Comstock Resources: Good Quarter, Strong Reserve Growth for 2009

| About: Comstock Resources (CRK)
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It’s been awhile since I wrote about Comstock (August 2007) and much to my chagrin, other than the occasional mention, the company simply fell off my radar, in favor of other shiny, but more leveraged, baubles. I want to rectify that now.

CRK Reports Ho-Hum 4Q08 Results; Chops Budget; Increases Focus On Haynesville.

  • The 4Q Numbers:
    • Production: 164 MMcfepd (previously disclosed)
    • Revenues of $100.1 mm vs $107mm expected
    • EPS of $0.22 vs $0.31 expected
    • CFPS of $1.77 vs $1.55 expected
  • Budget: Falling. On January 5, CRK announced a budget of $450 mm with the vast majority ($399 mm) focused on East Texas and North West Louisiana (including 43 planned horizontal Haynesville Shale wells). Tuesday night’s budget has fallen to $366mm with 31.4 net wells planned for the H.S. out of a total of 41 planned company-wide. This is down from 2008 drilling levels of 136 wells.
  • Operational Update:
    • Haynesville: 2 wells to date, IP of 9 and 14 MMcfepd, decent, not world class
    • 8 more wells in progress (could have results from several of these in the next month).
    • 70,000 net acres in the H.S.
  • Guidance: 62 to 67 Bcfe or 7 to 15% growth on 2008 on an apples to apples basis.
  • Nutshell: 4Q results were light on the top line due to lower than expected prices. Going forward, the company looks quite a bit different with a smaller budget that is highly focused on the Haynesville wells. The bears are watching.

Conference Call Follow Up Thoughts:

  • A well attended, hour and forty minutes conference call

  • Focus on transitioning from Cotton Valley to higher return Haynesville Shale drilling. The company will focus on getting acreage into held by production status. The company won’t be getting into defining appropriate spacing this year. The company could grow faster but why bother at these gas prices.

  • Balance Sheet Strong and Likely To Stay That Way:
    • It is very unlikely that an equity deal will be seen in the near or medium term. There has been no deal since 2003, and is very stingy with the share.
    • There is no desire to draw down the revolver, with $555 mm available now. The company doesn’t see taking availability below $300 to $350 million.
    • The debt to total cap is low, at 17%.
    • There is not a lot of interest in M&A at this time.

  • Reserves: 582 Bcfe (90% gas) as of year end 2008:
    • Haynesville Shale well type curve of 5 Bcfe is probably light, and the company said it hopes to get to 6 Bcfe per well but the company is playing it safe with the numbers.
    • The company put potential reserves on its 70K acres in the H.S. at 3.3 Tcfe.
    • If you look at the 31 net wells the company plans for 2009, Haynesville completions can push you toward reserve adds of 150 Bcfe using its numbers and this can close on 200 Bcfe (gross) in additions if:
      • gas prices rise in the 2H09 allowing it to run a 7 rig program instead of the 5 currently planned or,
      • the company appears to be bagging the Street on the well costs (at $319 mm for the Haynesville part of the budget the wells run an awfully high $10.2 mm a pop). Get that to $8 and suddenly you have another 9 wells (or 45 Bcfe gross). There is no doubt some gathering costs in the $319 figure but not $2mm per well.
    • Add to that a couple of Wilcox tests in the Fandango field in S. Texas (call it 20 Bcfe total), and you could have net reserves of around 130 to 150 for 2009
    • It could see reserve growth of 15% and 2009 reserve replacement of 225+%.
    • TEV/ Reserves: $3.50 / Mcfe, which are decently priced and set to fall to a pretty low $3 per Mcfe by year-end.

  • Hedges: 10% of 2009 hedged at $8.20. Would like to see this as a higher number but the company is kind of anti-hedge.
  • In A Nutshell: The company had a good quarter, year and conference call. Conservative management, with little chance of an equity or debt deal, which is refreshing amongst its Haynesville poking brethren. Strong reserve growth for 2009 without the need to panic drill the play to hold onto acreage, but the strong balance sheet will allow the company to beef up its program quickly, should prices moves back up. The company is probably bagging the Street on well costs (looks like a sizable over estimate at $10mm ish per well) as well as on reserve adds, so we could see some upside surprise to reserve additions with the 2009 report.