Contango Oil & Gas (MCF) 10-Q 2004 Q4 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

Commission file number 001-16317

CONTANGO OIL & GAS COMPANY

(Exact name of registrant issuer as specified in its charter)

DELAWARE	95-4079863
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

3700 BUFFALO SPEEDWAY, SUITE 960

HOUSTON, TEXAS 77098

(Address of principal executive offices)

(713) 960-1901

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The total number of shares of common stock, par value $0.04 per share, outstanding as of February 11, 2005 was 13,177,865.

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE SIX MONTHS ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

			Page
	PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
		Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004	3
		Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003	5
		Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003	6
		Consolidated Statement of Shareholders’ Equity for the six months ended December 31, 2004 and 2003	7
		Notes to the Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		35
Item 4.	Controls and Procedures		35
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.	Defaults Upon Senior Securities		35
Item 4.	Submission of Matters to a Vote of Security Holders		36
Item 5.	Other Information		36
Item 6.	Exhibits and Reports on Form 8-K		36

All references in this Form 10-Q to the “Company”, “Contango”, “we”, “us” or “our” are to Contango Oil & Gas Company and its Subsidiaries. Unless otherwise noted, all information in this Form 10-Q relating to natural gas and oil reserves and the estimated future net cash flows attributable to those reserves are based on estimates prepared by independent engineers and are net to our interest.

WEBSITE ACCESS TO REPORTS

General information about us can be found on our Website atwww.contango.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our Website as soon as reasonably practicable after we file or furnish them to the Securities and Exchange Commission.

2

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

	December 31, 2004			June 30, 2004
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	44,061,770		$	396,753
Accounts receivable, net		1,100,013			4,715,748
Other		398,999			139,778
Total current assets		45,560,782			5,252,279
PROPERTY, PLANT AND EQUIPMENT:
Natural gas and oil properties, successful efforts method of accounting:
Proved properties		3,172,711			54,850,979
Unproved properties, not being amortized		5,381,444			7,540,678
Furniture and equipment		186,509			184,508
Accumulated depreciation, depletion and amortization		(711,841	)		(27,282,035	)
Total property, plant and equipment, net		8,028,823			35,294,130
OTHER ASSETS:
Cash and other assets held by affiliates		1,592,216			779,361
Investment in Freeport LNG Project		2,425,116			2,333,333
Investment in Contango Venture Capital Corporation		481,636			500,000
Deferred income tax asset		4,683,536			1,188,407
Facility fee		—			157,579
Other assets		5,822			5,822
Total other assets		9,188,326			4,964,502
TOTAL ASSETS	$	62,777,931		$	45,510,911

The accompanying notes are an integral part of these consolidated financial statements.

3

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

	December 31, 2004			June 30, 2004
	(Unaudited)
CURRENT LIABILITIES:
Accounts payable	$	512,659		$	810,360
Accrued exploration and development		205,805			950,175
Income taxes payable		9,334,501			240,758
Other accrued liabilities		847,105			219,282
Total current liabilities		10,900,070			2,220,575
LONG-TERM DEBT		—			7,089,000
ASSET RETIREMENT OBLIGATION		839			84,805
SHAREHOLDERS’ EQUITY:
Convertible preferred stock, 6%, Series C, $0.04 par value, 4,000 shares authorized, 1,400 shares issued and outstanding at December 31, 2004, and 1,600 shares issued and outstanding at June 30, 2004, liquidation preference at $5,000 per share		56			64
Common stock, $0.04 par value, 50,000,000 shares authorized, 15,700,535 shares issued and 13,125,535 outstanding at December 31, 2004, 14,885,700 shares issued and 12,310,700 outstanding at June 30, 2004		628,021			595,428
Additional paid-in capital		31,179,592			29,979,965
Treasury stock at cost (2,575,000 shares)		(6,180,000	)		(6,180,000	)
Retained earnings		26,249,353			11,721,074
Total shareholders’ equity		51,877,022			36,116,531
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	62,777,931		$	45,510,911

The accompanying notes are an integral part of these consolidated financial statements.

4

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
REVENUES:
Natural gas and oil sales	$	1,425,983		$	18,198		$	2,005,596		$	76,917
Gain (loss) from hedging activities		—			(24,071	)		—			58,171
Total revenues		1,425,983			(5,873	)		2,005,596			135,088
EXPENSES:
Operating expenses		209,123			14,106			252,973			51,029
Exploration expenses		944,273			2,153,056			1,732,339			3,276,541
Depreciation, depletion and amortization		459,338			6,789			619,622			14,800
Impairment of natural gas and oil properties		—			42,995			112,000			42,995
General and administrative expenses		1,087,051			768,473			1,899,524			1,145,580
Total expenses		2,699,785			2,985,419			4,616,458			4,530,945
(LOSS) FROM CONTINUING OPERATIONS		(1,273,802	)		(2,991,292	)		(2,610,862	)		(4,395,857	)
Interest expense		(22,341	)		(115,235	)		(71,317	)		(279,645	)
Interest income		15,503			5,250			33,356			19,666
Gain on sale of marketable securities		—			65,023			—			710,322
Gain on sale of assets and other		(46,313	)		6,243,989			(86,820	)		6,243,989
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,326,953	)		3,207,735			(2,735,643	)		2,298,475
(Provision) benefit for income taxes		465,790			(1,055,492	)		957,476			(737,250	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(861,163	)		2,152,243			(1,778,167	)		1,561,225
DISCONTINUED OPERATIONS (Note 3)
Discontinued operations, net of income taxes		14,116,542			2,136,166			16,516,445			5,785,675
NET INCOME		13,255,379			4,288,409			14,738,278			7,346,900
Preferred stock dividends		105,000			176,667			210,000			326,667
NET INCOME ATTRIBUTABLE TO COMMON STOCK	$	13,150,379		$	4,111,742		$	14,528,278		$	7,020,233
NET INCOME (LOSS) PER SHARE:
Basic
Continuing operations	$	(0.07	)	$	0.21		$	(0.15	)	$	0.13
Discontinued operations		1.08			0.23			1.27			0.62
Total	$	1.01		$	0.44		$	1.12		$	0.75
Diluted
Continuing operations	$	(0.07	)	$	0.17		$	(0.15	)	$	0.12
Discontinued operations		1.08			0.16			1.27			0.46
Total	$	1.01		$	0.33		$	1.12		$	0.58
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		13,049,641			9,366,423			12,960,450			9,332,547
Diluted		13,049,641			12,936,563			12,960,450			12,641,092

The accompanying notes are an integral part of these consolidated financial statements.

5

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended December 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations	$	(1,778,167	)	$	1,561,225
Plus income from discontinued operations, net of income taxes		16,516,445			5,785,675
Net income		14,738,278			7,346,900
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		2,202,980			3,412,735
Impairment of natural gas and oil properties		112,000			42,995
Exploration expenditures		839,283			2,619,443
Increase in deferred income taxes		(3,495,129	)		(910,246	)
Gain on sale of assets and other		(16,170,823	)		(7,826,732	)
Unrealized hedging gain		—			(58,171	)
Stock-based compensation		177,044			77,383
Changes in operating assets and liabilities:
Decrease in accounts receivable and other		3,662,826			1,962,973
Increase in prepaid insurance		(16,482	)		(45,225	)
Decrease in accounts payable		(325,651	)		(410,001	)
Decrease increase in other accrued liabilities		(118,616	)		425,364
Increase in income taxes payable		9,093,743			1,985,585
Other		199			91,187
Net cash provided by operating activities		10,699,652			8,714,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Natural gas and oil exploration and development expenditures		(2,174,718	)		(2,651,205	)
Natural gas and oil exploration and development reimbursements		2,654,890			—
Increase in net investment in affiliates		(812,855	)		(1,358,785	)
Investment in Freeport LNG Project		(91,783	)		(600,000	)
Additions to furniture and equipment		(4,972	)		(4,136	)
Increase in advances to operators		(438,311	)		(207,979	)
Investment in Contango Venture Capital Corporation		(68,860	)		—
Purchase of marketable equity securities		—			(375,000	)
Proceeds from sales of marketable equity securities		—			1,761,822
Sales costs		(168,686	)		(5,281	)
Proceeds from the sale of assets		40,334,692			7,747,464
Net cash provided by investing activities		39,229,397			4,306,900
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility		2,200,000			9,582,000
Repayments under credit facility		(9,289,000	)		(28,325,100	)
Proceeds from equity issuances		1,055,168			7,799,614
Preferred stock dividends		(210,000	)		(300,000	)
Repurchase/cancellation of stock options and warrants		—			(757,498	)
Debt issue costs		(20,200	)		—
Net cash used in financing activities		(6,264,032	)		(12,000,984	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		43,665,017			1,020,106
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		396,753			219,242
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	44,061,770		$	1,239,348
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes	$	2,337,387		$	2,471,184
Cash paid for interest	$	64,177		$	269,093

The accompanying notes are an integral part of these consolidated financial statements.

6

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

	For the Three and Six Months Ended December 31, 2003
	Preferred Stock					Common Stock			Paid-in Capital			Treasury Stock			Retained Earnings			Total Shareholders’ Equity
	Shares		Amount			Shares	Amount
Balance at June 30, 2003	7,500		$	300		9,296,076	$	473,399	$	21,803,090		$	(6,180,000	)	$	4,640,725		$	20,737,514
Exercise of stock options	—			—		3,750		150		7,350			—			—			7,500
Tax benefit from exercise of stock options	—			—		—		—		3,373			—			—			3,373
Cashless exercise of stock options	—			—		1,866		—		—			—			—			—
Expense of stock options	—			—		—		—		27,034			—			—			27,034
Repurchase/cancellation of stock options and warrants	—			—		—		—		(757,498	)		—			—			(757,498	)
Net income	—			—		—		—		—			—			3,058,491			3,058,491
Preferred stock dividends	—			—		—		—		—			—			(150,000	)		(150,000	)
Balance at September 30, 2003	7,500			300		9,301,692		473,549		21,083,349			(6,180,000	)		7,549,216			22,926,414
Exercise of stock options	—			—		118,750		4,750		232,750			—			—			237,500
Tax benefit from exercise of stock options	—			—		—		—		16,629			—			—			16,629
Cashless exercise of stock options	—			—		18,067		—		—			—			—			—
Issuance of Series C preferred stock	1,600			64		—		—		7,554,550			—			—			7,554,614
Expense of stock options	—			—		—		—		50,349			—			—			50,349
Net income	—			—		—		—		—			—			4,288,409			4,288,409
Preferred stock dividends	—			—		—		—		—			—			(176,667	)		(176,667	)
Balance at December 31, 2003	9,100		$	364		9,438,509	$	478,299	$	28,937,627		$	(6,180,000	)	$	11,660,958		$	34,897,248
	For the Three and Six Months Ended December 31, 2004
	Preferred Stock					Common Stock			Paid-in Capital			Treasury Stock			Retained Earnings			Total Shareholders’ Equity
	Shares		Amount			Shares	Amount
Balance at June 30, 2004	1,600		$	64		12,310,700	$	595,428	$	29,979,965		$	(6,180,000	)	$	11,721,074		$	36,116,531
Exercise of stock options and warrants	—			—		527,584		21,103		1,034,065			—			—			1,055,168
Expense of stock options	—			—		—		—		84,128			—			—			84,128
Partial conversion of Series C preferred stock	(200	)		(8	)	166,666		6,667		(6,659	)
Net income	—			—		—		—		—			—			1,482,900			1,482,900
Preferred stock dividends	—			—		—		—		—			—			(105,000	)		(105,000	)
Balance at September 30, 2004	1,400		$	56		13,004,950	$	623,198	$	31,091,499		$	(6,180,000	)	$	13,098,974		$	38,633,727
Cashless exercise of stock options	—			—		120,585		4,823		(4,823	)		—			—			—
Expense of stock options	—			—		—		—		92,916			—			—			92,916
Net income	—			—		—		—		—			—			13,255,379			13,255,379
Preferred stock dividends	—			—		—		—		—			—			(105,000	)		(105,000	)
Balance at December 31, 2004	1,400		$	56		13,125,535	$	628,021	$	31,179,592		$	(6,180,000	)	$	26,249,353		$	51,877,022

The accompanying notes are an integral part of these consolidated financial statements.

