Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Comstock Resources Inc. (NYSE:CRK)

Q4 2007 Earnings Call

February 12, 2008 11:30 am ET

Executives

Jay Allison - Chairman, President and Chief Executive Officer

Roland Burns - Senior Vice President and Chief Financial Officer

Mack Good - Vice President of Operations

Analysts

Jeffrey Robertson - Lehman Brothers

Jack Aydin - KeyBanc Capital Markets

Kim Pecanovsky - Ferris, Baker Watts

Dan McSpirit - BMO Capital Markets

Tim O'Toole - Delta Management.

Operator

Good day, ladies and gentlemen and welcome to the Q4 2007 Comstock Resources Incorporated earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jay Allison, President and Chief Executive Officer of Comstock. Please proceed, Sir.

Jay Allison

Thank you, Antoine. And all of you that are listening, I hope you're cold in the Midwest and East Coast. That would be really good for us since we're in the energy business. I do want to thank each of you for joining us today on the conference call.

We are pleased to tell you that 2007 was one of the best years in our corporate history. And really, better yet, we think that 2008 has the potential to be a far better year, of course subject to commodity prices, because our projected 15-20% growth in production in 2008 should be achieved by staying within our cash flow.

Welcome to the Comstock Resources 2007 fourth quarter and year end financial and operating results conference call. You can view a slide presentation during or after this call by going to our website at www.comstockresources.com and clicking presentations. There, you will find a presentation entitled fourth quarter 2007 results.

I'm Jay Allison, President of Comstock and with me this morning is Roland Burns, our Chief Financial Officer and Mack Good, our Chief Operating Officer. During this call, I will review our 2007 fourth quarter and annual financial and operating results, as well as the results of our 2007 drilling program.

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.

If you would turn to slide two, we turned in solid financial results in 2007, as shown on slide two. We had total revenues of $687 million. We generated EBITDAX of $542 million and operating cash flow of $477 million. EBITDAX and operating cash flow increased 40% over 2006. We also generated a profit of $69 million, or $1.54 per share. The strong financial results in 2007 were driven by 30% production growth, higher oil prices and higher cash margins.

Our onshore production increased by 27% and our offshore production is up 34% in 2007 as compared to 2006. Our onshore drilling program had a 95% success rate. 158 of the 165 wells we drilled onshore were successful and added 109 Bcfe of proved reserves. At Bois d'Arc, we drilled 15 wells with seven successes and eight dry holes. These discoveries added 96 Bcfe of proved reserves. We had strong reserve growth in 2007. We achieved this growth at an attractive all-in finding cost of $2.60 per Mcfe. We increased our proved reserves by 23% and replaced our production in 2007 by 326%. We also completed two strategic acquisitions in 2007 which added 79 Bcfe of proved reserves at a cost of $2.41 per Mcfe.

Slide three. On slide three we outline our production for the last three years. In the fourth quarter of 2007 our production averaged 249 million cubic feet equivalent per day, 26% higher than our production in the fourth quarter of 2006. For all of 2007 our production is up 30% over last year. You should note that substantially all of the production growth is coming from our successful drilling activities. Our onshore production averaged 133 million cubic feet equivalent per day in the fourth quarter as compared to 101 million cubic feet equivalent per day that we averaged in the fourth quarter of 2006.

East Texas / North Louisiana region, which has accounted for much of the production gains, was 74 million cubic feet equivalent per day, which was 38% higher than it was in the fourth quarter of last year. Production in South Texas was up 42% to 40 million cubic feet equivalent per day and production in our other regions was 19 million cubic feet equivalent per day. Bois d'Arc's production averaged 116 million cubic feet equivalent per day in the fourth quarter of 2007 as compared to 97 million per day in the fourth quarter of '06.

Here is even better news. We expect our production to increase again in 2008. We expect to produce between 100 and 105 Bcfe in 2008 which would represent a 15-20% growth over 2007. We expect to achieve this growth by staying within our cash flow.

Slide four. On slide four we cover our oil prices. Our average oil price increased 58% in the fourth quarter of '07 to $86.01 per barrel as compared to $54.51 per barrel in the fourth quarter of '06. In 2007 our realized oil price was $69.18 which was 14% higher than our oil price of $60.93 in 2006. Our average realized oil price was 96% of the average NYMEX WTI price in 2007.

Slide five shows our average gas price. Our average gas price increased 13% in the fourth quarter to $7.29 per Mcf as compared to $6.47 in the fourth quarter of '06. Our realized gas price was 105% of the average Henry Hub NYMEX price in the fourth quarter. In 2007, our average gas price increased only 1% to $7.03 per Mcf as compared to $6.95 in 2006. Our realized gas price averaged 102% of the average Henry Hub NYMEX price for all of 2007.

Slide six. On slide six we cover our oil and gas sales. Our sales increased 54% to $196 million in the fourth quarter due to our higher production levels and the strong oil prices. Sales from our onshore operations increased 58% to $96 million from $61 million in 2006 fourth quarter. Offshore sales increased 51% to $100 million from $66 million in 2006 fourth quarter. For all of 2007, oil and gas sales increased 34% to $687 million as compared to $512 million in 2006. Our onshore oil and gas sales increased 29% to $332 million from $257 million in '06. Offshore sales increased 40% to $355 million from $255 million in 2006.

Slide seven. Our earnings before interest, taxes, depreciation and amortization and exploration expense and other non-cash expenses, or EBITDAX, increased 66% in the fourth quarter to $154 million as compared to $93 million in last year's fourth quarter as shown on slide seven. Bois d'Arc accounted for $82 million and our onshore operations contributed $72 million. In 2007 our EBITDAX increased 40% to $542 million as compared to $387 million in 2006. Bois d'Arc contributed $291 million and our onshore operations contributed $251 million of the total EBITDAX.

