Joe Grady - CFO Allan Keel - President and CEO Steve Mengle - SVP, Engineering Tommy Atkins - SVP, Exploration Carl Isaac - SVP, Operations.

Neal Dingmann - SunTrust Don Chris - Johnson Rice Kyle Rhodes - RBC.

Good day everyone, and welcome to the Contango's Results for the Third Quarter 2015 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Joe Grady, Senior Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you, Vicky. I'd like to welcome everyone to Contango's earnings call for the quarter ended September 30. On the call today are myself; Allan Keel, our President and CEO; Steve Mengle, our Senior VP of Engineering; Tommy Atkins, our Senior VP of Exploration; and Carl Isaac, our Senior VP of Operations.

I’ll give a brief overview of the financial results, I’ll then turn it over to Allan for an overview of current operations and then we’ll follow that with the Q&A session.

Just as a reminder, as it is typical for most companies, we will limit questions to those from analysts who follow our stock as we believe that is the most constructive and productive use of everyone's time.

But before we begin, I want to remind everyone that the earnings release and the related discussion this morning may contain forward-looking statements as defined by the Securities and Exchange Commission, which may include comments and assumptions concerning Contango's strategic plans, expectations and objectives for future operations.

Such statements are based on assumptions we believe to be appropriate under the circumstances, however, those statements are just estimates, are not guarantees of future performance or results and therefore should be considered in that context.

Summarizing the financial results for the quarter, we reported a net loss of $185.7 million for the quarter or $9.79 per basic diluted share compared to net income of $3.7 million or $0.19 per share for the prior year quarter.

Included in this quarter’s results, was pre-tax, non-cash impairment charge of approximately $226 million as required by GAAP and as a result of the decrease and estimated risks discounted due to cash flows from certain of our properties.

Relative to the balance sheet carrying value for those properties, with the decrease in those future cash flows resulted [merit plan] included all natural gas and natural gas liquids prices. Also impacting the current quarter was the $9 million pre-tax, non-cash impairments of unproved prospect cost.

Exclusive of these impairments in the current quarter and $6.7 million impairment and drill offshore prospects and unproved acreage in the TMS in the prior year quarter. Adjusted loss before income taxes for the current quarter would have been $21 million compared to the adjusted income before tax of $13 million for the prior year quarter.

Contributing to the decrease and adjusted results period-over-period where more revenues resulting for more prices and production in the current period offset for a lower operating expenses, I will touch briefly on each of those in a few minutes.

Adjusted EBITDAX as we defined in our release was approximately $20.7 million or $1.9 per basic share for the current quarter compared to approximately $47.7 million or $2.50 per share for the prior year quarter, a decline attributable to the lower revenues again offset for lower lease operating expenses in cash G&A expenses and a $4.8 million settlement of loss during the quarter that is reflected in other income expense.

Cash flow per share on recurring basis meaning excluding the other income was approximately $0.83 a share which was in line with Contango's estimates.

[indiscernible] benefit of our emphasis on cost improvement, in this price environment quarter-over-quarter, we’ve reduced controllable cash cost by 20% and that is almost $4 million quarter-over-quarter.

And as notable, is notable is that our per unit production cost was also decreased by about 10% despite lower production, so we stayed focused on further improvement in both the field as well as the administrative side.

Production for the quarter was approximately 8.4 Bcfe or 91 million equivalents per day compared to 9.4 Bcfe or 102 million of natural gas equivalents per day in the prior year quarter. That 8.4 Bcfe or 91 million a day was within the guidance that the company gave at our previous call.

As discussed in our release for the quarter, due to the dramatic decline and uncertain outlook for commodity prices in the last year and half we emphasize discipline in our CapEx strategy by reducing our program to include only strategic drilling derisking new ideas, formations and our plays and have deemphasized the expenditure capital on marginally economic projects in this price environment merely to reflect production growth.

Consequently new production from oil and liquids related drilling has not been sufficient that to offset higher rate gas production from our GOM properties period-over-period. We have provided guidance of 85 million to 90 million equivalents per day for the fourth quarter with roughly to the same commodity mix as in the third quarter.

During the month of October, our production has averaged approximately 91 million cubic feet of equivalents per day. On the price side, commodity prices during the quarter were significantly below for prior year levels no surprise to anyone.

