Comstock Resources Q3 2007 Earnings Call Transcript

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Comstock Resources (NYSE:CRK)

Q3 2007 Earnings Call

November 6, 2007 11:30 am ET


M. Jay Allison - - Chairman, CEO, President

Roland Burns – CFO

Mack Good - COO


Wayne Andrews - Raymond James

Ronald Mills - Johnson Rice

Kim Pacanovsky - Ferris Baker Watts


Good day, ladies and gentlemen and welcome to the thirdquarter 2007 Comstock Resources earnings conference call. (OperatorInstructions) I would now like to turn the presentation over to your host fortoday, Mr. Jay Allison, President and CEO. Please proceed.

Jay Allison

Thank you, Stacy.Good morning, everyone. It's a great day to have a conference call. Welcome tothe Comstock Resources 2007 third quarter financial and operating resultsconference call. You can view a slide presentation during or after this call bygoing to our website at and clicking presentations.There, you will find a presentation entitled third quarter 2007 results.

I'm Jay Allison, President of Comstock and with me thismorning is Roland Burns, our Chief Financial Officer and Mack Good, our ChiefOperating Officer. During this call, I will review our 2007 third quarterfinancial and operating results, as well as the results to date of our 2007drilling program.

Our discussion today will include forward-looking statementswithin the meaning of securities laws. While we believe the expectations andsuch statements to be reasonable, there can be no assurance that suchexpectations will prove to be correct.

Our 2007 third quarter highlights, our production in thethird quarter averaged 251 Mcfe per day, an increase of 35% of our productionin the third quarter of 2006 and a 6% increase over the previous quarter. Our onshoreproduction soared to 132 Mcfe per day, an increase of 38% over last year'sthird quarter and is attributable to our successful East Texas/North Louisianaand South Texas drilling activity.

Offshore, production was up 31% which was primarily due tonew production from wells that we had drilled last year. For the quarter, wehad total revenues of $171 million and we generated EBITDAX of $133 million andoperating cash flow of $116 million. We also generated a profit of $16 millionor $0.37 per share.

Our drilling program continues to drive our productiongrowth. Onshore, we drilled 123 successful wells out of a total of 128 wellsdrilled. Offshore, we've had six successful wells and eight dry holes. Boisd'Arc announced on June 5 of this year that it is undertaking a process toreview strategic alternatives including a potential sale of the company. We'renot in a position to be able to comment on that process today on this call.

On slide 3, we outline our daily production rate by quarterand by region for 2005 and 2006 and the first three quarters of this year. Inthe third quarter of 2007, our production averaged 251 Mcfe per day, 35% higherthan our production in the third quarter of '06. For the first nine months ofthis year, our production is up 32% over last year.

Substantially all of the production growth is coming fromour successful drilling activities. Our onshore production averaged 132 Mcfeper day in the third quarter, as compared to the 118 Mcfe per day we averagedin the second quarter and the 95 million per day we averaged in the thirdquarter of 2006. This is the first quarter that our onshore operationsoutshined our offshore operations since the 2005 hurricanes.

East Texas/North Louisiana region, which has accounted formuch of the production gains, was 72 Mcfe per day, which was 41% higher than itwas in the third quarter of last year. Production in South Texassoared 58% to 41 Mcfe per day and our production in our other regions was 20 Mcfeper day. Bois d'Arc's production averaged 119 Mcfe per day in the thirdquarter, as compared to 118 million per day in the second quarter and the 91million per day in the third quarter of 2006.

On slide 4, we cover our oil prices. Our average oil priceincreased 10% in the third quarter of 2007 to $72.57 per barrel as compared to$65.95 per barrel in the third quarter of 2006. For the first nine months ofthis year, our realized oil price was $63.45, which was 1% higher than our oilprice of $63.06 in the same period in 2006. Our average realized oil price was96% of the average NYMEX WTI price.

Slide 5 shows our average gas price. Our average gas pricedecreased 4% in the third quarter to $6.35 per Mcf, as compared to $6.63 in thethird quarter of 2006. Our realized gas price was 103% of the average Henry HubNYMEX price in the third quarter.

