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Edited Transcript of CRK earnings conference call or presentation 7-Aug-19 3:00pm GMT

Q2 2019 Comstock Resources Inc Earnings Call

FRISCO Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Comstock Resources Inc earnings conference call or presentation Wednesday, August 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel S. Harrison

Comstock Resources, Inc. - COO

* Miles Jay Allison

Comstock Resources, Inc. - Chairman & CEO

* Roland O. Burns

Comstock Resources, Inc. - President, CFO, Secretary & Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the Second Quarter 2019 Comstock Resources, Inc. Earnings Conference Call.

(Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Jay Allison. Please go ahead.

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Miles Jay Allison, Comstock Resources, Inc. - Chairman & CEO [2]

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All right, Chris, thank you and good morning. Good morning, everyone.

I would be remiss this morning not to open this call with a thank you to the equity and debt holders and our sponsors of Comstock for really walking with us the past 12 months to create the second quarter results that we'll present today. I would extend a very special thanks to Denham Capital for selling us Covey Park and becoming a 16% stakeholder; and to Jerry Jones, who in the past 12 months has personally invested around $1.1 billion in Comstock, including purchasing 50 million newly issued shares of Comstock common stock at $6 per share about 3 weeks ago. That's a $300 million purchase. The Jones family now own a 75% stake in Comstock, and without their backing, we wouldn't have the results today. So thanks to all of you.

Welcome to the Comstock Resources Second Quarter 2019 Financial and Operating Results Conference Call. Today, we will review our second quarter 2019 earnings and drilling results; as well as update you on our acquisition of Covey Park Energy, which closed on July 16. You can view the slide presentation during or after this call by going to our website at www.comstockresources.com and downloading the quarterly results presentation. There you will find a presentation titled 2nd Quarter 2019 Results.

I am Jay Allison, Chief Executive Officer of Comstock. And with me is Roland Burns, our President and Chief Financial Officer; and Dan Harrison, our Chief Operating Officer.

Please refer to Slide 2 in our presentation and note that our discussions today will include forward-looking statements within the meaning of securities laws. While we believe the expectations in such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

Now if everyone would turn to Slide 3, the 2019 second quarter summary. On Slide 3, we cover some of the highlights of the second quarter.

For much of the first half of this year, we have been very, very focused on the transformative Covey Park Energy acquisition, which we closed on July 16. Combining Comstock and Covey Park created the basin leader in the Haynesville shale, which is the premier natural gas basin in North America with superior economics given its geographic proximity to the Gulf Coast. The operations of Covey Park will be included for 77 days of the third quarter. Our Haynesville/Bossier shale drilling program continues to deliver strong production growth. Comstock and Covey Park have drilled and completed a combined 174 operated wells since 2015, which have an average IP rate of 23 million cubic feet per day. Our Haynesville shale production in the second quarter was up 83% from the second quarter of last year and up 19% from the first quarter of this year. We have also been driving down our well costs in the Haynesville. To date, our well costs per lateral foot are down 9% from 2018 costs. Our strong natural gas production growth was offset by weaker natural gas prices in the second quarter.

For the quarter, we reported oil and gas sales of $130 million, adjusted EBITDAX of $93 million, operating cash flow of $66 million or $0.63 per share and adjusted net income of $12.7 million or $0.12 per share.

If you would flip over to Slide 4. Slide 4 is a good summary of the Covey Park Energy acquisition.

The combination of the 2 companies creates a company with substantial scale in the Haynesville. We produced over 1.2 billion cubic feet of natural gas equivalent per day in the second quarter and generated annualized pro forma second quarter EBITDAX of $926 million. We'll have 5.4 Tcfe of SEC proved reserves and 290,000 net acres in the Haynesville. We will have 2,000 net drilling locations, which gives us over 20 years of inventory.

Our second quarter pro forma unit cost structure is only $0.72 per Mcfe, which is one of the lowest in the industry. And our second quarter pro forma EBITDAX margins of 78% is one of the highest in the industry.

