan are subject to such restrictions, terms and conditions, including
forfeitures, if any, as may be determined by the board. Restricted stock awards generally vest over a period of three
years. Grants of service based restricted stock awards are valued at our common stock price at the date of grant.
During the fiscal year ended June 30, 2008, the Company granted 4,140 shares of restricted stock to its board of
directors. During the fiscal year ended June 30, 2007, the Company granted 16,750 shares of restricted stock to its
employees, and 8,416 shares of restricted stock to its board of directors as part of its annual compensation. The
shares of restricted stock granted to the board of directors vest over a period of one year.
On February 7, 2007, the Company granted 200,000 options to the Chairman and Chief Executive Officer
at a fair value of $11.25 per option, to be expensed over the vesting period. During the years ended June 30, 2008,
2007 and 2006, the Company recorded a charge of $1.2 million, $1.3 million and $0.9 million in stock option
expenses to general and administrative expense, respectively.
Derivative Instruments and Hedging Activities. The Company did not enter into any derivative
instruments or hedging activities for the fiscal years ended June 30, 2008, 2007 or 2006, nor did we have any open
commodity derivative contracts at June 30, 2008.
Asset Retirement Obligation. The Company adopted SFAS No. 143 (“SFAS 143”), “Accounting for Asset
Retirement Obligations” as of July 1, 2002. SFAS 143 requires the Company to record the fair value of a liability
for an asset retirement obligation (“ARO”) in the period in which it is incurred. When the liability is initially
recorded, a company increases the carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain
or loss upon settlement. Due to the Company’s focus on offshore properties during the past few years, the ARO has
increased since June 30, 2005. Activities related to the Company’s ARO during the year ended June 30, 2008 and
2007 are as follows:
F-12
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Year Ended June 30,
2008
2007
Initial ARO as of July 1…………………………………………
862,344
Liabilities incurred during period……………………………… 1,222,402
Liabilities settled during period…………………………………
Accretion expense…………………………………..…………… (134,865)
$
-
$
665,458
460,886
(264,000)
-
Balance of ARO as of June 30………………………………
$
1,949,881
$
862,344
3. Natural Gas and Oil Exploration Risk
The Company’s future financial condition and results of operations will depend upon prices received for its
natural gas and oil production and the cost of finding, acquiring, developing and producing reserves. Substantially
all of its production is sold under various terms and arrangements at prevailing market prices. Prices for natural gas
and oil are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors
beyond the Company’s control.
Other factors that have a direct bearing on the Company’s financial condition are uncertainties inherent in
estimating natural gas and oil reserves and future hydrocarbon production and cash flows, particularly with respect
to wells that have not been fully tested and with wells having limited production histories; the timing and costs of
our future drilling; development and abandonment activities; access to additional capital; changes in the price of
natural gas and oil; availability and cost of services and equipment; and the presence of competitors with greater
financial resources and capacity. The preparation of our financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect our reported results of operations,
the amount of reported assets, liabilities and contingencies, and proved natural gas and oil reserves. We use the
successful efforts method of accounting for our natural gas and oil activities.
4. Customer Concentration Credit Risk
The customer base for the Company is primarily concentrated in the natural gas and oil exploration
industry. The majority of the Company’s revenues for the fiscal year ended June 30, 2008, approximately 59%,
resulted from oil and gas sales to a single customer, Cokinos Energy Corporation. The receivables associated with
the revenues from Cokinos Energy Corporation are secured with letters of credit. We believe the loss of this
purchaser would not have a material effect on our financial position or results of operation since there are numerous
potential purchasers of our production.
Other major purchasers of our natural gas and oil for the fiscal year ended June 30, 2008 include
ConocoPhillips Company (24%) and Shell Trading US Company (8%).
5. Sale of Properties - Discontinued Operations
On December 21, 2007, the Company sold its Western core Arkansas Fayetteville Shale properties to
Petrohawk Energy Corporation for $199.2 million. The sale was effective October 1, 2007. The Company sold
approximately 14,200 acres with 6.4 million cubic feet per day (“Mmcfd”) of production, net to Contango. The
Company recognized a gain of approximately $155.9 million for the fiscal year ended June 30, 2008 as a result of
this sale. The Company’s proved and unproved properties as of June 30, 2007 were reduced by approximately $43.3
million as a result of classifying this sale as discontinued operations.
On January 30, 2008, the Company sold its Eastern core Arkansas Fayetteville Shale properties to XTO
Energy, Inc. for approximately $128.0 million. The sale was effective December 1, 2007. The Eastern core
consisted of approximately 11,200 acres with 3.0 Mmcfd of production, net to Contango. The Company recognized
F-13
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
a gain of approximately $106.4 million for the fiscal year ended June 30, 2008 as a result of this sale. The
Company’s proved and unproved properties as of June 30, 2007 were reduced by approximately $21.6 million as a
result of classifying this sale as discontinued operations.
Effective February 1, 2008, the Company sold its interest in two on-shore wells to Alta Resources LLC.
The Alta-Ellis #1 in Texas and the Temple-Inland in Louisiana were sold for approximately $1.1 million.
On March 24, 2006, the Company’s board of directors approved the sale of all of the Company’s onshore
producing assets in Texas and Alabama for an aggregate purchase price of $11.6 million. These properties were
held by Contango STEP, LP (“STEP”), an indirect wholly-owned subsidiary of the Company. On April 28, 2006,
the Company completed the sale of substantially all of these natural gas and oil interests for $11.1 million pursuant
to a purchase and sale agreement. The sale of the remaining two wells under the same purchase and sale agreement
for an aggregate purchase price of approximately $0.5 million was completed in June 2006. The sold properties had
net reserves of approximately 203 thousand barrels (“Mbbl”) of oil and 849 million cubic feet (“Mmcf”) of gas, or
2.1 billion cubic feet equivalent (“Bcfe”). The Company recognized a pre-tax gain of $6.2 million for the year
ended June 30, 2006. This sale has been classified as discontinued operations in our financial statements for all
periods presented.
