Earnings Call: Q2 2019

Aug 7, 2019

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Comstock Resources Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Jay Allison. Please go ahead. Chris, thank you, and good morning. Good morning, everyone. I would be remiss this morning not to open this call with a thank you to the equity and debt holders and our sponsors of Comstock for really walking with us the past 12 months to create the becoming a 16% stakeholder and to Jerry Jones, who in the past 12 months has personally invested around $1,100,000,000 in Comstock, including purchasing 50,000,000 newly issued shares of Comstock common stock at $6 per share about 3 weeks ago. That's a $300,000,000 purchase. The Jones family now own a 75% stake in Comstock, and without their backing, we wouldn't have the results today. So thank to all of you. Welcome to the Comstock Resources Q2 2019 financial and operating results conference call. Today, we will review our Q2 2019 earnings and drilling results as well as update you on our acquisition of Covey Park Energy, which closed on July 16. You can view a slide presentation during or after this call by going to our website atwww.comstockresources.com and downloading the quarterly results presentation. There, you'll find a presentation titled 2nd Quarter 2019 Results. I am Jay Allison, Chief Executive Officer of Comstock, and with me is Roland Burns, our President and Chief Financial Officer and Dan Harrison, our Chief Operating Officer. Please refer to Slide 2 in our presentation and note that our discussions today will include forward looking statements with 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. Now if everyone return to Slide 3, the 2019 Q2 summary. On Slide 3, we cover some of the highlights of the Q2. For much of the first half of this year, we have been very, very focused on the transformative Covey Park Energy acquisition, which we closed on July 16. Combining Comstock and Covey Park, created the basin leader in the Haynesville shale, which a premier natural gas basin in North America with superior economics given its geographic proximity to the Gulf Coast. The operations of Covey Park will be included for 77 days of Q3. Our HaynesvilleBossier Shell drilling program continues to deliver strong production growth. Comstock and Covey Park have drilled and completed a combined 174 operated wells since 2015, which have an average IP rate of 23,000,000 cubic feet per day. Our Haynesville shale production in the 2nd quarter was up 83 percent from the Q2 of last year and up 19% from the Q1 of this year. We have also been driving down our well cost in the Haynesville. To date, our well cost per lateral foot are down 9% from 2018 cost. Our strong natural gas production growth was offset by weaker natural gas prices in the 2nd quarter. For the quarter, we reported oil and gas sales of $130,000,000 adjusted EBITDAX of 93,000,000 dollars operating cash flow of $66,000,000 or $0.63 per share and adjusted net income of $12,700,000 or $0.12 per share. If you would flip over to Slide 4. Slide 4 is a good summary of the Covey Park Energy acquisition. The combination of the 2 companies creates a company with substantial scale in the Haynesville. We produced over 1,200,000,000 cubic feet of natural gas equivalent per day in the second quarter and generated annualized pro form a second quarter EBITDAX of $926,000,000 We'll have 5.4 Tcfe of SEC proved reserves and 290,000 net acres in the Haynesville. We will have 2,000 net drilling locations, which gives us over 20 years of inventory. Our second quarter pro form a unit cost structure is only $0.72 per Mcfe, which is one of the lowest in the industry. And our 2nd quarter pro form a EBITDAX margins of 78% is one of the highest in the industry. With the merger, we have changed our leadership team with half of our department heads coming from each company. Our department heads are selecting best practices from each company and has put together their team with a focus on creating an efficient low overhead company. With favorable proximity to the Gulf Coast demand and over 500 miles of bone gathering infrastructure, we have higher natural gas price realizations. The Covey Park assets have higher gas price realizations and Comstocks, and we are currently negotiating new gathering contracts and marketing agreements to give us greater access to the premium Gulf Coast markets. We are currently consolidating the Dallas area corporate offices and are implementing a 41 percent reduction to the combined corporate staff, we are targeting go forward annual G and A of $30,000,000 which is about half of the combined annual G and A of the 2 companies of $61,000,000 in 2018. With the merger, we are adding data scientists to staff and implementing tailored drawdown for every new well, which we feel will further improve the economics of the Haynesville Wells. Lastly, we are very focused on the balance sheet. Our leverage metrics immediately improved as a result of the transaction. As Roland will go over later, we plan to reduce the planned drilling activity by releasing 1 to 2 operated rigs in the near term. This will protect our balance sheet and liquidity and ensure we can hit our target to generate free cash flow in 2020 divestitures of our non core assets in order to pay down our debt and improve our current liquidity. Now I'll have Roland cover the financial results in more details. Roland? Thanks, Jay. Slide 5 illustrates the production growth generated by our HaynesvilleBossier Shale drilling program. In the Q2 