For the first nine months of 2007, our average gas pricedecreased 3% to $6.93 per Mcf as compared to $7.13 from the same period in2006. Our realized gas price was also 102% of the average Henry Hub NYMEX pricefor the first nine months of the year.

On slide 6, we cover our oil and gas sales. Our salesincreased 32% to $171 million in the third quarter due to our higher productionlevels. Sales from our onshore operations increased 33% to $83 million from $62million in 2006 third quarter. Offshore sales increased 31% to $88 million from$67 million in 2006 third quarter.

For the first nine months of this year, oil and gas salesincreased 28% to $491 million as compared to $385 million for the same periodin 2006. Our onshore oil and gas sales increased 20% to $236 million from $197million in the first nine months of 2006. Offshore sales increased 35% to $255million from $188 million in 2006's first nine months.

Slide 7, EBITDAX. Our earnings before interest, taxes,depreciation, amortization, exploration expense and other non-cash expenses or,EBITDAX, increased 35% in the third quarter to $133 million as compared to $99million in last year's third quarter as shown on slide 7. Bois d'Arc accountedfor $70 million and our onshore production contributed $63 million. For thefirst nine months of this year, our EBITDAX increased 32% to $388 million ascompared to $295 million for the same period in 2006. Bois d'Arc contributed$209 million and our onshore operations contributed $179 million of the totalEBITDAX.

Operating cash flow. Slide 8 covers our operating cash flow.Our cash flow increased 30% this quarter to $116 million as compared to cashflow of $89 million in 2006 third quarter. Onshore cash flow was $53 millionand offshore cash flow was $63 million in the third quarter.

For the first nine months of this year, our operating cashflow was $344 million, 28% higher than cash flow in the first nine months of2006 of $268 million. Onshore cash flow totaled $153 million and offshore cashflow was $191 million for the first nine months of this year.

On slide 9, we outline our earnings. We reported net incomeof $16 million or $0.37 per share for the third quarter of 2007, which was thesame as our profit for the third quarter last year. For the first nine monthsof this year our earnings are $47 million or $1.05 per share, as compared to$55 million or $1.25 per share for the same period in 2006. We have adjustedthe 2006 results presented on this slide to exclude the unrealized gains on ourderivatives in 2006.

We outline our cost structure on slide 10. Our lifting costin the third quarter averaged $1.47 per Mcfe as compared to $1.57 in the thirdquarter of '06.. The $0.10 decrease in our lifting rates relate to our higherproduction levels this year. Our depreciation, depletion and amortization perMcfe produced increased to $2.69 per Mcfe in the third quarter of '07 ascompared to $2.37 per Mcfe in 2006's third quarter. The higher rate is a resultof the higher finding costs we have experienced in our East Texas/NorthLouisiana region which has increased our DD&A rate.

Slide 9 compares cost per unit for the first nine months ofthis year to the same period last year. Our lifting cost averaged $1.41 perMcfe for the first nine months of this year as compared to $1.59 in 2006. Theimproved lifting rate is also due to the higher production level. Ourdepreciation, depletion and amortization per Mcfe produced increased to $2.76per Mcfe in 2007 as compared to $2.12 per Mcfe in 2006.

Capitalization, on slide 12, we present our capitalstructure at the end of the third quarter. At the end of the third quarter, wehad $597 million in debt including $100 million of debt at Bois d'Arc Energy.Our bank credit facilities have a combined borrowing base of $725 million,giving us availability of $303 million. The borrowing base on the Comstockcredit facility was just increased from $400 million to $500 million. We expectthe Bois d'Arc credit facility borrowing base to increase by $125 million nextmonth.

Our equity at the end of third quarter was up to $739million and our debt to total booked capitalization at the end of the quarterwas 45%, illustrating the strong balance sheet that we have.

On slide 13, we outlined our exploration and developmentcost for the first three quarters of 2007 as compared to what we spent in 2006first nine months. We spent $256 million in the first three quarters of 2007for our onshore drilling program as compared to the $150 million that we spentin the same period in 2006. We spent $232 million to drill 124 developmentwells in the first nine months of 2007 and 121 of these wells were successful.We spent $10 million on four exploratory wells. Only one of these wells weresuccessful.