Slide eight, operating cash flow. Our cash flow increased 65% in the fourth quarter to $134 million as compared to cash flow of $81 million in 2006 fourth quarter. Onshore cash flow was $63 million and offshore cash flow was $71 million in the fourth quarter. In 2007 our operating cash flow was $477 million, 37% higher than our cash flow in 2006 of $349 million. Onshore cash flow totaled $215 million and offshore cash flow was $262 million in 2007.

Earnings. On slide nine we outline our earnings. We reported net income of $22 million or $0.48 per share for the fourth quarter of '07 as compared to $9 million or $0.19 per share in the fourth quarter of '06. In 2007 our profits totaled $69 million or $1.54 per share as compared to $63 million or $1.44 per share in 2006. We have adjusted the 2006 results presented on this slide to exclude the unrealized gains on our derivatives in '06. In the fourth quarter we had several special items included in G&A expenses which totaled around $4 million that were carried over from Bois d'Arc, including the early vesting of stock based incentive awards in connection with the retirement of Mr. Laufer, and costs to Bois d'Arc's strategic alternatives process including a special bonus paid to employees.

Slide ten. We outline our cost structure on slide ten. Our lifting costs in the fourth quarter averaged $1.41 per Mcfe as compared to $1.60 in the fourth quarter of 2006. The $0.19 decrease in our lifting rate relates to our higher production levels this year. Our depreciation, depletion and amortization for Mcfe produced increased to $2.82 per Mcfe in the fourth quarter of '07 as compared to $2.71 per Mcfe in 2006, fourth quarter.

Slide 11 compares cost per unit for the full year. Our lifting cost averaged $1.41 per Mcfe in 2007 as compared to $1.59 in 2006. The improved lifting rate is also due to the higher production level. Our depreciation, depletion and amortization per Mcfe produced increased to $2.77 per Mcfe in '07 as compared to $2.28 per Mcfe in 2006.

Slide 12. On slide 12 we present our capital structure at the end of 2007. At the end of the fourth quarter we had $760 million in debt, including $80 million debt at Bois d'Arc Energy. Our bank credit facilities have a combined borrowing base of $925 million giving us availability of $340 million. Our equity at the end of the year was up to $772 million. Our percentage of debt to our total book capitalization, after the close of our $160 million acquisition of Shell, is right at 50%.

In slide 13 we detail our exploration and development cost in 2007 as compared to what we spent in 2006. We spent $335 million in 2007 for our onshore drilling program as compared to the $228 million that we spent in '06. We spent $302 million to drill 160 development wells in 2007. 157 of these wells were successful. We spent $14 million on five exploratory wells. Only one of these was successful. We spent an additional $9 million on acquiring leases and $9 million for workovers and recompletions and other development cost.

We spent $222 million on our East Texas / North Louisiana drilling program, $80 million in South Texas and $33 million was spent in our other regions. Offshore we spent $214 million in 2007 on exploration and development activities as compared to $231 million in 2006. Offshore, we drilled seven successful wells out of the 15 wells drilled.

Slide 14. Our consolidated proved oil and gas reserves are now over 1 trillion cubic feet equivalent of reserves as shown on slide 14. Our proved reserves at the end of 2007 are estimated at 1,049 Bcfe compared to 851 Bcfe at the end of 2006. Our reserves are 80% natural gas and 68% are proved developed. We operate 84% of the proved reserve base. The present value using a 10% discount rate is approximately $3.8 billion using oil and natural gas prices of $90.67 per barrel for oil and $6.87 per Mcf for natural gas.

We replaced 326% of our 2007 production of 87.5 Bcfe and spent $740 million on acquisitions, exploration and development activities which added 285 Bcfe to our proved reserve base. We had an all-in finding cost of $2.60 for Mcfe in 2007. The proved reserves relating to our onshore properties are estimated at 651 Bcfe, as compared to 507 Bcfe at the end of 2006. These reserves have a present value of $1.6 billion, using a $6.70 gas price.

Our onshore reserves are 90% natural gas and 64% are proved developed. We replaced 417% of our 2007 onshore production of 45.3 Bcfe. We spent $526 million in 2007 on onshore acquisitions, exploration, and development activities which added 189 Bcfe to our proved reserve base, resulting in an onshore all-in finding cost of $2.79 per Mcfe. Acquisitions accounted for 79 Bcfe of the additions, discoveries and extensions, accounting for 105 Bcfe, and revisions of previous estimates adding 5 Bcfe.

Our proved offshore reserves at the end of 2007 were estimated at 398 Bcfe with a present value of $2.2 billion, as compared to 344 Bcfe at the end of 2006. Natural gas reserves accounted for 63% of the offshore reserves, and 74% were proved developed.

Bois d’Arc replaced 228% of its production, of 42.2 Bcfe in 2007, spending $214 million in 2007 on exploration and development activities which added 96 Bcfe to its proved reserve base, resulting in an all-in finding cost of $2.22 per Mcfe for 2007. Discoveries and extinctions accounted for 38 Bcfe, and proved recovery from the water flood project added 41 Bcfe, and revisions of previous estimates added 17 Bcfe. The minority interest in Bois d’Arc’s proved oil and natural gas reserves not owned by Comstock is 202.9 Bcfe as of December 31 of 2007, with a present value of $1.1 billion.

Slide 15, our 2008 offshore drilling program. We expect to spend $276 million for our 2008 onshore drilling program, as detailed on slide 15. We expect to drill approximately 110 onshore wells this year. Our East Texas / North Louisiana operating region at $149 million, accounts for 54% of the 2008 budget, and 74 of the wells to be drilled. This includes seven horizontal wells. We expect to spend $122 million in our South Texas region to drill 30 wells, including four wells on the properties we purchased in December from Shell. We have only budgeted $5 million to drill six wells in our Other Regions category.

