Intrinsic value of Contango Oil&Gas - MCF

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$7.60

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$7.60

 
Intrinsic value

$2.51

 
Up/down potential

-67%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MCF stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -33.33
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  78
  119
  122
  125
  129
  133
  137
  142
  147
  152
  158
  164
  171
  178
  185
  193
  202
  211
  220
  230
  241
  252
  264
  276
  289
  303
  318
  333
  349
  366
  384
Variable operating expenses, $m
 
  138
  141
  145
  149
  153
  158
  163
  169
  176
  182
  189
  197
  205
  214
  223
  233
  243
  254
  266
  278
  291
  305
  319
  334
  350
  367
  384
  403
  422
  443
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  132
  138
  141
  145
  149
  153
  158
  163
  169
  176
  182
  189
  197
  205
  214
  223
  233
  243
  254
  266
  278
  291
  305
  319
  334
  350
  367
  384
  403
  422
  443
Operating income, $m
  -53
  -18
  -19
  -19
  -20
  -20
  -21
  -22
  -23
  -23
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -54
  -56
  -59
EBITDA, $m
  10
  97
  99
  101
  104
  107
  111
  115
  119
  123
  128
  133
  138
  144
  150
  157
  164
  171
  179
  187
  195
  204
  214
  224
  235
  246
  257
  270
  283
  297
  311
Interest expense (income), $m
  4
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
Earnings before tax, $m
  -58
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -69
  -73
  -76
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -58
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -69
  -73
  -76

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  377
  425
  434
  446
  458
  472
  487
  504
  522
  541
  562
  584
  608
  633
  660
  688
  719
  751
  784
  820
  858
  897
  939
  984
  1,030
  1,079
  1,131
  1,185
  1,242
  1,303
  1,366
Adjusted assets (=assets-cash), $m
  377
  425
  434
  446
  458
  472
  487
  504
  522
  541
  562
  584
  608
  633
  660
  688
  719
  751
  784
  820
  858
  897
  939
  984
  1,030
  1,079
  1,131
  1,185
  1,242
  1,303
  1,366
Revenue / Adjusted assets
  0.207
  0.280
  0.281
  0.280
  0.282
  0.282
  0.281
  0.282
  0.282
  0.281
  0.281
  0.281
  0.281
  0.281
  0.280
  0.281
  0.281
  0.281
  0.281
  0.280
  0.281
  0.281
  0.281
  0.280
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
  0.281
Average production assets, $m
  360
  575
  589
  604
  621
  639
  660
  683
  707
  733
  761
  791
  824
  858
  894
  933
  974
  1,017
  1,063
  1,111
  1,162
  1,216
  1,273
  1,332
  1,396
  1,462
  1,532
  1,606
  1,683
  1,765
  1,850
Working capital, $m
  -44
  -19
  -20
  -20
  -21
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -54
  -57
  -59
  -62
Total debt, $m
  54
  118
  122
  127
  133
  139
  145
  152
  160
  168
  177
  187
  197
  208
  219
  231
  244
  258
  272
  288
  304
  321
  339
  358
  378
  399
  421
  444
  469
  495
  522
Total liabilities, $m
  140
  182
  186
  191
  197
  203
  209
  216
  224
  232
  241
  251
  261
  272
  283
  295
  308
  322
  336
  352
  368
  385
  403
  422
  442
  463
  485
  508
  533
  559
  586
Total equity, $m
  236
  243
  248
  254
  262
  270
  278
  288
  298
  309
  321
  334
  347
  362
  377
  393
  410
  429
  448
  468
  490
  512
  536
  562
  588
  616
  646
  677
  709
  744
  780
Total liabilities and equity, $m
  376
  425
  434
  445
  459
  473
  487
  504
  522
  541
  562
  585
  608
  634
  660
  688
  718
  751
  784
  820
  858
  897
  939
  984
  1,030
  1,079
  1,131
  1,185
  1,242
  1,303
  1,366
Debt-to-equity ratio
  0.229
  0.490
  0.490
  0.500
  0.510
  0.510
  0.520
  0.530
  0.540
  0.540
  0.550
  0.560
  0.570
  0.570
  0.580
  0.590
  0.600
  0.600
  0.610
  0.610
  0.620
  0.630
  0.630
  0.640
  0.640
  0.650
  0.650
  0.660
  0.660
  0.670
  0.670
Adjusted equity ratio
  0.626
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571
  0.571

