Contango (MCF): I don’t like the new management

Contango recently announced a merger with Crimson Exploration.  It’s crazy.  I think that the late Ken Peak chose the wrong person to be Contango’s CEO.

Crimson’s CEO is going to take over as the new CEO of the combined Contango/Crimson entity.  (!!!)  Ken Peak used to talk about how debt would always get companies into trouble.  Crimson has debt.  Ken Peak also talked about using the Peak ratio as a measure of value creation.  Again, Crimson fails on this measure.  He also talked about creating value by teaming up with the superstar explorationists.  The combined Contango/Crimson anticipates spending most of its capex on Crimson’s projects, not with prospects generated by Brad Juneau and his team of explorationists.

The new board of directors will be 8 people- 5 from Contango and 3 from Crimson.  I believe Contango’s current board is 6 people so that means somebody is leaving.  I wouldn’t be surprised if Juneau leaves on his own volition.  Then he can sell his stock (without the restrictions of being an insider) and figure out what to do next with his exploration business.  I think that he is privately extremely opposed to the merger and that he isn’t pleased that Joe Romano was trying to pay him less.  Presumably he will continue to have a business relationship with Contango to pay the bills but it won’t be the same anymore.  It will be awkward because Crimson’s CEO may try to pay him as little as possible and there will be politics involved in their negotiations.

The politics will hurt the business because Contango is best off if it can receive reliable advice from its explorationists.  Explorationists normally have an incentive to recommend that the company go drillbit-crazy.  More activity will likely increase their pay.  (You know, incentives drive behaviour.)  Brad Juneau and Ken Peak worked well together because sometimes Contango didn’t go drillbit crazy and sat on cash.  You need your explorationists to tell you when NOT to overbid on leases and when NOT to drill.  I think that relationship of trust is extremely important.  But now it’s gone.  I don’t think that Juneau wants to become a salesman to compete against Crimson’s explorationists, but he might do it anyways to pay his employees and to cover his business’ IT expenses (Juneau exploration has millions of dollars in computer equipment that loses value quickly).

This is awful and a sad ending to Contango.

*Disclosure:  I own MCF and will be selling my stock sometime.  Hopefully I get out at a good price.

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2 thoughts on “Contango (MCF): I don’t like the new management

  1. Looks like you were right about Juneau leaving MCF board, resigned last week, “http://biz.yahoo.com/e/140321/mcf8-k.html”

  2. Pingback: Ken Peak Contango presentations | Glenn Chan's Random Notes on Investing

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