Slide 16. On Slide 16 we focus on our East Texas / North Louisiana region. We drilled 128 wells in this region in nine different fields in 2007, including one horizontal well. All of these wells were successful. These wells have been tested at a per well average rate of 1.4 million cubic feet equivalent per day. Our drilling in this region which targets primarily the Cotton Valley and Hosston formations has allowed us to increase our production in this region in 2007 by 38%.

Slide 17. We drilled our first horizontal Cotton Valley well in the Waskom field in Harrison County, Texas, in December. On slide 17 we have a diagram of this well. The Bell 11A-H well was drilled to a total vertical depth of 9,409 feet with a 2,548 foot horizontal leg drilled through the upper and lower Taylor Cotton Valley Sands. This well was successfully completed with a seven-stage track. The well was tested at an initial production rate of 8.4 million cubic feet equivalent per day, and the well cost approximately $4.8 million, with a 69% working interest and a 53% net revenue interest in this successful horizontal well.

We currently plan to drill seven horizontal wells this year in our East Texas / North Louisiana region, including five additional horizontal wells in the Waskom field. Mack Good, our COO, will go over this program with you a little later during this call.

Slide 18. Another area of focus for us in this region is our Hico Knowles field in Lincoln Parish in Northern Louisiana, as shown on slide 18. Our acreage is just west of the very prolific Terryville field operated by Petrohawk. We drilled nine wells in Hico Knowles in 2007, and one additional well this year. Eight of these wells are producing at per well rates ranging from 2.2 million to 6.3 million cubic feet equivalent per day. We currently have three wells drilling in this field. We have another 28 operated drill locations identified on our acreage, and we have an interest in another 25 drill locations on acreage operated by Petrohawk.

Slide 19. Our South Texas region is displayed on slide 19. In our South Texas region we drilled 20 successful wells in 2007, and we had two dry holes. These wells have been tested at a per well average rate of 5.5 million cubic feet equivalent per day. Production in this region is up 27% because of our successful drilling program. Seven of the successful wells were drilled on our Las Hermanitas field in Duval County which we acquired last year. Five wells were drilled on the Javelina field in Hidalgo County, where we bought out our partner’s working interest and now own 100% of that field. The remaining successful wells were in the Ball Ranch field or the nearby Tom East field. We also drilled two infield development wells in our Double A Wells field in Southeast Texas.

Slide 20. On December 28, we closed an acquisition of producing properties from Shell in South Texas as displayed on slide 20. We acquired 70 producing wells in the Fandango, Rosita, and Dinn Ranch fields, which are currently producing 22 million cubic feet of natural gas equivalent per day. The acquired properties have net proved reserves of approximately 70 Bcfe. All of the proved reserves are in the developed category. In addition to the proved reserves, we estimate that there are 18 drilling locations which would add 50 Bcfe of probable and possible reserves, and we have identified 14 prospective drilling locations with 42 Bcfe of reserve potential.

Slide 21, our other regions. We drilled 15 wells in our other regions during 2007 as shown on slide 21. We drilled 13 wells in Mississippi, 8 of which were successful. We also drilled two successful coal bed methane wells in New Mexico.

On slide 22, we cover our offshore drilling results in 2007. In 2007, Bois d’Arc drilled seven successful wells out of a total of 15 wells drilled with 8 dry holes. The largest discoveries include a well drilled in Ship Shoal Block 93, which proved up the "Walleye" prospect. The second well drill in South Timbalier Block 75, which extended the "Doc Holliday" discovery made in ’05, and the ultra deep well drill in South Timbalier Block 81 which proved up the "Butch Cassidy" prospect.

Bois d’Arc also drilled three successful wells as part of its M-8 sand water flood project in the Ship Shoal 113 unit. During the fourth quarter of 2007, Bois d’Arc drilled a successful development well at Ship Shoal Block 119 which encountered 89 net feet of pay in three commercial reservoirs.

Slide 23. Bois d’Arc expects to spend $250 million in its development and exploration activities in 2008 to drill the 21 wells, as outlined on slide 23. The 2008 program includes eight low-risk development-like projects, six moderate-risk exploration projects and seven high-risk high-potential exploration projects. In total, our 2008 program targets 305 Bcfe of reserves. Adjusting for drilling risk, this program could add 82 Bcfe of reserves.

2008 offshore drilling results. Bois d'Arc’s 2008 drilling program is off to a strong start with two successful development wells as shown on slide 24. Bois d'Arc drilled a successful well at Ship Shoal block 97, to a depth of 12,983 feet, which encountered 71 net feet of pay in two high quality sands. First production for the Ship Shoal 97 well is expected in February. The second successful development well was drilled to test the "Perch" prospect at Ship Shoal block 120. This well was drilled to a depth of 5,000 feet to develop multiple previously proven undeveloped shallow gas reservoirs within the Ship Shoal block 113 field area. The well encountered 109 feet of pay in eight objective sands. First production for this well is expected in the second quarter. Bois d'Arc is currently drilling 18,500 foot exploratory well to test its “Chinook” prospect in South Pelto block 21.

Slide 25, the 2007 summary and the 2008 outlook. As we’ve been saying for the last probably 40 minutes, 2007 was one of the best years in our corporate history, as shown on slide 25. Our 30% production growth, which was generated primarily by our drilling program, drove strong financial results in 2007.

Our 2007 drilling and acquisitions activities added 285 Bcfe approved reserves at a finding cost of $2.60 per Mcfe. Our $278 million onshore drilling program in 2008 should support continued strong production growth onshore. We are targeting 15-20% production growth in 2008. Bois d'Arc’s planned $250 million exploration program for 2008 offers continued production in reserve growth opportunities exposing it to over 305 Bcfe of reserves that should support continued production growth. Bois d'Arc is targeting production growth of 10-15% in 2008. Our balance sheet remains strong to support future growth, and we expect to fund all drilling activities in 2008 exclusively with operating cash flow.