In March 2006, the Company completed the sale of its interest in a producing well in Zapata County, Texas
to an independent oil and gas company for approximately $2.0 million. Approximately 227 Mmcf of proven
reserves were sold. Pre-tax proceeds after netting adjustments were $2.0 million. The Company recognized a pre-
tax gain on sale of $1.0 million for the year ended June 30, 2006. This sale has been classified as discontinued
operations in our financial statements for all periods presented.
In accordance with SFAS 144, we classified our property sales as discontinued operations in our financial
statements for all periods presented.
The summarized financial results for discontinued operations for the periods ended June 30, 2008, 2007
and 2006 are as follows:
Operating Results:
2008
Revenues…………………………………………………………
Operating (expenses) credits * …………………………………
Depletion expenses………………………………………………
Exploration expenses……………………………………………
Impairment………………………………………………………
Gain on sale of discontinued operations…………………………
$
9,679,330
(1,144,786)
(3,273,655)
(359,888)
(591,737)
262,898,530
Gain before income taxes…………………………………… 267,207,794
(93,522,729)
(Provision) benefit for income taxes……………………………
$
June 30,
2007
$
4,547,661
(780,709)
(1,659,933)
(4,402,354)
(192,109)
-
2006
$
5,018,064
1,503,706
(997,752)
(2,479,376)
-
7,233,130
$
(2,487,444)
870,605
$
10,277,772
(3,597,220)
Gain from discontinued operations, net of income taxes………… 173,685,065
$
$
(1,616,839)
$
6,680,552
____________
* Credits due to severance tax refunds
For the year ended June 30, 2006, operating expenses from discontinued operations resulted in a net credit
of $1.5 million. The credit was attributable to credits issued for previously paid severance taxes. The Railroad
Commission of Texas allows for a severance tax reduction on tight sand gas wells. As a result, some of our former
south Texas formation properties, which were included in the sale of our south Texas natural gas and oil interests to
Edge Petroleum, were eligible for severance tax reduction. By contractual agreement, revenues and expenses prior
to July 1, 2004, the effective date of the sale, accrue to us.
F-14
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
6. Sale of Properties – Other
Freeport LNG Development, L.P.
On February 5, 2008, the Company sold its ten percent (10%) limited partnership interest in Freeport LNG
Development L.P. (“Freeport LNG”) to Turbo LNG LLC, an affiliate of Osaka Gas Co., Ltd., for $68.0 million, and
recognized a pre-tax gain of approximately $63.4 million on the sale. Freeport LNG is a limited partnership formed
to develop, construct and operate a 1.75 billion cubic feet per day (“Bcfd”) liquefied natural gas (“LNG”) receiving
and gasification terminal on Quintana Island, near Freeport, Texas. The Company used $20.3 million of the
proceeds from the sale to pay off its debt with The Royal Bank of Scotland plc, including principal, interest and fees.
Another $20.0 million was used to pay off its debt with a private investment firm. The remaining $27.7 million was
used for working capital purposes.
Contango Venture Capital Corporation
In March 2008, Contango Venture Capital Corporation (“CVCC”), our wholly-owned subsidiary, sold its
direct and indirect investments in Gridpoint, Inc., Trulite, Inc., Protonex Technology Corporation, Jadoo Power
Systems, Contango Capital Partners Fund, L.P. and Contango Capital Partnership Management, LLC for $3.4
million, in the aggregate, recognizing a pre-tax loss of approximately $2.9 million for the fiscal year ended June 30,
2008. CVCC’s only remaining alternative energy investment is Moblize, Inc. (“Moblize”).
The Company originally invested $1.2 million in Moblize in exchange for 648,648 shares of Moblize
convertible preferred stock. In March 2008, the Company determined that Moblize was partially impaired, and
wrote down the investment to $0.6 million, recognizing a loss of $0.6 million for fiscal year ended June 30, 2008.
In June 2008, CVCC sold 205,000 shares of convertible preferred stock of Moblize to a third party for $410,000. As
of August 22, 2008, CVCC owned 443,648 shares of Moblize convertible preferred stock, valued at $0.2 million,
which represents an approximate 19.5% ownership interest. Moblize develops real time diagnostics and field
optimization solutions for the oil and gas and other industries using open-standards based technologies.
7. Net Income (Loss) Per Common Share
A reconciliation of the components of basic and diluted net income (loss) per common share for the fiscal
years ended June 30, 2008, 2007 and 2006 is presented below:
Year Ended June 30, 2008
Net Income
Shares
Per Share
Income from continuing operations, including preferred dividends…………
Discontinued operations, net of income taxes………………………………
$
$
81,673,427
173,685,065
16,184,517
16,184,517
$
$
5.05
10.73
Basic Earnings per Share:
Net income attributable to common stock…………………………………… 255,358,492
Effect of Potential Dilutive Securities:
$
16,184,517
$
15.78
Stock options…………………………………………………..…………
Other………………………………………………………………………
Series E preferred stock……………………………………………………
-
-
1,547,777
448,264
7,570
622,364
-
Income from continuing operations…………………………………………
Discontinued operations, net of income taxes………………………………
$
$
83,221,204
173,685,065
17,262,715
17,262,715
$
$
4.82
10.06
Diluted Earnings per Share:
Net income attributable to common stock…………………………………… 256,906,269
$
17,262,715
$
14.88
F-15
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
7. Net Income (Loss) Per Common Share – continued
Year Ended June 30, 2007
Net Loss
Shares
Per Share
Loss from continuing operations including preferred dividends……………
Discontinued operations, net of income taxes………………………………
$
$
(1,617,434)
(1,616,839)
15,430,146
15,430,146
$
$
(0.11)
(0.10)
Basic Earnings per Share:
Net loss attributable to common stock………………………………………
Effect of Potential Dilutive Securities:
$
(3,234,273)
15,430,146
$
(0.21)
Stock options…………………………………………………..…………
Series D preferred stock……………………………………………………
Series E preferred stock……………………………………………………
-
(a)
(a)
(a)
(a)
(a)
Net loss attributable to common stock………………………………………
$
(3,234,273)
15,430,146
$
(0.21)
Diluted Earnings per Share:
Net loss attributable to common stock………………………………………
$
(3,234,273)
15,430,146
$
(0.21)
Anti-dilutive Securities:
Shares assumed not issued from options to purchase
common shares as income from continuing
operations was in a loss position for the period……………………
$
-
1,026,000
Series D Preferred Stock………………………………………………
Series E Preferred Stock………………………………………………
$
$
314,722
225,000
447,061
94,909
$
$
0.70
2.37
(a) Anti-dilutive.
