Contango Oil & Gas Co. entered a joint venture (JV) agreement on Dec. 20 to develop certain offshore exploration prospects in the U.S. Gulf of Mexico (GoM) shelf owned by Juneau Oil & Gas LLC.
“Our entire team could not be more excited to reconnect with our original partner Contango Oil & Gas, which Ken Peak and I started back in 1999,” Brad Juneau, president of Juneau Oil & Gas, said in a statement.
The companies’ original partnership made several notable discoveries in the GoM from inception, including the discovery of the Dutch and Mary Rose Field, which Wilkie S. Colyer, Contango’s president and CEO , said continues to be an important contributor to Contango’s reserves and cash flow.
As part of the JV agreement on Dec. 20, Contango will have the right to acquire an interest in all of Juneau’s GoM prospects for aggregate consideration of $6 million, consisting of $1.69 million cash and $4.31 million in stock.
“I’m honored to have the opportunity to work with Wilkie and his management team as they grow the company, and as a demonstration of our faith in his team we have taken most of our upfront reimbursement in Contango stock and not cash,” Juneau added.
The first prospect of Juneau’s that Contango acquired, the Iron Flea, is located in the Grand Isle Block 45 Area, which management currently estimates could have an expected reserve potential of about 19 million barrels of oil equivalent (86% oil) net to Contango’s interest.
Contango elected to acquire about 85%-90% of Juneau’s working interest in the Iron Flea prospect. The company anticipates drilling in second-quarter 2020 and expects the dry hole cost of the exploration well, net to Contango’s interest after project payout, to be $6.3 million.
Separately, Contango also sold 19 million shares of common stock in a private placement on Dec. 20 to a select group of institutional and accredited investors, including certain funds and accounts advised by T. Rowe Price Associates Inc. The company expects to receive gross proceeds of about $53.4 million from the private equity capital raise, which it said will be used for general corporate purposes, including capex under its JV agreement with Juneau.
Contango is a Houston-based independent oil and gas company with both offshore and onshore assets. The company most recently closed a duo deals that added 450,000 acres to its portfolio across Oklahoma, Texas and Louisiana for a cost of roughly $155 million. Transactions included assets of Oklahoma-focused White Star Petroleum LLC through a bankruptcy auction.
In the Dec. 20 company release, Colyer said Contango’s JV agreement in the GoM will not distract or deter the company from continuing to look for distressed, onshore, PDP and cash flow heavy assets to acquire, but instead “complements that strategy quite well.”
“Given the discount rate at which we are able to acquire these lower risk, onshore assets, we expect our returns for exploratory wells will be higher,” he said in the statement.
Colyer also admitted the Iron Flea well could be unsuccessful and that investors should recognize that exploratory drilling is inherently risky.
However, he said, “should our initial test well prove successful and the production levels reach what we currently expect, we believe the Iron Flea economics rival any play in the onshore United States.”
Willkie Farr & Gallagher LLP was legal adviser to Contango in connection with the joint development agreement.
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