We spent an additional $8 million on acquiring leases and $6million for workovers and recompletions and other development costs. We spent$164 million on our East Texas/North Louisiana drilling program, $62 million inSouth Texas and $30 million was spent in our otherregions.

Offshore, we spent $172 million in the first nine months ofthis year on exploration and development activities as compared to $177 millionin 2006 first three quarters. Offshore, we drilled six successful wells out ofthe 14 wells drilled.

We now expect to spend $330 million for our 2007 onshoredrilling program as detailed on slide 14. We expect to drill approximately 163 onshorewells this year. Our East Texas/North Louisiana operating region at $220million accounts for 68% of the 2007 budget and 125 of the wells to be drilled.

We expect to spend $80 million in our South Texasregion to drill 24 wells. We've also budgeted $30 million to drill 14 wells inour other regions. We currently have eight operated drilling rigs working atthis time. The eight rigs are running as follows: seven are in our EastTexas/North Louisiana area; one in Douglas; one in Darco; one in Logansport; twoin Hico Knowles; two in Waskom, one drilling a vertical well and one drilling ahorizontal well; additionally, we have one in South Texas in our Las Hermanitasfield.

On slide 15, we focus on our East Texas/North Louisianaregion. We drilled 95 wells in this region in nine different fields in thefirst three quarters of this year. All of these were successful. These wellshave been tested at a per well average rate of 1.3 Mcfe per day. Our drillingin this region, which targets primarily the Cotton Valley and Hosstonformations has allowed us to increase our production in this region in thethird quarter about 41% from 2006's third quarter. Our production is up 37% inthe first nine months of this year in this region.

On slide 16, we have a map of our Waskom field in HarrisonCounty, Texas. We are currently drilling the Bellno. 11A-H, our first Cotton Valleyhorizontal well in the Waskom field. We have a 69% working interest in thiswell, which is expected to cost $6.3 million to drill and complete. We havejust set intermediate casing through the curve at approximately 9,700 feet and are now drillingahead on the 3,000-foot horizontal lateral. We anticipate being able to testthis well in early December.

Devon, our partner in this well, appears to be having asuccessful horizontal program at Waskom. This well is near Devon Taylor's A-9horizontal well, which from public records had an initial production rate of 10Mcfe per day. In addition to their Taylor A-9 well, they completed two moresuccessful wells, the Bryson 10-H and the Abney B 18-H which were tested in excessof 8 Mcfe per day, according to our scouts. They are currently completing theTaylor no. 10, their fourth horizontal well at Waskom.

If our well is successful, we will drill additionalhorizontal wells with Devon at Waskom and we look toincorporate additional horizontal wells in our development drilling program onour other acreage in this region.

Slide 17. Anew area of focus for us in this region is our Hico Knowles field in LincolnParish in Northern Louisiana. Our acreage is just westof the very prolific Cherry/Bell field operated by Petrohawk. Our first wellthat we have drilled in Hico Knowles was tested at 4.6 Mcfe per day.

In addition to this well, we had three wells that arecurrently being completed and two wells that are drilling. We have another 35operated drilling sites on our acreage. In addition, we have an interest inanother 26 drill sites on acreage operated by Petrohawk. We believe that thisunderdeveloped field can make a significant contribution to our future reserveand production growth in this region.

Our South Texas region is displayedon this slide 18. Inour South Texas region, we drilled 18 successful wells in the first nine monthsof this year and we had one dry hole. These wells have been tested at a perwell average rate of 5.9 Mcfe per day. Production in this region is up 58%because of our successful drilling program. Six of the successful wells weredrilled in our Las Hermanitas field in Duval County which we acquired lastyear. Five wells were drilled in the Javelina field in Hidalgo County where we just bought out ourpartner's working interest and now own 100% of this field. The remainingsuccessful wells were drilled in the Ball Ranch field or the nearby Tom Eastfield. We also drilled two infield development wells in our Double A wellsfield in Southeast Texas.