With the merger, we have changed our leadership team, with half of our department heads coming from each company. Our department heads are selecting best practices from each company; and has put together their team, with a focus on creating an efficient, low-overhead company with favorable proximity to the Gulf Coast demand and over 500 miles of owned gathering infrastructure. We have higher natural gas price realizations. The Covey Park assets have higher gas price realizations than Comstock's, and we are currently negotiating new gathering contracts and marketing agreements to give us greater access to the premium Gulf Coast markets. We are currently consolidating the Dallas area corporate offices and are implementing a 41% reduction to the combined corporate staff. We are targeting go-forward annual G&A of $30 million, which is about half of the combined annual G&A of the 2 companies of $61 million in 2018. With the merger, we are adding data scientists to the staff and implementing tailored drawdown for every new well, which we feel will further improve the economics of the Haynesville wells.

Lastly, we are very focused on the balance sheet. Our leverage metrics immediately improved as a result of the transaction. As Roland will go over later, we plan to reduce the planned drilling activity by releasing 1 to 2 operated rigs in the near term. This will protect our balance sheet and liquidity and ensure we can hit our target to generate free cash flow in 2020 of approximately $100 million. We will also consider potential divestitures of our noncore assets in order to pay down our debt and improve our current liquidity.

Now I'll have Roland cover the financial results in more details.

Roland?

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Roland O. Burns, Comstock Resources, Inc. - President, CFO, Secretary & Director [3]

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Thanks, Jay.

Slide 5 demonstrates the production growth generated by our Haynesville/Bossier shale drilling program. In the second quarter this year, production from our Haynesville/Bossier wells was up 83% to 416 million cubic feet of gas per day, as compared to the 227 million per day that we produced in the second quarter of 2018. Production this quarter was also up 19% from our first quarter production rate of 349 million per day. We put 8 net wells on production in the quarter after adding 6.6 net wells in the first quarter.

On the slide we're also showing Covey Park's Haynesville/Bossier production. And in the second quarter, Covey Park's Haynesville/Bossier wells produced 694 million per day, which is an increase of 43% over the 484 million per day that they produced in the second quarter of 2018. Covey Park put 6.1 net wells to sales in the second quarter after adding 11.7 net wells in the first quarter.

On a combined basis, we produced 1.1 billion cubic feet of net production in the Haynesville in the second quarter. In the third quarter, we expect to see that rate of growth slowing just a little bit, as on a combined basis we're going to put 10.5 net wells to sales in the third quarter.

Slide 6 recaps what production we had shut in for the quarter. And we were pleased to see that second quarter shut-in volumes decreased to 4%; and that most of the shut-in volumes or almost 80% related to pipeline curtailment for either maintenance activities or repair activities or, in a few instances, where we had limited capacity to flow our wells at full rate. We are working to expand our options for transportation, mainly in our Northern Haynesville operations, that will bring this percentage down further in the future.

On Slide 7, we detail our producing costs per Mcfe produced. Operating costs per Mcfe fell to $0.68 in the second quarter, as compared to the first quarter rate of $0.74. Gathering costs were $0.23. Production taxes averaged $0.13, and other field-level operating costs were $0.32. Looking ahead, our producing costs will improve further with the Covey Park operations combined in with ours. Pro forma for the Covey Park merger, operating costs fall to $0.65 in the second quarter, and that's before we get the benefit of the synergies and cost savings we expect to create from combining our field operations. Breaking down the pro forma costs: Gathering costs were $0.27. Production taxes averaged $0.08, and field-level costs were $0.30.

We do expect some improvement to our gathering cost rate, as new contracts that we have just finished up negotiating will create additional efficiencies and give us a little bit lower overall gathering rates. And we also hope to see some efficiencies in combining our field-level offices where they make sense to combine.

On Slide 8, we detail our corporate overhead costs per Mcfe. Our G&A costs per Mcfe fell to $0.14 in the second quarter, as compared to the second quarter of last year of $0.23 and our first quarter rate of $0.19. And one of the more significant benefits of the merger is the improvement we'll have to this metric. On a pro forma basis, we have the overhead per Mcfe cut in half to only $0.07 per Mcfe with the reduction in the duplicate personnel from the 2 organizations in the 2 corporate Dallas offices. With this very low overhead rate, we will have one of the lowest cost structures in the industry.