of this year, production from our HaynesvilleBossier wells is up 83% to 416,000,000 cubic feet of gas per day as compared to the 227,000,000 per day that we produced in the Q2 of 2018. Production this quarter was also up 19% from our 1st quarter production rate of $349,000,000 per day. We put 8 net wells on production in the quarter after adding 6.6 net wells in the Q1. On the slide, we're also showing Covey Park's HaynesvilleBossier production. And in the Q2, Covey Park's HaynesvilleBossier Wells produced $694,000,000 per day, which is an increase of 43% over the $484,000,000 per day that they produced in the Q2 of 2018. Covey Park put 6.1 net wells to sales in the 2nd quarter after adding 11.7 net wells in the Q1. On a combined basis, we produced 1,100,000,000 cubic feet of net production in the Haynesville in the 2nd quarter. In the Q3, we expect to see the rate of growth slowing just a little bit as on a combined basis, we're going to put 10.5 net wells to sales in the 3rd quarter. Slide 6 recaps what production we had shut in for the quarter. And we're pleased to see that second quarter shut in volumes decreased to 4%, and then most of the shut in volumes are almost 80% related to pipeline curtailment for either maintenance activities or repair activities or in a few instances where we had limited capacity to flow our wells at full rate. We are working to expand our options for our transportation, mainly in our Northern Haynesville operations that will bring this percentage down further in the future. On Slide 7, we detail our producing costs per Mcfe produced. Operating cost per Mcfe fell to $0.68 in the 2nd quarter as compared to the Q1 rate of $0.74 Gathering costs were $0.23 production taxes averaged $0.13 and other field level operating costs were $0.32 Looking ahead, our producing costs will improve further with the Covey Park operations combined in with ours. Pro form a for the Covey Park merger, operating costs fall to $0.65 in the Q2, and that's before we get the benefit of the synergies and cost savings we expect to create from combining our field operations. Breaking down the pro form a costs, gathering costs were $0.27 production taxes averaged $0.08 and fill level costs were $0.30 We do expect some improvement to our gathering cost rate as new contracts that we've just finished up negotiating will create additional efficiencies and give us a little bit lower overall gathering rates. And we also hope to see some efficiencies in combining our field level offices where they make sense to combine. On Slide 8, we detail our corporate overhead cost per Mcfe. Our G and A cost per Mcfe fell to $0.14 in the 2nd quarter as compared to the Q2 of last year of $0.23 and our Q1 rate of $0.19 And one of the more significant benefits of the merger is the improvement we'll have to this metric. On a pro form a basis, we have the overhead per Mcfe in half to only $0.07 per Mcfe with the reduction in the duplicate personnel from the 2 organizations in the 2 corporate Dallas offices. With this very low overhead rate, we will have one of the lowest cost structures in the industry. Our merger is a great example of the benefit of combining the 2 best shale operators in the same basin and the value that can be created from a combination. On Slide 9, we detail the depreciation, depletion and amortization per Mcfe produced. This noncash expense increased to $1.04 per Mcfe in the 2nd quarter as compared to $0.99 in the 1st quarter. On a pro form a basis, we see our DD and A rate coming back down and we think it will average somewhere around $0.86 per Mcfe produced. Slide 10 summarizes the Q2 financial results that we reported this morning. Our production in the 2nd quarter was 45.1 Bcfe, which includes 695,000 barrels of oil. This is 103% higher than our production in the Q2 of 2018, and it's 19% higher than what we reported for the Q1 of this year. Our oil and gas sales were $130,000,000 which was 108% higher than the 2nd quarter of last year. Weaker oil and gas prices offset some of the impact of the higher natural gas production. In the quarter, our realized oil price was $52.12 per barrel, and our realized gas price was $2.29 per Mcf. Differentials for our natural gas prices continue to be wider this quarter than normal. For our natural gas, we sold more than half of our production in the quarter in the daily market. The average day prices were $0.11 less than the 1st of month index reference price for Henry Hub gas. In the quarter, our EBITDAX came in at $93,000,000 which was 110% higher than the Q2 of last year. Operating cash flow was $66,000,000 which was up 151%. And we reported adjusted net we reported net income of $21,400,000 or $0.20 per share. But if you exclude the unrealized mark to market gain on our hedge contracts of $12,800,000 in the quarter and the $1,400,000 and cost we expense relating to the merger, our adjusted net income per share was $0.12 per share for the quarter. On Slide 11, we summarize our financial results for the 1st 6 months of this year. Our production for the first half of the year was 83 Bcfe, including 1,500,000 barrels of oil. This is 84% higher than the same period in 2018. Oil and gas sales were $262,000,000 which was 92% higher than last year, and our oil prices for this period averaged $48.71 per barrel, and our realized gas price averaged $2.55 per Mcfe. Adjusted EBITDAX was $190,000,000 or 94% higher than last year, and operating cash flow was $137,000,000 up 120% from 2018. We reported net income of $35,000,000 for the 1st 2 quarters or $0.33 per