With that, I’ll turn it over for questions to you Antoine.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Please hold briefly for your first question. There are no questions at this time.

Jay Allison

Well with that I’d like to conclude the 45 minute phone call. I’d like for Mack to speak a little bit about the horizontal program in 2008. So Mack, if you’d do that because I told the audience that we would do that.

Mack Good

I’d be happy to Jay. Good morning everyone. Comstock is pretty enthusiastic and committed to the horizontal drilling program that we have scheduled this year. We have five wells that we are targeting horizontal drilling candidates in Waskom. Our first well, as Jay mentioned in his presentation, was extremely successful. As a matter of fact, the first 60 days of production was right on our type curve, meaning that it meets expectations. It’s one of the top five horizontal Cotton Valley Taylor wells, horizontal wells, drilled in East Texas. We’re extremely pleased with those results, and as a result, in about four weeks we plan to spud our second horizontal well in Waskom.

We have, as I mentioned, five scheduled for this year. We have multiple other candidates within Waskom, but we’re going to be fine-tuning our drilling and completion technologies as we go.

We have other horizontal candidates in other fields that we plan to drill this year. Both of those are in East Texas, and we’re permitting those locations as we speak, and we’ll probably spud those in the third quarter of this year after we get through with our Waskom efforts.

The advent, and it hasn’t been recent, of horizontal technology, has really opened up additional opportunities for Comstock in a number of other reservoirs, and we’re looking very carefully at our entire asset package for additional candidates in other reservoirs. But for this year we’re targeting East Texas, and specifically Waskom, because that’s where we think we can get the biggest bang for our buck.

Roland Burns

With that we do have some questions. I think that are starting to come in. So maybe we’ll take the first question.

Operator

The first question comes from the line of Jeff Robertson with Lehman Brothers. Please proceed with your question.

Jeffrey Robertson - Lehman Brothers

Thanks. Good morning. Jay, could you talk a little bit about capital allocation between East Texas and South Texas in light of the acquisition that you made in the fourth quarter? And secondly, can you all also talk about the drilling inventory you have remaining in East Texas. A couple of years ago you had had a slide that had, I believe if I’m correct, 600 gross flotations. Can you talk a little bit about where that stands now in light of the 2007 drilling program?

Jay Allison

Yes, Jeff What I’d like to do is let Mack answer those questions, and if he would, go over the Shell acquisition in a little detail, because that adds to our inventory. And some of the dollars that we would historically spend in East Texas / North Louisiana have been pushed to South Texas either in a Vicksburg or Wilcox play. So I’ll let Mack go over that.

Mack Good

Sure, I’d be happy to. Our allocation on capital this year versus last, we plan to spend approximately $122 million in South Texas to drill 30 wells. Last year we spent about $80 million to drill 20 wells. The additional wells we plan to drill in South Texas, obviously some of those are going to be targeting our Shell acquisition assets. We have additional drilling to be accomplished in both Javelina and Hermanitas, Ball Ranch as well as some exploratory prospects that Abaco plans to drill.

So the allocation in South Texas is obviously weighted toward '08 for the additional projects we plan to pursue. And in the North Louisiana / East Texas region we’re reallocating some of those dollars that were spent last year to South Texas to stay within cash-flow. We plan in '08 to spend $149 million approximately, to drill 74 wells. And just as a side note, most of those 74 wells, 56 or so, are going to be drilled in three fields, Hico Knowles, Waskom and Logansport.

So last year, of course we spent about $222 million to drill 128 wells in nine fields. We were much less target specific, if you will, on a field basis last year compared to this year.

Jeffrey Robertson - Lehman Brothers

Mack, is part of that more selective drilling program in East Texas and North Louisiana, is that based on the results you had in those three fields versus some of the results in some of the secondary fields drilled in last year?

Mack Good

Yeah, Jeff. Without a doubt, the effort to stay within the cash-flow, that’s number one, and number two is we do feel we get a bigger return on investment in the three fields that we’re targeting this year - Logansport, Waskom for the horizontal efforts of course, and Hico Knowles is a hot region with good results for us as well

Jeffrey Robertson - Lehman Brothers

And lastly, what do your think you’re…

Jay Allison

Last year, we started out at a budget of about $275 million, and then we increased it to $300 million and then we went to about $330 million or so. We did that based upon success, but we did outspend our pre-cash flow. So what we’ve done this year, we’ve said $276 million is what we project our pre-cash flow onshore will be. And then we tried to high-grade those. And if you look at South Texas, particularly with the acquisition of the Shell properties, we did increase our production by 22 million a day. But we’ve piggy backed on our G&G group and our reservoir group and our operations group, because a year or so ago we bought out Las Hermanitas. There were wells, and we’ve since drilled about 11 wells, which is a Wilcox trend, and those wells have been really good wells.

We drilled seven last year. We’ll drill seven in '08. And then if you look at Javelina, that’s a Vicksburg trend. Well, as I’ve said earlier, we’ve bought out our partners. We had five wells. We drilled five or six more, and in '08, Javelina, we’ll drill seven of those wells. And then I think we’ll start blending in the additional Wilcox wells, which are locations that we have with the Shell acquisition, maybe starting in April or May. We plan on probably drilling four of those, and one of them, we’ll take it several thousand feet deeper to test a deeper Wilcox sand, which, some of those may be about 10 Bcfe reserves and make 20 million per day production. But we will test something like that in '08, because of that acquisition.

Jeffrey Robertson - Lehman Brothers

And Lastly Mack, or Jay, where do you think your inventory, your drilling location stands in East Texas now?

Mack Good

We have an excellent inventory, Jeff, as we’ve drilled last year we continued to prove up additional PUDs, therein lies one of the reasons for the reserve increases we had in the East Texas region. So, I can’t give you an exact well location number. But it’s in the hundreds.

