Joe Grady – Senior Vice President, Chief Financial Officer Allan Keel – President, Chief Executive Officer, Director.

Neal Dingmann – SunTrust.

Good day and welcome to the Contango results for third quarter 2016. Today's conference is being recorded. At this time, I would like to turn the conference over to Joe Grady, Chief Financial Officer. Please go ahead, sir..

Thank you. Good morning, everyone. I'd like to welcome you to Contango's earnings call for the quarter ended September 30, 2016. On the call today are myself; Allan Keel, our President and CEO; Tommy Atkins, our Senior Vice President of Exploration; and Carl Isaac, our Senior VP of Operations.

On the agenda, I will give you a brief overview of financial results, then turn it over to Allan to give you an overview of current operations and then we'll open it up for Q&A after that.

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

Before we begin, I want to remind everyone that the earnings press 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.

Starting with the financial results, net loss for the quarter was $12.5 million or $0.55 per basic and diluted share compared to a net loss of approximately $185.7 million or $9.79 per share for the prior year quarter.

Contributing to the improvement in net loss were lower operating expenses, lower DD&A, and lower impairment offset in part by the impact on revenue caused by lower production and lower commodity prices each of which we'll discuss in a minute.

Adjusted EBITDAX, as we define in our release, was approximately $4.6 million for the current quarter compared to approximately $20.7 million for the prior year quarter.

A special charge is negatively impacting the current quarter were $2.2 million in special G&A charges and a $1.2 million contingency accrual for anticipated failure to meet delivery minimums on the throughput agreement with a third-party pipeline operator over the next 12 months. Also, both of which I will address here in a few minutes.

Also contributing to the period-over-period decline were lower revenues, lower realized prices on hedges, and lower other income in 2016. Production for the current quarter was approximately 6 Bcfe or 65.7 million natural gas equivalents per day compared to approximately 91 million per day in the prior year quarter.

And that declined as expected is primarily due to the suspension of drilling for the last year due to the low and uncertain commodity price environment.

Negatively impacting the current year quarter was the shutdown of a third party processing plant at Vermilion 170 for approximately 20 days for line repairs, which cost us about on average for the quarter about 1.3 million equivalents per day.

We also had our purchaser build inventories of oil on our Dutch and Mary Rose properties for hurricane preparedness purposes and that represented about just under 1 million per day on average for the quarter.

Exclusive of these events, we would have likely produced approximately 68 million of equivalents per day during the quarter, which would have been within the guidance we previously provided. We have provided guidance of 63 million to 68 million a day for the fourth quarter with roughly the same commodity mix as in the most recent quarter.

As noted in our release, we have commenced the drilling of our first Upper Wolfcamp well on our newly acquired acreage in the Southern Delaware Basin. However, we do not expect any meaningful production contribution to the fourth quarter from that program.

We will likely announce the initial results of that Wolfcamp well after we have 30 days of sustained production, which likely will be late January or early February.

Crude oil and natural gas prices during the quarter were down 7% and 2% respectively, which combined with the decline in oil production as a percentage of our total production resulted in a 7% decrease in our weighted average equivalent price to $3.24 per Mcfe for the quarter compared to $3.47 per Mcfe in the prior year quarter.

As noted in our filings, we have approximately 25% to 30% of our forecasted PDP gas production for 2017 hedged and are closely monitoring the gas market for the right opportunity to likely add more gas hedges as we approach year-end.

As oil becomes a larger percentage of our overall production base, we will also look to acquire price protection on a portion of that production.

Operating expenses for the quarter exclusive of production and ad valorem taxes were $7.4 million compared to $8.2 million in the prior year quarter, a 10% decline despite the fact that the current quarter includes a $1.2 million charge for an anticipated failure to deliver minimum throughput volumes over the next year under a transportation agreement with a provider of a high pressure gas line in our Madison County area.

As noted in our Q, without additional drilling within the next year in our Chalktown area due to low commodity prices, we will likely incur slightly lower annual throughput efficiencies through 2019. Exclusive of that contingency charge, normal operating costs were down 24% over the prior year quarter.

Over the last 15 months, we have reduced our operating expenses from approximately $3.1 million per month to about $2.1 million per month and that's despite the fact that a vast majority of those expenses are fixed in nature.

Guidance for the fourth quarter is for operating expenses of $6 million to $6.5 million, a little higher than the third quarter due to planned expense workovers and the addition of the anticipated cost associated with our new Southern Delaware Basin play.

Exclusive of non-cash stock compensation, cash G&A was $6.2 million for the current quarter compared to $5.1 million for the prior year quarter and that increase can be attributable to the previously mentioned accrual during the quarter of $1.5 million for estimated employee cash performance bonuses for 2016 and about $500,000 due to the payment in cash of salaries and director fees for the first nine months of 2016 that we had previously accrued under our salary replacement program adopted in August of last year as part of our cost reduction plan.

That plan was terminated effective September 1 of this year and those deferred salaries and fees, which were originally expected to be paid in common stock under the plan were paid in cash. Guidance for the fourth quarter cash G&A is $4.8 million to $5.4 million.

On the CapEx front, we incurred $22.4 million during the quarter and that includes $10 million upfront cash payment associated with our Southern Delaware Basin acquisition and an additional $10 million accrual of the consideration that we'll pay over the next 12 months as we pursue our drilling program.

We currently anticipate incurring between $15 million and $18 million in capital expenditures in the fourth quarter, substantially all of which will also be associated with our program in the Southern Delaware Basin. We are currently in the process of preparing our 2017 budget.