Our weighted average equivalent price declined to $3.47 per Mcfe compared to $7.17 per Mcfe in the prior year quarter. And that overall decrease can be attributable to declines of 54%, 25%, 59% in crude oil, natural gas and natural gas liquids prices respectively.

Lower prices contributed to a little more than half of the total decrease in [revenue] quarter-over-quarter. For the fourth quarter, we have 35,000 barrels per month of oil production hedged through costless callers with a [foot cost] spread of $55 about $65.15.

On the expense side, total lease operating costs were approximately $9 million for the quarter compared to $13.8 million in the prior year quarter.

Excluding production and the ad valorem taxes operating costs were $8.2 million or $0.98 per Mcfe compared to $10.6 million or $1.13 per Mcfe for the prior year quarter, which is a 23% improvement over the prior year quarter as our efforts to reduce field operating costs through efficiencies as well as concessions from service providers are starting to filter into our reported results.

As notable – also notable is that a large portion of monthly lease operating cost or fixed cost and despite lower production, we have been successful of reducing per unit cost period-over-period as well. Guidance for the second quarter is $8 million to $8.5 million, excluding production on ad valorem taxes.

Impairment expense in the current quarter again was total of $235 million, $225 million of which related to producing properties of approximately $10 million of which related to the impairment value of unproved prospects in expiring leases.

As noted in our release, we’ve required under GAAP to reduce carrying value of our assets on balance sheet because that carrying volume exceeded the estimated risk discounted future cash flows from certain of our properties.

Recent decline in commodity prices resulted in that reduction in the estimated future cash flows thereby [indiscernible] need to impair that carrying value on our balance sheet.

Other income expense was a credit of approximately $4.3 million for the quarter compared to [indiscernible] amount prior year quarter included in the current quarter was $4.8 million and proceeds from the settlement loss related to third-party damage in our Gulf of Mexico facilities in 2010.

General and administrative expense was $7.5 million for the current quarter compared to $6.8 million for the prior to exclude non-cash compensation expense for both periods and approximately $600,000 in severance cost related to reduction in-force in the current quarter recurring cash G&A expense was approximately $4.5 million compared to $5.6 million for the prior year quarter a decrease of approximately 200%.

Just as we have done in the field, we have emphasized internally the need to reduce administrative cost and accordingly in August of this year we implemented reduction in-force in our corporate offices that reduced headcount by about 30%. Guidance for the fourth quarter is $4.5 million to $5 million.

As of the end of the current quarter, we had $114.6 million outstanding on our credit facility and had additional borrowing capacity of $109 million under our $225 million borrowing base.

Due to a less active CapEx program plan for the fourth quarter, we forecast that our year-end debt level will be similar probably even a little lower than current levels. Our next [regularly] schedule borrowing base redetermination is to be effected November 01. That redetermination is currently in process and should be finished in a week or two.

We do expect some reduction in the borrowing base due to the decline in commodity prices and reduced drilling program since last redetermination but we do not expect in reduction whatever meaningful adverse impact on our liquidity position.

Despite the slight increase in our debt level from the second quarter, we still maintain one of the healthiest balance sheets and liquidity profiles in our peer group.

At the end of the quarter, we had a debt of total book cap of 25%, a debt to last 12 months EBITDAX ratio of 1.3 to 1, 109 million of availability under our revolver at the current borrowing base. So, we have a strong financial position that we expect to maintain during the next quarter.

Regarding our CapEx program, fourth quarter activity will consist of the completion of the [indiscernible] well and Muddy formation in Weston County which is our second well in this play and commencement of production and a completion of drilling of the [indiscernible] well our third well in the area.

Our total CapEx program for 2015 is currently estimated to be in the $58 million to $60 million range where of approximately $52 million of that having been spend through the third quarter. We are currently developing our CapEx program for 2016 and we will share that once completed which is likely to be around the end of the year.

That concludes the financial review and I’ll now turn it over to Allan for an operations update..

Thanks Joe, and good morning to everyone and thank you for being with us today. I'd like to give brief update on our operations during the quarter, a quarter that continued to be a challenge for majority in the industry.