Jeffrey Robertson - Lehman Brothers

Okay, thank you.

Mack Good

Yes sir.

Operator

Your next question comes from the line of Jack Aydin with KeyBanc Capital Markets. Please proceed with your question.

Jack Aydin - KeyBanc Capital Markets

Hi Guys.

Jay Allison

Hi Jack.

Jack Aydin - KeyBanc Capital Markets

Jay, you mentioned that the $4 million that basically was non-recurring items, is that formally pre-tax or after tax in the fourth quarter?

Roland Burns

Jack, it’s Roland. That’s definitely a pre-tax number. That’s the number that was included in G&A, that’s in Comstock’s G&A in the fourth quarter.

Jack Aydin - KeyBanc Capital Markets

Okay, second question. On the other regions, with all the opportunities you have in East Texas / North Louisiana and other areas, what is the big deal about having the other regions (the coal business) in one well and this and that. Why even the focus on something that is so minor?

Jay Allison

Well Jack, what I think you'll see us do is - we've only allocated about $5 million to what we call "other regions" activities. So the goal in '08 is to take some of those properties and we'll probably monetize them, we'll probably sell some of those because, as Mack said earlier we're pretty efficient on high cash margin and excellent returns in East Texas / North Louisiana. And we’ve increased our presence in South Texas with the group that we've added in the last eighteen months. We’ve not concentrated with a lot of success in quote our "other regions". Some of those regions we don’t operate. So I do expect that we'll have some divestitures in properties located on that slide, Jack.

Jack Aydin - KeyBanc Capital Markets

The other question is maybe unfair. But let me ask in anyway. I mean, the big, big thing that basically clients ask is, why are you not accelerating and focusing your activities more in East Texas? I assume you have huge acreages of 100, 120 whatever acreage position. How do you answer that question in a way, or, how do you respond to that question?

Jay Allison

I think our goal, if you remember last year, and I’d mentioned this to Jeff earlier, we started out with a CapEx budget onshore of around $275 million. We increased that as the year went by because commodity prices held up at the seven and change level. We increased that by another, probably, $60 million. What we want to do is we want to start off the year within our pre-cash flow budget. As you know we have very little gas hedged - just the production we bought from Shell. And if we need to increase that, then we do have ample opportunities to spend on prospects in East Texas / North Louisiana. But, we’re not starting out the year doing that.

Jack Aydin - KeyBanc Capital Markets

Comments on the process of Bois d'Arc?

Jay Allison

On Bois d'Arc, in May of last year we - by June, Bois d'Arc was put up for sale. It went through a process for several months. We felt like we didn’t have a real offer with real cash that was acceptable. We felt like the markets hurt some of the buyers, we felt like the share price, the material appreciation of the stock chased some of the buyers off.

I think what we’ve done on the Bois d'Arc side is we've secured the growth of Bois d'Arc. We had a conference call probably an hour and a half ago, Jack, and Bois d'Arc put in and the best numbers it’s ever had in ’07 and ’08 should have a 10-15% production growth. Bois d'Arc should have about $350 million of free cash flow in ’08 and its CapEx budget for 21 wells is $250 million so it still will have an additional $100 million that’s not allocated. And we reported on that conference call that those dollars would be used either to repurchase shares, be used to pay down debt - Bois d'Arc has about 80 million of debt now with the $350 million facility. But it will be used to enhance the value and I think we’ll just see what happens between now and year end with Bois d'Arc, but keep it on a growth course, for it's more valuable tomorrow, than it is today.

Jack Aydin - KeyBanc Capital Markets

Thanks Jay.

Jay Allison

Thank you, Jack

Operator

Your next question comes from Kim Pecanovsky with Ferris, Baker Watts please proceed with your question.

Kim Pecanovsky - Ferris, Baker Watts

Hi, good morning everyone.

Jay Allison

Hi Kim.

Kim Pecanovsky - Ferris, Baker Watts

Hi, I lost the call while I was going in an elevator and I don’t know if you talked about the Bossier Shale but can you mention, if you did not, what’s going on with the Bossier Shale and what you found on your properties, maybe what the thicknesses are in your area versus north of you, I know Chesapeake has done some drilling. And also perspective acres.

Jay Allison

Good question and Mack is ready to answer that Kim.

Mack Good

Well, we’re in the process of evaluating that, like a lot of other operators we’re aware of Chesapeake’s drilling activity to the north. We’re also familiar with some other drilling activity to the south. There’s been mixed results reported, and so as with any shale play you better be careful and as with anything in our business, but specifically the shale plays require horizontal drilling to be successful. That’s been shown in every shale play. The Bossier will be no exception. And so, as Comstock’s shown in the past, we try to do our homework before we get out there with the drill bit and spend a lot of money. So, we’re in the process of doing the homework, we have an excellent lease position and we’re evaluating the Bossier.

Jay Allison

We have drilled a well to test the Bossier, Kim, and Mack’s just now reporting results, it’s a little early, but we want you to know we’ve spent money, we deepened a well a couple thousand feet and we’ve got a big acreage position. And it’s like the horizontal wells, when we drill our first one hopefully it’s a really good one. So we’re taking the same attitude here.

Kim Pecanovsky - Ferris, Baker Watts

Okay and when you say big acreage position, give me an idea of what that entails?

Mack Good

Probably around 20,000 to 30,000 acres, proximity.

Kim Pecanovsky - Ferris, Baker Watts

Okay, alright and what were the results south of you?

Mack Good

Well, not good. There was no reported production. Wells were drilled through the Bossier and the logs were run and cores were taken and no gas rates reported, and so that’s always a bad sign.

Kim Pecanovsky - Ferris, Baker Watts

How far as the crow flies is that from your acreage?

Mack Good

It’s about 10 miles.

