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Contango Oil and Gas Company (NYSEMKT:MCF)

April 30, 2013 11:00 am ET

Executives

Joseph J. Romano - Chairman, Chief Executive Officer and President

Allan D. Keel - Chief Executive Officer, President and Director

E. Joseph Grady - Chief Financial Officer, Senior Vice President, Chief Financial Officer of Crimson Exploration Operating Inc and Senior Vice President of Crimson Exploration Operating Inc

Analysts

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Stephen F. Berman - Canaccord Genuity, Research Division

Operator

Good day, and welcome to the Contango Oil & Gas and Crimson Exploration joint conference call announcing the recently signed merger agreement. As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Joe Romano, President and CEO of Contango Oil & Gas. You may go ahead, sir.

Joseph J. Romano

Thank you. Good morning, everyone. My name is Joe Romano and I'm the President and CEO of Contango Oil & Gas. I'm joined today by Allan Keel, the President and CEO of Crimson Exploration and by Joe Grady, the Chief Financial Officer of Crimson.

Before we begin, I want to remind everyone that the discussion this morning may contain forward-looking statements concerning the proposed transaction between Contango and Crimson, the expected timetable for completing the proposed transaction, its financial and business impact, management's beliefs and objectives with respect thereto and management's current expectations for future operating and financial performance.

Such statements are based on assumptions we believe to be appropriate under the current circumstances and therefore, should be considered in that context. There's also a slide deck posted to the Contango and Crimson websites this morning that further outlines the forward-looking statements, as well as provides an overview of the transaction in detail.

I'm very pleased today to announce that Contango Oil & Gas has entered into a merger agreement whereby we'll acquire Crimson Exploration in a stock for stock transaction, valued at approximately $390 million, including assumed debt. To quickly summarize the transaction, each Crimson share shall be exchanged for approximately 0.08 shares of Contango stock. The Crimson shareholders will own 20.3% of Contango Oil & Gas following closing of the merger. Contango will assume the $244 million of existing Crimson debt with the anticipation of refinancing the debt at a lower blended rate at closing.

The combined company will have an enterprise value of nearly $1 billion at current prices, approximately 101 million cubic feet equivalent per day of net production, 312 Bcfe of proved reserves and over 1 Tcfe of estimated total resource potential. This transaction will continue Contango's strategy of building shareholder value to the drillbit and will address a number of our long-term objectives. The contemplated merger with Crimson is immediately accretive to Contango's cash flow per share.

My excitement, though, today is tempered by the recent passing of my very good friend, Ken Peak, Contango's Founder and Chairman. Ken was a wonderful man. He was smart but humble and very funny. Ken's enthusiasm for everything he did was endearing. Ken's commitment himself over the past -- committed himself over the past 13 years to his work and the company he founded. He took great pride in the success of Contango and its legacy of creating shareholder value. He will be sorely missed by his family, friends, Contango employees and business colleagues.

Over the past few months, Contango personnel have spent a great deal of time with the Crimson team. We like their reserves, we like their prospects and we like their people. Crimson Exploration is a publicly traded independent oil and natural gas company and has historically focused its operations in the onshore U.S. Gulf Coast, Texas and Colorado regions. Over the past few years, Crimson has shifted its strategic focus to include the Woodbine oil play in Southeast Texas and the Eagle Ford Shale and Buda oil plays in South Texas. Crimson is also monitoring activity adjacent to its acreage positions in the perspective for the Niobrara shale oil play in Colorado and the James Lime liquids play in East Texas. We believe these plays provide significant long-term growth potential for multiple formations. Crimson has done a wonderful job of setting these properties up for large-scale future development, which we expect to undertake upon closing. Through this merger, we will be creating a larger, more diverse company with improved growth characteristics and an enhanced exposure to a balanced offshore Gulf of Mexico and onshore Texas production profile. Crimson's liquid-focused drilling program in several unconventional resource positions adds further scale to our existing asset base, while significantly increasing our exposure to oil. All of our pro forma key areas will have a critical mass to grow organically for years to come and the conservatively capitalized balance sheet will position the combined company to implement an accelerated liquids-focused drilling program.