Year Ended June 30, 2006
Net
Income (Loss)
Shares
Per
Share
Loss from continuing operations including preferred dividends……………
Discontinued operations, net of income taxes………………………………
$
(7,488,515)
6,680,552
14,760,268
14,760,268
$
$
(0.50)
0.45
Basic Earnings per Share:
Net loss attributable to common stock………………………………………
Effect of Potential Dilutive Securities:
$
(807,963)
14,760,268
$
(0.05)
Stock options and warrants…………………………………………………
Series C preferred stock……………………………………………………
Series D preferred stock……………………………………………………
-
(a)
(a)
(a)
(a)
(a)
Loss from continuing operations……………………………………………
Discontinued operations, net of income taxes………………………………
$
(7,488,515)
6,680,552
14,760,268
14,760,268
$
(0.50)
0.45
Diluted Earnings per Share:
Net loss attributable to common stock………………………………………
$
(807,963)
14,760,268
$
(0.05)
Anti-dilutive Securities:
Shares assumed not issued from options to purchase
common shares as income from continuing
operations was in a loss position for the period……………………
$
-
927,500
$
7.78
Series D Preferred Stock………………………………………………
Series C Preferred Stock………………………………………………
$
$
601,000
21,000
833,330
1,166,667
$
$
0.72
0.02
(a) Anti-dilutive.
F-16
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
8. Adoption of FIN 48 and FSP FIN 48-1
We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109” (“FIN 48”) as of July 1, 2007. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. We also adopted FASB
Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”) as of July
1, 2007. FSP FIN 48-1 provides that a company’s tax position will be considered settled if the taxing authority has
completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would
reexamine the tax position in the future. The adoption of FIN 48 and FSP FIN 48-1 had no effect on our financial
position or results of operations. Estimated interest related to potential underpayment of any unrecognized tax
benefits are classified as a component of interest expense in the Consolidated Statement of Operations. Estimated
penalties related to potential underpayment of any unrecognized tax benefits are classified as a component of
general and administrative expense in the Consolidated Statement of Operations. The Company did not derecognize
any tax benefits, nor recognize any interest expense or penalties on unrecognized tax benefits as of the date of
adoption, or on our year end Consolidated Balance Sheets or Consolidated Statements of Operations. The Company
currently does not anticipate a significant increase in unrecognized tax benefits during the next 12 months.
The Company files income tax returns in the United States and various state jurisdictions. The Company’s
tax returns for 2005, 2006 and 2007 remain open for examination by the taxing authorities in the respective
jurisdictions where those returns were filed.
9. Change in Ownership of Partially-Owned Subsidiaries and Overriding Royalties
On September 2, 2005, we purchased an additional 9.4% ownership interest in each of our two partially-
owned offshore Gulf of Mexico exploration subsidiaries, REX for $5.6 million and COE for $1.9 million, for a total
expenditure of $7.5 million. Both interests were purchased from Juneau Exploration, L.P. (“JEX”), which prior to
the sale, owned 33.3% of each of the two subsidiaries. As a result of these two purchases, the Company’s equity
ownership interest in REX increased from 33.3% to 42.7% and in COE from 66.6% to 76.0%. The purchases were
financed from the Company’s existing cash on hand. An independent third party also purchased a 9.4% interest in
each of REX and COE from JEX for the same total purchase price of $7.5 million. JEX has continued in its
capacity as the managing member of both REX and COE and following these two sales, owns a 14.6% interest in
each of REX and COE.
During the fiscal year ended June 30, 2006, the Company allocated the purchase price to the net assets
acquired (“purchase price allocation”). These assets include planned drilling commitments, unevaluated exploration
blocks, and proven developed producing (“PDP”) properties. A significant portion of the purchase price allocation
was allocated to our Eugene Island 10 (“Dutch”) and Grand Isle 63/72/73 (“Liberty”) exploration prospects, which
proved to be discoveries. During the fiscal year ended June 30, 2006, we wrote off $0.3 million of the purchase
price relating to our Main Pass 221 prospect and $0.3 million relating to our West Delta 43 prospect, because they
were dry holes; and $0.1 million relating to our East Cameron 107 prospect, as a result of the expiration of its lease.
On April 3, 2008, the members of REX entered into an Amended and Restated Limited Liability Company
Agreement (the “REX LLC Agreement”), effective as of April 1, 2008, to, among other things, distribute REX’s
interest in Dutch and Mary Rose to the individual members of REX or their designees. In connection with this
distribution, REX repaid in full all amounts owing by REX to a private investment firm under a $50.0 million
demand promissory note with such private investment firm (the “REX Demand Note”), and all security interests and
other liens granted in favor of such private investment firm as security for the obligations under the REX Demand
Note have been released and terminated. The Company’s portion of such repayment was approximately $22.5
million.
F-17
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Effective April 1, 2008, in connection with the REX LLC Agreement, the Company sold a portion of its
membership interest in REX to an existing member of REX for approximately $0.8 million. As a result of the sale,
the Company’s equity ownership interest in REX has decreased to 32.3%. Also effective April 1, 2008, the
Company sold a portion of its membership interest in COE to an existing member of COE for approximately $0.9
million. As a result of the sale, the Company’s equity ownership interest in COE has decreased to 65.6%.
10. Acquisitions
On January 3, 2008, the Company acquired additional working interests in the Eugene Island 10 (“Dutch”)
and State of Louisiana (“Mary Rose”) discoveries in a like-kind exchange, using funds from the sale of its Western
core Arkansas Fayetteville Shale properties held by a qualified intermediary. The Company purchased an additional
8.33% working interest and 6.67% net revenue interest in Dutch and an additional average 9.11% working interest
and 6.67% net revenue interest in Mary Rose from three different companies for $200 million. We allocated 60%,
or $120.0 million, of the purchase price to Dutch, and the remaining 40%, or $80.0 million, to Mary Rose. Of these
three companies, one of them was the managing member of REX, who exchanged an ownership interest in REX for
a direct working interest in Dutch and Mary Rose. The Company purchased a 2.45% working interest in Dutch and
a 2.68% working interest in Mary Rose from this company for approximately $58.9 million. The effective date of
the transactions was January 1, 2008.
