Before it was acquired by BP
In 1976, ARCO agreed to purchase Anaconda Copper, which forced the folks at Dow Jones to seek a replacement in their benchmark index. They went with 3M
Unocal (now part of Chevron
Given the historical track record of oil and gas companies diversifying into metals and mining, you should probably cast a skeptical eye at any such move. What to make, then, of Monday's announcement by Contango Oil & Gas
I think it's important to note that Contango's expertise is not finding oil and gas. CEO and Chairman Ken Peak, whom I interviewed last month, has said that he couldn't find oil at a gas station. There is no explorationist among Contango's staff of seven.
Contango's core competency, as I see it, is the allocation of risk capital. All past discoveries, such as major finds in the Gulf of Mexico and the Fayetteville shale, were made alongside partners who generated the prospects and shared in both the risk and the upside of these programs. The same structure is being employed in this new mineral exploration program.
Grassroots exploration for economic gold deposits is like looking for a needle in a haystack. The odds of success are extremely low. Majors like Barrick Gold
With an eye to this favorable "reward/risk ratio," Contango is committing up to $3 million for this initial exploration phase in Alaska. That's a fraction of the cost of drilling a single wildcat well offshore. A pair of recently "spudded" exploratory wells in the Gulf of Mexico are together expected to cost Contango $25 million.
This company is still directing the vast majority of its exploratory budget to these and other oil and gas-seeking efforts, so I don't believe shareholders should sweat a small side bet on hitting Alaskan gold.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter. 3M is a Motley Fool Inside Value choice. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.