Our merger is a great example of the benefit of combining the 2 best shale operators in the same basin and the value that can be created from a combination.

On Slide 9, we detail the depreciation, depletion and amortization per Mcfe produced. This noncash expense increased to $1.04 per Mcfe in the second quarter, as compared to $0.99 in the first quarter. On a pro forma basis, we see our DD&A rate coming back down, and we think it'll average somewhere around $0.86 per Mcfe produced.

Slide 10 summarizes the second quarter financial results that we reported this morning.

Our production in the second quarter was 45.1 Bcfe, which includes 695,000 barrels of oil. This is 103% higher than our production in the second quarter of 2018, and it's 19% higher than what we reported for the first quarter of this year.

Our oil and gas sales were $130 million, which was 108% higher than the second quarter of last year. Weaker oil and gas prices offset some of the impact of the higher natural gas production. In the quarter, our realized oil price was $52.12 per barrel, and our realized gas price was a $2.29 per Mcf. Differentials for our natural gas prices continued to be wider this quarter than normal. For our natural gas, we sold more than half of our production in the quarter in the daily market. The average day prices were $0.11 less than the first-of-month index reference price for Henry Hub gas.

In the quarter, our EBITDAX came in at $93 million, which was 110% higher than the second quarter of last year. Operating cash flow was $66 million, which was up 151%. And we reported adjusted -- we reported a net income of $21.4 million or $0.20 per share, but if you exclude the unrealized mark-to-market gain on our hedge contracts of $12.8 million in the quarter and the $1.4 million in cost we expensed relating to the merger, our adjusted net income per share was $0.12 per share for the quarter.

On slide 11, we summarize our financial results for the first 6 months of this year.

Our production for the first half of the year was 83 Bcfe, including 1.5 million barrels of oil. [This is] 84% higher than the same period in 2018. Our oil and gas sales were $262 million, which was 92% higher than last year. And our oil prices for this period averaged $48.71 per barrel, and our realized gas price averaged $2.55 per Mcfe.

Adjusted EBITDAX was $190 million or 94% higher than last year. And operating cash flow was $137 million, up 120% from 2018. We reported net income of $35 million for the first 2 quarters or $0.33 per share. And if you adjust that to exclude the unrealized mark-to-market loss on the hedges and the merger transaction costs, that number would have been $0.34 per share for the first 2 quarters of this year.

On Slide 12, we cover the operating results which are pro forma for the Covey Park acquisition.

So pro forma production for the second quarter was 113 Bcfe, with oil and gas sales of $312 million. On a pro forma basis, our natural gas price improved to $2.54 per Mcf. For the 6 -- for the first 6 months of this year, our pro forma production was 214 Bcfe, with oil and gas sales of $622 million. The pro forma natural gas price for this period was $2.67 per Mcf.

One of our major priorities is protecting and enhancing our natural gas price realizations while at the same time looking to improve flow assurance for our growing production in the basin. On Slide 13, we outline some of the initiatives we're undertaking in marketing our gas.

We just put new gathering contracts in place with almost 75% of our Haynesville production that will lower our current gathering costs as well as providing for additional capacity to support the drilling plan. We are also negotiating to improve our access to premium Gulf Coast markets and are looking to tie our sales to these indexes which have much tighter correlation to Henry Hub than in-basin hubs at Perryville and Carthage. 2/3 of the acquired Covey Park production is marketed off these premium Gulf Coast indexes, which is why their net realized gas price before hedging was 22% -- or $0.22 higher than Comstock's in the second quarter. Our pro forma natural gas price realization improved by $0.12 per Mcf in the quarter when we are combined with Covey Park. We also have a near-term goal to market more of our natural gas off first-of-month index pricing, which also will improve the correlation of our realized prices to our hedges.

And speaking of hedges. On Slide 14, we summarize the hedge position that we have in place for our oil and gas production. For the rest of this year, we have about 717 million cubic feet per day of our gas production hedged and about 3,250 barrels of our oil hedged. And our plan is to continue to keep 50% to 60% of our production hedged on a rolling 12-month basis.

