I ran across two stunning statements yesterday morning in a press release from Contango Oil & Gas Company (MCF). The release announced that Contango had revised its oil and gas reserve estimates down by 48.5 Bcfe, to 300 Bcfe.
Regarding the revised estimates, Ken Peak, Contango’s Chairman and CEO, remarked:
The downward reserve revision is an enormous personal disappointment. I know full well the complexities and numerous uncertainties of reserve estimation, especially early on in a field’s production history. Moreover, the impact of a downward revision is particularly acute when all the Company’s reserves are in essence concentrated in one reservoir. I have full confidence that our reserve estimates were prepared in a careful, conscientious manner and fully consistent with SEC and SPE guidelines. Nonetheless, it is right that the economic pain of this downward revision be shared, therefore, neither myself nor any Contango employee will receive a bonus or stock options for the fiscal year ending June 30, 2010. (my emphasis added)
Lest the reader miss the economic impact of that statement, be it known that $2.47m of Peak’s $2.64m 2009 compensation derived from options and bonus pay. That’s an extreme pay cut–one of the largest self-inflicted I’ve ever seen (in terms of percentage).
Peak concluded with some commentary on the Gulf oil spill and its impact on Contango:
The question on many minds these days is the impact of the Gulf of Mexico oil spill on the industry and in our case, Contango specifically. Obviously no one knows, but I will venture an opinion since it goes to the core of our business model and future. I am certain we will face increased regulatory and permitting costs and scrutiny. I believe we can deal with these challenges. I am certain we will face an increased emphasis on safety, and in particular, redundancy in “fail safes”. I welcome these new standards, but believe everything we are currently doing already meets a very high threshold of safety adherence. Hopefully, it is recognized and understood that no human endeavor is ever, and can never be made to be, absolutely, totally and flawlessly 100% fail safe.
There are two areas that give me great concern. The first is the concept of unlimited environmental liability for a spill, or a limit so high that a debt-free company with an approximate $1.0 billion market cap like Contango is in essence, asked to “bet the Company” every time we drill a well. The move in recent days by some in Congress to retroactively change the law regarding environmental liability does not give me great confidence in our government. Nor do comments about “boots on throats”. The second area that causes great concern is the thought of going to jail for a judgment error or equipment failure – especially if the MMS approved the procedures that were being followed.
There is at the moment, an enormous amount of understandable emotion and anger together with political populism spewing forth along with the Gulf of Mexico spill, but I believe, and hope, that once the spill is contained, that serious reflection and thought will be brought to bear on how the nation, coastal states in particular, and the livelihood of tens of thousands who depend on a vibrant offshore exploration industry, can beneficially coexist. Contango’s capital expenditure plans, even before this spill, were to “wait out” the upcoming hurricane season, so no adjustment to our capital expenditure plans is required.
I’ll restrain any tendency to wax philosophical about contemporary political discourse and its relation to a nation’s moral fiber. Indeed, pertinent facts still remain hidden from public view. What stands clear–the tone of our conversation today will shape the arc of an industry’s future.
Disclosure: No position