Kim Pecanovsky - Ferris, Baker Watts

10 miles okay. And this special bonus that you mentioned that was paid to employees, how much was that out of the whole non-recurring pot of money and what was that paid for?

Jay Allison

It’s in Bois d'Arc, I’ll turn that over Kim to Roland.

Roland Burns

Yeah that was that 1.7 million so that was a good bit of the numbers. And really what that was, as typically Bois d'Arc looks at its performance bonus and pays those in like June or July and as we exited the strategic alternatives process and since we had a retention bonus plan that wasn’t going to come into effect, we decided, with Gary taking over CEO, we decided it would be a good beginning for the guys that stuck with us down there through the process to reward them for a great year.

Jay Allison

And going through that entire process Kim, we only lost one person, so that’s pretty good.

Kim Pecanovsky - Ferris, Baker Watts

Okay, gosh, I wish I worked for you guys.

Roland Burns

We try - we have great performance at Comstock. We definitely want to pay our people to reward that and at both companies everything’s performance based, and at the turn of the year we want to pay them and retain them because that’s who’s really creates the growth.

Kim Pecanovsky - Ferris, Baker Watts

Right, there’s no doubt you had a great year. And as far as Bois d'Arc is concerned, Jack asked the question about - you answered about the budget and what the cash flow is and where you’re going to put that free cash flow. If you have 100 plus in free cash flow after CapEx expenditures, why wouldn’t you put some of that into bringing those PDNTs online and having more of a parity when you look at what the reserves and what the cash flow is because there is not a parity right now because you have so many non-producing crude reserves.

Roland Burns

Yeah, one of the things, when we looked at Bois d'Arc’s business plan for this year is to improve that and I think even you saw our P ratio came down to 9 years at Bois d'Arc at the end of the year, so it shows you it's moving in the right direction. A large part of our budget is for development projects and you’ve already seen us drill three since starting this plan. And so a lot of what we’re doing is drilling development wells and some of that we can access. Some of the behind-pipe, it's just more cost effective to wait and we don’t want to look at production growth as the end all. We want to have overall balance growth. But, there is a bigger focus on improving production and drilling some acceleration wells and you’ll see it in the budget.

At the same time, we’re also continuing to test some of the various exploration projects and the biggest one now we’re drilling is Chinook, we’ll have results on that soon and those results will either lead us to drill "Wild Bill", one of the next deep Desperado plays, or if they’re not good then we’ll probably revamp the budget again and maybe look at other acceleration opportunities.

Jay Allison

Yeah, Kim, our goal this year was - you take the budget in - and of course I think one of the issues with the possible sale of Bois d'Arc was the production rate. So we’re trying to address that in ’08. We’re still trying to stay within a typical budget, which Bois d'Arc’s budget for the last three years has been anywhere from say $200 to $240 million and this year it's $250 million, so that’s within that comfort zone. I think if you spend a lot more than that, then you may have a lot more exposure to exploration that again historically has a 20% chance of success so we try to balance all that. At the same time, if the stock dips then we’ve got a $100 million repurchase program approved and we’ve only bought 100,000 shares back in that program, so we’ve not bought many shares back, though we have tried to keep it balanced.

Bois d'Arc was created as the goal was not to have any debt and it does have about $80 million of debt right now so we could use some of those dollars to pay down debt.

Kim Pecanovsky - Ferris, Baker Watts

Okay, and this is sort of a discussion we’ve had several times before, but can you just talk about - I know you’ve put some hedges in place for the south Texas properties, but with gas pricing being so strong right now is there any thought of hedging some of the gas?

Jay Allison

Roland did that at eight something, he’d wished he waited till nine.

Roland Burns

We knew that by taking a position in the market that we would cause gas prices to go up and so that’s what happened. We will always look at hedging with acquisitions, especially one that has a lot of production - stable production - like the Shell properties did. I think it’s a good fit for that acquisition. I think as we see gas prices strengthen here, I think there’s a good chance we’re going to add projects back into our capital budget. And again we adjust the capital budget to the gas market versus, vice-versa, trying to adjust the gas market to our capital budget. I think that’s why the company has always grown, remained very flexible and adapt to the price environment versus forcing something into a price environment that isn’t there because if gas prices are not real strong then acquisitions might be a better place for our capital versus drilling wells that need a higher gas price.

Kim Pecanovsky - Ferris, Baker Watts

Last question, I promise. Did you mention when the second Waskom well spud, that was just a couple of weeks ago?

Mack Good

No, it’s waiting a rig that we have on a (tract) and we’ll be spudding it probably in about three to four weeks.

Jay Allison

What rig is that Mack?

Mack Good

It’s a neighbor’s rig.

Jay Allison

Neighbors rig.

Kim Pecanovsky - Ferris, Baker Watts

Okay, Okay, I thought that was about to go any day. Thanks a lot guys.

Operator

Your next question comes from the line of Dan McSpirit with BMO Capital Markets please proceed with your question

Dan McSpirit - BMO Capital Markets

Thank you, good morning.

Jay Allison

Hi Dan.

Dan McSpirit - BMO Capital Markets

Assuming your success at Chinook how quickly would you follow up with the Wild Bill?

Roland Burns

You’re in the wrong conference call. You should ask Gary, he’s not here to answer that. But I think that listening to Gary, given some of the correlations between Chinook and Wild Bill it’s definitely a confidence builder if it works and it's key to that so…

Dan McSpirit - BMO Capital Markets

Okay. Yeah, likely the second half of ’08.

Roland Burns

Yeah I would say it’s kind of mid-year probably maybe to the third quarter, but again their plans are pretty fluid kind of based on what happens in the field.

Jay Allison

Particularly the instance - they operate 98% of what they own and particularly that play. I think, as Roland said, you need to see that Chinook is a clear winner and that will push him one way or the other toward drilling or look like.

