NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Business

Contango Oil & Gas Company (collectively with its subsidiaries, “Contango” or the “Company”) is a Houston, Texas based, independent oil and natural gas company. The Company’s business is to maximize production and cash flow in order to explore, develop, exploit , produce and acquire crude oil and natural gas properties in the onshore Texas Gulf Coast and Rocky Mountain regions of the United States.

The following table lists the Company’s primary producing areas as of March 31, 2016:

Additionally, the Company has (i) operated properties producing from various conventional formations in various counties along the Texas Gulf Coast; (ii ) operated producing properties in the Denver Julesburg Basin (“DJ Basin”) in Weld and Adams counties in Colorado, which the Company believes may also be prospective in the Niobrara Shale oil play; and (i ii ) operated producing properties in the Haynesville Shale, Mid Bossier and James Lime formations in East Texas.  

Due to the current challenging commodity price environment , the Company intends to focus its 2016 capital program   on: (i) the preservation of its healthy financial position, including limiting its overall capital expenditure budget to a minimal amount ; (ii) focusing drilling expenditures, if any, on strategic projects; (iii) identification of opportunities for cost efficiencies in all areas of its operations; and (iv) continuing to identify new r esource potential opportunities, internally and , where appropriate,   through acquisition. The Company will continuously monitor the commodity price environment, stability and forecast, and, if warranted, make adjustments to its drilling strategy as the year progresses.

The following table lists the primary area to which the Company   has allocated drilling capital for 20 16 :



In addition, we have allocated some geological and geophysical and leasehold capital to Madison and Grimes counties, Texas and Weston County, Wyoming.

2. Summary of Significant Accounting Policies

The accounting policies followed by the Company are set forth in the notes to the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 201 5 (the “201 5 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). Please refer to the notes to the financial statements included in the 201 5   Form 10-K for additional details of the Company’s financial condition, results of operations and cash flows. No material item s included in those notes have changed except as a result of normal transactions in the interim or as disclosed within this report.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, pursuant to the rules and regulations of the SEC , including instructions to Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete annual financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of the unaudited consolidated financial statements have been included. All such adjustments are of a normal recurring nature. The consolidated financial statements

should be read in conjunction with the 201 5   Form 10-K. The consolidated results of operations for the three   months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 201 6 .

The Company’s consolidated financial statements include the accounts of Contango Oil & Gas Company and its subsidiaries, after elimination of all material intercompany balances and transactions. All wholly-owned subsidiaries are consolidated. Republic Exploration LLC (“REX”), a p artially-owned oil and gas explor ation and development affiliate which is not controlled by the Company ,   w as proportionately consolidated prior to its dissolution as of December 31, 2015 .   The investment in Exaro by our wholly-owned subsidiary, Contaro Company (“Contaro”) is accounted for using the equity method of accounting, and therefore, the Company does not include its share of individual operating results , reserves   or production in those reported for the Company’s consolidated results.

Impairment of Long-Lived Assets

Pursuant to GAAP, when circumstances indicate that proved properties may be impaired, the Company compares expected undiscounted future cash flows on a field by field basis to the unamortized capitalized cost of the asset. If the estimated future undiscounted cash flows based on the Company’s estimate of future reserves, natural gas and oil prices , operating costs and production levels from oil and natural gas reserves, are lower than the unamortized capitalized cost, then the capitalized cost is reduced to fair value. The factors used to determine fair value include, but are not limited to, estimates of proved and probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties . Additionally, the Company may use appropriate market data to determine fair value.   The Company recognized approximately   $ 0 . 7   million for impairment of proved properties for the quarter ended March 31, 2016 . Substantially all of the non-cash impairment charge in the quarter ended March 31, 2016 is directly related to the decline in commodity prices and the resulting impact on estimated future net cash flows from associated reserves. The Company recognized a $2.0 million impairment of small marginal proved properties for the quarter ended March 31, 2015 .  