On February 8, 2008, the Company acquired a 0.3% overriding royalty interest in the Dutch and Mary Rose
discoveries for $9.0 million in a like-kind exchange, using funds from the sale of its Eastern core Arkansas
Fayetteville Shale properties held by a qualified intermediary. We allocated 60%, or $5.4 million, of the purchase
price to Dutch, and the remaining 40%, or $3.6 million, to Mary Rose.
On April 3, 2008, the Company acquired additional working interests in the Dutch and Mary Rose
discoveries in a like-kind exchange, using funds from the sale of its Eastern core Arkansas Fayetteville Shale
properties held by a qualified intermediary. The Company purchased an additional 4.17% working interest and
3.33% net revenue interest in Dutch and an additional average 4.56% working interest and 3.33% net revenue
interest in Mary Rose from two different companies for $100 million. The effective date of the transaction is
January 1, 2008.
On November 7, 2005, the Company, in a separate transaction, also acquired certain overriding royalty
interests in REX and COE for the purchase price of $1.0 million.
Pro Forma Results
The pro forma results presented below for the fiscal year ended June 30, 2008 and 2007 have been prepared
to give effect to our 2008 acquisitions on our results of operations under the purchase method of accounting as if
they had been consummated on July 1, 2007 and July 1, 2006. The pro forma results do not purport to represent
what our results of operations actually would have been if these acquisitions had in fact occurred on such date or to
project our results of operations for any future date or period. The results of our 2008 acquisitions for the fiscal year
ended June 30, 2008 are reflected in our revenues, net income, and earnings per share in our presented Consolidated
Statements of Operations.
F-18
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Year Ended June 30,
2008
2007
Pro Forma:
Revenues……………………………………………………………
Net income (loss)……………………………………………………
Basic earnings per share………………………………………………
Diluted earnings per share……………………………………………
$
125,058,436
$
86,391,194
$
5.24
$
5.00
$
17,514,201
$
(866,581)
$
(0.09)
$
(0.09)
11. Series E Perpetual Cumulative Convertible Preferred Stock
On May 17, 2007, we sold $30.0 million of our Series E preferred stock to a group of private investors.
The Series E preferred stock is perpetual and cumulative, is senior to our common stock and is convertible at any
time into shares of our common stock at a price of $38.00 per share. Each record holder of Series E preferred stock
is entitled to one vote per share for each share of common stock into which each share of Series E preferred stock is
convertible. The dividend on the Series E preferred stock can be paid quarterly in cash at a rate of 6.0% per annum
or paid-in-kind at a rate of 7.5% per annum, at the Company’s option. Our registration statement filed with the
Securities and Exchange Commission, covering the 789,468 shares of common stock issuable upon conversion of
the Series E preferred stock was declared effective September 12, 2007. Net proceeds associated with the private
placement of the Series E preferred stock was approximately $28.8 million, net of stock issuance costs.
Holders of common stock and holders of Series E preferred stock vote as one class for the election of
directors and most other matters. Upon any liquidation or dissolution of the Company, the holders of common stock
are entitled to receive a pro rata share of all of the assets remaining available for distribution to shareholders after
settlement of all liabilities and liquidating preferences of preferred stockholders.
During the quarter ended March 31, 2008, four Series E preferred stockholders voluntarily elected to
convert a total of 2,400 shares of Series E preferred stock to 315,786 shares of our common stock. The converted
shares of Series E preferred stock had a face value of $12.0 million. During the quarter ended June 30, 2008, the
final three Series E preferred stockholders voluntarily elected to convert a total of 3,600 shares of Series E preferred
stock to 473,682 shares of our common stock. The converted shares of Series E preferred stock had a face value of
$18.0 million.
12. Series D Perpetual Cumulative Convertible Preferred Stock
On July 15, 2005, we sold $10.0 million of our Series D preferred stock to a group of private investors.
The Series D preferred stock is perpetual and cumulative, is senior to our common stock and is convertible at any
time into shares of our common stock at a price of $12.00 per share. Each record holder of Series D preferred stock
is entitled to one vote per share for each share of common stock into which each share of Series D preferred stock is
convertible. The dividend on the Series D preferred stock can be paid quarterly in cash at a rate of 6.0% per annum
or paid-in-kind at a rate of 7.5% per annum, at the Company’s option. Our registration statement filed with the
Securities and Exchange Commission, covering the 833,330 shares of common stock issuable upon conversion of
the Series D preferred stock, became effective on October 26, 2005. Net proceeds associated with the private
placement of the Series D preferred stock was approximately $9.6 million, net of stock issuance costs.
In November 2006, two Series D preferred stockholders voluntarily elected to convert a total of 100 shares
of Series D preferred stock to 41,666 shares of our common stock. The converted shares of Series D preferred stock
had a face value of $0.5 million.
On January 15, 2007, we exercised our mandatory conversion rights pursuant to the terms of our Series D
preferred stock, and converted all of the remaining 1,900 shares of our Series D preferred stock issued and
outstanding into 791,664 shares of our common stock. The outstanding shares of the Series D preferred stock had a
face value of $9.5 million.