So we don't have any CapEx guidance for 2017 at this point, but we will likely continue our conservative strategy of keeping CapEx within cash flow. Having said that, we do possess the liquidity to be more aggressive in 2017 if our drilling results and our commodity prices exceed our expectations.

We had approximately $62.5 million outstanding on our credit facility at quarter-end, a reduction of $53 million over the prior year-end.

In conjunction with the closing of our Delaware Basin acquisition in late July, we completed a public offering of approximately 5.4 million shares of our common stock for net proceeds of a little over $50 million to use in funding that initial payment on the acquisition and the funding for several wells.

We recently completed our regularly scheduled borrowing base redetermination and our previous $140 million borrowing base was reaffirmed through the May 1, 2017. As of quarter-end, that provides us with an additional $75.6 million of availability under our revolver.

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

Thanks, Joe and thanks for everyone being on the call today. As most of you can take note, we've made some significant steps during this last quarter and I'd like to share some thoughts relative to that.

As we talked on our call in August, we're very pleased to have been successful and enter into the Permian play through our acreage position in the Southern Delaware. We did that on terms and a structure that allows us to have a very impactful investment for our shareholders.

So we were able to use that investment and that deal as a catalyst to help us raise roughly $50 million in common equity that we'll use in the development of that acreage, which also keeps our debt level relatively flat.

And just as Joe was mentioning a moment ago, a quick reminder on the deal structure, in terms of that acquisition, total consideration assuming all contingent success fees are payable be approximately $25 million or $5,000 an acre.

It was broken down between $10 million in upfront capital, $10 million of carries over a 12-month timeframe, and $5 million in success fees. And that's if the drill results meet our expectations, we anticipate they will.

So in terms of an entry fee for price per acre, we think that compares very favorably with other deals in the Southern Delaware Basin that I'm sure most of you aware of. I won't go into all those at this time, but we think we've got it at a very attractive price.

We spud our first well in the Upper Wolfcamp on October 15 and given success, we expect first production by the end of the year or early January. So we will follow our normal process of reporting results on a 30-day IP basis.

We expect to have our results out on the first well, which is our Lonestar Gunfighter number one this year in late January, early February timeframe. Given we get expected results, we anticipate having a rig active for the remainder of 2016 and 2017 keeping CapEx within cash flow.

Obviously, if we get better than expected results, are in better commodity prices, we could get a little bit more aggressive out there as 2017 progresses. Assuming continuation of the current commodity price environment, we think that substantially all of our capital activity will be focused on the Permian Basin in the near to intermediate term.

We continue to preserve our lease positions in our other core areas, we have a lot of HPP acreage and we have lot of term remaining on our primary term acreage. Also, as we discussed in our prior call, we currently estimate that our roughly 12,000 gross acres, over 5,000 net, contains between a 150, 160 gross locations from three benches.

Wolfcamp A to Wolfcamp B and the second Bone Springs with additional potential in more locations and other developed or less developed benches in the geographic section that we're dealing with here. That well count is based on using a 1,000 foot spacing and 10,000 foot laterals.

Others may quote different statistics than that, but that's the numbers that we are using at this time. We'll go into a lot of detail about our completion design or the top of propant or the pounds per stage or any of that at this time, but needless to say that we're actively researching that.

We've worked with our offset operators, have been able to observe best practices out here and we think that using those completion techniques we can generate the types of returns that we've talked about in our prior call, which was in excess of 50% at recent commodity prices.

What I would say now is that we have a probably average working interest -- operated working interest of around 41% across our acreage position here, but each individual well may provide more or less than that depending on the unit configurations in participation by a smaller or partial last season 12,000 gross acres.

I will plan to focus a lot of our activity on the Upper Wolfcamp to start with. I will evaluate those results and monitor offset activity as well in other benches, but our plan is to develop this acreage position in at least three benches and hopefully more.

So, that’s really – as we talk about what we're doing or what we're planning on for the remainder of this year and in 2017. We're in the final stages of putting together our budget for 2017, but as I mentioned most, if not all of our activity will be in the Southern Delaware Basin for next year.

So, in summary, until we gain a little bit more confidence in a better price environment, we continue to believe that the appropriate near-term strategy is to limit drilling to our higher return projects, preserve our acreage in our other core areas through either extensions or renewals and limit our CapEx program to internally generate cash flow in order to keep a solid financial position and I think that's served us well over the last 24 months.

So with that, that's all the remarks I have for today and we'll turn it over to the operator for any questions..

[Operator Instructions] We will take question from Neal Dingmann of SunTrust. Your line is open..

Allan, you mentioned kind of on this new area, your tackling all three benches. I'm just wondering, make sure I have this right, you've got that first well that will come out in late December, January, and then you talked about additional two wells by end of the year.

Just on familiar mix terms on certain, what are you targeting on those additional two wells?.

We're targeting the Wolfcamp A in our wells..

On all three of these and for the three original?.

Yes..

And then is that kind of going forward, will be predicated on your results, peer results, on how you go after the additional benches or will you at least for the majority of 2017 stick with kind of the tried and true with that initial Wolfcamp?.

Most of our activity is going to be in the Upper Wolfcamp, but we will be evaluating the Bone Springs as we go down.

So we're pretty excited to be able to give a lot of physical data and probably some rough data within the Bone Springs during the course of all that and then we'll just kind of take a look and see what each bench, what kind of properties it has and if we want to take that time to do it..

And it appears that we have no further questions at this time. I'd be happy to turn the call back over to Allan Keel..

Well, thanks everybody for joining our call today and we'll be looking forward to update you with some more news after our next quarter passes. So thanks again for your interest and we'll talk to you soon. Thanks..

This does conclude today's Contango results for third quarter 2016 conference. You may now disconnect your lines and everyone have a great day..