Unproved properties are reviewed quarterly to determine if there has been impairment of the carrying value, with any such impairment charged to expense in the period.   The Company recognized impairment expense of approximately $ 1 . 1 million   for the quarter ended March 31, 2016 ,   related to partial impairment of certain unproved properties due primarily to the sustained low commodity price environment and expiring leases ;   s ubstantially all  o f   which is related to unproved lease cost amortization of the Elm Hill project in Fayette and Gonzales counties Texas.   The Company recognized impairment expense of approximately $0.2 million for the quarter ended March 31 , 201 5 , related to partial impairment of certain unproved properties due to expiring leases.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net   loss attributable to common stock by the weighted average number of common shares outstanding for the period. Diluted net   loss per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potential dilutive securities, including unexercised stock options and unvested restricted stock, have not been considered when their effect would be antidilutive. For the quarter ended March 31 , 201 6 ,   116,461 stock options and 284,528 restricted shares were excluded from dilutive shares due to the loss for the period. For the quarter ended March 31, 2015 ,   1 29,852   stock options and 456,528 restricted shares were excluded from dilutive shares due to the loss for the period .  

Subsidiary Guarantees

Contango Oil & Gas Company, as the parent company (the “Parent Company”), has filed a registration statement on Form S-3 with the SEC to register, among other securities, debt securities that the Parent Company may issue from time to time. Any such debt securities would likely be guaranteed on a full and unconditional basis by each of the Company’s current subsidiaries and any future subsidiaries specified in any future prospectus supplement (each a “Subsidiary Guarantor”) .   Each of the Subsidiary Guarantors is wholly-owned by the Parent Company, either directly or indirectly. The Parent Company has no assets or operations independent of the Subsidiary Guarantors, and there are no significant restrictions upon the ability of the Subsidiary Guarantors to distribute funds to the Parent Company. The Parent Company has one wholly-owned subsidi ary that is inactive and not a Subsidiary G uarantor. Finally, the Parent Company’s wholly-owned subsidiaries do not have restricted assets that exceed 25% of net assets as of the most recent fiscal year end that may not be transferred to the Parent Company in the form of loans, advances or cash dividends by such subsidiary without the consent of a third party.



Recent Accounting Pronouncements  

In March 2016, the FASB issued Accounting Standards Update No. 2016-09: Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 is part of an initiative to reduce complexity in accounting standards. The areas of simplification in ASU 2016-09 involve several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years; early application is

permitted. The Company will continue to assess the impact this may have on its financial position, results of operations, and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02: Leases (Topic 842) (ASU 2016-02). The main objective of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 requires lessees to recognize assets and liabilities arising from leases on the balance sheet. ASU 2016-02 further defines a lease as a contract that conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefit from the use of the asset and (2) the right to direct the use of the asset. ASU 2016-02 requires disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. For public entities, ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; early application is permitted. The Company will continue to assess the impact this may have on its financial position, results of operations, and cash flows.

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2016-01: Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). The main objective of ASU 2016-01 is enhancing the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments in ASU 2016-01 make targeted improvements to GAAP by: (i) requiring equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income; (ii) simplifying the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) exempting all non-public business entities from disclosing fair value information for financial instruments measured at amortized cost; (iv) eliminating requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet: (v) requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vi) requiring separate presentation in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument- specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vii) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (viii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public entities, ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years; early application is permitted. The provisions of this accounting update are not expected to have a material impact on the Company’s financial position or results of operations.

Further, management is closely monitoring the joint standard-setting efforts of the FASB and the International Accounting Standards Board. There are a large number of pending accounting standards that are being targeted for completion in 2016 and beyond. Because these pending standards have not yet been finalized, management is not able to determine the potential future impact that these standards will have, if any, on the Company's financial position, results of operations, or cash flows.

3 . Fair Value Measurements

Pursuant to A ccounting S tandards C odification 820, Fair Value Measurements and Disclosures (ASC 820), the Company's determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company's consolidated balance sheets, but also the impact of the Company's nonperformance risk on its own liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 measurements are inputs that are observable for assets or liabilities, either directly or indirectly, other than quoted prices included within Level 1. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs.

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value as of March 31, 2016 .   As required by ASC 820, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the

significance of a particular input to the fair valu e measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have been no transfers between Level 1, Level 2 or Level 3.

Fair value information for financial assets and liabilities was as follows as of March 31, 2016 (in thousands):



Derivatives listed above are recorded in “ Current derivative asset ” on the Company’s consolidated balance s heet and include swaps that are carried at fair value. The Company records the net change in the fair value of these positions in " Gain (l oss ) on derivatives, net" in the Company's consolidated statements of operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted in the Company reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on quoted markets prices and implied volatility factors related to changes in the forward curves. As of December 31, 201 5 , there were no outstanding commodity price contracts. See Note 4 - "Derivative Instruments" for additional discussion of derivatives.