On Slide 15, we recap our spending in the first 6 months on our drilling and development activity; and what we expect to spend on drilling for all of this year, including drilling on the Covey Park assets.

So in the first half of this year, we spent $182 million on development activities. $165 million was in the Haynesville shale program. We drilled 20 or 15.3 net operated horizontal Haynesville wells. We also completed 8 operated wells or 5.2 net wells that we drilled in 2018. We spent $16 million drilling 4 or 2.2 net Eagle Ford oil wells. And for the entire year, we're estimating that we'll spend $538 million on capital activity. And we'll be -- which is basically running 8 to 9 operated rigs in the Haynesville.

In response to the lower natural gas prices, we are now working on a new capital plan, and we expect to release 1 to 2 of these drilling rigs before the end of the year. For each rig we release, we can reduce capital expenditures next year by $75 million to $85 million, which would generate free cash flow of $40 million to $50 million and for each rig that we release, so dropping 2 rigs would add $100 million of free cash flow to 2020 and will help offset the impact of the lower natural gas prices we're seeing right now. With a smaller drilling program, our expected natural gas production growth in 2020, and we're looking at this growth on a pro forma combined basis of the 2 companies, would be dialed back from the 15% range that we discussed when we announced the Covey Park acquisition to 10% to 11% if we release 2 rigs. Again, we'll be working on -- we're going to optimize our drilling program. And then before we -- when we announce the third quarter, we'll have a new approved budget which we suspect will be lower than the budget that we had announced back when we announced the Covey Park acquisition.

On Slide 16, we present our balance sheet at the end of the second quarter and then also what it looks like pro forma for the closing of the Covey Park transaction which happened 16 days after the end of the second quarter.

So we had $47 million in cash at the end of the quarter and $1.3 billion in total debt, comprised of a 5-year credit facility and the $850 million in senior notes. This was pretty much the same balance that we had outstanding at the end of the first quarter. We ended the quarter with $277 million in total liquidity.

So after closing the merger on July 16, our pro forma debt is $2.7 billion, with $1.26 billion outstanding under a new 5-year credit facility and $1.475 billion in senior notes. Our equity increased to almost $1.5 billion, including the $385 million of the new preferred equity that we issued. And our liquidity improved to $287 million.

I'll now turn it over to Dan to cover a report on the drilling results for the quarter.

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Daniel S. Harrison, Comstock Resources, Inc. - COO [4]

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Thanks, Roland.

On Slide 17, you'll see our new acreage map highlighting our new 293,000 net acre position as a result of the [Covey Park] acquisition. Since reentering the play in 2015, the newly combined company has now drilled and completed a total of 174 operated wells with an average IP rate of 23 million cubic feet a day. To date this year, the combined companies have drilled 44 gross operated wells and plans to drill a total of 79 gross operated wells by year-end, with an average lateral length this year of 8,000 feet. These wells have been and continue to be very successful.

Over on Slide 18, you'll see the location of the 18 new operated wells from both companies that have been completed since our last update. This includes 10 new wells completed by Comstock and 8 new wells completed by Covey Park. The green markers denote the latest Comstock completions, and the red markers denote the latest Covey Park completions.

All 10 Comstock wells were completed using our latest gen-3 frac design, which is using 3,800 pounds per foot of sand loading at 15- to 20-foot cluster spacing. The lateral lengths on these Comstock wells range from 4,426 feet to 11,319 feet, with an average lateral length of 6,970 feet. The initial production rates ranged from 22 million to 28 million cubic feet per day, with an average of 24 million cubic feet a day.

The 8 new Covey Park wells completed in the second quarter were completed using an average sand loading of 3,400 pounds per foot and at 24- to 40-foot cluster spacing. The lateral lengths range from 5,209 feet to 9,320 feet, with an average length of 7,702. The initial production rates ranged from 12 million to 30 million cubic feet a day, with an average IP of 21 million cubic feet a day.

