Kenneth Peak on Bloomberg: Contango's CEO Discusses the Importance of Low Costs and Value Creation Per Share

Contango Oil and Gas (MCF) is a houston-based exploration and production business with a ~ $ 920 million market value. Kenneth Peak, the founder, CEO, and chairman of Contango, was recently interviewed on Bloomberg. In the interview, he talks about the importance of being among the lowest cost producers in the natural gas and oil exploration business.

Bloomberg Interviews Contango CEO

In a commodity business where (by definition) you have no control over price, being at or near the lowest cost becomes all-important. Being at least among the lowest cost producers is a crucial factor for survival during the bad times (low prices) and excess returns during the good times (high prices) for any commodity business.
(For banks it's similarly about having the lowest cost money.)

A durable low cost position, balance sheet strength, and management that allocates capital wisely is at the top of the list of things an investor should attempt to gauge before putting capital at risk. Well, at least that's what I'd look for before investing a penny in any commodity-based business.

Mr. Peak also explains why he has eliminated stock options at every level. He first eliminated his own stock options four years ago then later moved to do the same at the board level and for employees (there are previously awarded stock options still to be exercised or that haven't yet expired). He emphasizes the importance of value creation per share saying "there's no point in getting big, the object is to get rich". Stock options have a tendency to quietly dilute shareholders (and in some cases not so quietly...actually rather blatantly).

The buying back of shares just to offset that dilution isn't really a buyback.

Mr. Peak's way of thinking shows in Contango's steady share count reduction over time.

Adam

No position in MCF

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Kenneth Peak on Bloomberg: Contango's CEO Discusses the Importance of Low Costs and Value Creation Per Share

Reviewed by jembe
Published : 2012-07-05T08:40:00-07:00
Rating : 4.5