F-19
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
13. Income Taxes
Actual income tax expense (benefit) from continuing operations differs from income tax expense (benefit)
from continuing operations computed by applying the U.S. federal statutory corporate rate of 35 percent to pretax
income (loss) as follows:
Provision (benefit) at statutory tax rate……………………………
State income tax provision (benefit), net of federal benefit………
Permanent differences ……………………………………………
Other………………………………………………………………
$
47,205,069
1,526,658
2,393,765
524,930
35.0%
1.13%
1.78%
0.39%
$
(539,099)
-
13,604
62,926
2008
2007
2006
$
(3,739,594)
-
(185,315)
127,871
-35.0%
-
0.88%
4.09%
-35.0%
-
-1.74%
1.20%
Income tax provision (benefit)…………………………………… 51,650,422
$
38.30%
$
(462,569)
-30.03%
$
(3,797,038)
-35.54%
Year Ended June 30,
The provision (benefit) for income taxes for the periods indicated are comprised of the following:
Year Ended June 30,
2008
2007
2006
Current:
Federal…………………………………………………
State……………………………………………………
$
25,364,147
$
(1,155,387)
$
(3,804,177)
-
-
-
Total…………………………………………………
$
25,364,147
$
(1,155,387)
$
(3,804,177)
Deferred:
Federal…………………………………………………
State……………………………………………………
$
23,937,570
2,348,705
$
692,818
-
$
7,139
-
Total…………………………………………………
$
26,286,275
$
692,818
$
7,139
Total:
Federal…………………………………………………
State……………………………………………………
$
49,301,717
2,348,705
$
(462,569)
-
$
(3,797,038)
-
Total…………………………………………………
$
51,650,422
$
(462,569)
$
(3,797,038)
The net deferred tax asset (liability) is comprised of the following:
Deferred tax asset (liability):
Net operating loss carryover………………………………
AMT credit carryforward…………………………………
Temporary basis differences in
Year Ended June 30,
2008
2007
2006
$
-
$
-
$
$
13,254,460
523,149
2,805,770
$
$
-
natural gas and oil properties and other………………… (112,189,684)
(10,400,593)
1,649,420
Net deferred tax asset (liability)
$
(112,189,684)
$
3,377,016
$
4,455,190
F-20
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
14. Long-Term Debt
As of June 30, 2008, the Company had $15.0 million outstanding under its $30 million loan agreement with
a private investment firm (the “Term Loan Agreement”). The commitments to fund under the Term Loan
Agreement were increased from $30.0 million to $60.0 million on January 17, 2008, and decreased to $30.0 million
on June 5, 2008. Borrowings under the Term Loan Agreement bear interest at 30 day LIBOR plus 5.0%. Accrued
interest is due monthly and the Term Loan Agreement matures on January 1, 2010, but we may prepay at any time
with no prepayment penalty. We pay a non-use fee in the amount of 1.50% per annum multiplied by such
non-funded amount.
The Term Loan Agreement requires a minimum level of working capital and contains certain negative
covenants that, among other things, restrict or limit our ability to incur indebtedness, sell certain assets, and pay
dividends. Failure to maintain required working capital or comply with certain covenants in the Term Loan
Agreement could result in a default and funds not being available for borrowing. As of June 30, 2008, the Company
was in compliance with its financial covenants, ratios and other provisions of the Term Loan Agreement.
On February 5, 2008, using the proceeds from our $68.0 million sale of Freeport LNG, the Company
prepaid the $20.0 million it had outstanding under its three-year $20.0 million secured term loan facility with The
Royal Bank of Scotland plc (the “RBS Facility”) and terminated the RBS Facility. The Company paid an additional
$342,292 in accrued and unpaid interest and prepayment fees.
15. Commitments and Contingencies
Operating Leases. Contango leases its office space and certain other equipment. As of June 30, 2008
minimum future lease payments are as follows:
Fiscal years Ending June 30,
2009……………………………………………………………………………………
2010……………………………………………………………………………………
2011……………………………………………………………………………………
2012……………………………………………………………………………………
2013 and thereafter……………………………………………………………………
Total
190,458
183,922
187,780
63,022
-
625,183
$
The amount incurred under operating leases during the years ended June 30, 2008, 2007 and 2006 was
$149,782, $173,259 and $139,744, respectively.
Additionally, once we have completed drilling Eloise #1, we are committed to retain the drilling rig for two
more wells. The Company will use this rig to drill a rate acceleration well at Dutch #4 and then either a second rate
acceleration well or a wildcat exploration well.
16. Stock Based Compensation
In September 1999, the Company established the Contango Oil & Gas Company 1999 Stock Incentive
Plan (the “1999 Plan” or the “Option Plan”). Under the Option Plan, the Company may issue up to 2,500,000 shares
of common stock with an exercise price of each option equal to or greater than the market price of the Company’s
common stock on the date of grant, but in no event less than $2.00 per share. The Company may grant key
employees both incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended, and stock options that are not qualified as incentive stock options. Stock option grants to non-
employees, such as directors and consultants, can only be stock options that are not qualified as incentive stock
options. Options generally expire after five or ten years. The vesting schedule varies, but vesting generally occurs
over a two-year period (1/3 immediately, 1/3 one year from the date of grant and 1/3 two years from the date of
F-21
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
grant) or four-year period (1/4 one year from the date of grant and 1/4 two years, three years and four years from the
date of grant). As of June 30, 2008, options under the Option Plan to acquire 855,667 shares of common stock at
prices between $3.00 and $21.00 per share were outstanding.
A summary of the status of the Option Plan and those options granted outside of the Option Plan as of June
30, 2008, 2007 and 2006, and changes during the fiscal years then ended, is presented in the table below:
Year Ended June 30,
2008
2007
Shares
Under
Options
Outstanding, beginning of year……………...…
Granted………………………...…………………
Exercised………………………..…………………
Cancelled………………………….………...……
1,026,000
-
(71,000)
(99,333)
Outstanding, end of year…………...………….
Aggregate intrinsic value………………………
855,667
69,608,510
$
Weighted
Average
Exercise
Price
10.87
$
$
-
$
8.18
$
6.77
$
11.57
Exercisable, end of year………………...………
Aggregate intrinsic value………………………
686,167
56,300,002
$
$
10.87
Available for grant, end of year……………….
Weighted average fair value of
568,666
Weighted
Average
Exercise
Price
$
$
$
$
7.97
20.42
4.93
8.14
$
10.87
$
9.04
Shares
Under
Options
960,500
213,500
(107,750)
(40,250)
1,026,000
26,079,555
$
671,500
18,301,165
$
469,333
Weighted
Average
Exercise
Price
$
$
$
$
6.74
12.31
4.10
5.17
$
7.97
$
6.82
2006
Shares
Under
Options
1,176,000
76,000
(284,000)
(7,500)
960,500
5,926,285
$
561,292
4,108,657
$
642,583
options granted during the year (1)…………
-
$
10.85
$
5.17
_________________
(1) The fair value of each option is estimated as of the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants during the years ended June 30, 2007 and 2006, respectively: (i)
risk-free interest rate of 5.0 percent and 5.1 percent; (ii) expected lives of five years for the Option Plan and other options;
(iii) expected volatility of 56 percent and 40 percent; and (iv) expected dividend yield of zero percent.
