Contango Oil & Gas Co., an up-and-coming exploration and production independent based in Houston, Texas, was to launch its third deep-gas Gulf of Mexico exploratory well this month on its prolific Eugene Island Block 10 Dutch prospect, following the drilling of two successful natural gas wells on the prospect.
A production test at Contango's Dutch No. 2 well also was completed, testing at a rate of approximately 18 million cubic feet of gas equivalent per day. The well is expected to come onstream by early July, at which time the Dutch No.1 and No. 2 wells are expected to flow at a combined rate of about 55-to 60 million cubic feet of gas equivalent per day, the company said, noting that Dutch No. 1 is currently flowing at 40 million cubic feet equivalent per day.
The Dutch No. 2 well is located roughly one mile from the Dutch No. 1 well and extended the reservoir found by Dutch No. 1, Contango said. Both wells are operated by Contango Operators, Inc., a wholly-owned subsidiary of the company. The two Dutch wells will produce from the same reservoir at a depth greater than 15,000 feet. Contango’s net revenue interest in Dutch No. 1 and Dutch No. 2, before payout, is about 29%, inclusive of its 42.7% investment in Republic Exploration LLC.
Contango's independent third party engineer calculated that as of March 31 future net cash flow from the Dutch and adjacent Mary Rose prospects offshore Louisiana would be $203.9 million on 43.5 billion cubic feet in gas equivalent reserves. Calculations assume an additional $84 million of capital expenditures would be required to drill two development wells and construct a production platform, the company said.
The Dutch No. 3 well is located 2,200 feet southeast of the Dutch No. 1 well. The Mary Rose prospect is contiguous and north of the company's Dutch acreage.
Kenneth R. Peak, Contango's chairman and chief executive officer, said reserves associated with the No. 3 Dutch well are classified as probable, and if successful would add to the company's proved reserves.
"As previously announced our ... engineer has assigned probable reserves, net to Contango, of approximately 77 billion cubic feet equivalent from our Dutch discovery," Peak said. "We expect to spud our fourth well, the Mary Rose No.1, on Louisiana state acreage, upon completion of our Dutch No. 3 well later this summer."
The reserves at the Mary Rose No. 1 well are classified as proved undeveloped, Peak said, adding that Dutch No. 3 and Mary Rose No. 1 are planned to flow into a platform currently under construction. He said the platform will have a daily capacity of 160 million cubic feet of gas equivalent, and is expected to be delivered in the fall, at an anticipated cost of $25 million.
"We anticipate it will take between seven to nine wells to fully develop our Dutch and Mary Rose discovery,” Peak said. He said the Dutch No. 3 well is expected to cost about $25 million, while Mary Rose No. 1 is expected to cost about $30 million, to drill, complete and hookup.
Meanwhile, Contango said it entered into agreements to sell $30 million of its Series E Preferred Stock to a group of private investors. The company said $28.8 million of net proceeds from the offering will be used to pay off $15 million in debt outstanding from the company's $30 million term loan agreement, to finance its offshore Gulf of Mexico deep-shelf exploration program and its Arkansas Fayetteville Shale play. Contango said it has $13.8 million of cash on hand to go along with the $30 million of available borrowing capacity under its line of credit.
