Joe Grady - SVP & CFO Allan Keel - President & CEO Steve Mengle - SVP of Engineering Tommy Atkins - SVP of Exploration Jim Metcalf - SVP of Operations.

Neal Dingmann - SunTrust John White - Roth Capital.

Good day, everyone, and welcome to the Contango Oil & Gas Company Results for Second Quarter 2017. Today's call is being recorded. And at this time, I'd like to turn the conference over to Mr. Joe Grady, Senior Vice President and Chief Financial Officer. Please go ahead, sir..

Thank you. Welcome to Contango's earnings call for the second quarter. On the call today are myself; Allan Keel, President and CEO; Steve Mengle, Senior VP of Engineering; Tommy Atkins, Senior VP of Exploration; and Jim Metcalf, our Senior VP of Operations. I'll give you a brief overview of the financial results.

Allan will follow up with the overview of the current operations, and then we'll open it up for Q&A after that and entertain questions from the analysts that follow our stock, which we as most do, limit it to the analysts because we believe it's most constructive and productive use of everybody'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.

Now starting with the financial results, we recorded a net loss for the quarter of approximately $6 million or $0.24 per basic and diluted share compared to a net loss of $17.3 million or $0.90 per share for the prior year quarter.

The improvement in our results can be attributed to higher revenues from higher prices, lower operating expenses, lower DD&A and improvement in mark-to-market valuation of our hedges.

Adjusted EBITDAX, a measure of operational cash flow, as we define it in our release, was approximately $10.2 million, comparable to the prior year's result, but nearly 50% higher than our first quarter 2017 result. Higher revenues and lower costs in the current quarter were offset by lower realizations from our hedges for the quarter.

Cash flow per share, exclusive of the impact of changes in working capital, was approximately $0.35 per share for the quarter, slightly above consensus estimates. Revenue for the second quarter was $20.3 million, an increase over $19.4 million for the prior year quarter, despite lower production, due primarily to increases in oil commodity prices.

Our average equivalent price for the quarter was $3.84 per Mcf equivalent, up almost $1 compared to $2.85 per Mcfe last year. Production for the quarter was approximately 5.3 Bcfe or 58 million cubic feet equivalent per day, toward the upper end of the guidance we gave at the beginning of the quarter.

As mentioned in the release, that was comparable to this year's first quarter production. So the new production from our West Texas drilling program is beginning to approach offsetting normal field decline from all of our producing assets.

The midpoint guidance for the third quarter of 2017 is also comparable to the second quarter and first quarter, as the three active wells we currently have in process in Pecos County are not expected to contribute meaningful production until the fourth quarter.

Total operating expenses, exclusive of production and ad valorem taxes, were $5.6 million for the quarter, better than the low end of our $6.2 million guidance and below last year's $5.9 million, as we continue to find ways to reduce cost and operate more efficiently.

Third quarter guidance of $6.8 million to $7.3 million, higher obviously, but that includes approximately $1.3 million in anticipated workovers to be done during the quarter. Also note that the current year quarter included approximately $100,000 in operating expenses for our new Permian Basin properties that are new versus the prior year quarter.

SG&A expenses, that is excluding stock compensation expense, were comparable to the prior year quarter and at the low end of guidance. Guidance for the third quarter of $4.5 million to $5.1 million also reflects ongoing efforts to continue to reduce cost.

On the CapEx front, we continued our Southern Delaware Basin drilling program that we started in late 2016, and it permits the production on our first three wells. As mentioned, we have three wells in process on our Pecos County acreage as of this fall, and we'll remain focused on that area for the remainder of the year.

Our current CapEx forecast for the year is currently estimated to be between $50 million and $55 million and approximately $45 million to $50 million, which is to drill and complete an estimated eight wells in the Delaware and up to $5 million for potential tack-on leasehold acquisitions in that area.

Allan will share more details on that program in a minute. We expect that the vast majority of the drilling part of our CapEx will be funded with internally generated cash flow with the remainder from temporary borrowings under our revolver. We currently have $71 million outstanding on our revolver, which has $125 million borrowing base.

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

Thanks, Joe, and thanks for everyone participating in the call today. We're excited about our progress we're making in the Southern Delaware, kind of despite the headwinds that we're seeing in the marketplace. But we think from executions perspective, we're making very good progress.

As Joe had mentioned, we concentrated our CapEx efforts since the quarter on the continued development of our Southern Delaware position that we acquired last year in the third quarter. And we do continue to plan to keep that focus for the remainder of this year.

As Joe again alluded to, we had three horizontal wells on production in Pecos County, our fourth well, the Gunner #2H has just started flowback earlier this week.

In addition to that, we have the Fighting Ace and the Crusader wells, which were drilled from the same pad, with the Crusader well drilling in the lateral currently and the Fighting Ace drilled to the curve, and that lateral will be drilled out after the Crusader well.

After completion of our -- excuse me after drilling of these two wells, we'll have those wells completed in kind of the early to mid-September time frame, and after that, we'll move back to our Lonestar Gunfighter location and spud the Ragin Bull #1H. That well is likely to test -- be our first test in the Bone Springs.

To date, we've focused our efforts on Wolfcamp A. As you know, we have multiple benches across our leasehold position and think that it may be time for us to start looking at other zones as we think we've proven up the Wolfcamp A.

All wells that we have been drilled to date have been drilled to a total measured depth of approximately 20,000 feet, including roughly 10,000 foot laterals and have had 50 stages of frac in the Upper Wolfcamp A. We are meeting our type curve on a boe basis on the first 3 producers, but lower on oil and higher on gas.

