In a presentation (pdf) released Monday, Contango Oil & Gas Company (NYSEMKT:MCF) CEO Ken Peak provides more details regarding his view of the situation unfolding in the Gulf of Mexico. We have commented on Contango Oil & Gas in the past and believe that Mr. Peak provides some of the most useful commentary on oil and gas economics in the Gulf of Mexico. Recently, Contango announced new production and signaled an intent to return cash to shareholders through a special dividend or continued share repurchases.
The following is an excerpt from Mr. Peak’s presentation regarding the chaos in the Gulf of Mexico. He follows up with additional slides on why Contango still likes the economic prospects in the Gulf and plans to move forward with exploration.
- Independents are waiting to see what new regs, bonding requirements are in store for us.
- Regulations/bonding requirements so onerous as to remove independents from shallow water drilling (less than 500 feet) – very unlikely in my opinion.
- Increased safety procedures, safer fail safe’s, more rigorous/lengthy permitting etc. – very likely but I believe we can manage through these.
- We are and have always been 100% responsible to clean up any spill.
- Unlimited “Economic Damages” for spills – few independents would be willing – or able - to take the risk of dealing with the plaintiffs bar.
- The talk about criminalizing errors in judgment, or equipment failures – reflects how out of touch with the real world Washington is.
- There are too many jobs at risk in an already devastated region, too much in tax and royalty revenues, too many votes and too much production to just shut the GOM down. Plus Congress would be loathe to be seen helping majors.
- Exploration permits are now being approved.
- We will be aggressive. We just hired an outstanding Drilling Engineer to augment our efforts – can't help myself – this is a contrarian's dream.
- It ain’t exactly a bed of roses for the on-shore guys either.
- “Doubt is not a pleasant condition, but certainty is absurd” -Voltaire
Mr. Peak also released a document entitled The Contango Story (pdf) which is well worth reading.
Not long ago, we wrote about efforts by the Obama Administration to make the Gulf of Mexico a less hospitable place for small exploration firms such as Contango. Carol Browner, the top energy advisor to President Obama, was quoted as follows:
“Maybe this is a sector where you really need large companies who can bring to bear the expertise and who have the wherewithal to cover the expense if something goes wrong,” Carol Browner, special adviser to U.S. President Barack Obama on energy and climate change, said in “The Big Interview,” a WSJ.com video interview. Eliminating a $75 million cap on liability for oil spills “will mean that you only have large companies in this sector.”
While Mr. Peak’s comments seem to indicate that he believes the regulatory climate will allow Contango to continue operations, there is little doubt that powerful forces in government are arrayed against offshore oil and gas exploration and will continue efforts to curtail activity. Consolidation would ironically help the oil majors pick up reserves at potentially fire sale prices for small independents facing large debt burdens. On the other hand, debt free firms like Contango are not likely to have their reserves “stolen” in a fire sale if the worst comes to pass with regulatory policy in the Gulf of Mexico.
Disclosure: The author of this article owns shares of Contango Oil and Gas Company and has other investments with interests in the Gulf of Mexico.