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Comstock to Pay $332.7M for Delaware Basin Acreage

Comstock Resources Inc. has established a new core area in the Delaware Basin in West Texas, agreeing to pay Eagle Oil & Gas Co. $332.7 million for approximately 68,000 gross (44,000 net) acres in Reeves County, TX, the Frisco, TX-based company said. The deal is expected to close by the end of this month.

The acreage is prospective for development in the Bone Spring and Wolfcamp shales in the Southern Delaware Basin and consists primarily of leasehold, but also includes an estimated 23.2 MMBoe of proved reserves and net production of approximately 1,400 Boe/d, Comstock said. The properties include 29 producing wells and five wells that are in various stages of completion. The deal would add more than 900 net identified vertical drilling locations in the Bone Spring and Wolfcamp shales.

Comstock said the acquisition will be funded with borrowings under its bank credit facility.

"Our goal in adding a new region was, one, we needed to operate; two, it had to have enough size for years and years and years of drilling; three, it had to be an oil basin; four, it had to have infrastructure in place for the producing properties; and five, really, it had to be materially derisked by recent drilling activities if we were to use our bank credit line to purchase the properties. This acquisition satisfied all of those goals and more," CEO M. Jay Allison said during a conference call with analysts Tuesday.

Comstock also announced a revised 2012 capital budget to include drilling operations on the newly acquired properties. The company, which previously announced a $396 million capital budget, said it now plans to spend $545 million for drilling and completion activities next year, including $170 million to drill 46 wells on its Delaware Basin properties; $88.2 million to drill 32 wells in its East Texas/North Louisiana operating region, including 31 Haynesville or Bossier shale wells; and $207.3 million to drill 32 horizontal wells in the Eagle Ford Shale in South Texas.

Comstock will spend 72% of its capital budget on oil projects next year and plans to exit 2012 with more than 20% of its production coming from crude oil, according to Allison.

In response to the announcement, Moody's Investors Service changed Comstock's outlook to "negative" from "stable."

"The negative outlook reflects increased leverage as a result of the acquisition, the increased proportion of 2012 drilling expenditures [that] will be focused on relatively early stage operations in the Permian and Eagle Ford, execution risk surrounding proposed asset sales and other financing activities that will be needed to help fund the 2012 drilling program, and tight post-acquisition liquidity" said Moody's analyst Jonathan Kalmanoff. At the same time the acquisition adds diversification to the oil-focused portion of Comstock's drilling inventory, he said.

Establishing a position in the Permian Basin has been a priority for Comstock this year. The company had already leased about 12,000 net exploratory acres in the Permian region and added another 10,000 net acres to its Eagle Ford Shale lease inventory in 2011.

Canaccord Genuity analysts recently said the Permian Basin rig count jumped by 100 between late 2010 and October 2010 (see Shale Daily, Oct. 20). "Since the beginning of 3Q2011 there have been more than 385 new horizontal drilling permits approved in the Permian Basin," according to the analysts. "In the Delaware Basin, the Bone Spring and Wolfcamp trends continue to dominate the permitting activity as these subplays continue to represent some of the most economic horizontal liquids plays at current strip prices." An uptick in permitting activity also was found in the southern Midland Basin of Texas, where recent horizontal Wolfcamp results "are improving," they said.

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