Due to the low price environment and the uncertainty for near-term improvement, we stayed focused on and committed to our strategy and goals that we set in the beginning of the year and [indiscernible], number 1, maintain our strong and conservative balance sheet, limit our CapEx, cash flow and only strategic projects reduced costs and maintain the flexibility go through capitalizing on acquisition opportunities that come up in the environment like this.

Concerning our financial conditions, we now forecast our total CapEx program for the year will be around $58 million to $60 million as Joe mentioned earlier, which is expected to be less than our forecasted discretionary cash flow for the year.

Well our debt at the end of the quarter is higher than the beginning of the year will simultaneously reduce our working capital debts that similar manner. So our total obligations remain fairly constant. As Joe mentioned, our year-end plan for profile is expected to be as good or better than as it is today.

Concerning our drilling program, during the quarter we continued to focus on strategic projects that would enhance our portfolio and position us to quickly increase capital activity when process improve and our cost decline.

Specifically, we focused primarily on our unproven North Cheyenne and Muddy Sandstone plan in Wyoming, in a number of formation in our new Elm Hill play Fayette and Gonzalez County East Texas and testing and exploratory prospect of [indiscernible] in Natrona County, Wyoming.

We believe that the success that anyone of these three place could be very meaningful for the future growth of the company and based on the results of our first well announced in July we believe that the North Cheyenne play could be one of those. We are now discovering there with two more drilling wells currently at process.

At the Elm Hill project our play in Texas has proved being consistent so far after drilling five test wells uneconomic due to current price environment that we were in. And in our first forecast in the group [indiscernible] was also a disappointment.

On the cost side during the quarter we continued our cost reduction efforts in each and every aspect of our business in the drilling and completion phase of our operations in our field activities and in our corporate office.

It's a little bit difficult to give a sustainable kind of a trending percentage reduction in drilling completion costs under eliminated and pretty sporadic rig schedule that we had, but we have seen, we have 30% decrease in rig rates around the 30% -40% decrease in completion cost first stage even with more profit.

We have achieved an estimated 23% saving on legacy field operating cost quarter-over-quarter to identify ways to manage field operations more cost effectively and on the G&A side we took the difficult step of implementing the reduction enforced in our corporate offices where we cut the head count up about 30%.

As Joe mentioned our recovering period-over-period cost this quarter were down approximately 20%. Our goal is to get our cash G&A cost down about 30% commensurate with the reduction in head count. We will continue to identify [indiscernible] for cost improvements and we will continue to press our vendors, suppliers for additional concessions.

Regarding our acquisition efforts, we reviewed and analyzed numerous opportunities. However a number of markets forces has less than fewer than expected opportunities and for those actually in market there are larger disparity in the bid out spread.

We continue to look for opportunities that provide a good mix of producing reserves and a meaningful amount of resources upside that could provide strong platform for growth when processed and cost improve. I will now update you on our strategic drilling activity that we are currently focused on.

In the Madison and Grimes county area what we believe that a sizable amount of unproven potential steel exist there for the taking and we don't believe that the current environment is such that we should go into development mode until we can get better returns on our own invested capital.

We do believe however that it does strategically to test the concept of certain areas of potential upside in this area in 2016.

As Joe mentioned we are now beginning to develop our 2016 budget and that will likely include strategic test of the Lower Lewisville, the Eagle Ford and certain areas contain the Upper Lewisville than those previously drilled in the area.

In our [indiscernible] project in Wyoming in July as you may recall we released the initial results in Western County where we drilled a very nice exploratory success that tested at peak 24 hour rate of 907 barrels equivalent per day which was about 98% oil and RP30 of 420 BOEs per day we are working through our typical logistical issues.

The current rate on this well is approximately 140 barrels equivalent per day. We are still experimenting with various lift mechanisms to optimize production rates and decline profiles, review the core data to optimize completion and other important information that was not available at the time of initial drilling and completion of the area well.

We are still very excited about prospects for our 35,000 acres position.

We are utilizing a different completion technique on our second well to pop on number [1H] and what we use in the oil well and began initial flow back just this past weekend and already see a significant oil rates in 650 BOE per day range which happened much sooner than initial completion.

Additionally on that well we were able to drill [indiscernible] log side track and completed 6700 foot ladder with the 40% more stages for under $5 million putting us in a good cost position going forward. We will observe production results from these two wells for few months before we complete the third well in the spring.