As of March 31, 2016 , the Company's derivative contracts were with major financial institutions with investment grade credit ratings which are believed to have minimal credit risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate such nonperformance.

Estimates of the fair value of financial instruments are made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The estimated fair value of the Company's credit f acility with the Royal Bank of Canada and other lenders (the “RBC Credit Facility”) approximates carrying value because the facility interest rate approximates current market rates and is re set at least every three months. See Note 8 - "Long-Term Debt" for further information.

Impairments

Contango tests proved oil and natural gas properties for impairment when events and circumstances indicate a decline in the recoverability of the carrying value of such properties, such as a downward revision of the reserve estimates or lower commodity prices. The Company estimates the undiscounted future cash flows expected in connection with the oil and gas properties on a field by field basis and compares such future cash flows to the unamortized capitalized costs of the properties. If the estimated future undiscounted cash flows are lower than the unamortized capitalized cost, the capitalized cost is reduced to its fair value. The factors used to determine fair value include, but are not limited to, estimates of proved and probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Additionally, the Company may use appropriate market data to determine fair value. Because these significant fair value inputs are typically not observable, impairments of long-lived assets are classified as a Level 3 fair value measure.

Asset Retirement Obligations

The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with oil and gas properties. The factors used to determine fair value include, but are not limited to, estimated future plugging and abandonment costs and expected lives of the related reserves .

4. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk. Derivative contracts are typically utilized to hedge the Company's exposure to price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil and natural gas production. The Company typically hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. The Company believes that these derivative arrangements, although not free of risk, allow it to achieve a more predictable cash flow and to reduce exposure to commodity price fluctuations. However, derivative arrangements limit the benefit of increases in the prices of crude oil, natural gas and natural gas liquids sales. Moreover, because its derivative arrangements apply only to a portion of its production, the Company’s strategy provides only partial protection against declines in commodity prices. Such arrangements may expose the

Company to risk of financial loss in certain circumstances. The Company continuously reevaluates its hedging programs in light of changes in production, market conditions and commodity price forecasts.

As of March 31, 2016 , the Company’s natural gas derivative positions consisted of “ swaps”.  Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas .  

It is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competent and competitive market makers. The Company does not post collateral, nor is exposed to potential margin calls, under any of these contracts as they are secured under the RBC Credit Facility. See Note 8 - "Long-Term Debt" for further information regarding the RBC Credit Facility.

The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs. The Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in " Gain (l oss ) on derivatives, net" on the consolidated statements of operations.

The following swaps were in place at March 31 , 201 6 (fair value in thousands):











The following summarizes the fair value of commodity derivatives outstanding on a gro ss and net basis as of March 31 ,   201 6 (in thousands):



As of December 31, 201 5 , the Company did not have any outstanding derivative positions.

The following table summarizes the effect of derivative contracts on the c onsolidated s tatements of o perations for the quarter ended March 31 , 201 6   (in thousands):





There were no gains or losses related to derivative instruments for the three months ended March 31, 2015.

In April 2016, the Company entered into the following financial derivative contracts with a member of its bank group:



A costless collar consists of a purchased put option and a sold call option , which establishes a minimum and maximum price , respectively, that the Company will receive for the volumes under the contr act .

5. Stock-Based Compensation

During the quarter ended March 31, 2016 , the Company had a stock-based compensation program in effect which allows for stock options and/or restricted stock to be awarded to officers, directors, consultants and employees. This program includes (i) the Company's Amended and Restated 2009 Incentive Compensation Plan (the “2009 Plan”); and (ii) the Crimson 2005 Stock Incentive Plan (the “2005 Plan” or "Crimson Plan"), which e xpired on February 25, 2015.

Effective September 1, 2015, all employees and board members entered into a salary replacement program (the “Salary Replacement Program”) which is expected to continue through December 31, 2016. The Salary Replacement Program reduces all office employees’ base salary by 10% and all board of director retainer and committee chairman fees by 10% and replaces annually the portion of the salary/fees being reduced with common stock in a number of shares commensurate with the salary/fees reduction amount.

Stock Options

Under the fair value method of accounting for stock options, cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as financing cash flows. For the quarters ended March 31, 2016 and March 31, 2015 , there was no excess tax benefit recognized.