7

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. The financial statements should be read in conjunction with the audited financial statements and notes included in Contango Oil & Gas Company’s (“Contango” or the “Company”) Form 10-K for the fiscal year ended June 30, 2004. The results of operations for the three and six months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2005.

1. Summary of Critical Accounting Policies

The application of generally accepted accounting principles involves certain assumptions, judgments, choices and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can result in varying results from company to company. Contango’s critical accounting principles, which are described below, relate to the successful efforts method for costs related to natural gas and oil activities, consolidation principles and stock options.

Successful Efforts Method of Accounting. The Company follows the successful efforts method of accounting for its natural gas and oil activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, and any such impairment is charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs, such as seismic costs and other geological and geophysical expenses, are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above. Depreciation, depletion and amortization is on a cost center by cost center basis using the unit of production method, with lease acquisition costs amortized over total proved reserves and other costs amortized over proved developed reserves.

When circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future cash flows on a cost center basis to the unamortized capitalized cost of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and oil prices and operating costs and anticipated production from proved reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair market value.

On July 1, 2003, the Company changed its accounting policy for amortizing and impairing the Company’s natural gas and oil properties from a well-by-well cost center basis to a field-by-field cost center basis. Management believes the newly adopted policy is preferable in these circumstances to have greater comparability with other successful efforts natural gas and oil companies by conforming to predominant industry practice. In addition, the field level is consistent with the Company’s operational and strategic assessment of its natural gas and oil investments. The Company determined that the cumulative effect of the change in accordance with APB Opinion No. 20 was immaterial to the consolidated financial statements.

In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified our recent property sale to Edge Petroleum as discontinued operations. It is our intent; however, to remain an independent natural gas and oil company engaged in the exploration, production, and acquisition of natural gas and oil.

8

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cash Equivalents. Cash equivalents are considered to be highly liquid investment grade debt investments having an original maturity of three months or less. As of December 31, 2004 the Company had cash and cash equivalents of $44,061,770. The carrying amounts approximated fair market value due to the short maturity of these instruments.

Principles of Consolidation. The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries and affiliates, after elimination of all intercompany balances and transactions. Wholly owned subsidiaries are fully consolidated. Subsidiaries not wholly owned, such as 33.3% owned Republic Exploration LLC (“Republic Exploration”), 50% owned Magnolia Offshore Exploration LLC (“Magnolia Offshore Exploration”) and 66.7% owned Contango Offshore Exploration LLC (“Contango Offshore Exploration”) are not controlled by the Company and are proportionately consolidated. By agreement, Republic Exploration, Magnolia Offshore Exploration and Contango Offshore Exploration have disproportionate allocations of their profits and losses among the owners. Accordingly, the Company determines its income or losses from the ventures based on a hypothetical liquidation determination of how increases or decreases in the book value of the ventures’ net assets will ultimately affect the cash payments to the Company in the event of dissolution.

By agreement, since the Company was the only owner that contributed cash to Republic Exploration and Magnolia Offshore Exploration, the Company consolidated 100% of the ventures’ net assets and results of operations until the ventures expended all of the Company’s initial cash contributions. Subsequent to that event, the owners’ share in the net assets of the ventures is based on their stated ownership percentages. By agreement, the owners in Contango Offshore Exploration immediately share in the net assets of Contango Offshore Exploration, including the initial Company cash contribution, based on their stated ownership percentages. The other owners of Republic Exploration, Magnolia Offshore Exploration and Contango Offshore Exploration contributed seismic data and related geological and geophysical services to the ventures.

Contango’s 10% limited partnership interest in Freeport LNG is accounted for at cost. As a 10% limited partner, the Company has no ability to direct or control the operations or management of the general partner.

Contango’s 32% ownership in Contango Capital Partnership Management, LLC and its 20% limited partnership interest in Trulite, L.P. are accounted for using the equity method. Under the equity method, only Contango’s investment in and amounts due to and from the equity investee are included in the consolidated balance sheet.

Recent Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) has issued several new pronouncements, including Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51”, Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”.

The primary objectives of FIN 46R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (these entities are referred to as “variable interest entities” or “VIEs”) and how to determine if a business enterprise should consolidate the VIEs. This new model for consolidation applies to an entity for which either:

• The equity investors (if any) do not have a controlling financial interest; or

• The equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties.

9

CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In addition, FIN 46R requires that all enterprises with a significant variable interest in a VIE make additional disclosures regarding their relationship with the VIE. The adoption of FIN 46R had no effect on the Company’s financial statements.

SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS 133. The amendments set forth in SFAS 149 require that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 20, 2003 (with limited exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively only. The adoption of SFAS 149 had no effect on the Company’s financial statements.

SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. It was to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of SFAS 150 did not have an impact on the Company’s consolidated financial position or results of operations.

Stock-Based Compensation. Prior to the fiscal year-ended June 30, 2002, the Company accounted for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the common stock.

Effective July 1, 2001, the Company prospectively changed its method of accounting for employee stock-based compensation to the fair value based method prescribed in Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. The fair value of each award is estimated as of the date of grant using the Black-Scholes options-pricing model.

The Company has determined that the fair value method is preferable to the intrinsic value method previously applied. During the six months ended December 31, 2004 and 2003, the Company recorded a charge of $177,044 and $77,383 to general and administrative expense, respectively. Because compensation expense is recognized over a vesting period, the effect of applying the fair value method in the initial years of implementation may not be representative of the effects on net income (loss) that will be reported in future years.

2. Natural Gas and Oil Exploration Risk

The Company’s future financial condition and results of operations will depend upon prices received for its natural gas and oil production and the cost of finding, acquiring, developing and producing reserves. Substantially all of its production is sold under various terms and arrangements at prevailing market prices. Prices for natural gas and oil are subject to fluctuations in response to changes in supply, market uncertainty and a variety of other factors beyond the Company’s control. Other factors that have a direct bearing on the Company’s prospects are uncertainties inherent in estimating natural gas and oil reserves and future hydrocarbon production and cash flows, particularly with respect to wells that have not been fully tested and with wells having limited production histories; access to additional capital; changes in the price of natural gas and oil; availability and cost of services and equipment; and the presence of competitors with greater financial resources and capacity.

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Sale of Properties - Discontinued Operations

On December 29, 2004 the Company completed the sale of the majority of its south Texas natural gas and oil interests to Edge Petroleum Corporation for $50 million. The sale was approved by a majority of the Company’s stockholders at a Special Meeting of Stockholders on December 29, 2004. Approximately 16 Bcfe of proven reserves were sold having a pre-tax net present value when using a 10% discount rate as of June 30, 2004 of $54.3 million. Pre-tax proceeds after netting adjustments were $40.3 million. Adjustments were made for net revenues that Contango received for production occurring after July 1, 2004, the effective date of sale, up to the closing date of December 29, 2004. We have classified this sale as discontinued operations since the south Texas reserves sold constituted an entire natural gas and oil producing field. The Company recognized a gain on sale of $16.3 million for the quarter ended December 31, 2004. Our sale of assets to Edge Petroleum has been classified as discontinued operations in our financial statements for all periods presented. In September 2003, the Company completed the sale of certain reserves in Brooks County, Texas for $5.0 million and recorded a gain of approximately $900,000 for the six months ended December 31, 2003. Proved reserves were 1.5 Bcfe and accounted for approximately $5.0 million of the Company’s discounted present value at 10% per annum as of June 30, 2003. The sale of the Brooks County reserves has been reclassed as discontinued operations since these reserves were part of our original south Texas natural gas and oil interests.

The summarized financial results for discontinued operations for each of the periods ended December 31, are as follows:

Operating Results:

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Revenues	$	5,858,649		$	5,962,110		$	11,951,278		$	14,155,895
Operating expenses		(382,016	)		(902,579	)		(1,190,029	)		(2,517,885	)
Depreciation expenses		(13,739	)		(1,612,110	)		(1,583,358	)		(3,397,935	)
Exploration expenses		(4,073	)		21,171			(26,911	)		(211,457	)
Gain (loss) on sale of discontinued operations		16,258,936			(182,184	)		16,258,936			872,421
Gain before income taxes	$	21,717,757		$	3,286,408		$	25,409,916		$	8,901,039
Provision for income taxes		(7,601,215	)		(1,150,242	)		(8,893,471	)		(3,115,364	)
Gain from discontinued operations, net of income taxes	$	14,116,542		$	2,136,166		$	16,516,445		$	5,785,675

4. Cash and Cash Equivalents

As of December 31, 2004, the Company had $44,061,770 in cash and cash equivalents. At December 31, 2004, approximately $3.1 million of the $44.1 million was held in the Company’s operating account to be used for general corporate purposes and $29 million was invested in highly liquid AAA rated tax-exempt money market funds. The remaining $12 million was invested in a portfolio of periodic auction reset (PAR) securities that have coupons periodically reset to market interest rates. PAR securities consist of AAA-rated tax exempt municipal bonds and AAA-rated municipal preferred shares. PAR securities are highly liquid and at the Company’s options are immediately convertible to cash.

The Company considers all highly liquid investment grade debt instruments having an original maturity of 90 days or less to be cash equivalents.

A portion of the funds will be used to pay estimated taxes of approximately $9 million in March 2005 related to the gain on the sale of our south Texas properties, to provide working capital for on-going operations and to invest in our exploration programs. The funds will also be used to maintain our 10% limited partnership interest in the Freeport LNG plant, including any expansion in the plant’s capacity, and to continue to invest in alternative energy projects.

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. Net Income (Loss) Per Common Share

A reconciliation of the components of basic and diluted net income (loss) per share of common stock is presented in the tables below.

	Three Months Ended December 31, 2004								Three Months Ended December 31, 2003
	(Loss)			Weighted Average Shares		Per Share			Income		Weighted Average Shares	Per Share
Income (Loss) from continuing operations	$	(966,163	)	13,049,641		$	(0.07	)	$	1,975,576	9,366,423	$	0.21
Discontinued Operations, net of income taxes		14,116,542		13,049,641			1.08			2,136,166	9,366,423		0.23
Basic Earnings Per Share:
Net income	$	13,150,379		13,049,641		$	1.01		$	4,111,742	9,366,423	$	0.44
Effect of Dilutive Securities:
Stock options and warrants		—		(a	)					—	1,153,778
Series A preferred stock		—		—						50,000	1,000,000
Series B preferred stock		—		—						100,000	1,136,363
Series C preferred stock		(a	)	(a	)					26,667	279,999
Income (Loss) from Continuing Operations	$	(966,163	)	13,049,641		$	(0.07	)	$	2,152,243	12,936,563	$	0.17
Discontinued Operations, net of income taxes		14,116,542		13,049,641			1.08			2,136,166	12,936,563		0.16
Diluted Earnings Per Share:
Net Income	$	13,150,379		13,049,641		$	1.01		$	4,288,409	12,936,563	$	0.33
Anti-dilutive Securities:
Shares assumed not issued from options to purchase common shares as the exercise price was above the average market price for the period	$	—		21,000		$	7.50		$	—	25,500	$	6.15
Series C Preferred Stock	$	105,000		1,168,329		$	0.09		$	—	—	$	—

(a) Anti-Dilutive.

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Net Income (Loss) Per Common Share - continued

	Six Months Ended December 31, 2004								Six Months Ended December 31, 2003
	(Loss)			Weighted Average Shares		Per Share			Income		Weighted Average Shares	Per Share
Income (Loss) from continuing operations	$	(1,988,167	)	12,960,450		$	(0.15	)	$	1,234,558	9,332,547	$	0.13
Discontinued Operations, net of income taxes		16,516,445		12,960,450			1.27			5,785,675	9,332,547		0.62
Basic Earnings Per Share:
Net income	$	14,528,278		12,960,450		$	1.12		$	7,020,233	9,332,547	$	0.75
Effect of Dilutive Securities:
Stock options and warrants		—		(a	)					—	1,038,849
Series A preferred stock		—		—						100,000	1,000,000
Series B preferred stock		—		—						200,000	1,136,363
Series C preferred stock		(a	)	(a	)					26,667	133,333
Income (Loss) from Continuing Operations	$	(1,988,167	)	12,960,450		$	(0.15	)	$	1,561,225	12,641,092	$	0.12
Discontinued Operations, net of income taxes		16,516,445		12,960,450			1.27			5,785,675	12,641,092		0.46
Diluted Earnings Per Share:
Net Income	$	14,528,278		12,960,450		$	1.12		$	7,346,900	12,641,092	$	0.58
Anti-dilutive Securities:
Shares assumed not issued from options to purchase common shares as the exercise price was above the average market price for the period	$	—		31,500		$	7.33		$	—	175,500	$	4.94
Series C Preferred Stock	$	210,000		1,168,329		$	0.18		$	—	—	$	—

(a) Anti-Dilutive.

