Comstock Resources: Diversifying Production With Oil Boosts Profits

| About: Comstock Resources (CRK)
Comstock Resources (NYSE:CRK) gets 98% of its production from natural gas, where prices have floundered amid significant shale rig activity. But that’s about to change as Comstock switches gears and increases oil and liquids production in 2011.
Comstock invested heavily to bring natural gas acreage to held by production last year, significantly increasing its natural gas production. However, the investment didn’t come without costs. Industry-wide, natural gas production growth depressed natural gas prices while higher rig demand increased wellhead costs and reduced profits. This dynamic played out in Haynesville, where well costs moved up to $8-$10 million per well last year.
Independents like Comstock were faced with a challenge. They had to boost production faster than commodity prices fell and input costs rose. As a result, producer gas profits increased in spite of, instead of, because of, pricing and margins.
At Haynesville, Comstock’s 78k net acres sit on top of a field estimated to be the fourth largest for natural gas worldwide, holding an estimated 245 Tcf of natural gas. In the past three years, Haynesville activity has ramped to 1,060 wells, making it the biggest natural gas producing shale formation in the U.S. But, it’s tough shale, deep and costly to drill. And Comstock has spent more than hoped to ramp its production. Money investors’ hope has been well spent given Haynesville is a high-pressure field with solid yields. Alongside solid production, the acreage offers another benefit to Comstock shareholders. Roughly 50k of the company’s acres also sit on top the Bossier shale.
Clearly, Haynesville is a huge, resource rich field. As a result, operators like Comstock took a Field of Dreams “build it and they will come” approach. At Comstock, the majority of its $515 million capex budget was spent on Haynesville last year. They drilled 43 net wells, bringing the number of wells they participate in to 936. As a result, Comstock’s production rose 12% in 2010 while proved reserves climbed 45% to 402 Bcfe. However, this production growth is all low priced dry natural gas. A situation Comstock hopes to change by diversifying its production into more oil and liquids this year.
Comstock’s strategy reflects an industry increasingly focused on becoming more selective in its natural gas drilling. Rather than throwing money blindly at Haynesville and Bossier, Comstock is shifting resources to its 18k acres in the oil rich counties of the Eagle Ford Shale.
While it spent very little in Eagle Ford shale last year, starting only four wells, it's slated to spend nearly $175 million of its capex there this year. And, that means a much bigger share of 2012 production will come from crude than in 2010.
The company estimates 2011 oil production will grow to 10% of its production pie from a mere 2% last year. Of the three Eagle Ford wells the company reported exiting in 2010, two were producing at about 800 bbl/d combined. The capex budget for this year calls for an additional 22 wells to be drilled in Eagle Ford. And, unlike Haynesville, Eagle Ford offers solid profitability with its high percentage of easier-to-frac carbonate shale. And, that could boost results given where crude prices are currently.
There is still plenty of opportunity in Haynesville and Bossier. Comstock was sitting on 26 wells needing completion at year-end. A pullback in industry demand suggests those wells will be finished sooner rather than later. And, that’s good news for production and revenue.
Overall, the company is modeling production growth of 16%-23%, or 85-90 Bcfe, as it increases activity in Eagle Ford and leverages its 2010 Haynesville investments.
As we move further away from bringing acreage to held by production, and focus more on price-driven production growth, overall natural gas prices should improve – unlocking significant growth opportunity for Comstock. We are already seeing evidence of such as shift. In the past six months, the rig count in Haynesville has fallen 18%. Couple improving natural gas prices with growing oil production and shareholders will be well rewarded in the coming year.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CRK, NBL over the next 72 hours.