Compensation expense related to stock option grants are recognized over the stock option’s vesting period based on the fair value at the date the options are granted. The fair value of each option is estimated as of the date of grant using the Black-Scholes options-pricing model. No stock options were granted during the quarters ended March 31 , 201 6 or 201 5 .

During the quarter ended March 31, 2016 ,   no stock options were exercised and no   stock options were forfeited. During the quarter ended March 31 , 2 015 ,   no stock options were exercised and stock options for 82 shares of common stock were forfeited.

Restricted Stock

During the quarter ended March 31, 2016 , the Company granted 40,688 shares of restricted common stock under the 2009 Plan. Of these, 38,943 shares were granted to employees, which vest ed   immediately , and 1,745 shares were granted to directors, which vest ed   immediately ; all of which were granted pursuant to the Salary Replacement Program. The weighted average fair value of the restricted shares granted during the quarter ended March 31, 2016 , was $ 6 . 40 with a total fair value of approximately $ 0 . 3 million after adjustment for an estimated weighted average forfeiture rate of 0 . 0 % .   During the quarter ended March 31, 2016, 40 restricted shares were forfeited by former employees. The aggregate intrinsic value of restricted shares forfeited during the quarter ended March 31, 2016 was approximately $ 1 thousand. Approximately 0. 8 million shares remain available for grant under the 2009 Plan as of March 31 , 201 6 .

During the quarter ended March 31, 2015, the Company granted 241 , 121 shares of restricted common stock under the 2009 Plan   to newly hired and promoted employees as part of their overall compensation package , which vest over four years .   Additionally, t he Company issued the final 7, 030 shares of restricted stock under the 200 5 Plan to employees as part of their compensation package, which vest over four years. The weighted average fair value of the restricted shares granted during the quarter ended March 31, 20 15 , was $ 31 . 31 with a total fair value of approximately $ 7.8 million after adjustment for an estimated weighted average forfeiture rate of 5.2 % . During the quarter ended March 31, 20 15 ,   708 restricted shares were forfeited by former employees. The aggregate intrinsic value of restricted shares forfeited during the quarter ended March 31, 20 15 was approximately $ 34 thousand .

T he Company recognized approximately $ 1 . 7 million and $1.1 million in stock compensation expense during the quarters ended March 31, 2016 and 2015, respectively, for restricted shares granted to its officers, employees and directors.   As of March 31, 2016 , an additional $ 6 . 0 million of compensation expense remained to be recognized over the remaining weighted-average vesting period of 2 . 1 years.

Additionally, in April 2016, the Company granted 197,306 stock awards to employees under the 2009 Plan as part of their overall compensation package.

6. Other Financial Information

The following table provides additional detail for accounts receivable, prepaid expenses and other, and accounts payable and accrued liabilit ies which are presented on the c onsolidated b alance s heets (in thousands):





Included in the table below is supplemental information about certain cash and non-cash transactions during the quarters ended March 31, 2016 and 201 5 (in thousands):



















7 . Investment in Exaro Energy III LLC

In April 2012, the Company entered into a Limited Liability Company Agreement (the “LLC Agreement”) in connection with the formation of Exaro. Pursuant to the LLC Agreement, as amended, the Company committed to invest up to $67.5 million in Exaro for an ownership interest of approximately 37% . The Company did   not   make any contributions during the quarter ended March 31 , 201 6 . As of March 31, 20 16 , the Company had invested approximately $46.9 million.

The following table (in thousands) presents condensed balance sheet data for Exaro as of March 31 , 201 6 and December 31, 201 5 . The balance sheet data was derived from Exaro ’s balance sheet as of March 31 , 201 6 and December 31, 201 5 and was not adjusted to represent the Company’s percentage of ownership interest in Exaro. The Company’s share in the equity of Exaro at March 31 , 201 6 was approximately $ 14 . 2 million.



The following table (in thousands) presents the condensed results of operations for Exaro for the three months ended March 31 , 201 6 and 201 5 . The results of operations for the three months ended March 31 , 20 16 and 201 5 were derived from Exaro's financial statements for the respective periods. The income statement data below was not adjusted to represent the Company’s ownership interest but rather reflects the results of Exaro as a company. The Company's share in Exaro's results of operations recognized for the three months ended March 31 , 201 6 and 201 5 was a gain of $ 40   thousand, with an insignificant   tax expense , and a gain of $0 . 6 million, net of tax expense of $0. 3   million, respectively.