The following table summarizes information about options that were outstanding at June 30, 2008:
Range of Exercise Price
$3.00 - $3.99……………………………………
$6.00 - $6.99……………………………………
$9.00 - $9.99……………………………………
$10.00 - $10.99…………………………………
$11.00 - $11.99…………………………………
$12.00 - $12.99…………………………………
$14.00 - $14.99…………………………………
$21.00 - $21.99…………………………………
Options Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
$
$
3.00
6.78
9.30
10.23
11.59
12.95
14.14
21.00
11.57
Number of
Shares
Under
Outstanding
Options
35,000
215,000
82,500
187,500
17,834
7,500
7,500
133,333
686,167
Weighted
Average
Exercise
Price
$
$
$
$
$
$
$
$
$
3.00
6.78
9.30
10.23
11.55
12.95
14.14
21.00
10.87
Number of
Shares
Under
Weighted
Average
Remaining
Outstanding Contractual
Options
Life
4.0
0.9
2.0
2.0
2.8
2.7
3.0
3.6
2.2
35,000
215,000
110,000
250,000
30,667
7,500
7,500
200,000
855,667
F-22
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Effective July 1, 2001, the Company changed it method of accounting for employee stock-based
compensation to the fair value method prescribed in SFAS 123. Effective July 1, 2005, the Company adopted SFAS
123(R). Prior to the adoption of SFAS 123(R), we presented all tax benefits resulting from the exercise of stock
options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123(R) requires that cash
flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative
compensation cost (excess tax benefits) be classified as financing cash flows. For the fiscal years ended June 30,
2008, 2007 and 2006, approximately $1.1 million, $188,897 and $359,772 respectively, of such excess tax benefits
were classified as financing cash flows. See Note 2 – Summary of Significant Accounting Policies.
All employee stock option grants are expensed over the stock options vesting period based on the fair value
at the date the options are granted. The fair value of each option is estimated as of the date of grant using the Black-
Scholes options-pricing model. During the fiscal year-ended June 30, 2008, 2007 and 2006, the Company recorded
stock option expense of $1.2 million, $1.3 million and $0.9 million, respectively.
As of June 30, 2008, we have approximately $1.1 million of total unrecognized compensation cost related
to non-vested awards granted under our various share-based plans, which we expect to recognize over an average
period of three years.
The aggregate intrinsic values of the options exercised during fiscal years 2008, 2007 and 2006 were
approximately $1.9 million, $1.9 million and $2.2 million, respectively.
On November 14, 2007, the Company awarded a total of 4,140 shares of restricted stock under the 1999
Plan to its board of directors. Of these 4,140 shares of restricted stock, 2,070 shares vest on the date of grant, and
the remaining 2,070 shares vest one year thereafter. The fair value of restricted stock was approximately $180,000.
On November 16, 2006, the Company’ awarded a total of 8,416 shares of restricted stock under the 1999 Plan to its
board of directors. Of these 8,416 shares of restricted stock, 4,208 shares vest on the date of grant, and the
remaining 4,208 shares vest one year thereafter. The fair value of restricted stock was approximately $144,000. On
July 5, 2006, the Company awarded a total of 16,750 shares of restricted stock under the 1999 Plan to certain
employees. The restricted stock vests over a three year period, commencing on the grant date. The fair value of
restricted stock was approximately $239,000 and is being recognized as compensation expense over the three year
vesting period.
For the year ended June 30, 2008 and 2007, the Company recognized $252,435 and $153,979, respectively,
in compensation expense relating to restricted stock awards. No restricted stock awards were granted for the year
ended June 30, 2006. A summary of the Company’s restricted stock as of June 30, 2008, is as follows:
Nonvested balance at June 30, 2007……………………………… 15,375
Granted……………………………………………………………
4,471
Vested…………………………………………………………… (12,192)
Forfeited……………………………………………………………
Shares
Weighted
Average
Number of Fair Value
Per Share
15.04
$
42.95
20.80
-
-
Nonvested balance at June 30, 2008………………………………
7,654
$
15.03
17. Warrants
As of June 30, 2008 and 2007, the Company had no outstanding warrants. The final remaining issued
warrants were exercised during the fiscal year ended June 30, 2006. The Company reserved an equal number of
shares of common stock for issuance upon the exercise of its outstanding warrants. A summary of the Company
F-23
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
warrants as of June 30, 2008, 2007 and 2006, and changes during the fiscal years then ended, is presented in the
table below:
Year Ended June 30,
2008
2007
2006
Number of
Shares
Under
Outstanding
Warrants
-
Weighted
Average
Exercise
Price
Number of
Shares
Under
Outstanding
Warrants
-
Weighted
Average
Exercise
Price
Outstanding, beginning of year…………………
Exercised………………………………………………………..
Cancelled………………………………………
Outstanding, end of year…………………………
-
-
Exercisable, end of year…………………………
-
-
-
-
-
-
-
-
-
-
Number of
Shares
Under
Outstanding
Warrants
125,000
(125,000)
-
-
Weighted
Average
Exercise
Price
$
$
3.06
3.06
-
-
-
-
We received cash from options and warrants exercised during the years ended June 30, 2008, 2007 and
2006 of $0.6 million, $0.5 million and $1.5 million, respectively. The impact of these cash receipts is included in
financing activities in the accompanying Consolidated Statements of Cash Flows.
18. Related Party Transactions
In the ordinary course of business, the Company contracted with Moblize to install automation equipment
that will allow COI to remotely monitor, control and record, in real time, daily production volumes from the Grand
Isle 72 #1 well. For the year ended June 30, 2008 and 2007, the Company paid approximately $4,000 and $85,000,
respectively, to Moblize for such services. The Company did not contract with Moblize during the year ended June
30, 2006.