6. Investment in Freeport LNG

As of December 31, 2004, the Company had invested $2.4 million in Freeport LNG Development, L.P. The Company owns a 10% limited partnership interest in Freeport LNG Development, L.P., a limited partnership formed to develop a 1.5 billion cubic feet per day LNG receiving terminal in Freeport, Texas.

In July 2004, Freeport LNG finalized its transaction with ConocoPhillips for the construction and use of the proposed liquefied LNG receiving terminal in Freeport, Texas. ConocoPhillips acquired 1 billion cubic feet per day of regasification capacity in the terminal, purchased a 50% interest in the general partner managing the Freeport LNG project and agreed to provide substantial construction funding to the venture. This construction funding will be non-recourse to Contango. Dow Chemical has also acquired regasification capacity of 500 million cubic feet per day. Freeport LNG is responsible for the commercial activities of the partnership, while ConocoPhillips will manage the construction of the facility. The Federal Energy Regulatory Commission granted Freeport LNG a permit to construct and operate the LNG receiving terminal on June 21, 2004.

As part of the formation of Freeport LNG Development, L.P., Cheniere Energy, Inc. (“Cheniere”) granted Contango warrants to purchase 300,000 shares of Cheniere common stock. In June and September 2003, Contango exercised the warrants, purchasing 300,000 shares of Cheniere common stock. As of December 31, 2003, the

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Company sold 300,000 shares of Cheniere common stock and reported a gain on the sale of marketable securities for the six months ended December 31, 2003 of $710,322 as follows:

	Three Months Ended December 31, 2003			Six Months Ended December 31, 2003
Realized gain on sale of marketable securities sold	$	570,773		$	1,161,822
Unrealized gain on marketable securities held as an investment		—			—
Reversal of previously recognized unrealized gain		(505,750	)		(451,500	)
Total recognized gain	$	65,023		$	710,322

As of December 31, 2004, the Company had no investment in marketable securities and has not owned any marketable securities since December 31, 2003.

7. Investment in Alternative Energy

In June 2004, our wholly owned subsidiary, Contango Venture Capital Corporation, acquired a 32% general partnership interest in Contango Capital Partnership Management, LLC. Contango Capital Partnership Management, LLC was formed by us and other investors to invest in the energy venture capital market with a focus on domestically sourced, environmentally preferred energy technologies and to expose us to leading edge technologies and opportunities in alternative energy markets. Our initial cash contribution of $0.5 million was used to fund the initial overhead for the sourcing and management of energy venture capital investments to be undertaken by Contango Capital Partnership Management, LLC. We hold two of six seats on the board of managers of Contango Capital Partnership Management, LLC. Contango Capital Partnership Management LLC is the general partner of an alternative energy company named Trulite. Trulite develops lightweight hydrogen generators for fuel cell systems and expects to produce a prototype of portable fuel cell in 2005.

As of December 31, 2004 the Contango Venture Capital Corporation had invested $68,860 of its $100,000 commitment into Trulite, L.P.

8. Long-Term Debt

Prior to the closing the sale of its south Texas natural gas and oil interests to Edge Petroleum Corporation, the Company repaid all of its long-term debt outstanding. Our south Texas properties that were sold to Edge Petroleum constituted the bulk of the assets used to secure our existing bank line. As of December 31, 2004, the Company had no long term debt outstanding.

The Company’s credit facility with Guaranty Bank, FSB is a secured, revolving line of credit, secured by the Company’s natural gas and oil reserves. As of December 31, 2004, the revolving line of credit provides for a borrowing capacity of $100,000 and matures on June 29, 2006. Borrowings will bear interest, at the Company’s option, at either (i) LIBOR plus two percent (2%) or (ii) the bank’s base rate plus one-fourth percent (1/4%) per annum. Additionally, the Company pays a quarterly commitment fee of three-eighths percent (3/8%) per annum on the average availability.

The credit facility requires the maintenance of certain ratios, including those related to working capital, funded debt to EBITDAX, and debt service coverage, as defined in the credit facility. Additionally, the credit facility contains certain negative covenants that, among other things, restrict or limit the Company’s ability to incur indebtedness, sell assets, pay dividends and reacquire or otherwise acquire or redeem capital stock. Failure to

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CONTANGO OIL & GAS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

maintain required financial ratios or comply with the credit facility’s covenants can result in a default and acceleration of all indebtedness under the credit facility. As of December 31, 2004, the Company was in compliance with its financial covenants, ratios and other provisions of its credit facility.

9. Conversion of Series C Preferred Stock into Common Stock

On July 1, 2004, private institutional investors elected to convert 200 of the 1,600 outstanding shares of the Company’s Series C convertible cumulative preferred stock into 166,666 shares of Contango common stock.

10. Sale of Properties – Continuing Operations

In December 2003, Contango and Republic Exploration sold their producing Gulf of Mexico leases for approximately $12.0 million. As a result of this sale, Contango recorded a gain of approximately $6.2 million as of December 31, 2003. Properties included in the sale were Eugene Island 110, Grand Isle 28 and High Island 25-L. Contango received approximately $3.7 million in cash proceeds for its portion of the sale. Republic Exploration received cash proceeds of approximately $8.3 million for its portion of the sale. In connection with this sale, Republic Exploration subsequently made distributions of $3.0 million to its members, of which $1.0 million was distributed to Contango.

11. Repurchase of Certain Stock Options and Warrants

In September 2003, Contango paid $757,498 to certain related parties and cancelled certain stock options and warrants to purchase 336,666 shares of Contango common stock exercisable at $2.00 per share. These stock options and warrants were fully vested and Contango paid $2.25 per option. The fair market value of each option at the date of cancellation, using the Black-Scholes options-pricing model, was estimated at $2.69. Assumptions used in this estimate were: (i) risk-free interest rate of 3.28 percent; (ii) expected volatility of 36 percent; (iii) expected dividend yield of zero percent; and (iv) underlying stock price at the date of cancellation of $4.55. Options to purchase an additional 33,334 shares of Contango common stock were also cancelled. In accordance with the terms of these stock options, vesting would never occur.

12. Subsequent Events

In January 2005, our wholly owned subsidiary, Contango Venture Capital Corporation invested an additional $40,000 into Trulite L.P., fulfilling its $100,000 commitment. The limited partnership interest for Trulite, L.P. was converted into a limited partnership interest in the newly formed Contango Capital Partners Fund (“Fund”) on January 31, 2005. Prior to the Fund’s close, Contango Venture Capital committed to invest $1.5 million in the Fund. Contango Venture Capital owns a 25% partnership interest in the Fund. Total capitalization of the Fund is $8.25 million. The general partner of the Fund is Contango Capital Partnership Management LLC.

In January, 2005, Freeport LNG received its authorization to commence construction of the first phase of its terminal from the Federal Energy Regulatory Commission (FERC). Construction of the permitted 1.5 Bcf per day facility commenced on January 17, 2005.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the accompanying notes and other information included elsewhere in this Form 10-Q and in our Form 10-K for the fiscal year ended June 30, 2004, previously filed with the Securities and Exchange Commission.

Cautionary Statement about Forward-Looking Statements

Some of the statements made in this Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended. The words and phrases “should be”, “will be”, “believe”, “expect”, “anticipate”, “estimate”, “forecast”, “goal” and similar expressions identify forward-looking statements and express our expectations about future events. These include such matters as:

• Our financial position

• Business strategy and budgets

• Anticipated capital expenditures

• Drilling of wells

• Natural gas and oil reserves

• Timing and amount of future discoveries (if any) and production of natural gas and oil

• Operating costs and other expenses

• Cash flow and anticipated liquidity

• Prospect development

• Property acquisitions and sales

• Development, construction and financing of our LNG receiving terminal

Although we believe the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that such expectations will occur. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from actual future results expressed or implied by the forward-looking statements. These factors include among others:

• Low and/or declining prices for natural gas and oil

• Natural gas and oil price volatility

• The risks associated with exploration, including cost overruns and the drilling of non-economic wells or dry holes

• Availability of capital and the ability to repay indebtedness when due

• Ability to raise capital to fund capital expenditures

• The ability to find, acquire, market, develop and produce new natural gas and oil properties

• Uncertainties in the estimation of proved reserves and in the projection of future rates of production and timing of development expenditures

• Operating hazards attendant to the natural gas and oil business

• Downhole drilling and completion risks that are generally not recoverable from third parties or insurance

• Potential mechanical failure or under-performance of significant wells or pipeline mishaps

• Weather

• Availability and cost of material and equipment

• Delays in anticipated start-up dates

• Actions or inactions of third-party operators of our properties

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• Ability to find and retain skilled personnel

• Strength and financial resources of competitors

• Federal and state regulatory developments and approvals

• Environmental risks

• Worldwide economic conditions

• Ability of LNG to become a competitive energy supply in the United States

• Ability to fund our LNG project, cost overruns and third party performance

You should not unduly rely on these forward-looking statements in this Form 10-Q, as they speak only as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. See the information under the heading “Risk Factors” in our Form 10-K for the year ended June 30, 2004 for some of the important factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in forward-looking statements.

Overview

We are an independent natural gas and oil company engaged in the exploration, production and acquisition of natural gas and oil in the United States, both onshore Gulf Coast and offshore in the Gulf of Mexico. Our primary source of natural gas and oil production currently is in south Texas. We also own a 10% partnership interest in Freeport LNG Development, L.P., which is developing a 1.5 Bcf per day LNG receiving terminal in Freeport, Texas. Contango Venture Capital Corporation, our wholly owned subsidiary, owns a 32% interest in Contango Capital Partnership Management, LLC, which was formed to invest in the alternative energy venture capital market, and a 25% interest in the Contango Capital Partners Fund, L.P. Contango Capital Partners Fund, L.P. owns interests in several portfolio companies.

Our Strategy

Our exploration strategy is predicated upon two core beliefs: (1) that the only competitive advantage in the commodity-based natural gas and oil business is to be among the lowest cost producers and (2) that virtually all the exploration and production industry’s value creation occurs through the drilling of successful exploratory wells. As a result, our business strategy includes the following elements:

Funding exploration prospects developed by our alliance partners. Because we only have four employees, we depend on alliance partners for exploration, development and production expertise. Our four alliance partners, Juneau Exploration, L.P. (“JEX”), Alta Resources, LLC (“Alta”), Ameritex Minerals and Exploration, Ltd. (“Ameritex”) and Coastline Exploration, Inc. (“Coastline”) perform all of our prospect generation and evaluation functions.

Negotiated acquisitions of proved properties. We continue to seek negotiated producing property acquisitions, based on our view of the pricing cycles of natural gas and oil and available exploitation opportunities of probable and possible reserves. Since January 1, 2002, we have acquired approximately 14 Bcfe of proved developed producing reserves of natural gas and oil for approximately $26 million.

Sale of proved properties. From time-to-time as part of our business strategy, we have sold and may again sell some or a substantial portion of our proved reserves to capture current value, using the sales proceeds to further our exploration activities. In December, 2004, we sold producing properties consisting of 39 wells in south Texas for $50 million to Edge Petroleum Corporation. The sale was approved by a majority of the Company’s stockholders at a Special Meeting of Stockholders on December 29, 2004. In July 2003, we sold producing properties consisting of 10 wells in south Texas for $5 million. In December 2003, Contango and its 33%-owned subsidiary, Republic Exploration LLC, sold all of their then producing Gulf of Mexico leases for approximately $12 million. Since its inception, the Company has purchased $26 million worth of natural gas and oil properties and sold over $67 million worth of oil and natural gas properties.

17

In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified our recent property sale to Edge Petroleum as discontinued operations. It is our intent; however, to remain an independent natural gas and oil company engaged in the exploration, production, and acquisition of natural gas and oil.

Controlling general and administrative and geological and geophysical costs. Our goal is to be among the highest in the industry in revenue and profit per employee and among the lowest in general and administrative costs. We plan to continue outsourcing our geological, geophysical, reservoir engineering and land functions, and partnering with cost efficient operators whenever possible. We have four employees.

