Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Comstock Resources Incorporated acquisition of Covey Park Energy 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. If anyone should require operator assistance during today's conference, please press star then zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jay Allison. Sir, please begin.
Perfect, Howard. Thank you. Good morning, everyone. It's a great way to start out a Monday morning. Thanks for gathering for the call today. With me today is Jerry Jones, our principal stockholder, Roland Burns, our President and CFO, John Jacobi, and Alan Levande, co-CEOs of Covey Park, and Richard Burnett, the CFO of Covey Park. With a slide presentation you can view during or after this call by going to our website at www.comstockresources.com and downloading the Covey Park acquisition presentation. If you'll go to slide two in our presentation and note that our discussions today will include forward-looking statements within the meaning of securities laws. While we believe the expectations of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. Most of you will go to slide three. Before that, I want to make an introduction comment.
The energy market has made it loud and clear at once. We've listened. Today, we check many of the boxes. First of all, we're combining two highly complementary businesses. We'll create a public company with significant size and scale in the Haynesville Shale, thus opening the doors wide open for opportunities to enhance shareholder value. Secondly, we're combining two strong operating teams that, when combined, has drilled over 500 Haynesville Shale wells. We end up with proven operations in quality rock. Third, the combined companies create industry-leading margins and free cash flow to drive leverage under two times by 2021. We understand that we need to reduce our debt leverage. We hear you loud and clear. Finally, I'm looking at the Covey management, then John, and I'm looking at Roland and Jerry.
Over an eight-month timeframe, and I think it's really important, eight-month timeframe, both Comstock and Covey evaluated each other thoroughly. We vetted each other's acreage, our drill sites, our gas gathering, and marketing arrangements. All areas passed rigorous due diligence. The reason is both companies are very good companies standalone. We liked who we were until we met Covey. Covey liked who they were until they met Comstock. What happens is the management from both companies agreed that a merger would create the blue ribbon company, and a blue ribbon event, which is what we have today. As one analyst earlier this morning said, "How about them Cowboys?" Think that's appropriate. Jerry Jones, our largest shareholder, with cumulative investment of almost $1.1 billion, along with Denham Capital, a leading private equity fund backing Covey Park, supported the merger and made it happen.
I want to thank both of them, which is Jerry and Denham, as well as Covey management and really our management. John, Alan, Ricky, I want to thank the three of you, and I'll ask you for comments later on. If we go back to the slides, we are very excited today to announce that we have entered into an agreement with Covey Park, Denham Capital, and Jerry Jones to merge Covey Park Energy with Comstock to create the basin leader in the Haynesville Shale. The Haynesville Shale in East Texas, North Louisiana is one of the premier natural gas plays in North America, with superior economics over most other basins, given its proximity to Henry Hub and the growing Gulf Coast market.
With this transformational event, we will have the leading per-unit producing cost structure and EBITDAX margins, which when combined with strong economics from our Haynesville drilling program, we think we have all the tools to grow both our production and reduce our financial leverage. Our plan is to fully fund our drilling program with operating cash flow and target a capital budget that will generate free cash flow, which can be used to reduce our debt. The proved reserves we are acquiring result in a 50% increase in our proved net asset value per share. This is before giving any value to an additional five-plus trillion cubic feet equivalent in upside beyond the proved reserves. This transaction is only, and I emphasize, only possible because of the support and investment by Jerry Jones. His investment of $475 million brings his cumulative investment in Comstock to almost $1.1 billion. Slide four.
Slide four is an overview of the merger transaction. Comstock will acquire Covey Park in a cash and stock transaction, which values Covey Park at $2.2 billion. The equity owners of Covey Park will receive $700 million in cash, $210 million in a new 10% perpetual convertible preferred stock, and 28.8 million shares of common stock. Jerry Jones is investing $475 million in the company, which brings his cumulative investment to almost $1.1 billion. He is purchasing 50 million shares of common stock for $300 million, which values the stock at $6 a share. He is also purchasing $175 million of the new preferred stock we are issuing. We will assume Covey Park's $625 million of 7.5% senior notes, and we will borrow $798 million under a new $1.5 billion bank credit facility to refinance their bank debt and redeem their preferred units and fund part of the purchase price.