share. And if you adjust that to exclude the unrealized mark to market loss on the hedges and the merger transaction cost, that ever would have been $0.34 per share for the 1st 2 quarters of this year. On Slide 12, we cover the operating results, which are pro form a for the Covey Park acquisition. So pro form a production for the Q2 was 113 Bcfe with oil and gas sales of $312,000,000 On a pro form a basis, our natural gas price improved to $2.54 per Mcf. For the 6 months for the 1st 6 months of this year, our pro form a production was 214 Bcfe with oil and gas sales of $622,000,000 The pro form a natural gas price for this period was $2.67 per Mcf. One of our major priorities is protecting and enhancing our natural gas price realizations, while at the same time looking to improve flow assurance for our growing production in the basin. On Slide 13, we outlined some of the initiatives we're undertaking in marketing our gas. We just put new gathering contracts in place, almost 75% of our Haynesville production that will lower our current gathering costs as well as providing for additional capacity to support the drilling plan. We are also negotiating to improve our access to premium Gulf Coast markets and are looking to tie our sales to these indexes, which have much tighter correlation to Henry Hub than in basin hubs at Perryville and Carthage. Twothree of the acquired Covey Park production is marketed off these premium Gulf Coast indexes, which is why their net realized gas price before hedging was $0.22 higher than Comstocks in the 2nd quarter. Our pro form a natural gas price realization improved by $0.12 per Mcf in the quarter when we are combined with Covey Park. We also have a near term goal to market more of our natural gas of 1st of the month index pricing, which also will improve the correlation of our realized prices to our hedges. And speaking of hedges, on Slide 14, we summarize the hedge position that we have in place for our oil and gas production. For the rest of this year, we have about 717,000,000 cubic feet per day of our gas production hedged and about 3,250 barrels of our oil hedged. And our plan is to continue to keep 50% to 60% of our production hedged on a rolling 12 month basis. On Slide 15, we recap our spending in the 1st 6 months on our drilling and development activity and what we expect to spend on drilling for all of this year, including drilling on the Covey Park assets. So the first half of this year, we spent $182,000,000 on development activities. Dollars 1 $165,000,000 was in the Haynesville Shale Program. We drilled 20 or 15.3 net operated horizontal Haynesville wells. We also completed 8 operated wells or 5 2 net wells that we drilled in 2018. We spent $16,000,000 drilling 4 or 2.2 net Eagle Ford oil wells. And for the entire year, we're estimating that we'll spend $538,000,000 on capital activity, which is basically running 8 to 9 operated rigs in the Haynesville. In response to the lower natural gas prices, we're now working on a new capital plan, and we expect to release 1 to 2 of these drilling rigs before the end of the year. For each rig we release, we can reduce capital expenditures next year by $75,000,000 to $85,000,000 which would generate free cash flow of $40,000,000 to $50,000,000 for each rig that we release. So dropping 2 rigs would add $100,000,000 of free cash flow to 2020 and will help offset the impact of the lower natural gas prices we're seeing right now. With a smaller drilling program, our expected natural gas production growth in 2020 and we're looking at this growth on a pro form a combined basis of the 2 companies, it would be dialed back from the 15% range that we discussed when we announced the Covey Park acquisition to 10% to 11% if we release 2 rigs. Again, we'll be working on we're going to optimize our drilling program. And then before we when we announce the Q3, we'll have a new approved budget, which we suspect will be lower than the budget that we had announced back when we announced the Covey Park acquisition. On Slide 16, we present our balance sheet at the end of the second quarter and then also what it looks like pro form a for the closing of the Covey Park transaction, which happened 16 days after the end of the second quarter. So we had $47,000,000 in cash at the end of the quarter and $1,300,000 in total debt comprised of a 5 year credit facility and the $850,000,000 in senior notes. This was pretty much the same balance that we had outstanding at the end of the Q1. We ended the quarter with $277,000,000,000 in total liquidity. So after closing the merger on July 16, our pro form a debt is $2,700,000,000 with $1,260,000,000 outstanding under a new 5 year credit facility and $1,475,000,000 in senior notes. Our equity increased to almost 1,500,000,000 dollars including the $385,000,000 of the new preferred equity that we issued, and our liquidity improved to $287,000,000 I'll now turn it over to Dan to kind of report on the drilling results for the quarter. Thanks, Roland. On Slide 17, you'll see our new acreage map highlighting our new 293,000 net acre position as a result of the CohBar acquisition. Since reentering the play in 2015, the newly combined company has now drilled and completed a total of 174 operated wells with an average IP rate of 23,000,000 cubic feet a day. To date, this year, the combined companies have drilled 44 gross operated wells and plans to drill a total of 79 gross operated wells by year end, with an average lateral length this year of 8,000 feet. These wells have been and continue to be