Structuring transactions to minimize front-end investments. We seek to maximize returns on capital by minimizing our up-front investments in acreage, seismic data and prospect generation whenever possible. We want our partners to share in both the risk and the reward of our success.

Diversified energy investments. While our core focus is the domestic exploration and production business, we will continue to seek opportunities that may include foreign exploration prospects or investments related to new and developing energy sources such as LNG and alternative energy.

Structuring incentives to drive behavior. We believe that equity ownership aligns the interests of our partners, employees, and stockholders. Our directors and executive officers beneficially own approximately 21% of our common stock. In addition, our alliance partners co-invest in prospects that they recommend to us.

Exploration Alliances with JEX, Alta Resources, Ameritex and Coastline

Alliance with JEX.JEX is a private company formed for the purpose of assembling domestic natural gas and oil prospects.Under our agreement with JEX, JEX generates natural gas and oil prospects and evaluates exploration prospects generated by others. In exchange, we have committed, within various parameters, to invest along with JEX up to 95% of the available working interest in the recommended prospects. In the Gulf of Mexico, JEX brings offshore exploration prospects directly to our affiliated companies, Republic Exploration, LLC and Contango Offshore Exploration, LLC (see “Offshore Gulf of Mexico Exploration Joint Ventures” below).

If JEX recommends an onshore prospect to Contango, we pay the lease and seismic costs, and JEX generally pays the remaining costs of generating and preparing a prospect to drill ready status. When drilling begins on a prospect, we are obligated to assign to the JEX geoscientists an overriding royalty interest equal to 3 ¹/3% of our working interest in the prospect. In addition, when our revenues from prospects we invest in under the agreement, net of taxes, royalties and other expenses equals our capital expenditure related to the exploration and development of the prospects on a well-by-well basis, JEX is entitled to an assignment of 25% of our working interest in the well.

We may terminate the agreement upon 30 days written notice, and JEX may terminate the agreement upon 180 days notice. If we are in default under the agreement, JEX may terminate the agreement upon 30 days written notice.

Alliance with Alta Resources. Alta Resources is a private company formed for the purpose of assembling domestic, onshore natural gas and oil prospects. Our arrangement with Alta Resources generally provides for us to pay our share of seismic and lease costs, with Alta Resources generally receiving a negotiated overriding royalty interest and a carried or back-in working interest.

Alliance with Ameritex.In February 2004, we entered into an exploration agreement with Ameritex, a privately held San Antonio based prospect generation and exploration company. Our participation percentage is typically a 33.3% working interest, with Ameritex being carried to casing point. Ameritex’s activities are concentrated on the generation of exploration opportunities utilizing 3-D seismic technology. The annual geological and geophysical cost to Contango for this prospect generation effort is approximately $80,000 per year.

18

Alliance with Coastline.Coastline is a private company engaged in domestic, onshore natural gas and oil exploration and production. In late 2003, we entered into our original agreement with Coastline to explore for and develop natural gas and oil prospects in Kenedy County, Texas. Our arrangement with Coastline generally provides for us to pay all leasehold costs, with Coastline generally receiving a negotiated overriding royalty interest and a carried working interest to casing point.

Domestic Onshore Exploration and Properties

JEX Activities

Between May 2000 and March 2004, we drilled 49 wells with JEX on our south Texas properties in Jim Hogg and Brooks Cos., Texas, resulting in 34 successes. These properties were sold to Edge Petroleum Corporation.

JEX’s principle activity is the exploration management of our affiliated offshore Gulf of Mexico exploration companies. See “Offshore Gulf of Mexico Exploration and Joint Ventures”.

Alta Resources Activities

In January 2005, Contango and Alta successfully drilled two shallow wells in Duval County. The Fitzsimmons #1, in which we have a 33% net revenue interest, is a natural gas well, and the Marshbanks #1, in which we have a 32% net revenue interest, is an oil well. We expect production to commence on both of these discoveries in March 2005.

We have recently elected to participate with Alta in an exploratory well in Bandera County, Texas that we expect to drill by mid-year 2005. Our 50% share of the dry hole cost is estimated at $0.6 million. In addition, we have elected to participate in three exploratory wells in Escambia County, Alabama that we expect to drill by mid-year 2005. Our 75% share of the dry hole costs for all three wells is estimated at $2.4 million. In Calcasieu Parish, Louisiana, we have elected to participate in the drilling of an exploratory well by mid-year 2005. Our 75% share of the dry hole cost is estimated at $ $0.2 million.

Ameritex Activities

In February 2004, we entered into an exploration agreement with Ameritex. Ameritex has currently identified six prospect areas. During the quarter, we drilled an exploratory well in Live Oak County, Texas, which was determined to be a dry hole and is in the process of being plugged and abandoned. Our 40% share of dry hole costs is estimated at $0.4 million.

We plan to drill five shallow wells on the Palmeras Ranch located in Dimmit County and Zavala County, Texas by mid-year 2005. Our 38% share of the dry hole costs for all five wells is estimated at approximately $1.3 million. We also plan to drill two exploratory wells, located in Zapata County, Texas in the first half of 2005. Our combined share of estimated drilling costs for both wells is estimated at $1.2 million.

Coastline Activities

In December 2004, Coastline purchased 3-D seismic data on an approximate a 22 square mile area together with a lease option for an initial 180 days on a minimum of 15,060 acres in Jim Hogg County. Coastline also purchased 3-D seismic data on another 41 square mile area, where Coastline entered into lease options to purchase leases on 29,694 acres located in Jim Hogg County. This lease option is also for an initial term of 180 days. Coastline has subsequently leased 1920 acres. Our share of the investment was $0.7 million. If drillable prospects are identified, we will pay all of the prospect leasehold costs and carry Coastline on a portion of the drilling costs on a specified number of wells. In addition, Coastline will receive a 3% overriding royalty interest.

19

Sale of South Texas Properties

On December 29, 2004 the Company completed the sale of the majority of its south Texas natural gas and oil interests to Edge Petroleum Corporation for $50 million. The sale was approved by a majority of the Company’s stockholders at a Special Meeting of Stockholders on December 29, 2004. Approximately 16 Bcfe of proven reserves were sold having a pre-tax net present value using a 10% discount rate as of June 30, 2004 of $54.3 million. Pre-tax proceeds after netting adjustments were $40.3 million. Adjustments were made for net revenues that Contango received for production occurring after July 1, 2004, the effective date of sale, up to the closing date of December 29, 2004.

The Company recognized a gain on sale of $16,258,936 for the quarter ended December 31, 2004. Following the sale, the Company has remaining production of approximately 2,300 MMBtue per day. Based on current prices and production rates, the Company anticipates production revenues of $0.4 million per month, a level believed to be sufficient to pay estimated on-going general and administrative expenses of $0.2 million per month.

As of December 31, 2004, the Company had $44,061,770 in cash and cash equivalents. At December 31, 2004, approximately $3.1 million of the $44.1 million was held in the Company’s operating account to be used for general corporate purposes and $29 million was invested in highly liquid AAA rated tax-exempt money market funds. The remaining $12 million was invested in a portfolio of periodic auction reset (“PAR”) securities that have coupons periodically reset to market interest rates. PAR securities consist of AAA-rated tax exempt municipal bonds and AAA-rated municipal preferred shares. PAR securities are highly liquid and at the Company’s options are immediately convertible to cash.

The Company considers all highly liquid investment grade debt instruments having an original maturity of 90 days or less to be cash equivalents.

A portion of the funds will be used to pay estimated taxes of $9 million in March 2005 related to the gain on the sale of our south Texas properties, to provide working capital for on-going operations and to invest in our exploration programs. The funds will also be used to maintain our 10% limited partnership interest in the Freeport LNG plant, including any expansion in the plant’s capacity, and to continue to invest in alternative energy projects.

Offshore Gulf of Mexico Exploration Joint Ventures

Contango directly and through affiliated companies conducts exploration activities in the Gulf of Mexico. Currently, Contango and its affiliates have interests in 41 offshore leases. See “Offshore Properties” below for additional information on our offshore properties.

Contango owns an equity interest in Republic Exploration and Contango Offshore Exploration, formed for the purpose of generating exploration opportunities in the Gulf of Mexico. These companies have collectively licensed approximately 4,000 blocks of 3-D seismic data and have focused on identifying prospects, acquiring leases at federal and state lease sales and then selling the prospects to third parties, subject to timed drilling obligations plus retained reversionary interests in favor of Republic Exploration and Contango Offshore Exploration. In the future, Contango may choose to take a direct working interest in some of these prospects under the same arms-length terms available to industry partners. JEX is the managing member of Republic Exploration and Contango Offshore Exploration.

Republic Exploration LLC.Contango has invested approximately $5.8 million in Republic Exploration for a 33.3% ownership interest. The other members of Republic Exploration are JEX, its managing member, and a privately held seismic company. Both have comprehensive offshore experience. Republic Exploration holds a non-exclusive license to approximately 1,700 blocks of 3-D seismic data in the shallow waters of the Gulf of Mexico. This data is used to identify, acquire and exploit natural gas and oil prospects. All leases owned by Republic Exploration are subject to a 3.3% overriding royalty interest in favor of the JEX exploration team. See “Offshore Properties” below for more information on Republic Exploration’s offshore properties.

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Contango Offshore Exploration LLC.Contango purchased a 66.7% interest in Contango Offshore Exploration in September 2002. JEX is the only other member and acts as the managing member. Contango Offshore Exploration’s activities will be focused on identifying and purchasing prospects in the Gulf of Mexico and selling them to third parties, retaining a reversionary interest. Contango Offshore Exploration has invested approximately $13.4 million to acquire and reprocess 2,294 blocks of 3-D seismic data and to acquire leases in the Gulf of Mexico. All leases are subject to a 3.3% overriding royalty interest in favor of the JEX exploration team. See “Offshore Properties” below for additional information on Contango Offshore Exploration’s properties.

Current Activities.The Eugene Island 113B well has been successfully tested and is expected to begin production by the end of the second quarter. Republic Exploration and Contango Offshore Exploration have farmed out the following six lease blocks, West Cameron 174, Eugene Island 76, Vermilion 154, Main Pass 221 and East Breaks 369 and 370. Eugene Island 76 is expected to begin drilling in February 2005. West Cameron 174 and Main Pass 221 are expected to be drilled in 2005. A timetable for drilling Vermilion 154 and East Breaks 369 and 370 has not been determined at this time.

The Minerals Management Service (“MMS”) has implemented a rule on royalty relief for shallow water, deep natural gas production from certain Gulf of Mexico leases. “Deep shelf gas” refers to natural gas produced from depths greater than 15,000 feet in waters of 200 meters or less. Royalty relief is available on the first 15 Bcf of natural gas production if produced from an interval between 15,000 to less than 18,000 feet. Royalty relief is available on the first 25 Bcf of natural gas production if produced from well depths greater than 18,000 feet. This royalty relief is expected to have a positive impact on the economics of deep gas wells drilled on the shelf of the Gulf of Mexico.

