It's What Contango Oil And Gas Doesn't Have That Makes It So Great

| About: Contango Oil (MCF)

Contango Oil and Gas - (NYSEMKT:MCF)

So many times it’s what companies think they must have that turn them into poor businesses and investments. Too often investors forget the one promise a company must have. A company must have a sincere and disciplined approach to increasing shareholder value and we as investors must be able to believe that promise. A lot of companies will tell you that shareholders are their main objective but I cannot find a company that is more dedicated and disciplined to increasing share value than Contango Oil and Gas.

Contango’s Core Beliefs

Contango is a small and very unique independent natural gas and oil company. Before explaining MCF’s business model, it is worth mentioning MCF’s three core beliefs. These three disciplines are reiterated time and time again in MCF’s filings and presentations.

  • The only competitive advantage in the natural gas and oil business is to be among the LOWEST COST producers
  • Virtually all the exploration and production industry’s VALUE CREATION occurs through the drilling of successful exploration wells
  • The whole point of a business is only and always to increase SHAREHOLDER WEALTH – PER SHARE

Business Model

So how does MCF achieve all of these core beliefs? MCF outsources almost everything related to their exploration, development, and production. So management finds and chooses the wells, they pick and hirer the geologists and they contract a driller to deliver the product. It is MCF’s business model to do more with less. Contango focuses on the most important and profitable aspect of the value chain of natural gas production which is the funding of actual projects. This is all done while maintaining one of MCF’s core objectives, to always have majority ownership in their projects. In an industry where consolidation continues to dominate, it is crucial companies do more with less. With only 8 full time employees MCF is hands down a low cost leader.

Investment Pitch

What makes MCF a great investment is actually what it does not have. MCF does not have:

  • Debt: = 0$
  • Too many shares = 15.7 million
  • Leasing Expenses = 0
  • Too many employees = 8
  • Hedges = 0
  • Too many wells = 12
  • Too many regulators = 4
  • Long term rig contracts = 0
  • Sovereign Taxes = 0
  • Too many land owners = 2

MCF is lean and mean. You’ll have a hard time finding any natural gas company with better fundamentals than MCF.

Looking towards the future, Contango has just finished their Wildcat Exploration budget for 2012 which is their newest natural gas well. Additionally, MCF is prospecting 5 other ideas. Wildcat and additional wells will be the primary focus for management in 2012. Management has also recently released their Absolute Measures for incentives for 2012. These measures are clear performance based incentives for the team of 8. For example, management will only receive a bonus if the stock price is above $59 and outperforms MCF’s respect index. Simply put the management team only gets paid in 2012 if you do too.

In addition to performance based incentives, MCF has just finished a $100 million dollar share buyback program increasing share ownership 13.5% since 2007. That apparently wasn’t good enough as the company has announced they will buy back an additional $50 million worth of shares in the coming years.

The vision and simplicity of Contango’s business objectives and disciplines are beautiful. Too often egos, unrealistic innovation, unnecessary expansion, silly mergers, and everything else companies seem they must have, end up destroying shareholder value.

If you’re like me and think natural gas is the answer to our energy problems MCF is a great pick. If you buy one share of MCF you get $7 dollars in cash, $0 debt, 12 wells, 5 prospect ideas and only 8 employees who only have one goal – to increase the value of the share you just bought.

Disclosure: I am long MCF.