Great writeup. If one suspects the stub to be the most significantly undervalued part, then why invest in only long Loew’s without shorting out the other risks. Would you expect maybe buying cheap calls on L (to keep the capital invested small) while shorting the 3 stocks to outperform just investing in L itself over time?

Thanks!
Danny

Contango’s 10-Q report has been released:

http://www.sec.gov/Archives/edgar/data/1071993/000107199313000008/mcf-20130331x10q.htm

As anticipated in the article, additional downward estimates in GOM reserves were recorded:

“Our total proved reserves as of March 31, 2013 were approximately 41.1 billion cubic feet equivalent (“Bcfe”) less than our reserves as of June 30, 2012. The major contributors to this decrease include production of 18.8 Bcfe during the nine months ended March 31, 2013; a 19.2 Bcfe decrease in our Dutch and Mary Rose reserve estimates based upon additional pressure data; a 9.2 Bcfe decrease in our Ship Shoal 263 reserves estimates due to the well unexpectedly beginning to water out; and a 14.0 Bcfe decrease in our Vermilion 170 reserves due to additional pressure data; offset by a 19.6 Bcfe increase in our reserve estimate for the Exaro-Encana venture and a 0.5 Bcfe increase from our Crosby 12H-1 well in the TMS. ”

However, the company has for the first time included reserves from the Exaro onshore investment estimated at 19.6 Bcfe resulting in proved reserves estimate of 215.5 Bcfe at 3/31/2013.

(Disclosure: No position)

http://www.sec.gov/Archives/edgar/data/1071993/000144530512003621/mcf-2012930x10q.htm

It appears that Contango will not drill any new prospects in the Gulf of Mexico until “mid 2013″ at which time it will commence drilling on one of its six offshore prospects with drilling continuing sequentially over the course of the subsequent eighteen months. So for the remainder of fiscal 2013 (ending 6/30/2013), we can expect Contango to retain earnings from production. Cash was at $96.5 million as of November 1 and proved reserves were 248 Bcfe as of 9/30/2012. The company has also repurchased shares in October and currently has 15,194,952 shares outstanding and no stock options outstanding.

At the current share price of $48.39, each share of Contango can be viewed as a security representing $6.35 in cash and 16.3 Mcfe in reserves. Therefore the implied price/mcfe is $2.58. We can expect reserves to decline for the rest of Fiscal 2013 as production depletes reserves and no new exploration occurs in the GOM (although perhaps some reserves will be found in the onshore projects). Although there is no sugar coating the $45 million in dry hole costs (a bit less than $2/share after tax), the basic investment thesis remains intact: Contango seems like a conservative way to gain exposure to oil and natural gas without accepting any balance sheet leverage.

Press Release:

http://www.businesswire.com/news/home/20121030005799/en/Contango-Updates-Operations

http://www.sec.gov/Archives/edgar/data/1071993/000118143112053799/xslF345X03/rrd357827.xml

Acting CEO Brad Juneau: http://www.sec.gov/Archives/edgar/data/1071993/000118143112052564/xslF345X03/rrd357277.xml

CFO Sergio Castro: http://www.sec.gov/Archives/edgar/data/1071993/000118143112052582/xslF345X03/rrd357331.xml

Juneau now owns $2.75 million worth of Contango directly plus another $1.5 million of stock in trusts for his children.

In my opinion, most other companies would have thrown a boatload of options into the mix for an Acting CEO under these circumstances. While we will not know Juneau’s compensation package until the proxy is out in a week or two, I view large buying of shares with actual cash quite encouraging.

I don’t care about a recent hiccup in the quarter or next year. This company generates FCF every year. If this company can keep steady & moves lower again around $46/share, it looks attractive to me. Plus with no leverage, this company could have huge opportunities for more growth. No fire sale will happen. They’re not in a position where they have to take a bad deal i.e. no debt.

Downside in the event of a distressed sale appears to be limited based on the current valuation which I believe is more than adequately backed by reserves in the ground even at today’s low natural gas prices, with recognition for the high margins realized through sale of oil/NGLs as shown in the chart within the article.

Finally, I would suggest that even if the worst is to occur, Ken Peak will take his responsibilities to shareholders seriously and try to arrange a reasonable outcome. I don’t think a fire sale is in any way required or desirable given the strength of the company and see no reason to model that as a baseline scenario (although obviously it is prudent to look at it for downside risk). Why fire-sale a company with no debt that is highly cash generative even at low natural gas prices when one could simply run it off by stopping new exploration and producing proved reserves in the ground?

Ravi, have you given much thought to the liquidation value of the company if they decide to sell. My thesis is that it’s pretty much a one-man show. You point out that it’s not at all certain that Mr. Juneau would run the company on a permanent basis.

Finally, I commented on my SA article, perhaps prematurely, but I am no longer bearish on the name in the short-run (which was my original call). I believe that my concerns that I expressed are now likely priced into the stock.