We will also design our 2016 program for the series based on the results of these first two wells in the price environment that we expect to see in 2016.

we believe that this play profile here is very similar to that of our Woodbine play in Madison County and Texas and based on 160 acre space we believe we have somewhere between 200 to 300 locations that are possible on our acreage.

Going back to Elm Hill, our project in Fayette and Gonzalez County Texas we and our partner drilled 5 wells, testing 3 formations the Nevada, the Austin Chalk and Buda. Two wells are produced in the Nevada sand but not at rates that provide acceptable returns at this price environment.

The two wells in the Buda and Austin Chalk did produce a very high oil rates initially but that since declined in producing economic rates at this time. We and our partner are currently aware and waiting other opportunities across our leasehold block there in determining what our next step will be.

In summary we believe that we made good start on our goals during the first three quarters that will pay off at process rebound and we return the development mode and make the economic since to do so. Similar to the upspring sector we have suffered to a dramatic decline.

We will stay focused on maintaining and improving our financial strength prudently de-risking our portfolio and adding to our drilling inventory so as to be positioned to accelerate activity and improve commodity price environment. With that -- that concludes our remarks and we will now ask the operator to open the line for questions..

[Operator Instructions] And we will take our first question today from Neal Dingmann with SunTrust. Please go ahead..

Good morning guys.

So Allan just a quick question on [indiscernible] after these next two wells, you have this three wells on what let’s say there is -- for that first one will that give you a confidence in most of that 35000 net that you all have or you are still in the area -- you have to do in there?.

Yes we are still, yes we are still delineating the play but we think that after these first three wells will have pretty good geographical area de-risked but we want a little bit more that but yes I think the majority of our acreage we feel very confident about the potential there.

And the big thing there for us is to continue to find the way to drive down the cost of drilling complete and our operations team did a very outstanding job driving that cost down further from our first well to the second well to the third well. And I would say that is going to be a key factor for us. We think the resource is there.

We got to find the way to get out economically..

Okay that’s kind of -- here is my next question. Is it more when you and Joe think about obviously your plan I think you are doing the right thing in cutting back in the environment.

Is it more just on well economics you are looking rather than a set price obviously it depends on what cost do and what other factors on these wells in order to step up your program is it just a sort of hurdle rates that you and Joe established to decide when you want to sort of excel that drilling or given that you are looking more at acquisitions is there, I guess, it's just a hurdle rate that you are looking at before deciding organically that increase?.

Yes, I think it's definitely a hurdle rate that's certainly number one for us. I think that in this environment I mean you got to weigh what the different alternatives are, I mean I think that there are we believe there is opportunities out there to whether it’s asset or corporate type activity we think that does exist. We are focused on that.

We think size and scale are still extremely important but also for us needing more inventory in the price environment that we are in so we are equally focused on that. So I would say it is greater return driven and so therefore we are trying to drive down our cost and at the same time try to be as efficient as we can. We are still in the early stages.

We are still learning as we go out there and so far we are pleased with what we have seen..

Okay then lastly just offshore things -- recompletes or anything that you are looking at early next year how should we look at sort of that production?.

No. we did a re-completion earlier this year and it worked out well. But there is really not much left to do there it’s all PDP, so we are just hanging in there with that and we are again pleased with the decline that we have so far out there. So --.

Okay. Thank you..

Yes thanks Neal. .

And the next question comes from Don Chris with Johnson Rice..

Good morning guys.

Just starting in the Muddy, can you talk about the differences in pumps that you did on the [indiscernible] well and how that 140 BOE a day that has produced currently translates to your curve?.

I will turn that over to Carl in terms of that pumps that we used and then Tommy and Steve can comment regarding our – we are still very early in the process in terms of trying to even determine what type curve would be so that's just very early stage but Carl why don’t you..

Don could you go across through the file first..

Yes, I am sorry I was just curious I know you spotted on jet pump and I thought you went to a sort of pump on that.

I was just curious as to what you learned the process?.

Well actually on the first well we started out with the gas lift system and [indiscernible] transitioned to the pump and then we transitioned to a rod pump after that and starting out on the second well we will commence with the rod pump as soon as the well is kind of at point where requires artificial lift.