In fiscal year 2007, REX executed the REX Demand Note which was non-recourse to Contango. Under the
terms of the REX Demand Note, REX could borrow up to $50.0 million at a per annum rate of 11.5% for the first
advance, and a per annum rate of LIBOR plus 6.0% for each additional advance. As of April 1, 2008, REX had
borrowed the entire $50.0 million available under the REX Demand Note. The Company was not a party to or
guarantor of the REX Demand Note. On April 3, 2008, the members of REX entered into the REX LLC
Agreement, effective as of April 1, 2008, to, among other things, distribute REX’s interest in Dutch and Mary Rose
to the individual members of REX or their designees. In connection with this distribution, REX repaid in full all
amounts owing by REX under the REX Demand Note, and all security interests and other liens granted in favor of
such private investment firm as security for the obligations under the REX Demand Note were released and
terminated. As a result of our proportionate consolidation of REX, the Company’s portion of such repayment was
approximately $22.5 million. For the fiscal year ended June 30, 2008, the Company’s proportionate share of such
interest expense was approximately $1.3 million.
In fiscal year 2007, the Company executed a series of promissory notes with Trulite (the “Trulite Notes”),
whereby Trulite borrowed funds from the Company, agreeing to pay all accrued and unpaid interest on the various
due dates. On November 25, 2007, the Company entered into a subscription agreement with Trulite pursuant to
which both parties agreed to convert the aggregate principal balance of all five outstanding promissory notes and all
accrued but unpaid interest thereon into shares of Trulite common stock. The Company converted $1,255,000 of
principal and $101,540 of interest into 2,024,687 shares of Trulite common stock. For the fiscal year ended June 30,
2008, the Company earned approximately $58,000 in interest income from the five Trulite Notes. As discussed in
Note 6 - Sale of Properties - Other, the Company sold its interest in Trulite effective March 2008.
F-24
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
On February 13, 2008, the Company’s board of directors approved the purchase of an aggregate of 99,333
stock options from three officers of the Company and one member of its board of directors for approximately $5.9
million, in the aggregate. The board also approved the purchase of 10,000 shares of common stock from one
member of its board of directors for approximately $0.7 million. All purchases were completed during the three
months ended March 31, 2008. The Company does not have a program to repurchase shares of our common stock.
On March 31, 2006, COE executed a Promissory Note (the “COE Note”) to the Company to finance its
share of development costs in Grand Isle 72, in the aggregate principal amount of up to $2.8 million. The COE Note
is payable upon demand and bears interest at a per annum rate of 10%. The COE Note has been amended from time
to time and on April 24, 2007, the aggregate principal amount of the COE Note was increased to $5.0 million. As of
June 30, 2008, the outstanding principal balance under the COE Note was $4.3 million. For the fiscal year ended
June 30, 2008, the amount of interest income was approximately $0.5 million.
19. Suspended Well Costs
The Company’s net changes in suspended well costs for the year ended June 30, 2008, in accordance with
FASB Staff Position No. 19-1 (“FSP 19-1”), “Accounting for Suspended Well Costs”, are presented below:
Year Ended
June 30, 2008
Balance at June 30, 2007……………………………………………………… 3,010,401
$
-
Additions pending the determination of economic resources………………
-
Reclassification to proved reserves…………………………………………
Charged to dry hole costs……………………………………………………
-
Balance at June 30, 2008……………………………………………………… 3,010,401
$
FSP 19-1 permits the continued capitalization of exploratory well costs if a well finds a sufficient quantity
of reserves to justify its completion as a producing well and we are making sufficient progress towards assessing the
reserves and the economic and operating viability of the project. The $3.0 million in capitalized well costs that have
been capitalized for a period of greater than one year were incurred in fiscal year 2007. These costs relate to our
Grand Isle 70 discovery. We are undergoing an analysis of various development scenarios to determine if economic
quantities of natural gas can be produced from this project.
20. Subsequent Events
On August 26, 2008, the Company prepaid the $15.0 million it had outstanding under its $30.0 million
Term Loan Agreement with a private investment company and terminated the Term Loan Agreement. The
Company paid an additional $116,442 in accrued and unpaid interest and non-use fees.
F-25
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
The following disclosures provide unaudited information required by SFAS No. 69, “Disclosures about Oil
and Gas Producing Activities”.
Costs Incurred. The following table presents information regarding our net costs incurred in the purchase
of proved and unproved properties and in exploration and development activities for the periods indicated:
Year Ended June 30,
2008
2007
2006
Property Acquisition Costs:
Unproved…………………………………………
Proved…………………………………………… 309,000,000
Exploration costs…………………………………… 45,243,651
Developmental costs………………………………… 76,025,586
Capitalized interest…………………………………
$
-
-
$
3,571,830
$
14,609,232
-
72,888,603
1,453,066
1,083,693
-
19,529,607
590,395
149,365
Total costs………………………………………… 430,269,237
$
$
78,997,192
$
34,878,599
Natural Gas and Oil Reserves. Proved reserves are estimated quantities of natural gas and oil that
geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that
reasonably can be expected to be recovered through existing wells with existing equipment and operating methods.
Proved natural gas and oil reserve quantities at June 30, 2008, 2007 and 2006, and the related discounted
future net cash flows before income taxes are based on estimates prepared by W.D. Von Gonten & Co. and William
M. Cobb & Associates, Inc., petroleum engineering. Such estimates have been prepared in accordance with
guidelines established by the Securities and Exchange Commission.
