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Comstock: Haynesville 'More Important Than Ever,' Writing Off TMS

Recently recapitalized, Frisco, TX-based Comstock Resources Inc. is relying more than ever on the Haynesville Shale. Its once-promising Tuscaloosa Marine Shale (TMS) acreage is a bust given lower-for-longer oil prices, and Eagle Ford Shale drilling is still paused.

"We have 67,000 net acres [in the Haynesville Shale and Bossier Sands], and they're more important than they've ever been to us..." said COO Mack Good during an earnings conference call Tuesday. "We're looking at several different arrangements that will increase our position in both plays, but the details on that will have to wait."

While the company has talked about the belief that its Haynesville/Bossier acreage holds 6 Tcf of resource potential, that conviction has additional support now, Good said, adding that every well drilled by the company since 2015 has had an initial production rate greater than 20 MMcf/d and an average recovery approaching 15.6 Bcf.

"We think we can do better than that, so we've decided to make some improvements," Good said. A flat gas price between $2.50 and $3.00/Mcf could get rates of return of from 50 to 80% for the various lateral lengths the company had been drilling in the Haynesville, he said.

"But those results were then and this is now, and what we're telling you now is that our expectation is better than that," Good said. "We think that we can increase these rates of return by around 20% across the board by changing our future well completion design to include more proppant and smaller frack stages. Our plan is to increase the completion frack intensity by pumping more proppant per foot of lateral length and decreasing the target stage length that receives that proppant...

"This improved recovery will also create tremendous additional value in our remaining drilling inventory...We're planning to add to this inventory through various arrangements."

As for the Eagle Ford Shale, Comstock drilling activity there has been on hold. But the company hasn't been sitting on its hands in the Eagle Ford, Good said, adding that there are "several ideas" for the play once oil prices improve. Once oil prices get back to the high $50s/bbl, Comstock will turn Eagle Ford drill bits again. "No one should be surprised that we have specific plans to drill in the Eagle Ford once the oil price does recover," Good said.

That's not likely to be the case on the company's TMS acreage (see Shale DailyNov. 15, 2013) where Comstock is taking a $76.5 million third quarter impairment, said CFO Roland Burns. Comstock is "totally" writing off the acreage "...as we see oil prices continue to linger at these low levels, we just do not see the company being able to drill on this acreage, and the company doesn't have real plans to try to maintain this acreage position by spending more capital on it so a decision was made to go ahead and write this off. We'll continue to own these leases and if there was a miraculous turnaround in oil, we can get some value out of them," Burns said.

Last September, Comstock completed a debt exchange with the holders of 98% of its outstanding senior notes, which frees up cash flow for investment in the Haynesville/Bossier, CEO Jay Allison said.

After commencing drilling in March, Comstock drilled three (2.8 net) successful Haynesville horizontal gas wells before releasing its operated drilling rig in July. In late September the company restarted its Haynesville program after the completion of the debt exchange. Comstock recently drilled its fourth operated Haynesville horizontal well, the James Pace 5-8 #1 in DeSoto Parish, LA. This well was drilled to a total depth of 19,452 feet with an estimated 7,500-foot horizontal lateral.

The well will be the first well to be completed with a larger stimulation package, which includes 3,800 pounds of proppant per lateral foot as compared to 2,800 pounds on earlier wells. Completion operations are expected to commence on the well within the next week. Currently, Comstock has two operated rigs drilling two Haynesville shale horizontal wells (2.0 net) and it is participating in two non-operated Haynesville shale wells (0.2 net).

Under its revised drilling program, Comstock expects to drill five additional wells (3.7 net) in the fourth quarter and 22 horizontal wells (17.1 net) in 2017. Capital expenditures for this drilling program are currently estimated to be $20.9 million in the fourth quarter of 2016 and $142.9 million in 2017.

The company has also initiated its 2017 hedging program and currently has 12.6 Bcf of its 2017 natural gas production hedged at approximately $3.27/Mcf.

Comstock produced 14.1 Bcf of natural gas and 320,388 bbl of oil -- or 16 Bcfe -- in the third quarter. Natural gas production averaged 153 MMcf/d, an increase of 4% over the third quarter of 2015. Oil production, which averaged 3,482 b/d, declined by 50% from the 6,903 b/d produced in the third quarter of 2015, primarily due to the sale of the company's Burleson County, TX, properties in 2015 and the lack of drilling in the South Texas Eagle Ford Shale properties in 2015 and 2016 (see Shale Daily,Oct. 17).

The company reported a net loss of $28.5 million (minus $2.32/share) for the third quarter compared to a net loss of $545 million (minus $59.05/share) for the third quarter of 2015. Third quarter results include impairments on oil and gas properties and undeveloped leases of $76.5 million, which primarily relate to TMS acreage; a net loss on the pending sale of oil and gas properties of $13.2 million; a net gain on debt extinguishment of $100.5 million related to the debt exchange and an income tax benefit to reflect a change in state law of $0.8 million.

Results for the third quarter of 2015 included a charge to impair certain producing oil and gas properties and unevaluated leases of $549.8 million, recognition of a valuation allowance on deferred tax assets primarily resulting from the large impairment provision of $189.4 million, an unrealized gain from derivative financial instruments of $0.7 million and a net gain on extinguishment of debt of $51.1 million.

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