On a two stream basis, we're at about 75% oil versus projected 80%, but we saw improved results in the Rude Ram and Ripper State wells, our second and third producers, after we tweaked the completion recipe and added artificial lift. Those later two wells also be -- also seem to be following a flatter decline.

We're looking at more like 65% rather than a 75%, and they appear to be in line with our predrill estimated ultimate per well recoveries. If we keep our schedule and everything goes as planned, we, as Joe mentioned, we expect to have seven or eight Southern Delaware Basin wells on production by the end of the year.

All of which are expected to include the longer lateral with the same frac stages that we've discussed. As a lot of you may be aware, well costs in our area have risen due to the rising cost of vender services and supplies, especially on the completion side.

Based on our current design, our expected completed cost per well is projected to be approximately $10.9 million. Despite the low-price or soft-price environment and the vendor price pressure, we remain optimistic with our project here in the Permian and what it will provide in terms of shareholder value.

And then I would say is, although all of our completions to date reside in the Wolfcamp A, we remain very encouraged by the offset well results from other operators, especially in the Wolfcamp B and the Bone Springs. And as I mentioned earlier, we'll begin delineating those benches in the very near future.

I really don't have a lot to report other than that on our Southern Delaware Basin position. That's where we're focusing our efforts. We continue to manage our business in other areas of our operations and production. But in terms of CapEx and any type of activity is limited to Pecos County at this time.

So that really concludes our remarks this morning. Happy to answer some questions from some of our analysts at this time. So operator, if you will, open the line for questions..

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

Just the first question I had, with Vermilion being off-line. You know, Allan, you mentioned it was temporary I think in the release.

But for you or Joe, just any more color on timing you anticipate for that through this year?.

Well, it's back on stream, Neil. That was actually a first quarter item..

Got it. Got it. Okay. Was there -- I thought there was -- Joe, was there not something else that they were going to have to take that down? Maybe I'm just wrong and that I was looking at something that they were -- I guess, there was maintenance or something else coming up.

Is that not correct?.

Not that I think of, Neal..

Okay, okay. And then, just on the onshore side, you obviously have an active program, talking about potentially eight wells this year coming online. Allan, when you look at that, how do you think about just continuously -- we continue to hear out there completions and other services becoming tighter.

Is this something that you've already, sort of, contract or locked in through the end of the year? Or maybe just talk about your certainty that you have as far as -- and timing around this towards the end of the year?.

Yes, I think, Neil, that is an area of concern for us and other operators. We're attempting to break down the components of each phase of our completion, compare that to what other in the industry are doing. In terms of the execution, and we haven't had any problems with our -- with fracking our wells or the completion of our wells.

But in terms of cost, it just continues to be an issue for us. And we hear what others say they are doing it for. And that's -- it's interesting to us, and we're investigating that to try to determine how we can keep -- reduce our cost or tweak our completion procedure to save capital in that area..

And then lastly, Allan, just quickly on M&A. Are you seeing just any bolt-on anything? You've obviously had some great success now with those early wells.

I am just wondering about trying to continue to bolt-on in the area, what's your thoughts there?.

Yes, it's -- I think there are some positions that are available, merely offsetting this. I think it's more difficult, because we are somewhat surrounded. But as you get more outbound from us, there are some areas that people are trying to move, but it's in, probably what we would view as, a more riskier stage at this point in time.

There has not been a lot of drilling in those areas that -- where the acreage is available. So we're taking a somewhat cautious approach. We want to develop our asset and prove that up before we start looking too far away from where we are currently..

And we'll now take a question from John White with Roth Capital..

It looked like a pretty good quarter for you versus my estimates and consensus. I took special note of you talking about the Bone Spring.

Can you provide a little bit more data on what you've done there? Have you taken some cores in the Rude Ram or the Ripper State or your other wells?.

No, John. We have not taken any cores. We did have a log that we drilled that was kind of a behind casing log that we had in the Grim Reaper well, the vertical well that we drilled. So we did get some information there. But we don't really have any core data, whether it be hole core, sidewalk core data nearby to us at this time.

Our offset operator, we understand they plan to drill a Bone Springs well relatively soon. So I think, as time moves on, there's going to be more and more data to give us more information on the Bone Springs. We're certainly excited what has happened just to the northeast of us with the Bone Springs.

So we're very excited about the possibilities that we have on our acreage..

Is that the Diamondback well you mentioned?.

Yes..

Yes, looked really strong.

And what's the depth of the Bone Spring versus the Upper Wolfcamp?.

Yes, it's shallower.

It's about, what, 500 feet?.

Yes, 500 feet. I mean that's a 2,000 foot thick inner boulder probably about four different objectives that we kind of see in the Bone Spring. So that's part of what we're looking at now. We do have some legacy open-hole logs across our acreage position.

And so, kind of depending on which section you do, it's probably equivalent to about 9,500 feet, 9,300 feet TBD..

Okay. Very good. I really appreciate that. And one last, you have a little increase in LOE for workovers.

You want to say what those properties are that you're targeting?.

John, they are just scattered around in mostly planned production-enhancing, kind of, things..

Yes, we put three of the wells down in Karnes County on rod pumps which was part of the plan from the beginning. It was just time to convert them. Things of that nature, John..

And at this time, I'd like to turn the call back to Mr. Allan Keel for any additional or closing remarks..

We would like to, again, thank everyone for joining the call today, and listening in on our update of our operations and our progress. So we'll continue to keep you updated and look forward to giving you more news in the near future. Thanks, so much..

And thank you, very much. That does conclude our conference for today. I'd like to thank everyone for your participation, and have a great day..