Dan McSpirit - BMO Capital Markets

Okay. And then turning to Comstock, you talked about the Bell number, number 11 your first horizontal, it’s fitting your type curve, it’s early yet, but what do you think that translates into an EUR?

Roland Burns

Well right now we’re estimating about close to 4bcf.

Dan McSpirit - BMO Capital Markets

Okay.

Roland Burns

And we’re between three-five to four, that’s the way it’s looking right now Dan.

Jay Allison

And that well was 4.8 million.

Dan McSpirit - BMO Capital Markets

Right, right. Okay. Great, great. And then one last question on Bois d’Arc, more strategic than anything. What would prompt you to revisit the sale of Bois d’Arc in 2008 or a later period?

Roland Burns

Well, Dan, I don’t think we would plan to put the company up on the market in a formal method like we did last year in 2008. I think that a lot of people know the situation of Bois d’Arc and really would be something for another party to initiate something on it. So we’ve got to focus the company on the growth and improving, shortening the reserve life, like Kim said and building the reserves and really focus on some of the lower risk opportunities that it has there. At the same time, test some of these high risk projects.

Dan McSpirit - BMO Capital Markets

Got it.

Jay Allison

And another thing, I think you create a more valuable Bois d’Arc, I mean they drilled a Butch Cassidy, but it's hard to give value when it's not producing so you produce it. Same with the M-8 water floods, the same way with (walla) - you produce it and you start proving up some of the value there and you create a more valuable Bois d’Arc by maybe having fewer shares or by having no debt, and particularly by having a higher production rate, so hopefully it's even a more appealing company.

Dan McSpirit - BMO Capital Markets

Okay, got it, thank you.

Jay Allison

Thank you, Dan.

Operator

Your next question comes from the line of Tim O’Toole with Delta Management. Please proceed with your question.

Tim O’Toole - Delta Management

Hi guys, and nice job, things are really evolving well. I wanted to go through a couple things and make sure I’m on the same page though. Could you break out what your all-in finding in development costs would’ve looked like without the Shell acquisition, which was at the end of the year? And if you just go on a straight crude preserves basis and maybe you could talk to that also, it looked like three or something and, but if you look at some of the potential reserves that are there that you’ll be going after once you start the drilling program up, we’ll look back and it’ll be a much lower number so could you parse those out for me on the F&D costs for the year?

Jay Allison

Do you want to do that Roland?

Roland Burns

Yeah, Tim I’d have to give you some more exact numbers later on maybe if you call back, but just to kind of give you a feel for those numbers.

Tim O’Toole - Delta Management

Yeah. That’s all I really wanted to know, no science project, right?

Roland Burns

Yeah, I think the all-in cost for the Shell acquisition was about $2.40, which is a little lower than the total all-in cost for onshore which was $2.79 for Mcfe.

Tim O'Toole - Delta Management.

I got you. Okay. So you did put some of the prospective reserves that you had to go out, and you know they’re there, it’s just a matter of hitting them, into the mix.

Roland Burns

The reserves on Shell are proved developed, so the other reserves that we have identified are not a part of that number yet.

Tim O'Toole - Delta Management.

Oh they’re not, okay.

Roland Burns

When we had out external audit of the Shell numbers, the numbers actually went up a little bit. One, because we are in a stronger price environment, and two, the producing wells were just really performing well and so we end up with a little higher reserves than what we originally announced at the acquisition. But we haven’t at all booked any undeveloped reserves yet on Shell. We are going to wait until we drill the wells.

Jay Allison

We had, Tim, about 58 Bcfe, and we ended up with 70 Bcfe. That’s the difference in your number.

Tim O'Toole - Delta Management.

Oh that’s, okay, wow, that’s just…

Jay Allison

92 Bcfe of probable, possible, and prospective.

Tim O'Toole - Delta Management.

Great. Okay. That’s actually helpful and I’m sure you put that up on one of the reserve statements or something earlier but I didn’t remember that.

The other thing that might be helpful also around South Texas in general, but really about the Shell properties, once you get going there, could you give us some sort of a sense for what range we could project well cost - well and completion cost - and the kind of size of reserves you’ll be looking for there. Ex going to deep Wilcox or something - it sounded like there was some kind of interesting potential things and if you experiment find something there then that could actually open up in ’09 a whole incremental high impact program for your onshore business there. But just kind of the more bread-and-butter wells under the Shell properties where the targets are and the sizes that you’re going after.

Roland Burns

Right. The estimated drilling complete costs for those wells is around $5 million and the simple reserve target numbers to keep in mind for those wells is anywhere between 5 and 10 Bs.

Tim O'Toole - Delta Management.

5 to 10 Bs. Wow. Well that’s really good in terms of F&D costs once you start booking them

Jay Allison

Tim, let Mack tell you a little bit about the deeper tests. We’ll drill four wells and one will be a deeper test, so it could be a bust. But you might go into that…

Mack Good

Sure we have a deeper Wilcox objective at below 19,000 feet we want to test toward the end of the year, and that’s going to be a $10 million type well to drill and complete. Right now on the timeline, we’re looking at probably an October or November spud. It’s going to be a 60-day well to drill. But that kind of potential is well north of 20 Bs.

Tim O'Toole - Delta Management.

Let me ask you there also though, let’s say you spend the 10 million on the well, you’ve still got the shallower target above that, is that correct?

Mack Good

Well, that’s what we’re trying to do, to be honest with you. We’re trying to stack the shallow opportunities to allow us to drill deep and still have those bailout zones. You’re exactly right.

Tim O'Toole - Delta Management.

And now there’s two ways to look at it. I don’t know how this actually works operationally, but if the deep test really is not terribly successful in that zone though, the higher zone is actually still available to complete and bring on line, is it not?

Mack Good

Yes, absolutely right.

Tim O'Toole - Delta Management.

