- Comstock's Q4 2013 earnings call demonstrates the importance of success in the East Texas Eagle Ford to the stock price.
- The expectation is already set high: drilling has not even started, but half of all questions on the call were related to the East Texas Eagle Ford.
- While Comstock will not have any new East Texas Eagle Ford results to report until July, the first well completed in August 2013 is performing well.
- Offset operator activity is ramping up and will provide ample additional data points.
South Texas Eagle Ford
Comstock's most recent wells in the South Texas Eagle Ford appear to perform essentially in line with the 2013 average (the 63 Eagle Ford shale wells that were completed in 2013 had an average per well initial production rate of 780 Boe/d).
Since its last operational update, Comstock has completed an additional 21 Eagle Ford shale wells. Most of these wells were put on production late in December 2013 or early in January 2014. Wells on the company's Gloria Wheeler block in McMullen County, Texas were the strongest, substantially exceeding the average. The Gloria Wheeler is one of the best acreage parcels that Comstock has in its portfolio. Strong IP rates may also reflect higher-than-average natural gas content, given the wells' location (map below).
- Gloria Wheeler A #4H: 1,066 Boe/d
- Gloria Wheeler C #1H: 1,219 Boe/d
- Gloria Wheeler C #2H: 1,025 Boe/d
- Gloria Wheeler C #3H: 1,340 Boe/d
- Gloria Wheeler D #3H: 1,054 Boe/d
- Gloria Wheeler D #4H: 1,113 Boe/d
(Source: Comstock Resources' February 2014 Investor Presentation)
Following the divestiture of the Permian assets in the first half of last year, the South Texas Eagle Ford remains Comstock's flagship asset that accounts for the majority of the company's capital spending and production growth. Based on drilling results to date, Comstock earns excellent returns in South Texas Eagle Ford (particularly once the impact of KKR's drilling carry is factored in). However, the obvious challenge is the size of the company's inventory relative to its current drilling pace.
To date, Comstock has drilled 129 of the 300 estimated drilling locations on its ~25,300 net acre position. Assuming 60 wells per year, the company's existing acreage can support approximately three additional years of drilling. A risk also exists that not all remaining drilling locations will be equally attractive from a return perspective (wells on the northern acreage blocks are expected to have lower-than-average EURs).
So far, Comstock has been able to continuously add to its acreage position and maintain the level of its inventory. At some point, however, an acreage acquisition might make sense.
In this context, a success in the emerging East Texas Eagle Ford play would provide a solution to the company's drilling inventory issue and may serve as an important catalyst for the stock.
East Texas Eagle Ford
As a reminder, in November 2013, Comstock agreed to purchase approximately 21,000 net acres (32,000 gross) in the East Texas Eagle Ford play located primarily in Burleson County, Texas. The transaction was priced at $66.5 million. The seller was privately held Ursa Resources Group II LLC (Comstock acquired 70% of Ursa's interests in the acreage).
The properties included one producing Eagle Ford well, the Bravenec #2H, that Ursa had completed in late August 2013. Excluding estimated $6 million value of existing production, the implied acquisition price per undeveloped acre was ~$3,000. While slightly above the ~2,000 per acre "going rate" seen in recent transactions in the area, the price was reasonable given the large size of the block (and a bargain relative to valuations seen in better-established shale oil plays).
Comstock plans to spud its first operated East Texas Eagle Ford well in March of this year with results likely to be reported in July. In total in 2014, the company plans to spud 10 gross wells to evaluate its acreage.
It is important to note that a portion of Comstock's position - the western and northern areas - is already effectively de-risked by the original evaluation well drilled by Ursa and several industry wells that are "on-trend" with Comstock's acreage (map below). To prove up its entire acreage, Comstock needs to demonstrate the productivity of the eastern portion of its block. The company also needs to show that it can deliver on execution in this new operating area.
(Source: Zeits Energy Analytics; Comstock Resources)
Original Evaluation Well Performance
Management commented on the earnings call that Ursa Resources' original test well had a relatively short lateral and small frac completion:
We didn't feel like it was a very good test for what we are going to do out there and for what Halcon has been doing that has been so successful.
It is important to note, however, that being Ursa's first well in the play, the Braveneck can in fact be viewed as a significant success. The well has cumulatively produced ~37,000 barrels of oil in its first 134 days, which is close to the average performance achieved by Clayton Williams in its ten wells drilled in 2013 (Clayton Williams has also used shorter laterals and smaller size frac jobs).
Going forward, Comstock plans to use larger frac jobs and hopes to drill wells with longer laterals, with an average in the 6,500 to 7,000 foot range, depending on lease geometry.
Management commented on the call that they are particularly inspired by the results of a Clayton Williams well drilled in close proximity to Comstock's acreage (obviously, this is the Pivonka E Unit #1 shown on the map above).
Pertaining to our location, Clayton Williams has hit pretty good well as you probably followed. So our first well will probably be as close to that well as possible... I think Clayton is about three miles away. Halcon's leases are five miles away, but we certainly like what we've seen from the well results from Clayton and others.
Given the intended location of Comstock's first well (close to the Pivonka and Bravenec wells), the result may not add much from the acreage delineation perspective. Investors will need to wait for the results of step-out wells in the second half of the year.
Early on in its evaluation program, Comstock plans to drill two or three pilot holes with full suits of logs and core one well. The tests will be aimed at gathering technical information on the formation that will help the company's engineers to design the frac jobs and pick the exact landing point for the laterals.
Comstock has initiated discussions with other operators in the play regarding data trading agreements and is closely monitoring offset operators' completion designs and lateral positioning.
Management commented on the call that they see significant similarity of East Texas Eagle Ford to South Texas Eagle Ford ("a lot of information we've learned down there would apply here").
Acreage Acquisition Activity
Management commented that they are still shopping for acreage within what they believe is the play's core.
By and large it's leased up… We don't see any more big blocks available… We are fortunate… to get our interest in that block.
There is a little bit open acreage but we feel like the parties involved have picked most of it at this time. We think it will be a pretty aggressive area in 2014.
Management also commented on their expectation with regard to EURs and drilling economics in the play.
On the East Texas Eagle Ford, we were looking at a type curve of about 400 MBoe. And that gives us - at the well cost of starting at $9.5 million (but really development cost being around $8.5 million) - that gives us very comparable returns with those in the South Texas program.
Clearly, somewhat higher recoveries than the 400 MBoe quoted by Comstock would ultimately be needed to make the play "work." However, given that the East Texas Eagle Ford is still in its early innings, the headroom for improvements certainly cannot be ruled out.
Analysts Are Paying Attention
Judging by the number of questions during the call that related to Comstock's East Texas Eagle Ford operation (ten in total), the sell side is finally paying due attention to this promising play. However, judging by the questions asked, the Street is still a bit behind the curve. Given the dearth of new promising shale oil plays, the East Texas Eagle Ford may become a lot more prominent in research coverage, providing tailwind for the companies involved.
So far, Halcon Resources (HK) and Clayton Williams (CWEI) have been the most active and visible operators in the play, now joined by Comstock. Assuming continued positive operating momentum in the play, these three stocks will be the primary beneficiaries of the news flow.
In a follow-up note, I will cover activity by other operators.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.