So I think lessons learned which I think is what your question was guide toward was based on the [GORs] that we have in this field rod pump is much efficient way starting out based on our experience with the jet pumps and the gas lift system..

Yes go ahead. I am sorry..

I think the second part of your question was really how we split the type curves and my response to that would be that we just haven't seen the data yet to confirm or deny a type curve..

Okay and just as it relates to the early flow back on the second well I know it's very early days but how does that translate to what you saw on the elite well? Is it kind of in line with the elite well or is it turning ahead of what you saw at same stage?.

Well I would add though as Allan said few moments ago that we are more encouraged at this point in this well than perhaps we were on the first well. I think the way I have to describe this -- is that we haven't had anything that are optimism..

Okay Allan and one just for you I know a lot of people going through bank determinations now specially on the private side.

What is the M&A market look like right now compared to what it looked like two or three months ago and do you think there is -- the M&A market looks little better now from the transaction standpoint?.

I would say that it's slightly better but I think it's going to – I think probably in the first quarter of next year is when you are going to see more activity I think there is limited activity now.

I think there is some of this is beginning to get home with people and but I don't think you will see as much at the end of this year as you will next year when I think it becomes more real to some people. I anticipate next year be a pretty active year for M&A..

Okay. I appreciate the answers. Thank you. I will get back in queue..

Thank you. .

And we will now go to Kyle Rhodes with RBC..

Hey guys! Certainly some encouraging on the second my result early on is that well cut on wells doing increasing?.

Yes. It is increasing in this point but we had a flip on the vast oil relative to the water. So we expect that content – that trend will continue. We are just going to keep the things. .

Great.

And just kind of I guess tying that into your fourth quarter guidance just curious kind of what you baked in from the Muddy kind of in that guidance number?.

We didn’t bake very much in there Kyle. It just come along now which is in November and as Carl mentioned it's going up. It's only one well. So the third well won’t be completed probably until spring because we watch both and compare how they both perform with first and compare performance on those before we decide having completing the third one.

So there is not a whole lot in the fourth quarter related to that well..

Now that makes sense. I guess you guys need to see the completion of the third well before you would think about adding a dedicated rig there in 2016 or is two kinds of results enough. As you are kind putting your budget together around year end.

Would that be enough to kind of go and allocate a full rig there for 2016?.

No, I think we are going to test this well. I think we are going to make our budget, will have some contingencies in that, will see how this well and the first well produced for a period of time. If we can get cost to the point where we tell like we could get the type of return that we need. We would certainly want to do that.

That’s something that we are continuing to focus on and work on but it’s going to take a little bit more time before we will be in a position to do that. But it is something that‘s on our minds.

And Kyle when we go out with our budget at the end of the year will have a better idea hopefully of what the price environment might be for 2016 so that will play into as well..

Got it and then this kind of on the M&A front.

Can you guys give us a sense for kind of flavor of deals that you guys are looking at these days and then how would you think about funding a deal, are you willing to do equity fees levels or is there kind of a more creative type of funding you guys are looking at?.

Yes, we are looking at opportunities tied in and around our existing areas of operations but also in areas sort of they are very similar to where we operate. So but we need it’s as you can appreciate it’s pretty difficult finding things plays that were today and unless you’re in the core of a particular play.

So yes we have been active again both on the asset side and on the corporate side as well there has been anything that really that has been a great fit, from a financing standpoint I think that we look at what our cheapest cost of capital going to be and how we could best structure it going forward.

If you recognize the market has gotten pretty choppy and we were with a deal not long ago and the market increased like 200 basis points in like a 30 or 40 day period. Where we were working on a deal. So it’s a challenging environment for sure but with our balance sheet we feel like we can get some things done..

And certainly the profile of whatever we are looking at would dictate how we might proceed on the financing side as well. So it’s sort of different for every deal we look at actually..

Got it, got them and this one final one for me.

You guys have an estimate for kind of one year base decline for your onshore assets assuming no new drilling?.

Probably 10 to 15% Steve said is exclusive of new drilling..

And that will conclude our question and answer session. I’d like to turn the call back to Mr. Allan Keel for any additional or closing remarks..

We would like to thank everybody for participating today and we look forward to updating you at our next call. So thanks so much..

And thank you very much that does conclude our conference for the day. I would like to thank everyone for your participation..