F-26
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
The Company’s net ownership interests in estimated quantities of proved natural gas and oil reserves and
changes in net proved reserves as of June 30, 2008, 2007 and 2006, all of which are located in the continental United
States, are summarized below:
Oil and
Condensate
(MBbls)
NGL's
(MBbls)
Natural
Gas
(MMcf)
Proved Developed and Undeveloped Reserves as of:
June 30, 2005…………………………………….……………………………
77
Sale of reserves……………………………………………………………
Discoveries…………………………………………………………………
Recoveries and revisions……………………………………………………
Production…………………………………………………………………
June 30, 2006…………………………………….……………………………
Sale of reserves……………………………………………………………
Discoveries…………………………………………………………………
Recoveries and revisions……………………………………………………
Production…………………………………………………………………
June 30, 2007…………………………………….……………………………
Sale of reserves……………………………………………………………
Discoveries…………………………………………………………………
Purchases……………………………………………………………………
Recoveries and revisions……………………………………………………
Production…………………………………………………………………
June 30, 2008…………………………………….……………………………
Proved Developed Reserves as of:
June 30, 2005……………………………………………………..…………
June 30, 2006……………………………………………………..…………
June 30, 2007……………………………………………………..…………
June 30, 2008……………………………………………………..…………
(203)
174
-
(37)
11
(2)
1,188
6
(39)
1,164
-
2,200
1,496
806
(187)
5,479
77
11
827
5,479
-
-
-
-
-
-
-
-
-
-
-
-
3,186
2,015
2,350
(112)
7,439
-
-
-
7,439
911
(1,076)
3,813
172
(456)
3,364
(414)
75,662
1,732
(2,452)
77,892
(13,789)
117,999
78,745
41,309
(10,588)
291,568
911
1,876
57,721
291,568
F-27
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
Standardized Measure. The standardized measure of discounted future net cash flows relating to the Company’s
ownership interests in proved natural gas and oil reserves as of June 30, 2008, 2007 and 2006 are shown below:
As of June 30,
2008
2007
2006
Future cash flows………………………………...……… 5,635,443,766
Future operating expenses……………...………………… (211,104,075)
Future development costs…………………………………
(20,712,845)
Future income tax expenses………………...…………… (1,733,031,168)
$
$
575,634,244
(56,151,152)
(51,478,940)
(114,832,834)
$
20,342,459
(2,957,249)
(4,436,360)
(1,389,931)
Future net cash flows…………………………..……… 3,670,595,678
353,171,318
11,558,919
10% annual discount for
estimated timing of cash flows……………...……… (1,436,677,549)
(100,874,043)
(3,824,813)
Standardized measure
of discounted future net cash flows……………..……… 2,233,918,129
$
$
252,297,275
$
7,734,106
Future cash flows are computed by applying fiscal year-end prices of natural gas and oil to year-end
quantities of proved natural gas and oil reserves. Future operating expenses and development costs are computed
primarily by the Company’s petroleum engineers by estimating the expenditures to be incurred in developing and
producing the Company’s proved natural gas and oil reserves at the end of the year, based on year-end costs and
assuming continuation of existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for tax basis and applicable tax credits.
A discount factor of 10 percent was used to reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement cost or fair value of the Company’s
natural gas and oil properties. An estimate of fair value would also take into account, among other things, the
recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, and a discount
factor more representative of the time value of money and the risks inherent in reserve estimates of natural gas and
oil producing operations.
F-28
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
Change in Standardized Measure. Changes in the standardized measure of future net cash flows relating to
proved natural gas and oil reserves are summarized below:
Year Ended June 30,
2008
2007
2006
Changes due to current year operation:
Sales of natural gas and oil, net of
$
natural gas and oil operating expenses…………………...… (118,255,500)
Extensions and discoveries…………………………………… 1,320,872,171
393,348,968
Net change in prices and production costs………………...…
Change in future development costs………………………..…
50,366,258
Revisions of quantity estimates…………………………...…… 641,122,998
Purchase of reserves…………………………………………… 868,101,751
(26,923,252)
Sale of reserves……………………………………………….
Accretion of discount…………………………………………
32,917,957
Change in the timing of production rates and other…………… (306,888,418)
Changes in income taxes……………………………………… (873,042,079)
$
(17,015,997)
326,092,883
1,721,445
2,737,444
5,450,220
$
(7,301,314)
17,872,465
249,397
(5,660)
1,023,322
-
-
(1,529,012)
885,209
1,985,288
(75,764,311)
(11,517,747)
708,142
742,058
712,843
2,483,506
5,250,600
Net change……………………………………………………… 1,981,620,854
Beginning of year………………………………………………… 252,297,275
244,563,169
7,734,106
End of year………………………………………………….…… 2,233,918,129
$
$
252,297,275
$
7,734,106
F-29
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
Quarterly Results of Operations. The following table sets forth the results of operations by quarter for
the years ended June 30, 2008 and 2007:
Fiscal Year 2008:
Quarter Ended
Sept. 30,
Dec. 31,
Mar. 31,
June 30,
($000, except per share amounts)
Revenues from continuing operations………………………
$
9,096
$
16,596
$
20,559
$
70,246
Income from continuing operations (1)…………………...… 5,377
Net income attributable
$
$
7,693
$
43,965
$
26,186
to common stock…………………………………………
$
5,721
$
111,274
$
112,399
$
25,964
Net income per share (2):
Basic:
Continuing operations…………………………………
Discontinued operations…………………………………
$
$
0.31
0.05
Diluted:
Continuing operations…………………………………
Discontinued operations…………………………………
$
$
0.31
0.04
Fiscal Year 2007:
Revenues from continuing operations………………………
$
726
Income (loss) from continuing operations (1)………………
Net income (loss) attributable
$
(422)
$
$
0.45
6.49
$
$
2.70
4.27
1.58
$
$
-
$
$
0.45
6.02
$
$
2.57
4.02
$
1.52
$
-
$
251
$
5,127
$
8,036
$
(2,388)
$
249
$
1,483
to common stock…………………………………………
$
(406)
$
(2,459)
$
156
$
(525)
Net income (loss) per share (2):
Basic:
Continuing operations…………………………………
Discontinued operations…………………………………
$
$
(0.04)
0.01
Diluted:
Continuing operations…………………………………
Discontinued operations…………………………………
$
$
(0.04)
0.01
$
(0.13)
$
-
$
0.01
$
-
$
$
0.05
(0.11)
$
(0.13)
$
-
$
0.01
$
-
$
$
0.05
(0.11)
(1) Represents natural gas and oil sales, less operating expenses, exploration expenses, depreciation, depletion and
amortization, impairment of natural gas and oil properties, and general and administrative expense and other income
after benefit (expense) for income taxes.
(2) The sum of the individual quarterly earnings (loss) per share may not agree with year-to-date earnings (loss) per share
as each quarterly computation is based on the income or loss for that quarter and the weighted average number of
common shares outstanding during that quarter.
F-30
CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
F-31