At this time, we have 8 additional wells between both companies [literally in the process of] being completed.

On Slide 19. Slide 19 is a summary of our new, expanded Haynesville/Mid-Bossier drilling inventory.

With the Covey Park acquisition, our total gross operated inventory has now increased to 2,387 locations with an average net interest of 76% or 1,823 net operated locations. This represents 30 years' worth of drilling based on our current drilling activity levels. The gross operated inventory consists of 866 10,000-foot laterals, 910 7,500-foot laterals and 611 4,500-foot laterals.

The 2,387 gross operated locations consist of 1,450 Haynesville locations and 937 Mid-Bossier locations. In addition to the 2,387 gross operated locations, we have 1,535 gross non-operated locations with an average net interest of 13% or 205 net non-operated locations.

The company closed on a significant acreage trade at the beginning of the second quarter which reduced our 4,500-foot well inventory by 25 wells and increased our 7,500-foot well inventory by 20 wells. We currently have another acreage trade in the works that will further add to our operated core inventory and increase our overall lateral lengths. In the future, we will continue to pursue acreage trades that will further consolidate our core acreage position and enhance our lateral lengths.

I will now turn it back over to Jay to summarize our outlook for the rest of the year.

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Miles Jay Allison, Comstock Resources, Inc. - Chairman & CEO [5]

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All right, again excellent reports from Roland and Dan. Thanks, both of you.

If you look at the 2019 outlook, go to Slide 20. We summarize our outlook for this year.

For the rest of this year, our primary focus is to complete the integration of Covey Park into Comstock. Our goal is to have this substantially completed by year-end. And it is going very well, as I discussed earlier. We're confident that we will deliver on the substantial value-adding synergies that the combination of the 2 Haynesville shale operators can offer. Our Haynesville drilling program continues to generate economic returns even in the low natural gas price environment we're in today. Combined with Covey Park, Comstock now has the industry-leading low cost structure and natural gas well economics.

The drilling program is [showing] production growth this year, as Dan said. Our natural gas production is expected to average 1.1 to 1.2 Bcf per day in second half of this year with Covey Park's production being added for 77 days of the third quarter.

Our oil production is expected to average 7,500 to 8,500 barrels per day in the second half of 2019, with new production from 4 new wells being added into Eagle Ford starting in early July. These 4 wells had an average per-well IP rate of 1,034 barrels of oil equivalent.

We will put in a conservative operating plan in 2020, as Roland has described, that internally has funded the drilling program. And we will prioritize free cash flow generation over production growth. We are high-grading our drilling program now, and we will look to drop 1 to 2 of our operated rigs in the Haynesville before the end of the year. [We will continue] to maintain an active hedging program targeting the next 12 months of production. And lastly, we will protect our liquidity, which is currently $287 million. And we we'll look to enhance it with noncore asset sales and free cash flow generation so we can pay down our bank debt.

For the rest of the call, we'll take questions from the analysts who follow the company, so Chris, I'll turn it back over to you.

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Operator [6]

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(Operator Instructions)

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Miles Jay Allison, Comstock Resources, Inc. - Chairman & CEO [7]

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Chris?

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Operator [8]

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Yes, sir...

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Roland O. Burns, Comstock Resources, Inc. - President, CFO, Secretary & Director [9]

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Jay, it was such a complete report today that I think we answered all the questions...

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Miles Jay Allison, Comstock Resources, Inc. - Chairman & CEO [10]

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We had a conference call 2 months ago, and Jerry was on the call and others were on the call, when we announced the merger. Again I want to thank you. It's a pretty heavy docket today. At 10:00, there are 4 or 5 other companies reporting.

I want to tell you that we're going to continue to be consistent. We're going to continue to drill the low-risk wells that have high return. We're going to be consistently strong. We've got some great legacy advantages. And again, the market that we're seeking is the Gulf Coast, which is the market with the greatest demand.

So thank you for listening to the call and for exposing yourself to Comstock's story. We're disciplined, and we don't plan on disappointing anybody. We're going to give you our best effort.

So thank you for the morning.

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Operator [11]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.