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Offshore Properties

The following table sets forth the interests owned by Contango and related entities in the Gulf of Mexico as of February 11, 2005:

Area/Block	WI		NRI		Acquired	Status
Contango Oil & Gas Company:
East Cameron 107	33.8	%	27.0	%	May-01	Available for farm-out
Eugene Island 113B	(2	)	(2	)	May-01	Farmed-out, being prepared for production
Area/Block	WI		NRI		Acquired	Status
Republic Exploration (1):
East Cameron 107	66.2	%	53.0	%	May-01	Available for farm-out
Eugene Island 113B	(2	)	(2	)	May-01	Farmed-out, being prepared for production
West Delta 36	100.0	%	80.0	%	May-02	Available for farm-out
West Cameron 174	(3	)	(3	)	Jun-03	Farmed out; drilling expected March, 2005
High Island 113	100.0	%	80.0	%	Sep-03	Available for farm-out
South Timbalier 191	50.0	%	40.0	%	May-04	Available for farm-out
Vermilion 36	100.0	%	80.0	%	May-04	Available for farm-out
Vermilion 109	100.0	%	80.0	%	May-04	Available for farm-out
Vermilion 134	100.0	%	80.0	%	May-04	Available for farm-out
West Cameron 179	100.0	%	80.0	%	May-04	Available for farm-out
West Cameron 185	100.0	%	80.0	%	May-04	Available for farm-out
West Cameron 200	100.0	%	80.0	%	May-04	Available for farm-out
West Delta 18	100.0	%	80.0	%	May-04	Available for farm-out
West Delta 33	100.0	%	80.0	%	May-04	Available for farm-out
West Delta 34	100.0	%	80.0	%	May-04	Available for farm-out
West Delta 43	100.0	%	80.0	%	May-04	Available for farm-out
Ship Shoal 220	50.0	%	40.0	%	May-04	Available for farm-out
South Timbalier 240	50.0	%	40.0	%	May-04	Available for farm-out
Eugene Island 76	(3	)	(3	)	Jul-04	Farmed out; drilling expected February, 2005
South Marsh Island 247	(4	)	(4	)	Jul-04	Subject to farm-out option
Vermilion 130	100.0	%	80.0	%	Jul-04	Available for farm-out
West Cameron 80	100.0	%	80.0	%	Jul-04	Available for farm-out
West Cameron 133	(5	)	(5	)	May-04	NE/4 sold, remainder available for farm-out
West Cameron 167	100.0	%	80.0	%	Jul-04	Available for farm-out
Vermilion 154	(6	)	(6	)	Jul-04	Farmed out; drilling schedule undetermined
Area/Block	WI		NRI		Acquired	Status
Contango Offshore Exploration (1):
Viosca Knoll 75	100.0	%	80.0	%	May-02	Available for farm-out
Vermilion 231	100.0	%	80.0	%	May-03	Available for farm-out
Viosca Knoll 167	100.0	%	80.0	%	May-03	Available for farm-out
Eugene Island 209	100.0	%	80.0	%	Jun-03	Available for farm-out
Viosca Knoll 161	100.0	%	80.0	%	Jul-03	Available for farm-out
High Island A16	100.0	%	80.0	%	Nov-03	Available for farm-out
East Breaks 283	100.0	%	80.0	%	Nov-03	Available for farm-out
East Breaks 369	(7	)	(7	)	Nov-03	Farmed out; drilling schedule undetermined
East Breaks 370	(7	)	(7	)	Nov-03	Farmed out; drilling schedule undetermined
South Timbalier 191	50.0	%	40.0	%	May-04	Available for farm-out
Grand Isle 63	100.0	%	80.0	%	Jun-04	Available for farm-out
Grand Isle 72	100.0	%	80.0	%	Jun-04	Available for farm-out
Grand Isle 73	100.0	%	80.0	%	Jun-04	Available for farm-out
Ship Shoal 220	50.0	%	40.0	%	May-04	Available for farm-out
South Timbalier 240	50.0	%	40.0	%	May-04	Available for farm-out
Viosca Knoll 118	33.3	%	26.6	%	Jun-04	Available for farm-out
Main Pass 221	(8	)	(8	)	Jul-04	Farmed out; drilling expected calendar year 2005
Vermilion 154	(6	)	(6	)	Jul-04	Farmed out; drilling schedule undetermined
Ship Shoal 358, A-3 well	10.0	%	7.7	%	May-04	Producing

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Area/Block	WI		NRI		Acquired	Status
Magnolia Offshore Exploration (1):
Ship Shoal 155	100.0	%	80.0	%	May-02	Available for farm-out
Viosca Knoll 75	100.0	%	80.0	%	May-02	Available for farm-out

(1) Contango has a 33.3% interest in Republic Exploration, 50% interest in Magnolia Offshore Exploration (subject to a third party net profits interest) and 66.7% interest in Contango Offshore Exploration. Magnolia Offshore Exploration does not intend to acquire any additional leases.

(2) Contango (33.75%) and Republic Exploration (66.25%) will collectively have a 5% overriding royalty interest (1.7% and 3.3%, respectively).

(3) Republic Exploration has a 5% of 8/8 ORRI in the lease before payout. Upon payout, Republic Exploration will elect to either (i) escalate its ORRI in the lease from 5% to 8 ¹/3% of 8/8 or (ii) convert the 5% ORRI to a 25% WI (20% NRI).

(4) If optionee elects to drill a well on this block, it will be subject to the following terms: Republic Exploration has a 5% of 8/8 ORRI before payout. At payout, Republic Exploration has the option, but not the obligation, to convert the ORRI to a 25% WI (20% NRI).

(5) Republic Exploration has no interest in the NE/4 of the block. The remainder of the block, which is available for farm-out, is owned by Republic Exploration 100% WI (80% NRI).

(6) Republic Exploration and Contango Offshore Exploration will split a 25% back-in WI after payout.

(7) Contango Offshore Exploration has a 4.267% ORRI before payout and a 7.27% ORRI after payout.

(8) Contango Offshore Exploration has a 5% of 8/8 ORRI in lease before payout. Upon payout, Contango Offshore Exploration’s ORRI will escalate to 7.2% of 8/8.

Freeport LNG Development, L.P.

In March 2003, we exercised an option to purchase from Cheniere Energy, Inc. a 10% limited partnership interest in Freeport LNG Development, L.P. (“Freeport LNG Project” and “Freeport LNG”), a limited partnership formed to develop a 1.5 billion cubic feet per day LNG receiving terminal in Freeport, Texas. The $2.3 million cost to acquire our 10% limited partnership interest was paid as of December 31, 2004, including a final payment of $0.4 million paid in June 2004 upon receipt of Federal Energy Regulatory Commission (“FERC”) approval for the project.

On March 1, 2004, Freeport LNG and Dow entered into a 20-year Terminal Use Agreement providing for a firm commitment by Dow for the use of 250 million cubic feet per day of regasification capacity and an option to acquire an additional 250 million cubic feet per day of regasification capacity. Dow has exercised its rights to the full 500 million cubic feet per day of regasification capacity.

In June 2004, FERC issued an Order under Section 3 of the Natural Gas Act authorizing Freeport LNG to site, construct and operate a liquefied natural gas receiving terminal in Freeport, Texas. In September 2004, FERC extended until June 2009 the time Freeport LNG has to put the LNG terminal into service.

In July 2004, Freeport LNG finalized its transaction with ConocoPhillips for the construction and use of the proposed liquefied LNG receiving terminal in Freeport, Texas. ConocoPhillips acquired 1 billion cubic feet per day of regasification capacity in the terminal, purchased a 50% interest in the general partner managing the Freeport LNG project and agreed to provide substantial construction funding to the venture. This construction funding will be non-recourse to Contango. Freeport LNG is responsible for the commercial activities of the partnership, while ConocoPhillips will manage the construction of the facility.

In December, 2004, Freeport LNG executed a 17-year terminal use agreement (TUA) with MC Global Gas Corporation, a wholly-owned subsidiary of Mitsubishi Corporation. The agreement is for 150 million cubic feet per day (MMcf/d) (approximately 1 million tons of LNG per year) of throughput capacity at Freeport LNG’s liquefied natural gas (LNG) receiving terminal, located in Quintana, Texas, starting from Jan. 1, 2009. MC Global Gas Corporation has an option to increase the total capacity by an additional 100 MMcf/d, to a total of 250 MMcf/d. ConocoPhillips also owns options for up to 500 MMcf/d of additional capacity.

In January, 2005, Freeport LNG received its authorization to commence construction of the first phase of its terminal from the Federal Energy Regulatory Commission (FERC). Construction of the permitted 1.5 Bcf per day

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facility commenced on January 17, 2005. The engineering, procurement and construction contractor is a consortium of Technip USA, Zachry Construction of San Antonio, and Saipem SA of Italy. The capacity of the first phase of 1.5 Bcf per day has been fully sold on a long-term basis to ConocoPhillips and Dow Chemical Company.

Freeport LNG Development, L.P. anticipates filing federal and state permit applications in the first quarter of 2005 for a significant expansion of the terminal. The expansion would provide for up to approximately double the vaporization capacity, a second berth, and additional storage.

Although we believe that a majority of the Freeport LNG financing will be provided by construction funding through ConocoPhillips, we anticipate that we may, from time-to-time, be required to provide funds to the project. Moreover, if Freeport LNG receives approval of its plans to expand the capacity beyond the first phase of 1.5 Bcf per day, we intend to provide our pro rata 10% equity participation. Contango’s 10% share of budgeted 2005 calendar year expenditures for both Phase I and II construction is approximately $1.5 million.

Contango Venture Capital Corporation

In June 2004, our wholly owned subsidiary, Contango Venture Capital Corporation, acquired a 32% general partnership interest in Contango Capital Partnership Management, LLC. Contango Capital Partnership Management, LLC was formed by us and other investors to invest in the energy venture capital market with a focus on domestically sourced, environmentally preferred energy technologies and to expose us to leading edge technologies and opportunities in alternative energy markets. Our initial cash contribution of $0.5 million was used to fund the initial overhead for the sourcing and management of energy venture capital investments to be undertaken by Contango Capital Partnership Management, LLC. We hold two of six seats on the board of managers of Contango Capital Partnership Management, LLC. Contango Capital Partnership Management LLC is the general partner of an alternative energy company named Trulite. Trulite develops lightweight hydrogen generators for fuel cell systems and expects to produce a prototype of portable fuel cell in 2005.

In July 2004, Contango Venture Capital Corporation committed to invest $100,000 in seed preferred equity as a limited partner in Trulite, L.P. As of December 31, 2004 the Contango Venture Capital Corporation has invested $68,860 of its $100,000 commitment into Trulite, L.P.

In January 2005, Contango Venture Capital Corporation invested an additional $40,000 into Trulite L.P., fulfilling its $100,000 commitment. The limited partnership interest for Trulite, L.P. was converted into a limited partnership interest in the newly formed Contango Capital Partners Fund (“Fund”) on January 31, 2005. Prior to the Fund’s close, Contango Venture Capital committed to invest $1.5 million in the Fund. Contango Venture Capital owns a 25% partnership interest in the Fund. Total capitalization of the Fund is $8.25 million. The general partner of the Fund is Contango Capital Partnership Management LLC.

Summary of Critical Accounting Policies

The application of generally accepted accounting principles involves certain assumptions, judgments, choices and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can result in varying results from company to company. Contango’s critical accounting principles, which are described below, relate to the successful efforts method for costs related to natural gas and oil activities, consolidation principles and stock options.

Successful Efforts Method of Accounting. The Company follows the successful efforts method of accounting for its natural gas and oil activities. Under the successful efforts method, lease acquisition costs and all development costs are capitalized. Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, and any such impairment is charged to expense in the period. Exploratory drilling costs are capitalized until the results are determined. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploratory costs, such as seismic costs and other geological and geophysical expenses, are expensed as incurred. The provision for depreciation, depletion and amortization is based on the capitalized costs as determined above. Depreciation, depletion and amortization is on a cost center by cost center basis using the unit of production method, with lease acquisition costs amortized over total proved reserves and other costs amortized over proved developed reserves.

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When circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future cash flows on a cost center basis to the unamortized capitalized cost of the asset. If the future undiscounted cash flows, based on the Company’s estimate of future natural gas and oil prices and operating costs and anticipated production from proved reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair market value.

On July 1, 2003, the Company changed its accounting policy for amortizing and impairing the Company’s natural gas and oil properties from a well-by-well cost center basis to a field-by-field cost center basis. Management believes the newly adopted policy is preferable in these circumstances to have greater comparability with other successful efforts natural gas and oil companies by conforming to predominant industry practice. In addition, the field level is consistent with the Company’s operational and strategic assessment of its natural gas and oil investments. The Company determined that the cumulative effect of the change in accordance with APB Opinion No. 20 was immaterial to the consolidated financial statements.

In accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company classified our recent property sale to Edge Petroleum as discontinued operations. It is our intent; however, to remain an independent natural gas and oil company engaged in the exploration, production, and acquisition of natural gas and oil.

Cash Equivalents. Cash equivalents are considered to be highly liquid investment grade debt investments having an original maturity of three months or less. As of December 31, 2004 the Company had cash and cash equivalents of $44,061,770. The carrying amounts approximated fair market value due to the short maturity of these instruments.