Okay, so your F&D relative to the rest of the targets there goes up, but it’s still actually very economic potentially even if that’s a miss.

Mack Good

Exactly.

Tim O'Toole - Delta Management.

The second order question is then, if it’s successful, you could complete produce out of that deep zone, probably would want to isolate the upper zone though I would think. But then can you go back and do a re-complete even though it’s still a fairly deep target I think, and whether it’s six months or 18 months down the line, mingle those zones. Does that work?

Mack Good

Yes. And another alternative would be to dual the well.

Tim O'Toole - Delta Management.

Obviously if you find both zones it’s perfectly economic to do that. I’m just thinking about bailout also, if an inventory evolves in that direction, it’s kind of an interesting way to do it and kind of be both efficient and then have good solid production performance as opposed to something that has huge early declines and then you have to peddle hard to keep up. You wind up then doing a workover in whatever it is, eight months or 15 months or something and then bringing both zones online.

Mack Good

You’re right.

Tim O'Toole - Delta Management.

Okay, so that’s it.

Jay Allison

The interesting thing Tim about the Fandango field discovered in the late seventies, early eighties, some of those wells came 40 Bcfe. And in the second generation of seismic, they came in like 15 Bcfe and today they're this 5 plus Bcfe. But it is a really exciting field that’s been around quite a while, and…

Tim O'Toole - Delta Management.

And it's not to say that some of those targets are actually aren't still there, it's just because things were not as precise on the seismic basis that long ago.

Jay Allison

And the reason we comfortable with Shell was again you look at the G&G operations group and reservoir group and we were very successful at Las Hermanitas, we were very successful at Javelina. Again, it's confidence builder in the South Texas group and then we end up with Shell, so it's why we think '08 is really set to be a great year.

Tim O'Toole - Delta Management.

And then moving to - well actually one quick question on the Texas property, the Shell properties. Obviously you want to go in there and study the data before you start throwing holes in the ground, because they're a little more expensive etcetera, at the front end. Although if you're successful they should be very economic. But ultimately, you're targeting four wells there. But ultimately, it would be interesting to see you get more aggressive. What would it take to get the light bulb to go on there and say, okay, let's go forward and spend a little bit more money? Could it be by the second half of '08? Or are you really going to cook through those four wells and the deep target and then see what you have and then really lay that program into '09?

Mack Good

Well, the timeline for the drilling program out there really starts in April of May and as you said, you want to thoroughly evaluate the seismic before you start turning it awry with the drill bit. So, taking 45 days to drill the wells and then you'd want some production to confirm performance. I can't see us really being overly - to much more aggressive than we already have on our plan sheet, to be honest with you.

Tim O'Toole - Delta Management.

Okay, so just the way the timeline lays in, it doesn't make any sense even thinking about getting more aggressive or even laying those plans in until the fourth quarter or as you go into '09 anyway.

Mack Good

Absolutely right.

Tim O'Toole - Delta Management.

The other thing I wanted to try to get straight in my head is on the East Texas / North Louisiana drilling program, I think you mentioned 74 wells across $150 million. But I was writing fairly quickly. Could you - the three higher impact zones, what was the mix of wells, those zones, and then some of the more, I hate to say generic, but the more generic Cotton Valley verticals?

Mack Good

Well we've got Waskom scheduled for eight wells. Logansport we're scheduling 34 wells, Hico Knowles, we've got at 16 wells. And there's some timing differences here about spudding and so forth. And working with the rigs, we have five rigs dedicated to East Texas. That does not include a rig that we are bringing in to drill horizontal. Waskom wells.

Tim O'Toole - Delta Management.

Okay, so that's interesting. So the vast majority of those wells, of the 74 wells, are actually in those higher impact zones. And that was one of things that I thought would be useful to spend some time on, because one of the things that I think that I've noticed over the last three years that I've been in there and tracking you guys, is that in '06, it seems like you had a blanket program, we'll drill anything in the Cotton Valley, virtually everything is vertical. In '07, some time early in '07, probably before the middle of the year but not much before the end of first quarter. It seemed like you started to move the dial over and say, hey, let's high-grade the drilling inventory and really look at better ROI projects, and look at the CapEx budget as more finite.

And as I look at this program for '08, I don’t know if you would be willing to put target ROI bands against those three different areas but against doing a stock Cotton Valley well that you might have drilled when you were getting really busy and getting rigs on in '06, which could have been 0.6, 0.8, 1 Be per well and an ROI that might be okay at let's say 15, 20, 25%. Some of the ROIs on some of these projects are 50, 100, maybe 100 plus and then you don't even want to venture a guess. Could you help, and am I right, in seeing and tracking that evolution over the last three years? It seems like you've turned the dial a lot in terms of what you can really do in getting in the return profile across the Cotton Valley which has some cats and dogs and some really interesting prospects.

Mack Good

I think you've accurately described what's happened with our drilling program. One additional note would be that we've in '06 drilled a number of wells to test acreage that we acquired through the Insight acquisition and of course those wells were in previously untested regions. So a number of those wells fall into that category. But then as we drilled through '06 we continued to high-grade and target the better performing regions. We internally do look backs in evaluating projects performance versus expectation. And that allows us to continually process that information so we can target the higher return regions. And that's what you are seeing in '08.

Operator

There are no further questions at this time. I will now like to turn the call back over to Mr. Jay Allison for any closing remarks.

Jay Allison

I guess my only closing statement would be, 2008 is off to a really good start and I want to highlight the fact that this 15-20% production growth that we expect to achieve in '08, it should be achieved by staying within our cash flow. And I think that's important to have double-digit growth in production by staying within your cash flow. That's important. And we'll continue to keep our strong balance sheet. It's been a really wonderful call, and thank you, appreciate it.

Operator

Thank you, for your participation in today's conference. This concludes the presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Comstock Resources Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts