An Example for CEOs Everywhere

I was saddened to learn that Ken Peak, the CEO of Contango Oil & Gas (MCF), passed away on Friday. Here’s the announcement by Contango, and here is his obituary from the Houston Chronicle.

And here is the presentation that Ken gave to my investors at my firm’s first annual meeting here in Islamorada a few years ago.

I’d emailed Ken a few times in 2009, prior to buying shares of Contango in the Tarpon Folio. The fact that he would patiently answer all sorts of questions from a newbie portfolio manager with only a handful of investors on an island in the middle of nowhere probably underscores how different a CEO he was than most of his public company peers. That and the fact that he named Contango’s wells after characters in The Big Lebowski.

When planning my first investor meeting later that year, I decided on a lark that I would call Ken and invite him to come down to Islamorada. I thought my investors here in the Keys would recognize him as a kindred spirit, and I also figured there’d be no better way to explain why we owned shares in Contango than have the CEO explain the business in person. Surprisingly, Ken immediately said yes. He also insisted on paying his own way.

I still think about the story he told at that meeting of how he built Contango from scratch. He was going through some tough times in the nineties – my impression, not his words – and at some point, as he described, “I took the last $400k I had in the bank, pushed all those chips into the middle of the table, and decided I would start wildcatting offshore myself.” The company is worth $550 million today.

I don’t believe Ken ever sold a share of stock in Contango – except to make payments to his ex-wife. He remained the biggest individual owner of his company’s shares right up until the end. And he ran Contango like he thought it should be run, Wall Street be damned. He saw his role as, simply put, capital allocator, and he was excellent at it. He had only six people working with him – seven people ran the entire company, mind you – and he outsourced everything and anything that might distract from his relentless obsession to be the lowest cost producer of natural gas in the U.S.

He thumbed his nose at pretentiousness everywhere he found it – from lawyers, a favorite target, to what he felt was the questionable accounting rampant in his industry. Without geeking out too much here…while most exploration and production companies use a more predictable accounting framework called “successful efforts,” Ken used the “full cost method” at Contango – which meant among other things that his quarterly earnings reports would be wildly lumpy.

Not surprisingly, not a single sell-side analyst followed the company. But using the full cost method also meant that his company’s earnings would be of high quality, since they would more closely resemble the cash his business actually produced. Ken thought it was a more honest view of what was actually going on at Contango. And he was right.

Based on my conversations with Ken Peak, and throughout the time that I owned Contango shares, I gained a deep respect for him as a businessman – and for wildcatting as a profession, too.

It struck me how there really isn’t a more quintessential American business than exploring for oil and natural gas. It’s a crazy blend of NASA-worthy engineering and craps-table luck. There is no marketing. There is no PR. And there are no taxpayer bailouts if you fail. You are either good or your company dies.

Ken Peak was one of the best.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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2 Responses to An Example for CEOs Everywhere

  1. Larry says:

    MCF uses “successful efforts,” which does produce the accurate picture/lumpy results

  2. Cale Smith says:

    Thanks, Larry. Updated. And here is a link for more on the differences: http://www.rationalwalk.com/?p=12869