Included in Other gain are realized and unrealized gains and losses attributable to derivatives, whose value is likely to change based on future oil and gas prices. Exaro's results of operations do not include income taxes because Exaro is treated as a partnership for tax purposes.

8 . Long-Term Debt

RBC Credit Facility

In October 2013, the Company entered into a $500 million four-year revolving credit facility with Royal Bank of Canada and other lenders (the “bank group”) with an initial hydrocarbon supported borrowing base of $275 million. A s part of the regular redetermination schedule, the Company’s bank group redetermined the Company’s borrowing base at $190 million effective

November 13, 2015, primarily to reflect lower commodity prices and the impact of the significant reduction in the Company’s drilling program in 2015   attributable to the low price environment . The borrowing base under the facility is redetermined each No vember and May.

As of March 31 , 201 6 and December 31, 201 5 , the Company had approximately $ 112 . 2 million and $115.4 million, respectively, outstanding under the RBC Credit Facility and $1.9 million and $1.9 million, respectively, in outstanding letters of credit. As of March 31 , 201 6 , borrowing availability under the RBC Credit Facility was $ 75 . 9 million.

Borrowings under the RBC Credit Facility bear interest at a rate that is dependent upon LIBOR, the U.S. prime rate, or the federal funds rate, plus a   0.5% to 2.5% margin , dependent upon the amount outstanding. Additionally, the Company must pay a commitment fee on the amount of the facility that remains unused, which varies from .375% to .5% , depending on the amount of the credit facility that is unused. Total interest expense under the RBC Credit Facility, including commitment fees, for the three months ended March 31 , 201 6   was approximately $ 0 . 9 million . Total interest expense under the RBC Credit Facility, including commitment fees, for the three months ended March 31, 2015 was approx imately $0.7 million .  

The RBC Credit Facility contains restrictive covenants which, among other things, restrict the declaration or payment of dividends by Contango and require a C urrent R atio of greater than or equal to 1.0 and a L everage R atio of less than or equal to 3.50, both as defined in the RBC Credit Facility Agreement . As of March 31 , 201 6 , the Company was in compliance with all covenants under the RBC Credit Facility , and at current commodity prices, does not expect any covenant compliance issues over the next twelve months . The RBC Credit Facility also contains events of default that may accelerate repayment of any borrowings and/or termination of the facility. Events of default include, but are not limited to, payment defaults, breach of certain covenants, bankruptcy, insolvency or change of control events.  

The weighted average interest rate in effect at March 31 , 201 6 and December 31, 201 5 was 2 . 6 % and 2.4 % , respectively. The RBC Credit Facility matures on October 1, 2017, at which time any outstanding balances will be due.

Effective May 6 , 2016, as part of the regular redetermination schedule, the borrowing base under the RBC Credit Facility was redetermined at $1 4 0 million, which reflects the impact of a decline in commodity prices from those used in connection with the last redetermination and the Company’s limited drilling program .   Also effective May 6 , 2016, the RBC Credit Facility was amended to, among other things, extend the maturity of the facility from October 1, 2017 to October 1, 20 19,   increase the LIBOR, U.S. prime rate and federal funds rate margins to 2 .5% - 4 . 0 % and increase the commitment fee to 0.5% , regardless of the amount of the credit facility that is unused .   The Company paid fees totaling approximately $ 1.0   million to its lenders in connection with the amendment.

9. Income Taxes

The Company’s income tax provision for continuing operations consists of the following (in thousands):



In recording deferred income tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those deferred income tax assets would be deductible. The Company believes that after considering all the available objective evidence, both positive and negative, historical and prospective,

with greater weight given to historical evidence, management is not able to determine that it is more likely than not that the deferred tax assets will be realized and, therefore, established a full valuation allowance at September 30, 2015. For the quarter ended March 31, 2016, the Company continues to fully value the net deferred tax asset. The Company will continue to assess the valuation allowance against deferred tax assets considering all available information obtained in future reporting periods.





10. Related Party Transactions

Republic Exploration LLC

Historically, REX, an entity owned 32.3% by Contango, participated with the Company in the drilling and development of certain prospects through participation agreements and joint operating agreements, which specified each participant’s working interest, net revenue interest and described when such interests were earned. The Company proportionately consolidated the results of REX in its consolidated financial statements prior to its dissolution as of December 31, 2015.

Olympic Energy Partners

In December 2012, Mr. Joseph J. Romano was elected President and Chief Executive Officer of the Company and in April 2013 was named Chairman of the Company. Upon the m erger with Crimson Exploration Inc. (“Crimson”) on October 1, 2013, Mr. Romano resigned as President and Chief Executive Officer, but remains Chairman. Mr. Romano is also the President and Chief Executive Officer of Olympic Energy Partners LLC ("Olympic"). Olympic last participated with the Company in the drilling of wells in March 2010, and its ownership in Company-operated wells is limited to its Dutch and Mary Rose wells.



During the quarter ended March 31 , 201 6 , Mr. Romano earned $ 14 thousand for his service as a director of the Company. During the quarter ended March 31, 2015 , Mr. Romano earned $2 7 thousand for his service as a director of the Company.

D uring the years ended December 31 ,   2015 and 2014 ,   Mr. Romano received   4,534 and 2,612   shares of restricted stock, respectively, which   both vest 100% on the one -year anniversary of the date of grant, as part of his board of director compensation.     Additionally, in January 2016, Mr. Romano received 261 shares of restricted stock, which vested immediately, pursuant to the Salary Replacement Program. The Company recognized compensation expense of approximately   $ 19 thousand and   $ 27 thousand related to the shares granted to Mr. Romano for the three months ended March 31 , 201 6 and March 31, 2015, respectively .  



Below is a summary of payments received from (paid to) Olympic   and REX in the ordinary course of business in the Company’s capacity as operator of the wells and platforms for the periods indicated. The Company made and received similar types of payments with other well owners (in thousands):  



Below is a summary of payments received from Olympic   and REX as a result of specific transactions between the Company, Olympic and REX. While these payments are in the ordinary course of business, the Company did not have similar transactions with other well owners (in thousands):



As of March 31, 2016 and December 31, 2015 , the Company's consolidated balance sheets reflected the following balances (in thousands):





Oaktree Capital Management L.P.

As of March 31 , 201 6 , Oaktree Capital Management L.P. ("Oaktree"), through various funds, owned approximately 6.6% of the Company's stock. On October 1, 2013, Mr. James Ford, then a Managing Director and Portfolio Manager within Oaktree, was elected to the Company's board of directors. Mr. Ford is currently a Senior Advisor to Oaktree.

As part of Mr. Ford's director compensation, all cash and equity awards payable to Mr. Ford are instead granted to an affiliate of Oaktree. During the years ended December 31, 2015 and 2014, an affiliate of Oaktree receive d   4 ,534 and 2,612   shares of restricted stock , respectively, which both vest 100% on the one -year anniversary of the date of the grant. Additionally, in January 2016, an affiliate of Oaktree received 313 shares of restricted stock, which vested immediately, pursuant to the Salary Replacement Program.

During the three months ended March 31, 2016 , the affiliate of Oaktree earned $ 17 thousand in cash as a result of Mr. Ford's board participation, and the Company recognized compensation expense of approximately $ 19 thousand related to the shares of restricted stock granted to an affiliate of Oaktree under the Director Compensation Plan. During the three months ended March 31, 2015 , the affiliate of Oaktree earned $1 7 thousand in cash as a result of Mr. Ford's board participation, and the Company recognized compensation expense of approximately $27 thousand related to the shares of restricted stock granted to an affiliate of Oaktree under the Director Compensation Plan.  

11 . Commitments and Contingencies  

Legal Proceeding s  

From time to time, the Company is involved in legal proceedings relating to claims associated with its properties, operations or business or arising from disputes with vendors in the normal course of business, including the material matters discussed below.

In July 2010, several parties associated with a limited partnership formed to invest in oil and gas properties that was dissolved in 1995 filed suit against a subsidiary of the Company and several co-defendants in district court for Madison County in Texas.  The plaintiffs claim to own or have rights in certain oil and gas properties situated in Madison County, Texas by virtue of the partnership having interests in addition to those it held of record at the time of its dissolution, which were distributed to the partners in connection with such dissolution.  A predecessor of the subsidiary of the Company involved in this case acquired a portion of the interests now claimed by the plaintiffs from a successor to the general partner of the aforementioned partnership in 2000.  The plaintiffs’ expert has recently provided a range of estimated monetary damages of up to approximately $9.4 million as to our Subsidiary.  The Company is vigorously defending this lawsuit and believes that it has meritorious defenses.