We drilled 14 wells in our other regions during the firstnine months of this year as shown on slide 19. We drilled 13 wells inMississippi, eight of which were successful. We also drilled one successfulcoal bed methane well in New Mexico.

On slide 20, we cover our offshore drilling results. We havedrilled six successful offshore wells this year out of the 14 attempts. Wedrilled a successful well at South Timbalier 75 which extended our 2005 Doc Hollidaydiscovery in the first quarter of this year. In the third quarter, we drilled awell at Ship Shoal block 93 to test our Walleye prospect. The well was drilledto a true vertical depth of 12,786 feet and encountered 389 net feet of pay in 11 commercialreservoirs.

Our ultra deep well drilled in South Timbalier block 81 totest our Butch Cassidy prospect was also successful. The other three successfulwells were drilled in our water flood recovery project in the Ship Shoal 113unit.

Bois d'Arc also participated in the August and Octoberfederal Gulf of Mexico lease sales and was the apparent high bidder on the 11of the 14 blocks on which it bid. If all of these bids are approved by theMineral Management Service, Bois d'Arc will be awarded leases on approximately 56,000 acres for bids totaling$18.3 million. Nine of the leases are on the shelf in water depths of less than70 feet and twoof the leases cover blocks in water depths of 8,000 feet.

Slide 21, the outlook for 2007. We are on track to having anextremely successful year in 2007 as demonstrated by outstanding productiongrowth and improving cost structure. Our production is 34% ahead of last year'sproduction and we expect for the full year that our production will be 30%higher than the 67 Bcf we produced last year. Our onshore production was up 38%this quarter as our South Texas region had anoutstanding quarter to supplement East Texas, which hasbeen a consistent workhorse for us this year.

We expect to spend $330 million on our offshore drillingprogram this year in a balanced program which targets both low-risk developmentdrilling in our East Texas/North Louisiana region and high-impact drilling in South Texas.

We continue to maintain a multi-year inventory of drillsites, both in our East Texas/North Louisiana region and in our South Texas region. We are excited about drilling our first horizontal Cotton Valley well in the Waskom field. Asuccess could enhance the economics of drilling in our Cotton Valley acreage trend.

Bois d'Arc Energy continues to build value since we formedin 2004 and is having an outstanding year growing reserves and production.Production at Bois d'Arc is up 40% so far this year and has significantlyexceeded our expectations. Bois d'Arc has had a very successful explorationprogram, adding over 100 Bcfe to its proved reserve base in 2007. We continueto maintain a very strong balance sheet to support our future growth and thepotential sale of our stake in Bois d'Arc would allow us to significantlyreduce our debt, invest more in our onshore properties, fund futureacquisitions and allow us to repurchase shares of our common stock.

Stacy, I'll now open up the meeting and turn it back over toyou for questions.



Your first question comes from Wayne Andrews - RaymondJames.

Wayne Andrews - Raymond James

You mentioned DD&A rate being up largely because of EastTexas/North Louisiana. Could you review the economics there? I'm estimatingaround 1.7 million per well and 1.3 million a day. What sort of reserves areyou adding? Or is this sort of a net effect from last year's results as well?

Roland Burns

The DD&A rate is really a carryover of last year's inthe way we've booked the reserves in the Cotton Valley, which is as you know,typically a 0.8-type Bcf well. As far as the dollars spent, that has notincreased any more. I think it was fairly level in the third quarter versus thesecond quarter. But it really won't be until the end of the year that we reallysee the impact of our new drilling activity improve the economics there.

Wayne Andrews - Raymond James

Great. That's what Ithought. I also noticed that South Texas was up prettysubstantially in the quarter. Can you comment on what areas are contributingthe most there and what you see going forward in South Texas?

Mack Good

Hermanitas has been a real plus for Comstock, reallystarting to build volume into the quarter. As a matter of fact at Hermanitas,we have laid a loop line in order to get our additional product to sales. Wehave about 8 million a day right now that's waiting on that loop line. We'reabout two weeks away from finishing that, and that's a net number.

Javelina, as you know, we acquired additional interest inJavelina and as a result, those net volumes are what you're seeing as well. So,at both Javelina and Hermanitas going forward we expect to continue to beactive in both of those fields throughout the year and throughout next year, asa matter of fact.

