Contango Oil & Gas Co. is set to expand its footprint in the Big Horn, Permian and Powder River basins after agreeing to purchase bank-owned liquidated assets for $58 million.
Under the purchase and sale agreement announced Monday, the Fort Worth, TX-based independent is to acquire around 7,500 boe/d of production, 18.3 million boe of proved developed producing reserves and 182,000 net acres held by production. Production from the acquired assets is liquids weighted at more than 55% oil and natural gas liquids (NGL).
“This opportunity became actionable as a result of our proprietary pipeline of assets owned by non-natural owners, and our hope is that, as in this case, sellers view us as a solution provider as much as they do a counterparty in looking for a new home for stranded assets,” CEO Wilkie Colyer said.
Contango has existing operations in the Big Horn, Permian and Powder River. “This is another step for us in consolidating upstream assets in a difficult environment for the industry as a whole,” Colyer said.
The largest property in the package, the Elk Basin field in the Big Horn Basin, is a conventional asset that has been producing from multiple horizons for more than 100 years, according to Contango. The field has produced more than 500 million bbl of oil since discovery, with historic estimates of the original oil in place in excess of 1.2 billion bbl. Elk Basin currently produces around 2,000 boe/d (87% oil and 100% NGLs), with low single-digit decline rates exhibited for several decades, Contango said.
The second largest asset in the portfolio, in the Central Basin Platform and Northwest Shelf areas of the Permian Basin, now produces 3,800 boe/d (40% oil and 59% NGLs).
The deal represents a more than 50% discount to producing reserve value, according to Contango, and adds “significant volumes of low-decline liquids production requiring minimal maintenance capital.” The company estimated the unlevered payback on the assets at the end of November to be less than three years.
The asset purchase follows Contango’s announcement in October that it would merge with Mid-Con Energy Partners LP. The all-stock transaction would allow Contango to substantially increase its reserve base and cash flow. Before the tie-up, the companies had a management service agreement in place in which Contango took over the operations of Mid-Con’s oil and gas assets in exchange for fees and reimbursements to purchase Mid-Con common units.
Pro forma for the Mid-Con merger and the latest acquisition, Contango expects its net producing oil annual decline rate would drop to around 11% during 2021. With the Mid-Con merger, the assets are expected to increase the reserve value by about 36%.
The asset purchase, to be partly funded with a projected $22 million raised from the sale of around 14.2 million shares of common stock, is expected to close by the end of this month. Contango executed the stock agreement with a group of institutional and accredited investors to sell the shares in a private placement.
Contango has offshore properties in the shallow waters of the Gulf of Mexico and onshore properties in Texas, Oklahoma, Louisiana and Wyoming. During the third quarter, it achieved production sales of 17,200 boe/d, including about 500,000 boe/d produced during the second quarter and placed into excess storage capacity until sold in the third quarter at higher prices.Excluding this sale of second quarter oil inventory, Contango’s production sales were 16,700 boe/d, nearly three times the production achieved in 3Q2019, primarily because of additional production from properties acquired from White Star Petroleum LLC and Will Energy Corp in 4Q2019.
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