Principles of Consolidation. The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries and affiliates, after elimination of all intercompany balances and transactions. Wholly owned subsidiaries are fully consolidated. Subsidiaries not wholly owned, such as 33.3% owned Republic Exploration LLC (“Republic Exploration”), 50% owned Magnolia Offshore Exploration LLC (“Magnolia Offshore Exploration”) and 66.7% owned Contango Offshore Exploration LLC (“Contango Offshore Exploration”) are not controlled by the Company and are proportionately consolidated. By agreement, Republic Exploration, Magnolia Offshore Exploration and Contango Offshore Exploration have disproportionate allocations of their profits and losses among the owners. Accordingly, the Company determines its income or losses from the ventures based on a hypothetical liquidation determination of how increases or decreases in the book value of the ventures’ net assets will ultimately affect the cash payments to the Company in the event of dissolution.

By agreement, since the Company was the only owner that contributed cash to Republic Exploration and Magnolia Offshore Exploration, the Company consolidated 100% of the ventures’ net assets and results of operations until the ventures expended all of the Company’s initial cash contributions. Subsequent to that event, the owners’ share in the net assets of the ventures is based on their stated ownership percentages. By agreement, the owners in Contango Offshore Exploration immediately share in the net assets of Contango Offshore Exploration, including the initial Company cash contribution, based on their stated ownership percentages. The other owners of Republic Exploration, Magnolia Offshore Exploration and Contango Offshore Exploration contributed seismic data and related geological and geophysical services to the ventures.

Contango’s 10% limited partnership interest in Freeport LNG is accounted for at cost. As a 10% limited partner, the Company has no ability to direct or control the operations or management of the general partner.

Contango’s 32% ownership in Contango Capital Partnership Management, LLC and its 20% limited partnership interest in Trulite, L.P. are accounted for using the equity method. Under the equity method, only Contango’s investment in and amounts due to and from the equity investee are included in the consolidated balance sheet.

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Recent Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) has issued several new pronouncements, including Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51”, Statement of Financial Accounting Standards No. 149 (“SFAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” and Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”.

The primary objectives of FIN 46R are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (these entities are referred to as “variable interest entities” or “VIEs”) and how to determine if a business enterprise should consolidate the VIEs. This new model for consolidation applies to an entity for which either:

• The equity investors (if any) do not have a controlling financial interest; or

• The equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties.

In addition, FIN 46R requires that all enterprises with a significant variable interest in a VIE make additional disclosures regarding their relationship with the VIE. The adoption of FIN 46R had no effect on the Company’s financial statements.

SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS 133. The amendments set forth in SFAS 149 require that contracts with comparable characteristics be accounted for similarly. SFAS 149 is generally effective for contracts entered into or modified after June 20, 2003 (with limited exceptions) and for hedging relationships designated after June 30, 2003. The guidance is to be applied prospectively only. The adoption of SFAS 149 had no effect on the Company’s financial statements.

SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. It was to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of SFAS 150 did not have an impact on the Company’s consolidated financial position or results of operations.

Stock-Based Compensation. Prior to the fiscal year-ended June 30, 2002, the Company accounted for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of the grant over the amount an employee must pay to acquire the common stock.

Effective July 1, 2001, the Company prospectively changed its method of accounting for employee stock-based compensation to the fair value based method prescribed in Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the award vesting period. The fair value of each award is estimated as of the date of grant using the Black-Scholes options-pricing model.

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The Company has determined that the fair value method is preferable to the intrinsic value method previously applied. During the six months ended December 31, 2004 and 2003, the Company recorded a charge of $177,044 and $77,383 to general and administrative expense, respectively. Because compensation expense is recognized over a vesting period, the effect of applying the fair value method in the initial years of implementation may not be representative of the effects on net income (loss) that will be reported in future years.

Overview

We are an independent natural gas and oil company engaged in the exploration, production and acquisition of natural gas and oil in the United States, both onshore Gulf Coast and offshore in the Gulf of Mexico. Our primary source of natural gas and oil production currently is in south Texas. We also own a 10% partnership interest in Freeport LNG Development, L.P., which is developing a 1.5 Bcf per day LNG receiving terminal in Freeport, Texas. Contango Venture Capital Corporation, our wholly owned subsidiary, owns a 32% interest in Contango Capital Partnership Management, LLC, which was formed to invest in the alternative energy venture capital market, and a 25% interest in the Contango Capital Partners Fund, L.P. Contango Capital Partners Fund, L.P. owns interests in several portfolio companies.

Revenues and Profitability. Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas and oil and on our ability to find, develop and acquire natural gas and oil reserves that are economically recoverable and the completion and successful operation of our Freeport LNG project. The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved natural gas and oil reserves. We use the successful efforts method of accounting for our natural gas and oil activities.

Reserve Replacement. Generally, our producing properties onshore Gulf Coast and offshore in the Gulf of Mexico have high initial production rates, followed by steep declines. As a result, we must locate and develop or acquire new natural gas and oil reserves to replace those being depleted by production. Substantial capital expenditures are required to find, develop and acquire natural gas and oil reserves.

Sale of proved properties. From time-to-time as part of our business strategy, we have sold, and in the future may sell some or a substantial portion of our proved reserves to capture current value, using the sales proceeds to further our exploration, LNG and alternative energy investment activities.

Use of Estimates. The preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include estimates of remaining proved natural gas and oil reserves and the timing and costs of our future drilling, development and abandonment activities.

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MD&A Summary Data

	Three Months Ended December 31,							Six Months Ended December 31,
	2004		2003			Change		2004		2003		Change
Natural gas and oil sales	$	7,284,632	$	5,980,308		22	%	$	13,956,874	$	14,232,812	-2	%
Gain (loss) from hedging activities	$	—	$	(24,071	)	*		$	—	$	58,171	*
Production:
Natural gas (thousand cubic feet per day)		10,120		11,364		-11	%		10,438		13,089	-20	%
Oil and condensate (barrels per day)		209		241		-13	%		213		314	-32	%
Average sales price:
Natural gas (per thousand cubic feet)	$	6.85	$	5.08		35	%	$	6.41	$	5.20	23	%
Oil and condensate (per barrel)	$	46.95	$	30.10		56	%	$	44.61	$	29.57	51	%
Operating expenses	$	591,139	$	916,685		-36	%	$	1,443,002	$	2,568,914	-44	%
Exploration expenses	$	948,346	$	2,131,885		-56	%	$	1,759,250	$	3,487,998	-50	%
Depreciation, depletion and amortization	$	473,077	$	1,618,899		-71	%	$	2,202,980	$	3,412,735	-35	%
Impairment of natural gas and oil properties	$	—	$	42,995		*		$	112,000	$	42,995	*
General and administrative expenses	$	1,087,051	$	768,473		41	%	$	1,899,524	$	1,145,580	66	%
Interest expense	$	22,341	$	115,235		-81	%	$	71,317	$	279,645	-74	%
Interest income	$	15,503	$	5,250		*		$	33,356	$	19,666	*
Gain on sale of marketable securities	$	—	$	65,023		*		$	—	$	710,322	*
Gain on sale of assets and other	$	16,212,623	$	6,061,805		*		$	16,172,116	$	7,116,410	*

* not meaningful

Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003

Natural Gas and Oil Sales. We reported natural gas and oil sales of approximately $7.3 million for the three months ended December 31, 2004, up from approximately $6 million reported for the three months ended December 31, 2003. The increase was mainly attributable to higher prices for our natural gas and oil production, offset by decreased natural gas and oil production.

Natural Gas and Oil Production and Average Sales Prices.Our net natural gas production for the three months ended December 31, 2004 was approximately 10.1 million cubic feet of natural gas per day, down from approximately 11.4 million cubic feet of natural gas per day for the three months ended December 31, 2003. Net oil production for the comparable periods decreased from 241 barrels of oil per day to 209 barrels of oil per day. This decrease was due to the natural decline in production from our south Texas properties. For the three months ended December 31, 2004, prices for natural gas and oil were $6.85 per Mcf and $46.95 per barrel, compared to $5.08 per Mcf and $30.10 per barrel for the three months ended December 31, 2003.

Operating Expenses. Operating expenses, including severance taxes, for the three months ended December 31, 2004 were approximately $0.6 million. Included in this amount was approximately $0.7 million of lease operating expense, approximately $0.1 million for workover costs and a $0.2 million credit for production and severance taxes. The Railroad Commission of Texas has extended a natural gas incentive allowing for severance tax reduction on tight sand gas wells. As a result, some of our south Texas Queen City formation properties are eligible for severance tax reduction. The $0.2 million credit for production and severance taxes for the three months ended December 31, 2004 was attributable to a credit for previously paid severance taxes and overall lower costs of operations resulting from lower production. You should not necessarily expect comparable low levels of production and severance taxes in future reporting periods.

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Operating expenses, including severance taxes, for the three months ended December 31, 2003 were approximately $0.9 million. Of the $0.9 million reported, approximately $0.7 million was attributable to lease operating expense and ad valorem taxes and approximately $0.2 million was attributable to production and severance taxes.

Exploration Expense. We reported approximately $0.9 million of exploration expenses for the three months ended December 31, 2004. Of this amount, approximately $0.5 million was attributable to the cost to acquire and reprocess 3-D seismic data both onshore and offshore in the Gulf of Mexico, $0.1 million was spent on various other geological and geophysical activities, and $0.3 million was related to unsuccessful wells drilled in south Texas during the period. We reported approximately $2.1 million of exploration expenses for the three months ended December 31, 2003. Of this amount, approximately $0.7 million was attributable to the cost to shoot, acquire and reprocess 3-D seismic data in south Texas, approximately $0.7 million was attributable to the cost to acquire and reprocess 3-D seismic data offshore in the Gulf of Mexico and $0.7 million was related to an unsuccessful well drilled in south Texas during the period.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the three months ended December 31, 2004 was approximately $0.5 million. For the three months ended December 31, 2003, we recorded approximately $1.6 million of depreciation, depletion and amortization. The decrease in depreciation, depletion and amortization was primarily the result of the sale of our south Texas properties. There was no depreciation, depletion and amortization expense recorded in the second quarter of 2005 related to those properties since these properties were classified as held for sale as of October 2004.

Impairment of Natural Gas and Oil Properties. No impairment of natural gas and oil properties were incurred during the second quarter of 2005. Approximately $0.1 million of impairment was reported for the six months ended December 31, 2004, all of which had incurred in the first quarter of 2005. This was attributable to a writedown of costs associated with a Barnett Shale exploratory play undertaken during the summer of 2003 that has had only marginal success.

General and Administrative Expenses. General and administrative expenses for the three months ended December 31, 2004 were approximately $1.1 million, up from $0.8 million for the three months ended December 31, 2003.

Major components of general and administrative expenses for the three months ended December 31, 2004 included approximately $0.6 million in salaries and benefits, $0.4 million of office administration and other. Also included in total general and administrative expenses for the three months ended December 31, 2004 was approximately $0.1 million related to the cost of expensing stock options.

Major components of general and administrative expenses for the three months ended December 31, 2003 included approximately $0.4 million in salaries and benefits, $0.1 million of office administration expenses, $0.1 million of insurance costs, and $0.2 million of other expenses.

The increase in general and administrative expenses was attributable to overall higher expenses including higher salary expense, increased office administration expenses and increased stock option expense resulting from a higher level of option grants.

Interest Expense.We reported interest expense of approximately $22,341 for the three months ended December 31, 2004, down from the approximate $115,235 reported for the three months ended December 31, 2003. This decrease primarily was attributable to lower average levels of borrowings under our bank line of credit.

Gain (loss) on Sale of Assets and Other.We reported gain on sale of assets and other of approximately $16.2 million for the three months ended December 31, 2004, the majority of which was a $16.3 million gain resulting from the sale of our south Texas natural gas and oil interests to Edge Petroleum Corporation for $50 million, and approximately $46,320 in operating losses related to our alternative energy investments.

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For the three months ended December 31, 2003, we reported an approximate $6.2 million gain on the sale of assets. In December 2003, Contango and its 33.3%-owned subsidiary, Republic Exploration, sold their producing Gulf of Mexico leases for approximately $12.0 million. As a result of this sale, Contango recorded a gain of approximately $6.2 million as of December 31, 2003.

Six Months Ended December 31, 2004 Compared to Six Months Ended December 31, 2003

Natural Gas and Oil Sales. We reported natural gas and oil sales of approximately $14.0 million for the six months ended December 31, 2004, down from approximately $14.2 million reported for the six months ended December 31, 2003. The small decrease was mainly attributable to higher prices for our natural gas and oil production being offset by normal production declines in existing fields.