very successful. Over on Slide 18, you'll see location of the 18 new operated wells from both companies that have been completed since our last update. This includes 10 new wells completed by Comstock and 8 new wells completed by Cubby Park. The green markers denote the latest Comstock completions and the red markers denote the latest Covey Park completions. All 10 Comstock wells were completed using our latest Gen 3 frac design, which is using 3,800 pounds per foot of sand loading at 15 to 20 foot cluster spacing. The lateral lengths on these Comstock wells range from 4,426 feet to 11,319 feet with an average lateral length of 6,970 feet. The initial production rates range from 22,000,000 to 28,000,000 cubic feet per day with an average of 24,000,000 cubic feet a day. The 8 new Covey Park wells completed in the quarter were completed using an average sand loading of 3,400 pounds per foot and a 24 foot to 40 foot cluster spacing. The lateral lengths range from 5,209 feet to 9,320 feet with an average length of 7,702. The initial production rates range from 12,000,000 to 30,000,000 cubic feet a day with an average IP of 21,000,000 cubic feet a day. At this time, we have 8 additional wells between both companies that are in the process of being completed. On Slide 19 Slide 19 is a summary of our new expanded Haynesville Mid Bossier drilling inventory. With the Covey Park acquisition, our total gross operated inventory has now increased to 2,387 locations with an average net interest of 76% or 1823 net operated locations. This represents 30 years' worth of drilling based on our current drilling activity levels. The gross operated inventory consists of 86610,000 foot laterals, 9107,500 foot laterals and 611-4500 foot laterals. The 2,387 gross operated locations consist of 1450 Haynesville locations and 937 Mid Bossier locations. In addition to the 2,387 gross operated locations, we have 1535 gross non operated locations with an average net interest of 13% or 205 net non operated locations. The company closed on a significant acreage trade at the beginning of the Q2, which reduced our 4,500 foot well inventory by 25 wells and increased our 7,500 foot well inventory by 20 wells. We currently have another acreage trade in the works that will further add to our operated core inventory and increase our overall lateral lengths. In the future, we will continue to pursue acreage trades that will further consolidate our core acreage position and enhance our lateral lengths. I will now turn it back over to Jay to summarize our outlook for the rest of the year. All right. Again, excellent reports from Roland and Dan. Thank both of you. If you look at 2019 outlook, go to Slide 20, we summarize our outlook for this year. For the rest of this year, our primary focus is to complete the integration of Covey Park into Comstock. Our goal is to have that substantially complete by year end, and it is going very well as I discussed earlier. We're confident that we'll deliver on the substantial value adding synergies that the combination of the 2 Haynesville shale operators can offer. Our Haynesville drilling program continues to generate economic returns even in the low natural gas price environment we're in today. Combined with Covey Park, Comstock now has the industry leading low cost structure and natural gas well economics. The drilling program is delivering production growth this year, as Dan said. Our natural gas production is expected to average 1.1 to 1.2 Bcf per day in second half of this year, with Covey Parks production being added for 77 days of the third quarter. Our oil production is expected to average 7,500 to 8,500 barrels per day in the second half of twenty nineteen with new production from 4 new wells being added in the Eagle Ford starting in early July. These 4 wells had an average per well IP rate of 1034 barrels of oil equivalent. We will put in a conservative operating plan in 20, as Roland had described, that internally has funded the drilling program and will prioritize free cash flow generation over production growth. We are high grading our drilling program now and we'll look to drop 1 to 2 of our operated rigs in the Haynesville before the end of the year. We will continue to maintain an active hedging program targeting the next 12 months of production. And lastly, we will protect our liquidity, which is currently $287,000,000 and we'll look to enhance it with non core asset sales and free cash flow generation, so we can pay down our bank debt. For the rest of the call, we'll take questions from the analysts who follow the company. So Chris, turn it back over to you. Thank Chris? Yes, Jay. It was such a complete report today that I think we answered all the questions. We had a conference call 2 months ago, and Jerry was on the call and others were on the call when we announced the merger. Again, I want to thank you. It's a pretty heavy docket today at 10 There are 4 or 5 100 companies reporting. I want to tell you that we're going to continue to be consistent. We're going to continue to drill the low risk wells that have high return. We're going to be consistently strong. We've got some great legacy advantages. And again, the market that we're seeking is the Gulf Coast, which is the market with the greatest demand. So thank you for listening to the call and for exposing yourself to Comstock's story. We're disciplined and we don't plan on disappointing anybody. We're going to give you our best effort. So thank you for the morning. Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.