Houston-based junior independent Contango Oil & Gas Co. may sell all of its onshore assets and 99% of its current production, all located in South Texas, the company announced on Wednesday. Using the proceeds, the company wants to get back to what it does best: explore the onshore and offshore Gulf of Mexico for new reserves of natural gas and crude oil.

The producing properties up for sale, located in Jim Hogg and Brooks counties, have total proved reserves of approximately 24.9 Bcf and 515,00 bbl as of Sept. 30, which Contango said would put a current value on the properties of about $61 million, assuming a 10% discount rate (based on spot prices of $3.99/Mcf and $27.95/bbl). Current net production from its South Texas Exploration Program (STEP) properties is approximately 17 MMcf/d and 300 bbl/d. Contango’s offshore assets are principally investments in its Gulf of Mexico exploration subsidiaries, which currently have about $10.3 million invested.

“Since July 1, 2002, Contango has committed approximately $5.0 million for the shooting and the acquisition of 3-D seismic data,” said CEO Kenneth R. Peak. “We expect to direct most of our early effort as a result of these seismic acquisitions toward onshore south Texas exploration. We currently are in the field shooting seismic in South Texas and anticipate a second south Texas shoot in early 2003. If any prospects are identified, we would begin drilling in the spring of 2003.”

After Contango completed its exploration drilling on the STEP properties in February, Peak said that the company focused its efforts to increasing production and reserves through a series of four acquisitions from January to July that cost all together $25.9 million. The acquisitions nearly doubled the production and reserves, he said. Contango also spent another $6.1 million to repurchase 22% of its outstanding common stock for $2.40 a share.

With those expenses now behind them, which totaled about $32.1 million, Peak said the company will return to “a more active prospect generation effort. If the sale of our properties were to be completed, this would significantly increase the amount of funds available for exploration. Our cash flow, at today’s natural gas price levels, is expected to continue at approximately $1.5-to-$2.0 million per month through our fiscal year ending June 30, 2003.”

Contango’s current capital expenditure plans through next June are to spend about $10 million, but Peak said the budget could be boosted “significantly if our prospect generation efforts are successful.” Current exploration and production efforts are focused onshore on the Gulf Coast and offshore in the Gulf of Mexico.

Contango has secured Randall & Dewey to explore possible sales. For more information, contact Randall & Dewey at (281) 774-2000.

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