Wayne Andrews - Raymond James

In East Texas I know you're working on your first horizontalthere and if successful, you plan to do a few more. Are the current rigs thatyou have in the play, are they capable of doing this kind of work or do youneed to get some different rigs in? Could you discuss availability there?

Mack Good

Every rig we have in our inventory is capable of drillinghorizontals in Waskom and elsewhere that we're looking at. The rig that we haveout there now, just to brag a little bit on the crew and the drilling engineeringhere at Comstock, we're ahead of the drilling time curve by about a week andobviously, that goes straight to the bottom line. We're under budget. We'respending less money than we had anticipated, so we're extremely happy aboutthat. We would like to keep that rig or at least bring it back for a secondhorizontal in Waskom if that's what we decide to do because it's an excellentrig, excellent crew. Availability is not a problem. But we have rigs in ourfleet that can do the job.

Wayne Andrews - Raymond James

The Mississippioil play, any progress there? With oil prices where they are today, that'sprobably looking pretty interesting for you.

Mack Good

We're taking a real hard look at both Laureladditional opportunities as well as in our Maxie field area. We think we've gota couple of ideas there that we'll probably be drilling in the fourth quarteror first quarter of next year.


Your next question comes from the line of Ronald Mills - JohnsonRice.

Ronald Mills - Johnson Rice

A question on Hico Knowles. I may have missed the verybeginning of it. It sounds like you drilled two wells, one of which is testedand you have a couple of other wells completing. Can you just walk through whatyour prior activity has been at that area?

Mack Good

Prior to drillingthis year, we had been inactive in the Hico Knowles. We made an agreement withan operator to exchange interest. We improved our acreage position where wethought the most potential was and is. We also reestablished some units, so wecould comingle reservoirs that are targeted for production and we're drillingour sixth well right now in that field. One has come online, the other one iscompleting and testing, and we have three waiting on completion right now or arein the process of being completed and we're drilling our sixth.

Ronald Mills - Johnson Rice

Any infrastructure issues in that area?

Mack Good

No, sir. Petrohawk isextremely active in that area as we are, of course, and so the infrastructureissues have been addressed all along.

Ronald Mills - Johnson Rice

Petrohawk, I know that in both Hosston and Cotton Valley, they've also chased somemore structural play in the gray sands. The first well they tested at 4.6million a day. Is that Hosston/Cotton Valley comingling? Is that a Hosstonformation?

Mack Good

Cotton Valley only.

Ronald Mills - Johnson Rice

Cotton Valley only. Is the plan to eventually comingle productionor are you not able to do that from a pressure standpoint?

Mack Good

We want to draw downthat pressure and then comingle at a later date. You're exactly right.

Ronald Mills - Johnson Rice

How about on the deeper potential? I know it's moreseismically driven, but do you all have seismic in on the area to the extentthere is some potential gray sand?

Mack Good

Yes, we have someaccess to seismic and we think we have potential as well.

Ronald Mills - Johnson Rice

Going back to the Waskom area where you're drilling thehorizontal well right now, any idea, given your acreage position and to theextent it works, how many potential locations you could drill horizontally inthat area?

Mack Good

Preliminarily, we've identified 13 additional locations withmultiple other probable opportunities. Part of the issue when you drill ahorizontal of course is that you're drilling across lease tracks, so you haveto equalize interests and establish an equal playing field between all of theownerships and we're well into that process on multiple horizontal projecttargets.

But of the preliminary pile that we've identified right now,we don't think we'd have a major issue going forward. There are some additionalopportunities as well on the western part of our acreage that we're looking at.Bottom line, we have identified enough Waskom horizontal potential to keep arig busy all next year, at a minimum.

Ronald Mills - Johnson Rice

Just to follow up on one of Wayne's questions, in EastTexas, especially given the production results you're seeing from the wellsyou've drilled, are you feeling comfortable that the 0.8 Bcfe of reserves thatyou had bookings for on your East Texas, do you think that could move higherbased on production history, on your activity over the past 12 months?