In November 2010, a subsidiary of the Company, several predecessor operators and several product purchasers were named in a lawsuit filed in the District Court for Lavaca County in Texas by an entity alleging that it owns a working interest in two wells that has not been recognized by us or by predecessor operators to which the Company had granted indemnification rights. In dispute is whether ownership rights were transferred through a number of decade-old poorly documented transactions. Based on prior summary judgments, the trial court has entered a final judgment in the case in favor of the plaintiffs for approximately $5.3 million, plus post-judgment interest. The Company is vigorously defending this lawsuit, believes that it has meritorious defenses and is appealing the trial court’s decision to the applicable state Court of Appeals .  

In September 2012, a subsidiary of the Company was named as defendant in a lawsuit filed in district court for Harris County in Texas involving a title dispute over a 1/16th mineral interest in the producing intervals of certain wells operated by us in the Catherine Henderson “A” Unit in Liberty County in Texas. This case was subsequently transferred to the district court for Liberty County, Texas and combined with a suit filed by other parties against the plaintiff claiming ownership of the disputed interest. The plaintiff has alleged that, based on its interpretation of a series of 1972 deeds, it owns an additional 1/16th unleased mineral interest in the producing intervals of these wells on which it has not been paid (this claimed interest is in addition to a 1/16th unleased mineral interest on which it has been paid). The Company has made royalty payments with respect to the disputed interest in reliance, in part, upon leases obtained from successors to the grantors under the aforementioned deeds, who claim to have retained the disputed mineral interests thereunder. The plaintiff previously alleged damages of approximately $10.7 million although the plaintiff’s claim increases as additional hydrocarbons are produced from the subject wells. T he trial court has entered judgment in favor of the Company’s subsidiary and the successors to the grantors under the aforementioned deeds .   T he plaintiff is appealing the trial court’s decision to the applicable state Court of Appeals. The Company is vigorously defending this lawsuit and believes that it has meritorious defenses. The Company believes if this matter were to be determined adversely, amounts owed to the plaintiff could be partially offset by recoupment rights the Company may have against other working interest and/or royalty interest owners in the unit.



Mineral interest owners in South Louisiana filed suit against a subsidiary of the Company and several co-defendants in April 2013 in the 31st Judicial District Court situated in Jefferson Davis Parish, Louisiana alleging failure to act as a reasonably prudent operator, failure to explore, waste, breach of contract, etc. in connection with two wells located in Jefferson Davis Parish. Many of the alleged improprieties occurred prior to the Company’s ownership of an interest in the wells at issue, although the

Company may have assumed liability otherwise attributable to its predecessors-in-interest through the acquisition documents relating to the acquisition of the Company’s interest in these wells. This case is based on the same actions and allegations as a prior case in which the Company and its co-defendants prevailed . The plaintiffs claim damages of approximately $2.5 million against a subsidiary of the Company and its co-defendants. The Company and its co-defendants are vigorously defending this lawsuit and believe they have a meritorious position.

While many of these matters involve inherent uncertainty and the Company is unable at the date of this filing to estimate an amount of possible loss with respect to certain of these matters, the Company believes that the amount of the liability, if any, ultimately incurred with respect to these proceedings or claims will not have a material adverse effect on its consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company maintains various insurance policies that may provide coverage when certain types of legal proceedings are determined adversely .

Available Information

General information about us can be found on our website at www.contango.com. Our Annual Report 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 (“SEC”). We are not including the information on our website as a part of, or incorporating it by reference into, this Report.

Cautionary Statement about Forward-Looking Statements

Certain statements contained in this report 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. Although we believe the expectations reflected in such forward-looking statements are reasonable, such expectations may not occur. These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated. Risks and uncertainties that could cause or contribute to such differences include, without limitation, those discussed in the section entitled “Risk Factors” included in our Annual Report on Form 10-K and those factors summarized below:





Any of these factors and other factors described in this report could cause our actual results to differ materially from the results implied by these or any other forward-looking statements made by us or on our behalf. Although we believe our estimates and assumptions to be reasonable when made, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. Our assumptions about future events may prove to be inaccurate. We caution you that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure you that those statements will be realized or the forward-looking events and circumstances will occur. All forward-looking statements speak only as of the date of this report.

We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

You should not unduly rely on these forward-looking statements in this report, as they speak only as of the date of this report. 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 report or to reflect the occurrence of unanticipated events.