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Comstock's Now and Later Plays: Eagle Ford, Haynesville

With the proceeds counted from the sale of its Permian Basin acreage earlier this year, Frisco, TX-based Comstock Resources Inc. is squarely focused on the Eagle Ford Shale of South Texas, where it is drilling longer-lateral wells for less money in fewer days and looking for bolt-on acreage acquisitions. The Haynesville Shale will have to wait.

The sale of the Permian properties netted proceeds of $832.7 million upon closing in May. Comstock recognized a gain on the sale of of $230.6 million ($149.9 million after tax or $3.21/share) during the second quarter (see Shale Daily, March 18). CEO Jay Allison began the company's quarterly earnings conference call Tuesday by reminding analysts that Comstock's market capitalization is about $816 million and that it had held the Permian properties for only one year. And there's more; taxes on sale proceeds are expected this year to be only about $1 million

Proceeds allow Comstock to cut debt, increase liquidity, accelerate Eagle Ford drilling and acquire additional Eagle Ford and other oily acreage, Allison said. "In 2010, Comstock produced very little oil; we were a pure natural gas company, with the Haynesville being our marquee asset," he said. "Yes, we still own the 130,000-plus acres in the Haynesville-Bossier, which is really inventoried until gas prices improve."

The company entered the Eagle Ford in 2010 and now, thanks to the Permian sale, Comstock has accelerated its drilling program from 42 gross wells to a 72 gross well program, Allison said.

During the first six months of 2013, Comstock spent $128.7 million on its Eagle Ford development and exploration activities and $4.8 million on acreage and other acquisition costs. Comstock drilled 25 horizontal oil wells (15.2 net) and two horizontal natural gas wells (2.0 net) and had six oil wells (3.7 net) drilling at June 30.

Since the beginning of the year, Comstock has completed 25 (15.4 net) horizontal Eagle Ford wells, including six (3.8 net) wells drilled in 2012. The 25 Eagle Ford wells that were completed had an average per well initial production rate of 796 boe/d. The four wells with the highest initial production rates were Forrest Wheeler C #1H, Swenson B #1H, Swenson A #1H and Swenson B #2H. These wells are in McMullen County and had initial production rates of 1,337, 1,322, 1,222 and 1,143 boe/d, respectively. Beginning in June, Comstock had six operated rigs drilling in the Eagle Ford, an increase from the three rigs that were drilling during the first quarter.

The McMullen County leasehold is the company's "bread and butter" in the Eagle Ford, said BMO Capital Markets analyst Dan McSpirit in a note following Tuesday's conference call. "Our math on 60-acre development spacing and assuming six rigs running shows inventory in this part of South Texas lasting through early 2016, a slightly longer runway than what we previously calculated. That's a good thing," he said. "What picks up where McMullen/Eagle Ford leaves off is a question in the mind of the market, and one that appears to be weighing heavily on the shares today."

Comstock shares lost more than 5% Tuesday to close at $16.86. McSpirit has a "market perform" rating on the stock.

The company's production during the second quarter was 551,000 bbl of oil and 14.2 Bcf of natural gas, or 17.5 Bcfe, compared to the 24.5 Bcfe produced in the second quarter of 2012. Oil production grew 26% from the first quarter of 2013 and increased 20% from the second quarter of 2012. Gas production declined 35% from the year-ago quarter due to the lack of drilling activity on the company's Haynesville Shale properties.

The average realized natural gas price improved by 86% to $3.71/Mcf for the second quarter of 2013 as compared to $2.00/Mcf realized in the second quarter of 2012. Comstock's average realized oil price, including hedging gains, decreased by 2% to $105.30/bbl for the second quarter of 2013 as compared to $107.71/bbl for the second quarter of 2012.

Comstock reported net income of $129.7 million ($2.68/share) including the gain on the Permian sale. Second quarter 2012 net income was $7.16 million (15 cents/share).

Allison said not many of Comstock's peers have been able to build a comparable bridge position in oil while they wait for the gas market to improve. The company's approximately 1,500 drilling locations in the Haynesville will look better when gas prices are sticking around $4.30-4.50, he said. "I think some of the prospects we have in the core, not all of that 130,000-plus acres but the core acreage in the Haynesville, I think some of that would be competitive in the Eagle Ford," Allison told analysts.

"You'd best believe in the years to come that with demand increasing and the rig count kind of down and production pretty flat overall for natural gas on a daily basis, that the commodity will swing around and be a $4.50-5.00 commodity, maybe more. You can't run the company based upon that program in two years, but you can certainly run the company based upon inventorying the golden egg for the future, and I think that's what we've done."

ISSN © 2577-9877 | ISSN © 2158-8023
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