In short, Crimson is the right partner at the right time in our company's history and we are excited about the opportunity this presents for our future growth. As a show support for the proposed transaction, a number of key employees on both -- a number of key parties on both sides have entered into voting agreements supporting the deal. This group include the estate of Ken Peak, Mr. Brad Juneau, members of the senior management teams of Contango and Crimson, and the affiliates of Oaktree Capital Management, Crimson's largest shareholder. We appreciate their support and are glad they share our vision for the combined company.

Following closing this transaction, I will continue to be Chairman of the Board of Contango along with being Chairman of the newly created investment committee. Allan Keel will become Contango's new President and CEO and also serve our net investment committee. Joe Grady will become the company's new SVP and CFO.

Many of you know Brad Juneau. We will continue to benefit from Brad's knowledge and experience through his role as a director in our board and he will continue to generate Gulf of Mexico prospects for us with the support of his exploration team.

Our board will increase to 8 members comprised of 5 from Contango and 3 from Crimson. This transaction is subject to various closing conditions, including the required approval of both Contango and Crimson stockholders and customary regulatory approvals. We anticipate closing to occur in the third quarter of 2013.

We really do see this as a win-win for both Contango and Crimson. Our strategy to build shareholder value to the drillbit is well underway. I want to take a moment to thank the Crimson management and all of our employees and advisors for the energy they have put into making this transaction come together. And I now want to turn it over to Allan Keel for his comments. Thank you.

Allan D. Keel

Thank you, Joe. First, let me start by expressing how excited I am to be discussing this merger partnership with Contango. This is an incredible moment for our companies, investors and employees. This transaction will significantly enhance value to investors in both Contango and Crimson by creating an enterprise that will benefit from a more diversified asset base and increases in scale, liquidity and cash flow. Joe Romano and I have a shared vision of a combined company that grows by the drillbit while maintaining the financial flexibility to optimistically consider accretive acquisitions that would further enhance our scale, profitability and prospects for growth.

Over the last few months, the Crimson team has enjoyed getting to know the Contango team and has gained a deep respect for the company the assets that Ken Peak, Brad Juneau, John Miller and others have built to their offshore exploration success. We've known this group of people for quite some time and have really enjoyed working with them in the last few months.

I'd also like to express my condolences to Ken's family and many friends, as well as the Contango staff for their loss. Ken was admired across the industry for his entrepreneurial spirit and great success in the offshore arena.

Having personally spent time in the offshore side of the industry for over 25 years, I understand and appreciate the world-class quality of the wells this team has discovered in the Gulf of Mexico.

From Crimson's perspective, the strategic rationale for the transaction is very straightforward, and we believe this transaction is the best way for Crimson to enhance value for its shareholders. The month leading up to this transaction or in the month leading up to this transaction, Crimson conducted a strategic alternatives review to examine various scenarios to increase shareholder value. The merger with Contango is what we believe is the best approach to achieving Crimson's goals of increasing float, deleveraging our balance sheet and positioning the company to increased drilling activity.

The proposed merger will allow Crimson to accelerate development, which is a key to unlocking the value of Crimson's significant portfolio of liquids-rich, high-return drilling opportunities in our Woodbine, Buda, and the Eagle Ford areas among others. The combined company will have a balanced and diversified asset base with exploration in some of the top producing basins in the country.

Further, the cash on the balance sheet at Contango and the increased scale of the combined company will provide increased liquidity and access to capital, enabling the combined company greater flexibility for capital markets or M&A activity in the future. As Joe mentioned, we also see this as a win-win scenario for our shareholders.

Upon closing the transaction, we anticipate ramping up the combined company's 2013 capital plan to approximately $130 million. This capital will be allocated among our onshore plays that are characterized by lower cost, lower risk liquids-rich opportunities and our offshore prospects that are high-risk, high potential impact projects. Onshore, we will continue to focus on our Woodbine position and Madison and Grimes counties, our Buda and Eagle Ford acreage in South Texas and the emerging James Lime liquids play in East Texas. In the Gulf of Mexico, our inventory of exploratory prospects developed by Juneau exploration will enable us to get some high potential targets.

Over the long term, we will constantly seek to distribute capital to our highest return projects while optimizing our development plan and maintaining financial flexibility to consider new opportunities.

We believe this combination to be an extremely unique opportunity to join 2 talented management teams, complementary assets and complementary profiles for a combined company primed for accelerated growth. We are truly excited about the future of the new Contango.