Natural Gas and Oil Production and Average Sales Prices.Our net natural gas production for the six months ended December 31, 2004 was approximately 10.4 million cubic feet of natural gas per day, down from approximately 13.1 million cubic feet of natural gas per day for the six months ended December 31, 2003. Net oil production for the comparable periods decreased from 314 barrels of oil per day to 213 barrels of oil per day. This decrease was due to the natural decline in production from our south Texas properties. For the six months ended December 31, 2004, prices for natural gas and oil were $6.41 per Mcf and $44.61 per barrel, compared to $5.20 per Mcf and $29.57 per barrel for the six months ended December 31, 2003.

Operating Expenses. Operating expenses, including severance taxes, for the six months ended December 31, 2004 were approximately $1.4 million. Included in this amount was approximately $1.4 million of lease operating expense, approximately $0.2 million for workover costs and a $0.2 million credit for production and severance taxes. The Railroad Commission of Texas has extended a natural gas incentive allowing for severance tax reduction on tight sand gas wells. As a result, some of our south Texas Queen City formation properties are eligible for severance tax reduction. You should not necessarily expect comparable low levels of production and severance taxes in future reporting periods.

Operating expenses, including severance taxes, for the six months ended December 31, 2003 were approximately $2.6 million. Of the $2.6 million reported, approximately $1.6 million was attributable to lease operating expense and ad valorem taxes, approximately $0.8 million was attributable to production and severance taxes and $0.2 million was attributable to workover costs.

Exploration Expense. We reported approximately $1.8 million of exploration expenses for the six months ended December 31, 2004. Of this amount, approximately $0.8 million was attributable to the cost to acquire and reprocess 3-D seismic data both onshore and offshore in the Gulf of Mexico, $0.3 million was spent on various other geological and geophysical activities, and $0.7 million was related to unsuccessful wells drilled in south Texas during the period. We reported approximately $3.5 million of exploration expenses for the six months ended December 31, 2003. Of this amount, approximately $1.7 million was attributable to the cost to shoot, acquire and reprocess 3-D seismic data in south Texas, approximately $1.0 million was attributable to the cost to acquire and reprocess 3-D seismic data offshore in the Gulf of Mexico and $0.8 million was related to two unsuccessful wells drilled in south Texas during the period.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization for the six months ended December 31, 2004 was approximately $2.3 million. For the six months ended December 31, 2003, we recorded approximately $3.4 million of depreciation, depletion and amortization. The decrease in depreciation, depletion and amortization was primarily the result of the sale of our south Texas properties. There was no depreciation, depletion and amortization expense recorded in the second quarter of 2005 related to those properties since these properties were classified as held for sale as of October 2004.

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Impairment of Natural Gas and Oil Properties. We reported an impairment of natural gas and oil properties of approximately $0.1 million for the six months ended December 31, 2004. This was attributable to a writedown of costs associated with a Barnett Shale exploratory play undertaken during the summer of 2003 that has had only marginal success.

General and Administrative Expenses. General and administrative expenses for the six months ended December 31, 2004 were approximately $1.9 million, up from $1.1 million for the six months ended December 31, 2003.

Major components of general and administrative expenses for the six months ended December 31, 2004 included approximately $0.9 million in salaries and benefits, $0.1 million in legal, accounting, engineering and other professional fees, $0.5 million of office administration, $0.1 million of insurance costs and $0.1 million in other expenses. Also included in total general and administrative expenses for the six months ended December 31, 2004 was approximately $0.2 million related to the cost of expensing stock options.

Major components of general and administrative expenses for the six months ended December 31, 2003 included approximately $0.5 million in salaries and benefits $0.1 million in legal, accounting, engineering and other professional fees, $0.2 million of office administration expenses, $0.1 million of insurance costs, $0.1 million related to the cost of expensing stock options and $0.2 million of other expenses.

The increase in general and administrative expenses was attributable to overall higher expenses including higher salary expense, increased office administration expenses and increased stock option expense resulting from a higher level of option grants.

Interest Expense.We reported interest expense of approximately $0.1 million for the six months ended December 31, 2004, down from the approximate $0.3 million reported for the six months ended December 31, 2003. This decrease primarily was attributable to lower average levels of borrowings under our bank line of credit.

Gain (loss) on Sale of Assets and Other.We reported other income of approximately $16.2 million for the six months ended December 31, 2004, the majority of which was a $16.3 million gain resulting from the sale of our south Texas natural gas and oil interests to Edge Petroleum Corporation for $50 million, offset by approximately $86,820 in operating losses related to our alternative energy investments.

For the six months ended December 31, 2003, we reported an approximate $7.1 million gain on the sale of assets from two transactions.

In September 2003, we sold properties within our south Texas exploration program consisting of 10 wells in Brooks County, Texas for $5.0 million, reporting a gain of approximately $0.9 million attributable to this producing property sale.

In December 2003, Contango and its 33.3%-owned subsidiary, Republic Exploration, sold their producing Gulf of Mexico leases for approximately $12.0 million. As a result of this sale, Contango recorded a gain of approximately $6.2 million as of December 31, 2003.

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Production, Prices, Operating Expenses, and Other

	Three Months Ended December 31,					Six Months Ended December 31,
	2004			2003		2004			2003
	(Dollar amounts in 000s, except per Mcfe amounts)					(Dollar amounts in 000s, except per Mcfe amounts)
Production Data:
Natural gas (million cubic feet)		931			1,046		1,910			2,408
Oil and condensate (thousand barrels)		19			22		39			58
Total (million cubic feet equivalent)		1,045			1,178		2,144			2,756
Natural gas (thousand cubic feet per day)		10,120			11,364		10,438			13,089
Oil and condensate (barrels per day)		209			241		213			314
Total (thousand cubic feet equivalent per day)		11,374			12,810		11,716			14,973
Average sales price:
Natural gas (per thousand cubic feet)	$	6.85		$	5.08	$	6.40		$	5.20
Oil and condensate (per barrel)	$	46.95		$	30.10	$	44.61		$	29.57
Selected data per Mcfe:
Production and severance taxes	$	(0.19	)	$	0.22	$	(0.11	)	$	0.31
Lease operating expenses	$	0.76		$	0.56	$	0.78		$	0.63
General and administrative expenses	$	1.04		$	0.65	$	0.89		$	0.42
Depreciation, depletion and amortization of natural gas and oil properties	$	0.43		$	1.35	$	1.00		$	1.22
EBITDAX (1)	$	21,819		$	10,399	$	26,786		$	18,404

(1) EBITDAX represents earnings before interest, income taxes, depreciation, depletion and amortization, impairment expenses, exploration expenses, including gain (loss) from hedging activities, and sale of assets and other. We have reported EBITDAX because we believe EBITDAX is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and ability to incur and service debt. We believe EBITDAX assists investors in comparing a company’s performance on a consistent basis without regard to depreciation, depletion and amortization, impairment of natural gas and oil properties and exploration expenses, which can vary significantly depending upon accounting methods. EBITDAX is not a calculation based on U.S. generally accepted accounting principles and should not be considered an alternative to net income (loss) in measuring our performance or used as an exclusive measure of cash flow because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in our statements of cash flows. Investors should carefully consider the specific items included in our computation of EBITDAX. While we have disclosed our EBITDAX to permit a more complete comparative analysis of our operating performance and debt servicing ability relative to other companies, investors should be cautioned that EBITDAX as reported by us may not be comparable in all instances to EBITDAX as reported by other companies. EBITDAX amounts may not be fully available for management’s discretionary use, due to requirements to conserve funds for capital expenditures, debt service, preferred stock dividends and other commitments.

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A reconciliation of EBITDAX to income (loss) from operations and operating results for discontinued operations for the periods indicated is presented below.

	Three Months Ended December 31,						Six Months Ended December 31,
Reconciliation of EBITDAX:	2004			2003			2004			2003
	(Dollar amounts in 000s)						(Dollar amounts in 000s)
(Loss) from continuing operations	$	(1,274	)	$	(2,991	)	$	(2,611	)	$	(4,396	)
Exploration expenses		944			2,153			1,732			3,277
Depreciation, depletion and amortization		459			7			620			15
Impairment of natural gas and oil properties		—			43			112			43
Gain on sale of marketable securities		—			65			—			710
Gain (loss) on sale of assets and other		(46	)		6,244			(87	)		6,244
EBITDAX from continuing operations		83			5,521			(234	)		5,893
Income from discontinued operations before taxes		21,718			3,287			25,410			8,901
Exploration expenses		4			(21	)		27			212
Depreciation, depletion and amortization		14			1,612			1,583			3,398
EBITDAX	$	21,819		$	10,399		$	26,786		$	18,404

Capital Resources and Liquidity

During the six months ended December 31, 2004, we funded our activities with internally generated cash flow. Our current capital expenditure budget for calendar year 2005 is projected to be $20 million. Our budgeted capital expenditures call for us to drill 20 onshore wells at a budgeted cost of $10 million in drilling costs, and to expend $5 million for seismic and lease acquisitions. We are also projecting that our two offshore subsidiaries will be carried in four to six Gulf of Mexico exploration wells in 2005. We expect to spend an additional $1.5 million at our Freeport LNG project, and have committed to invest $1.5 million in the Contango Capital Partners Fund.

In March 2005, the Company expects to pay taxes of approximately $9 million on the capital gain resulting from the sale of assets to Edge Petroleum. As of December 31, 2004 we have a total of $44.1 million of cash and cash equivalents and have no long term debt outstanding. Following the sale, the Company has remaining production of approximately 2,300 MMBtue per day. Based on current prices and production rates, the Company anticipates production revenues of $0.4 million per month, a level believed to be sufficient to pay estimated on-going general and administrative expenses of $0.2 million per month.

We believe that our cash on hand and our anticipated cash flow from operations will be adequate over the next twelve months to satisfy planned capital expenditures to fund drilling activities, our share of construction costs related to the Freeport LNG receiving terminal and incremental investments in Contango Venture Capital Corporation and to satisfy general corporate needs. We may seek additional equity, sell assets or seek other financing to fund our exploration program and to take advantage of other opportunities that may become available. The availability of such funds will depend upon prevailing market conditions and other factors over which we have no control, as well as our financial condition and results of operations.

Natural Gas and Oil Reserves

The following table presents our estimated net proved, developed producing natural gas and oil reserves and the pre-tax net present value of our reserves at December 31, 2004, based on a reserve report generated by W.D. Von Gonten & Co. The approximate 16,000 MMcfe of proved reserves that were sold to Edge Petroleum are not included in the December 31, 2004 reserve report. The pre-tax net present value is not intended to represent the current market value of the estimated natural gas and oil reserves we own.

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The pre-tax net present value of future cash flows attributable to our proved reserves as of December 31, 2004 was determined by the December 31, 2004 prices of $5.815 per MMbtu for natural gas at the Houston Ship Channel and $46.45 per barrel of oil at West Texas Intermediate Posting, in each case before adjusting for basis and transportation costs. Over 99% of our proved reserves are classified as proved developed producing.

	Proved Reserves as of December 31, 2004
Natural gas (MMcf)		882
Oil and condensate (MBbls)		23
Total proved reserves (MMcfe)		1,020
Pre-tax net present value, SEC guidelines ($000)	$	4,218

The process of estimating natural gas and oil reserves is complex. It requires various assumptions, including natural gas and oil prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Our third party engineers must project production rates and timing of development expenditures, as well as analyze available geological, geophysical, production and engineering data. The extent, quality and reliability of this data can vary. Therefore, estimates of natural gas and oil reserves are inherently imprecise. Actual future production, natural gas and oil prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable natural gas and oil reserves most likely will vary from estimates. Any significant variance could materially affect the estimated quantities and net present value of reserves. In addition, our third party engineers may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing natural gas and oil prices and other factors, many of which are beyond our control. Because most of our reserve estimates are not based on a lengthy production history and are calculated using volumetric analysis, these estimates are less reliable than estimates based on a lengthy production history.

It should not be assumed that the pre-tax net present value is the current market value of our estimated natural gas and oil reserves. In accordance with requirements of the Securities and Exchange Commission, we base the estimated discounted future net cash flows from proved reserves on prices and costs available on the date of the estimate. Actual future prices and costs may differ materially from those used in the present value estimate.