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -58
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -69
  -73
  -76
Depreciation, amort., depletion, $m
  63
  115
  118
  121
  124
  128
  132
  137
  141
  147
  152
  158
  165
  172
  179
  187
  195
  203
  213
  222
  232
  243
  255
  266
  279
  292
  306
  321
  337
  353
  370
Funds from operations, $m
  40
  93
  95
  97
  100
  103
  106
  110
  113
  118
  122
  127
  132
  137
  143
  149
  156
  162
  170
  177
  185
  194
  203
  212
  222
  232
  243
  255
  267
  280
  294
Change in working capital, $m
  8
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
Cash from operations, $m
  32
  -92
  95
  98
  100
  103
  107
  110
  114
  119
  123
  128
  133
  138
  144
  150
  157
  164
  171
  179
  187
  195
  205
  214
  224
  235
  246
  258
  270
  283
  297
Maintenance CAPEX, $m
  0
  -113
  -115
  -118
  -121
  -124
  -128
  -132
  -137
  -141
  -147
  -152
  -158
  -165
  -172
  -179
  -187
  -195
  -203
  -213
  -222
  -232
  -243
  -255
  -266
  -279
  -292
  -306
  -321
  -337
  -353
New CAPEX, $m
  -25
  -11
  -13
  -15
  -17
  -19
  -21
  -22
  -24
  -26
  -28
  -30
  -32
  -34
  -36
  -39
  -41
  -43
  -46
  -48
  -51
  -54
  -57
  -60
  -63
  -66
  -70
  -74
  -77
  -82
  -86
Cash from investing activities, $m
  -20
  -124
  -128
  -133
  -138
  -143
  -149
  -154
  -161
  -167
  -175
  -182
  -190
  -199
  -208
  -218
  -228
  -238
  -249
  -261
  -273
  -286
  -300
  -315
  -329
  -345
  -362
  -380
  -398
  -419
  -439
Free cash flow, $m
  12
  -216
  -33
  -35
  -37
  -39
  -42
  -44
  -47
  -49
  -52
  -55
  -57
  -60
  -64
  -67
  -71
  -74
  -78
  -82
  -86
  -91
  -95
  -100
  -105
  -111
  -117
  -122
  -129
  -135
  -142
Issuance/(repayment) of debt, $m
  -61
  3
  4
  5
  5
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  25
  26
  27
Issuance/(repurchase) of shares, $m
  50
  217
  34
  37
  39
  41
  44
  46
  49
  52
  55
  58
  61
  64
  67
  71
  75
  79
  83
  87
  92
  96
  101
  107
  112
  118
  124
  130
  137
  144
  151
Cash from financing (excl. dividends), $m  
  -12
  220
  38
  42
  44
  47
  51
  53
  57
  60
  64
  68
  71
  75
  79
  83
  88
  93
  97
  102
  108
  113
  119
  126
  132
  139
  146
  153
  162
  170
  178
Total cash flow (excl. dividends), $m
  0
  -213
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -55
  -58
  -60
  -64
  -67
  -70
  -74
  -77
  -81
  -85
  -90
  -94
  -99
  -104
  -109
  -115
Retained Cash Flow (-), $m
  2
  -5
  -6
  -6
  -7
  -8
  -9
  -9
  -10
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -33
  -34
  -36
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Discount rate, %
 
  5.20
  5.46
  5.73
  6.02
  6.32
  6.64
  6.97
  7.32
  7.68
  8.07
  8.47
  8.89
  9.34
  9.81
  10.30
  10.81
  11.35
  11.92
  12.51
  13.14
  13.80
  14.49
  15.21
  15.97
  16.77
  17.61
  18.49
  19.41
  20.38
  21.40
PV of cash for distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  45.4
  38.2
  32.0
  26.6
  22.0
  18.1
  14.8
  12.1
  9.9
  8.0
  6.5
  5.2
  4.2
  3.4
  2.7
  2.2
  1.7
  1.4
  1.1
  0.9
  0.7
  0.5
  0.4
  0.3
  0.3
  0.2
  0.2
  0.1
  0.1
  0.1

Contango Oil & Gas Company, an independent oil and natural gas company, acquires, explores, develops, exploits, and produces crude oil and natural gas properties in the offshore shallow waters of the Gulf of Mexico, and in the onshore Texas Gulf Coast and Rocky Mountain regions in the United States. As of December 31, 2015, it had proved reserves of approximately 187.2 billion cubic feet equivalent, including 126.1 billion cubic feet of natural gas, 4.8 million barrels of crude oil and condensate, and 5.4 million barrels of natural gas liquids. The company was founded in 1986 and is based in Houston, Texas.

