Traders Cooperative

[kozak667]

cy, opinion on Contango Oil & Gas: MCF ? TIA
It was highlighted in a junk mail from Agora/ Chris Mayer last week @34. It has moved up substantially since.
Below a portion of his writeup:
"..How can I recommend a natural gas producer at a time like this, - it's falling like a bungee-jumper…without a bungee cord.But some natural gas companies can make money even at $4 natural gas. Contango is one of them. Its wells are prime examples of "tangible assets that sweat" - physical assets that pour off cash, our favorite kind of investment. Ken Peak, the CEO and largest individual shareholder, says that Contango earns $10 million a month in after-tax free cash flow at $5 gas. That's $120 million a year in free cash flow on a stock that trades for $533 million market cap. In other words, at $5 gas, the stock would be selling trades for less than five times free cash flow!
Of course, Contango’s depressed valuation is no accident. Investors are unloading the stock, partly because natural gas prices have already tumbled and partly because of the fear that they might tumble some more. But knowing what we know about how rapidly depleting natural gas deplete, we are very tempted to believe that natural gas is too darn cheap. If we get to $8 natural gas, Contango will gush cash flow.
Its production costs are about $2.18 per mcf, all in.
Natural gas ought to correct very quickly this time around. Annual natural gas depletion in the U.S. is around 36% per year. So it wouldn't take a lot of production cuts to quickly get a steep drop in supply.
As it is, the company has zero debt, another rarity. As of December 30, it had $77 million in cash, or nearly $5 per share.
And I admire Peak, who is one of those smart eggs who seems to coolly put his money in the right places time and time again. His track record is impressive. In December 2007, he sold Contango's shale acreage for $338 million. Contango's cost was only $38 million, so he turned a net profit of $300 million for Contango. In February of 2008, he sold Contango's interest in an LNG project for $68 million.
Contango's cost basis was $2 million. Contango itself is a great story of wealth creation. Peak started it in 1999. The total capital put into the business was $50 million - never a cent more than that. Today, Contango's market cap - even at this depressed level - is over $500 million.
How did Peak create such wealth? King Arthur had Excalibur, Ken Peak has Dutch and Mary Rose. Big finds in these fields in the Gulf of Mexico powered the wealth creation story at Contango. The company now has proven reserves of 369 Bcfe. So based on Contango’s current market cap, you get these reserves for only about $1.50 per Mcf - a super cheap price. These are low-cost and high-price reserves. It's the good stuff, to put it bluntly. "You get 22 [Mcfe] every time you buy a share," says Peak.
The stock is so cheap Peak worries some deep-pocketed bully will come along and try to steal it. Peak recently adopted a shareholder rights plan that makes such a takeover more difficult. As he put it: "Because the stock price is so far down, I didn't want the company to be vulnerable where some of the stockholders, including me, are taken advantage of."
The plan would normally bother me, but not in this case. Peak wants to get paid for what he has, and he knows what it is worth. Management owns 24% of the company. When they get paid, so do we.
He thought about selling Contango earlier in 2008, but couldn't get a price he was happy with. "Our seven wells [alone] are worth billions," he declares. Again, the market says Contango is worth only $544 million as I write. Ultimately, I think Peak will sell the company. I think the purchase price will be at least $95 per share. But even if that doesn't happen, Contango is a great bargain here at the current quote of $33.
Contango is also buying back its own stock. Peak says Contango enjoys a 50% after-tax return on these purchases. With the share price so low, buybacks add a lot of value to NAV because Contango is buying proven natural gas reserves at prices much cheaper than what it would cost you to find them with a drill bit. Plus, Contango has exploratory blocks still in the hopper. So there is more upside here."