With that, I will now turn the call over to Joe Grady, Crimson's Senior VP and Chief Financial Officer, who will provide a little more color on the transaction specifics.

E. Joseph Grady

Thank you, Allan. I'd like to take a moment to highlight the capitalization and liquidity of the combined company, and after that, we'll open it up for questions.

This all-stock transaction has the benefit of reducing leverage at Crimson and the associated cost of that capital, improving trading liquidity and increasing dramatically the capacity for the combined entity to invest on a more aggressive timeline in a combination of Crimson's inventory of onshore drilling opportunities and Contango's to head a potentially high-impact Gulf of Mexico prospects. We plan to expand our revolving credit facility capacity to access lower cost capital and combined with the cash on hand at closing, retire Crimson's second lien facility.

We expect to still have significant revolver availability, an excellent credit profile and strong cash flow. The early retirement of Crimson's second lien facility with expanded revolver capacity will also significantly reduce Crimson's net annual interest cost by approximately 75% or roughly $15 million on an annual basis.

After closing the merger, we will monitor the currently robust debt capital markets to potentially refinance the outstandings on our revolver with an attractive long-term financing instrument that would then free up revolver capacity to provide the company with ample financial flexibility to pursue strategic acquisition opportunities.

Our pro forma credit profile at closing will be very strong. Pro forma net debt to total book capitalization is estimated to be at approximately 24%. Our debt per Mcfe approved developed reserves is estimated to be in the $0.65 per mcfe range and our debt to the last 12 months EBITDAX is at 0.9x, slightly below 1.

Not only will we have an excellent financial profile, that profile will be complemented by a very strong cash flow stream that is forecasted to entirely fund the $250 million to $300 million capital program over the next 2 years following closing of the merger.

The combined company will benefit from a strong balance sheet and cash flow and low cost of capital that will allow us to focus on maximizing returns to our shareholders through production and reserve growth from a high-quality, diverse, risk balanced capital program.

We plan to maintain a conservative balance sheet in order to maintain financial flexibility going forward. I should also note that post closing, we anticipate adjusting Contango's fiscal June 30th year-end to a calendar year.

To conclude, I'd also like to express my enthusiasm to serve as CFO of the combined entity. Both sides of the transaction recognize the many benefits of the combination and we're all excited to be part of the new Contango.

I will now turn the call over to the operator for questions but we do request that questions be limited to the benefits of the merger, the comments made here, the press release and the materials made available on the company's websites. We expect to provide more detailed specific information regarding our future plans and a registration statement on Form S-4 to be filed with the SEC hopefully, within the next 30 days.

Question-and-Answer Session

Operator

.

[Operator Instructions] And we will first go to the site of Curtis Trimble with Global Hunter.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

I was hoping to get a little background information on kind of the strategic alternatives process, what else you looked at from both sides of the equation in terms of Crimson possibly selling down some of your asset base and then Contango, had you had previous ideas of moving onshore with a more active operated based in addition to your non-op? If you can give me just a little bit of idea of the evolution of the merger process.

Joseph J. Romano

Curtis, we did go through an extensive process, evaluating a number of strategic alternatives and determined that this combination was what will ultimately benefit the Crimson shareholders in the best way. We'll provide more color to that in the S-4 that we'll file in, hopefully, in the next 30 days.

Joseph J. Romano

Yes. This is Joe Romano of Contango. We have thought about -- I appreciate your -- you understand we are doing some things onshore in a non-op basis and we had thought about this. Ken was thinking, had thought about this for some time. And unfortunately, Ken isn't here right with us. I'm very familiar with the transaction, of course, but this was in line with also his thinking and some of the things that we've been thinking about in the past.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

Could you give me a breakdown of kind of the production mix now of offshore, onshore, as well as the reserve mix onshore versus offshore?

E. Joseph Grady

Curtis, you'll notice on the presentation that's on the website the production mix onshore, which is basically ours, is about 36 million a day, which was the average for the first quarter and the rest of that is Contango's, so it's roughly 65 million a day.

Curtis Ryan Trimble - Global Hunter Securities, LLC, Research Division

As you look a little further down the timeline, would you anticipate going to a calendar year end of the fiscal year as well or just too early to concern yourselves with converting to a calendar year end?