Mack Good

That's a greatquestion. We think we can move it higher. We know we can. We already are. We'reactive in Hico Knowles as well as Logansport.Waskom we're seeing tremendous results. As a consequence of that, we think ourper well recovery average is going to move up. We're also not drilling some ofthe fringe test wells that we did at the first part of this year, and ofcourse, we drilled several of those last year to test acreage that we hadpurchased.

The bottom line is, in answer to your question, yes, we feelvery confident that our 0.8 Bcfe will hold in the wells that we've alreadydrilled, and going forward, we're already seeing some significant increases inreserve estimates on the wells that we're drilling in Logansport, Waskom, HicoKnowles, and a couple of other East Texas fields.

Ronald Mills - Johnson Rice

When you look at your program, you drilled 95 wells so far.You still plan on 120 to 125. How many of those had been PUDs versus unbookedlocations?

If you look to 2008, I'm assuming you'd have a pretty flatprogram at least, if not growing, because of Hico Knowles. How much of it wouldhave already been booked versus unbooked?

Mack Good

We think we havemultiple opportunities to add reserves, not only in setting up PUDs andexisting reservoirs that are productive, but also we have some opportunities ondeeper horizons that are not booked.


Your next question comes from Kim Pacanovsky – Ferris BakerWatts.

Kim Pacanovsky - Ferris Baker Watts

I have a couple more questions on Hico Knowles. I looked onPetrohawk's website. I don't follow them, but I see that it's just a littleover 500,000 to deepen into the gray sand. What are the potential reserves inthe gray sand?

Mack Good

Depends on whereyou're drilling. I'll give you a range. Anywhere from 1 to 10 Bcf.

Kim Pacanovsky - Ferris Baker Watts


Mack Good

It's a tremendousreservoir if you hit the sweet spot.

Kim Pacanovsky - Ferris Baker Watts

Roland, you said earlier that those your wells were costingabout $3 million; PetroQuest is about $2.5 million. Does that mean that there'sroom for improvement in your cost structure there or are you just doing somethingdifferent; maybe going a little bit deeper or something like that?

Mack Good

We're testing somedeeper sections and we're also setting casing to protect shallow underpressured zones a little deeper than Petrohawk. In addition, our fractechnology approach is a little different, but there's always room forimprovement. I would never suggest otherwise and we're looking hard at ourcosts in every field.

Kim Pacanovsky - Ferris Baker Watts

What's the average working interest for your 50 locations?

Roland Burns

I think it's around75%. I know that the most recent well we had at 86% and we have some at 60%. On the operated side, I think our interest is30% to 40%.

Kim Pacanovsky - Ferris Baker Watts

Just a generalquestion about gas and oil prices right now. When you look at what prices havedone and where the strip is at, do you guys get tempted to do some hedging?

Roland Burns

We're never tempted. Wewalk the straight and narrow. We use hedging very much with our acquisitionprogram, and so to the extent that we're buying a property at a higher gasprice environment or oil price, that's when we put on hedges and have beenconsistent with that. We just haven't made a lot of acquisitions recently, sowe don't have any positions out but that's historically where they come from.

We try to direct our drilling activity in the market, and ifit's going to be a high gas prices market that's when we want to drill thosewells. If it's not going to be we're going to deploy our capital probablytoward acquisitions or other activity.


At this time, there are no further questions in the queue. Iwould now like to turn the presentation back over to Mr. Allison for closingremarks.

Jay Allison

I would just like to thankeveryone for participating in the call. It's nice to give stockholders solidfinancial results. It's also nice to really see a positive future. We've gotthe potential sale of Bois d'Arc. We've got the Hico Knowles program, thehorizontal program with Devon and other regions. We'vegot Logansport. If you look at the core areas South Texas, our production is up 58% from the third quarter of lastyear. In East Texas, it's up 41%. I think right now it'sa very bright time for Comstock and I like conference calls where the stockgoes up before the call and hopefully stays up and goes up more after the call.So, we are always thankful for good calls like this.

Stacy, thank you and thank you for pronouncing KimPacanovsky's last name properly. You're the first one that's ever done that sothank you.

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