FINANCIAL RATIOS  of  Contango Oil&Gas (MCF)

Valuation Ratios
P/E Ratio -3.3
Price to Sales 2.5
Price to Book 0.8
Price to Tangible Book
Price to Cash Flow 6
Price to Free Cash Flow 27.4
Growth Rates
Sales Growth Rate -33.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -67.9%
Cap. Spend. - 3 Yr. Gr. Rate -14%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 22.9%
Total Debt to Equity 22.9%
Interest Coverage -14
Management Effectiveness
Return On Assets -13.6%
Ret/ On Assets - 3 Yr. Avg. -22.9%
Return On Total Capital -18%
Ret/ On T. Cap. - 3 Yr. Avg. -29.9%
Return On Equity -24.5%
Return On Equity - 3 Yr. Avg. -37.2%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 62.8%
Gross Margin - 3 Yr. Avg. 71.1%
EBITDA Margin 11.5%
EBITDA Margin - 3 Yr. Avg. -59.6%
Operating Margin -69.2%
Oper. Margin - 3 Yr. Avg. -135.8%
Pre-Tax Margin -74.4%
Pre-Tax Margin - 3 Yr. Avg. -146.2%
Net Profit Margin -74.4%
Net Profit Margin - 3 Yr. Avg. -122.9%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 20.1%
Payout Ratio 0%

MCF stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MCF stock intrinsic value calculation we used $117 million for the last fiscal year's total revenue generated by Contango Oil&Gas. The default revenue input number comes from 2016 income statement of Contango Oil&Gas. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MCF stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.2%, whose default value for MCF is calculated based on our internal credit rating of Contango Oil&Gas, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Contango Oil&Gas.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MCF stock the variable cost ratio is equal to 115.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MCF stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Contango Oil&Gas.

Corporate tax rate of 27% is the nominal tax rate for Contango Oil&Gas. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MCF stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MCF are equal to 482.1%.

Life of production assets of 4.2 years is the average useful life of capital assets used in Contango Oil&Gas operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MCF is equal to -16.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $238 million for Contango Oil&Gas - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 23.757 million for Contango Oil&Gas is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Contango Oil&Gas at the current share price and the inputted number of shares is $0.2 billion.


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COMPANY NEWS

▶ Contango Updates Southern Delaware Basin Operations   [May-24-17 03:17PM  GlobeNewswire]
▶ Iraqs Crude Oil Production Is near a 9-Month Low   [May-16-17 10:39AM  Market Realist]
▶ Contango posts 1Q profit   [May-10-17 05:03AM  Associated Press]
▶ US Refinery Demand Hits an All-Time High   [Apr-27-17 08:58AM  Market Realist]
▶ Will Russias Oil Production Fall in the Coming Months?   [Apr-18-17 07:39AM  Market Realist]
▶ Contango to Present at Upcoming Conference   [Mar-27-17 10:17AM  GlobeNewswire]
▶ Contango reports 4Q loss   [Mar-15-17 05:36PM  Associated Press]
▶ Webcast-OGIS New York for Contango Oil & Gas Co.   [Mar-08-17 05:56PM  at Company Spotlight]
▶ Contango Announces Initial Southern Delaware Basin Success   [Mar-07-17 12:42PM  GlobeNewswire]
▶ IIROC Trading Halt - MCF   [Feb-14-17 01:54PM  PR Newswire]
▶ Contango Completes Colorado Property Sale   [Dec-22-16 12:24PM  Business Wire]
▶ Contango Announces Pricing of Common Stock Offering   [Jul-22-16 08:49AM  Business Wire]
Stock chart of MCF Financial statements of MCF Annual reports of MCF
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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