E. Joseph Grady

Well, we -- our first priority is getting the merger done and then we'll address the calendar year but it is a desire and will be a priority item for us as we go forward to change that calendar -- I mean, change that fiscal year end to a calendar year.

Joseph J. Romano

And this is Joe from Contango. We concur this is something we think we should do also. So I anticipate us doing that.

Operator

And we will next go to the site of Brian Grief [ph] with Raymond James.

Unknown Analyst

Yes, so are there any tax benefits in this transaction considering there's some tax liability on the Contango side and some tax loss carryforwards on the Crimson side?

E. Joseph Grady

Based on the guidance that we've gotten from our financial advisors, we believe that we will be able to use all of Crimson's net operating loss -- losses going forward.

Unknown Analyst

Do you remember what that number is?

E. Joseph Grady

It's roughly $100 million.

Operator

[Operator Instructions] And we'll next go to the site of John Fox [ph] with [indiscernible] Asset Management.

Unknown Analyst

I just wanted to clarify on the debt, there's about $240 million of debt at Crimson, and I was a little confused on which piece you're paying off immediately and then what piece you're refinancing?

E. Joseph Grady

We will use the cash on hand plus availability under an expanded credit facility to retire the second lien, which is $175 million. So pro forma, as you'll see in the presentation, it leaves us with about $175 million pro forma of debt.

Unknown Analyst

Right, I see the $174 million, so that would basically be all credit line at that point?

E. Joseph Grady

Yes.

Unknown Analyst

And then you would plan to term that out at some point?

E. Joseph Grady

We will monitor the debt capital markets starting now, actually, and determine what a good timing and strategy be in terming that out, yes.

Unknown Analyst

Okay, terrific. And then, it sounds like with the capital plan which is, call it, an average of $275 million, that's over the next 2 years, that will be funded from cash flow and you'd plan to run with the $175 million approximately of debt, is that fair?

E. Joseph Grady

That's our expectation, yes, and we'd use the availability under our credit facility to pursue acquisitions.

Unknown Analyst

Okay. And then, I know -- I'm a former shareholder of Contango, I knew Ken, and he always liked to have some cash on the balance sheet, in addition of course, that you didn't have any debt. Maybe for Joe, I mean, do you anticipate running with some cash or is this what the capital structure will look like going forward?

Joseph J. Romano

We will run with cash, and it is anticipated that the drilling of these initial wells that we will have a fair amount of cash on our balance sheet. This is quite exciting and we're pretty excited about our entry here into the onshore and what we believe to be the prolific nature of Crimson's inventory.

Operator

And we will next go to the side of Steve Berman with Cannacord Genuity.

Stephen F. Berman - Canaccord Genuity, Research Division

I'm noticing on Slide 7, James Lime spending in 2014 is up significantly from 2013. Is that a function of having the wherewithal to go after that a little more? Is that a function of gas prices have gone up? Because I thought that was a pretty interesting play and Devon had gone after it but there was not a lot of infrastructure down there, so they kind of walked away, I believe, from it. So just tell me your thinking on the James Lime here going forward, going from $5 million to $20 million.

Allan D. Keel

Yes, Steve, it's Allan. Devon actually -- they've actually increased their activity level out there over the last several months, so they've actually drilled at least 10 or 12 wells there with increasing success with -- as they get a little bit more efficiencies out there. As we've mentioned before, we went on an infrastructure solution out there and we think that some of that is taking place now, so we are in a position now with this combination to devote some capital to that play and we really think it's a great opportunity for us to pursue. So yes, we are going to invest capital out there this year, as well as ramping that up as we go forward.

Stephen F. Berman - Canaccord Genuity, Research Division

And Allan, how about the Liberty County stuff? You had some success there, I think you backed away with the lower gas prices. What's your thinking on Liberty County given gas has gone up and you'll have the balance sheet to maybe test that a little bit again here?

Allan D. Keel

Yes. I think, Steve, I think on Liberty County, I think what we would like to do is -- we've worked that pretty hard but I think what we would probably start evaluating now is looking at the potential of shooting a new 3D out there to image some of the deeper prospects out there or better image those and determine then whether or not we feel like those are -- how those fit in our inventory. But clearly, with this combination, it's going to be able to -- enable us to put a little bit more Science and try to figure out what the prospectivity of our roughly 15,000 net acres are out there. So I think that's another really nice positive to this transaction.