Credit Facility

Prior to closing the sale of its south Texas natural gas and oil interests to Edge Petroleum Corporation, the Company repaid all of its long-term debt outstanding. Our south Texas properties that were sold to Edge Petroleum constituted the bulk of the assets used to secure our existing bank line. As of December 31, 2004, the Company had no long term debt outstanding.

The revolving line of credit provides for a borrowing capacity of $100,000 and matures on June 29, 2006. Borrowings will bear interest, at the Company’s option, at either (i) LIBOR plus two percent (2%) or (ii) the bank’s base rate plus one-fourth percent (1/4%) per annum. Additionally, the Company pays a quarterly commitment fee of three-eighths percent (3/8%) per annum on the average availability.

The credit facility requires the maintenance of certain ratios, including those related to working capital, funded debt to EBITDAX, and debt service coverage, as defined in the credit facility. Additionally, the credit facility contains certain negative covenants that, among other things, restrict or limit the Company’s ability to incur indebtedness, sell assets, pay dividends and reacquire or otherwise acquire or redeem capital stock. Failure to maintain required financial ratios or comply with the credit facility’s covenants can result in a default and acceleration of all indebtedness under the credit facility. As of December 31, 2004, the Company was in compliance with its financial covenants, ratios and other provisions of its credit facility.

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Item 3.Quantitative and Qualitative Disclosure About Market Risk

As of December 31, 2004, we had approximately $44.1 million in cash and cash equivalents. At December 31, 2004, approximately $3.1 million of the $44.1 million was held in our operating account to be used for general corporate purposes, and $29 million was invested in highly liquid AAA rated tax-exempt money market funds. The remaining $12 million was invested in a portfolio of periodic auction reset (PAR) securities that have coupons periodically reset to market interest rates. PAR securities consist of AAA-rated tax exempt municipal bonds and AAA-rated municipal preferred shares. PAR securities are highly liquid and at the Company’s option are immediately convertible to cash.

All of our investments are highly liquid AAA tax exempt securities with maturities of 90 days or less. We consider all highly liquid debt instruments having an original maturity of 90 days or less to be cash equivalents.

Investments in fixed-rate, interest-earning instruments carry a degree of interest rate and credit rating risk. Fixed-rate securities may have their fair market value adversely impacted because of changes in interest rates and credit ratings. Additionally, the value of our investments may be impaired temporarily or permanently. Due in part to these factors, our investment income may decline and we may suffer losses in principal. Currently, we do not use any derivative or other financial instruments or derivative commodity instruments to hedge any market risks, including changes in interest rates or credit ratings, and we do not plan to employ these instruments in the future. Because of the nature of the issuers of the securities that we invest in, we do not believe that we have any cash flow exposure arising from changes in credit ratings. Based on a sensitivity analysis performed on the financial instruments held as of December 31, 2004, an immediate 10% change in interest rates is not expected to have a material effect on our near-term financial condition or results of operations.

Item 4.Controls and Procedures

Kenneth R. Peak, our Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report. Based upon his evaluation, he has concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings.

There were no changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.Legal Proceedings

None.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None.

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Item 4.Submission of Matters to a Vote of Security Holders

On December 29, 2004, the Company held a Special Meeting of Stockholders. At the Special Meeting, the following matter was voted upon and passed:

• Approval of the sale of the south Texas natural gas and oil interests by Contango and Contango’s subsidiary to Edge Petroleum Corporation as set forth in the Asset Purchase Agreement, dated as of October 7, 2004 and included as an exhibit to the Corporation’s definitive proxy statement filed with the Securities and Exchange Commission on December 7, 2004.

The number of affirmative votes was greater than 50% of the total votes entitled to be cast by the stockholders of record. A total of 10,105,148 shareholders responded, with 10,070,736 respondents voting “yes” thereby approving the Sale; 30,797 voting “no” to reject the Sale and 3,615 abstaining. Included in the total above is an equivalent of 1,166,662 shares of common stock cast by holders of Series C Preferred Stock, all of which voted “yes” to approve the Asset Sale.

Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

(a) Exhibits:

The following is a list of exhibits filed as part of this Form 10-Q. Where so indicated by a footnote, exhibits, which were previously filed, are incorporated herein by reference.

Exhibit Number	Description
3.1	Certificate of Incorporation of Contango Oil & Gas Company, a Delaware corporation. (7)
3.2	Bylaws of Contango Oil & Gas Company, a Delaware corporation. (7)
3.3	Agreement of Plan of Merger of Contango Oil & Gas Company, a Delaware corporation, and Contango Oil & Gas Company, a Nevada corporation. (7)
3.4	Amendment to the Certificate of Incorporation of Contango Oil & Gas Company, a Delaware corporation. (15)
4.1	Facsimile of common stock certificate of the Company. (1)
4.2	Certificate of Designations, Preferences and Relative Rights and Limitations for Series C Senior Convertible Cumulative Preferred Stock of Contango Oil & Gas Company, a Delaware corporation. (19)
10.1	Agreement, dated effective as of September 1, 1999, between Contango Oil & Gas Company and Juneau Exploration, L.L.C. (2)
10.2	Securities Purchase Agreement between Contango Oil & Gas Company and Trust Company of the West, dated December 29, 1999. (12)
10.3	Warrant to Purchase Common Stock between Contango Oil & Gas Company and Trust Company of the West, dated December 29, 1999. (3)
10.4	Co-Sale Agreement among Kenneth R. Peak, Contango Oil & Gas Company and Trust Company of the West, dated December 29, 1999. (3)
10.5	Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company and Trust Company of the West. (4)
10.6	Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company and Fairfield Industries Incorporated. (4)
10.7	Securities Purchase Agreement dated August 24, 2000 by and between Contango Oil & Gas Company and Juneau Exploration Company, L.L.C. (4)
10.8	Amendment dated August 14, 2000 to agreement between Contango Oil & Gas Company and Juneau Exploration Company, LLC. dated effective as of September 1, 1999. (5)

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10.9	Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (8)
10.10	First Amendment dated as of January 8, 2002 to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (9)
10.11	Asset Purchase Agreement by and among Juneau Exploration, L.P. and Contango Oil & Gas Company dated January 4, 2002. (9)
10.12	Asset Purchase Agreement by and among Mark A. Stephens, John Miller, The Hunter Revocable Trust, Linda G. Ferszt, Scott Archer and the Archer Revocable Trust and Contango Oil & Gas Company dated January 9, 2002. (10)
10.13	Second Amendment dated as of February 13, 2002 to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (11)
10.14	Waiver dated as of March 25, 2002 to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (11)
10.15	Option Purchase Agreement between Contango Oil & Gas Company and Cheniere Energy, Inc. dated June 4, 2002. (13)
10.16	Waiver and Third Amendment dated as of April 26, 2002 to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (14)
10.17	Fourth Amendment dated as of September 9, 2002 to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (14)
10.18	Fifth Amendment, effective June 1, 2003, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (16)
10.19	Sixth Amendment, effective September 1, 2003, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (18)
10.20	Seventh Amendment, effective September 1, 2003, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (21)
10.21	Securities Purchase Agreement dated December 12, 2003 by and between Contango Oil & Gas Company and the Purchasers Named Therein. (19)
10.22	Freeport LNG Development, L.P. Amended and Restated Limited Partnership Agreement dated February 27, 2003. (20)
10.23	Partnership Purchase Agreement among Contango Sundance, Inc., Contango Oil & Gas, Cheniere LNG, Inc. and Cheniere Energy, Inc. dated March 1, 2003. (20)
10.24	First Amendment, dated December 19, 2003, to Freeport LNG Development, L.P. Amended and Restated Limited Partnership Agreement dated February 27, 2003. (20)
10.25	Eighth Amendment, effective February 13, 2004, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (22)
10.26	Ninth Amendment, effective July 29, 2004, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (23)
10.27	Tenth Amendment, effective September 23, 2004, to Credit Agreement between Contango Oil & Gas Company and Guaranty Bank, FSB, dated June 29, 2001. (25)
10.28	Asset Purchase Agreement, dated as of October 7, 2004, by and between Contango Oil & Gas Company; Contango STEP, L.P.; Edge Petroleum Exploration Company; and Edge Petroleum Corporation. (24)
14.1	Code of Ethics. (17)
21.1	List of Subsidiaries. (23)
23.1	Consent of W.D. Von Gonten & Co. †
31.1	Certification required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934. †
32.1	Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †

† Filed herewith.

1. Filed as an exhibit to the Company’s Form 10-SB Registration Statement, as filed with the Securities and Exchange Commission on October 16, 1998.

2. Filed as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31, 1999, as filed with the Securities and Exchange Commission on November 11, 1999.

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3. Filed as an exhibit to the Company’s Form 10-QSB for the quarter ended December 31, 1999, as filed with the Securities and Exchange Commission on February 14, 2000.

4. Filed as an exhibit to the Company’s report on Form 8-K, dated August 24, 2000, as filed with the Securities and Exchange Commission of September 8, 2000.

5. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2000, as filed with the Securities and Exchange Commission on September 27, 2000.

6. Filed as an exhibit to the Company’s report on Form 8-K, dated September 27, 2000, as filed with the Securities and Exchange Commission on October 3, 2000.

7. Filed as an exhibit to the Company’s report on Form 8-K, dated December 1, 2000, as filed with the Securities and Exchange Commission on December 15, 2000.

8. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2001, as filed with the Securities and Exchange Commission on September 21, 2001.

9. Filed as an exhibit to the Company’s report on Form 8-K, dated January 4, 2002, as filed with the Securities and Exchange Commission on January 8, 2002.

10. Filed as an exhibit to the Company’s Form 10-QSB for the quarter ended March 31, 2002, as filed with the Securities and Exchange Commission on February 14, 2002.

11. Filed as an exhibit to the Company’s report filed on Form 10-QSB for the quarter ended March 31, 2002, dated May 2, 2002, as filed with the Securities and Exchange Commission.

12. Filed as an exhibit to the Company’s Form 10-QSB/A for the quarter ended December 31, 1999, as filed with the Securities and Exchange Commission on June 4, 2002.

13. Filed as an exhibit to the Company’s Registration Statement on Form S-1 (Registration No. 333-89900) as filed with the Securities and Exchange Commission on June 14, 2002.

14. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2002, as filed with the Securities and Exchange Commission on September 26, 2002.

15. Filed as an exhibit to the Company’s report filed on Form 10-QSB for the quarter ended December 31, 2002, dated November 14, 2002, as filed with the Securities and Exchange Commission.

16. Filed as an exhibit to the Company’s report on Form 8-K, dated June 17, 2003, as filed with the Securities and Exchange Commission on June 18, 2003.

17. Filed as an exhibit to the Company’s annual report on Form 10-KSB for the fiscal year ended June 30, 2003, as filed with the Securities and Exchange Commission on September 22, 2003.

18. Filed as an exhibit to the Company’s report filed on Form 10-Q for the quarter ended September 30, 2003, dated November 12, 2003, as filed with the Securities and Exchange Commission.

19. Filed as an exhibit to the Company’s report on Form 8-K, dated December 12, 2003, as filed with the Securities and Exchange Commission on December 17, 2003.

20. Filed as an exhibit to the Company’s report on Form 8-K, dated December 19, 2003, as filed with the Securities and Exchange Commission on December 23, 2003.

21. Filed as an exhibit to the Company’s report filed on Form 10-Q for the quarter ended December 31, 2003, dated February 13, 2004, as filed with the Securities and Exchange Commission.

22. Filed as an exhibit to the Company’s report filed on Form 10-Q for the quarter ended March 31, 2004, dated May 12, 2004, as filed with the Securities and Exchange Commission.

23. Filed as an exhibit to the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2004, as filed with the Securities and Exchange Commission on September 27, 2003.

24. Filed as an exhibit to the Company’s report on Form 8-K, dated September 27, 2004, as filed with the Securities and Exchange Commission on October 8, 2004.

25. Filed as an exhibit to the Company’s report filed on Form 10-Q for the quarter ended September 30, 2004, dated November 12, 2004, as filed with the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	CONTANGO OIL & GAS COMPANY
Date: February 14, 2005	By:	/s/ KENNETH R. PEAK
		Kenneth R. Peak
		Chairman and Chief Executive Officer
		(Principal Executive and Financial Officer)
Date: February 14, 2005	By:	/s/ LESIA BAUTINA
		Lesia Bautina
		Vice President and Controller
		(Principal Accounting Officer)

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