09
May

Contango Oil & Gas – Still Undervalued

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Contango Oil & Gas (MCF) - $33.65 - How sorry I am there aren't options on this one. The stock has been much stronger than the group for the last three days now on 3x normal volume. They had a great quarter to be sure but I haven't heard anything other than the usual "it was in a newsletter". That guy, who already owns something on the order of 10% the stock, thinks it's worth a little over 2x it's current market cap. Taking that with a grain of salt I have to say that I was shocked it hasn't moved even higher than it has in the wake of the second well at its Deep Shelf Double Dutch discovery.

Despite the 57% run the stock has had since announcing it's second successful well at Dutch back in early April (when I first highlighted the company ) I can almost get to the company's current valuation (TEV = $510) by only taking:

  • current proved reserves of ~56 Bcfe, up from 34 Bcfe at their August fiscal year end.
  • adding to that probable reserves of ~ 150 Bcfe for the company's 31,000 net acres in the Fayetteville Shale (either by way of a pretty conservation 5 Bcf per 1,000 acre metric or by taking the 117 locations MCF thinks is has there via its parter Alta and multiply by 1.3 Bcfe per well.
  • Which gets you to a pretty safe look at 2P reserves of ~ 205 Bcfe.
  • Based on recent transactions those assest could likely be sold for $2.40 / Mcfe in the ground which gets you to $492 million.

This gives NO value to:

    • estimated gross probables of 77 Bcfe for a third well at Dutch and another deep shelf prospect to be drilled this summer.
    • 4,400 blocks of 3D seismic data in the Gulf of Mexico
    • a 10% interest in Chenierre's Energy's (LNG) Freeport LNG facility due open 1Q08.
    • a portfolio of clean energy investments.

On top of that add the strong growth exhibited in the 1Q07 results.

First you have to love the way the boys at Dow Jones pull their headlines:

"Contango Oil & Gas 3Q Profit Down, Expenses Rise" - The stock then proceeded to rise another 7%. Somebody with some idea of what's really going on should write the headlines but that's not my issue today.

Production is ramping quickly:

  • 1Q07 average: 7.8 MMcfepd
  • Today (May 9, 2007): ~20 MMcfepd
  • Dutch #2 online soon adding another 7.5 MMcfepd
  • Add in ongoing drilling in the Fayetteville Shale and they expect to reach 30 by summer.

Potential Catalysts:

  • Dutch #3 spud late April and is expected to be at TD by July.
  • Two shale wells have been drilled and the first is being fracced now.

Operations:

  • LOE well in hand at a miniscule $0.39 per Mcfe. That's just shockingly low.
  • If they keep growing at this rate they'll even be worth looking at on P/CF basis.

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