Operator

And we will now go to the site of Craig Callagher [ph] with Mill Street [ph] Capital.

Unknown Analyst

Can you just kind of walk us through, or explain kind of, the lack of any really material control premium for the purchase of Crimson? I mean, just in terms of just simplistically, stock was at 5, 65, 70, kind of 52 week high not that long ago. Some of the research pieces out there have $6 and $7 price targets on the stock. Recent really good news out of your Woodbine drilling program that we should start to see in the numbers here. I mean, it seems like kind of even in the presentation, you say a lot of the stuff that's kind of lower risk high return stuff that Crimson is bringing to the table. So I'd just like to hear your opinions on that.

E. Joseph Grady

This is Joe Grady. We do reflect an 8% premium here but the one thing to keep in mind is it is a merger. And the Crimson shareholders are still retaining the ability to participate in not only the upside of the further derisking development of our asset base, but also of the Contango asset base. And the management team is going to be largely the Crimson management team, to help develop that over time, and so it's a combination of all those things that just made it a good fit for both of us. We'll, again, explain that in a little more detail in the S-4 but generally, that's the way we looked at it.

Unknown Analyst

And just in terms of the strategic review process, I mean, if you just look at the recent presentation you guys did recently with, I think, it was -- is it the Howard Weil conference, in late March? And in Page 18 of that presentation is a consistent slide we've seen you guys put forth before from Crimson and it talks about some of the base case and upside cases that you guys have been laying out for quite some time on kind of the NAV per share of Crimson. I mean, as you went through the strategic review process, did you have any bids for assets that will allow you to maybe generate some kind of near-term cash to pay down debt and then refocus your CapEx dollars towards kind of Woodbine, which we're seeing not only from you guys but many of the guys around you, has turned out to be a very attractive play?

Allan D. Keel

Yes. This is Allan Keel. We looked at just about every strategic alternative, including asset sales, going to the equity market, bringing in JV partners, and we found that this was, by far, the best opportunity to unlock the value of our asset base. So yes, we examined all of that, we had an advisor in to help us, so we've fully embedded that and our asset base, our liquidity, Contango's asset base, their liquidity was clearly the best option for the company.

Operator

And we will now go to the side of Brian Grief [ph] with Raymond James.

Unknown Analyst

Yes. Joe, could you talk a little bit from a Contango shareholder perspective being a relatively conservatively managed financial company? And merging with a company that maybe wasn't as conservatively managed, it looks like the combined company will be, but in terms of that shift in mentality and approach.

Joseph J. Romano

One, we have thought about that a lot. As Joe addressed earlier, we do have a sensitivity to the amount of debt that we have. As you know, we have managed without debt for a long time. We were fortunate to be able to do that. As Joe mentioned, we do plan on spending $250 million to $300 million over the next couple of years and as you noted, that debt, that is from cash flow. We do not anticipate having to borrow additional dollars to drill some of these prospects. Both our prospects offshore and in the onshore asset base of Crimson. So it is on our minds, that is a concern and we share that concern with Allan and Joe. We've talked about it a lot and we want this -- I think we have prided ourselves on our balance sheet and we want to continue to be able to do that. So that's -- we feel good about it.

Operator

And this does conclude our question-and-answer session. I'd now like to turn the program back over to our presenters for any closing remarks.

Allan D. Keel

Yes, this is Allan Keel. I would like to just close by saying how excited we are about this transaction with Contango, with Joe and Brad and the company that Ken built. We think that having the prospect inventory that Contango brings and the ability to generate prospects in the Gulf of Mexico that are high-impact, top opportunities combined with our lower risk development prospects that are liquids-rich and balance sheet that Contango brings to bear and the management, the 2 combined management teams, we think this is an excellent opportunity for all shareholders to benefit in the growth of our company and we look forward to speaking with you soon and look forward to getting this thing closed in the very near future. And with that, again, thanks for all your interest and we look forward to talking to you again soon.

Operator

This does conclude today's program. You may disconnect at any time.

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Source: Contango Oil & Gas Company, Crimson Exploration Inc. - M&A Call
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