Jerry Jones will own 75% of the outstanding common shares, and Denham Capital and the Covey Park equity owners will have 16%. At this time, Jerry, can you make a few comments about the transaction?
Yes, Jay, good morning. It's a great morning. I might be asked why, over the last relatively 18 months, two years period of time have I put $1.1 billion in this sector, in this industry. First of all, I believe these assets to be the best, the very best hydrocarbon assets, frankly, I'm going to reach and say the world. Where they're located, I'm talking about the Haynesville, where this gas is located, there are prolific reserves, proven ways to economically get them in pipelines and get them to the market. This was such an opportunity to aggregate the assets of these two companies that I just couldn't pass it up. I see many opportune ways that we can take this position, this free cash flow, these assets, and just make money. I drilled my first shale well. I was an investor in my first shale well.
I've been in the business for almost 40 years. I drilled in this basin three and a half years ago. I put in $600 million, I hear the stories about people investing and where's the money? Well, not only by the time that I got to Covey Park, that investment I had received back over $300 million, that's in 24, a little over 30 months. I fully intend to monetize every dollar that we're putting in the ground. Every time we drill a well, I know there are a lot of perspectives and a lot of ways to look at that, every time we drill a well in this area, in this Haynesville, I think I'm three times in my money, that's why I'm doing this.
Great to be on with you guys this morning and certainly open to any questions later in this call.
Yeah, I think at this time, I'd like to see if Alan has any comments since we got Jerry's comments. Alan?
Thank you, John. Thank you and good morning. It is really a pleasure for us to be here today. This is something, as you said, that we have been working on for actually close to a year. All of us at Covey Park, in conjunction with everyone at Comstock Resources, truly believe that this is just an absolutely fabulous transaction. It is the first key step in creating the transformation of the Haynesville. It's the first key step in a very important trend in consolidation in this as well as some other gas basins. We are just absolutely delighted to be a part of the broader team here.
We're delighted to be working with Jerry Jones and his team as well on this. We just believe that the company that we're in the process of creating can go on to do many bigger and better things while continuing to manage its balance sheet in a conservative financial approach. We are very pleased once again to be a part of it.
It's pretty incredible. Again, you've got to get the synergy that we're dealing with. This is not a normal merger. This is, you've got two great companies. Again, the management says we should consolidate. Then we approach Jerry, we approach Denham. It's the way it should be, because again, we're listening to what Wall Street wants because that's what we want, and that's what Jerry's always had. I'm going to ask John Jacobi if he wants to say something right now. John?
Hey, thanks, Jay. I can only say a ditto on both what Alan and Mr. Jones have said. We are very excited about the merger of these companies. To add to Jay's point, we've listened to the market as we travel around thinking about going public ourselves. They've asked us to consolidate. We think this is a great way to do that. It's good news for the basin, good news for the industry. We look forward to the partnership, relationship. We certainly intend to work with Comstock to build this company into being the greatest in its basin and one of the best in the country. Thanks, Jay.
John, again, you and Alan, I want to ask Ricky to say a few words second. We blended in this model over and over. We blended in the model to come up with what we think will happen in 2019, 2020. We've gone to 2021 and beyond. Ricky has worked really hard as the CFO of Covey Park with Roland. They've known each other for 20 some odd years. It's that type chemistry I want the market to see we're getting. Ricky, you have any comments before I go on the slides?
I don't, Jay. I guess I think what Roland said, the one thing I'd like the market to understand is there's been a lot of time and effort putting this together, we're real comfortable with where things sit, as they see the numbers come together, I think they'll be proud to have a piece of this and look forward to working with everybody as everybody's already articulated.
What you've just got, if you're on the call, you got a little bit of what Jerry Jones and Denham Capital has seen for eight months, that is the formation of a new team. I'll go back to script now. If you go back to slide five. Slide is a good overview of the new Comstock Resources, which results from the merger. The combination of the two companies creates a company with substantial scale in the Haynesville Shale. We will produce over 1.1 billion cubic feet of natural gas equivalent per year. Our annualized pro forma first quarter EBITDAX is about $935 million. We'll have 5.4 TCFE of SEC proved reserves, 290,000 net acres in the Haynesville Shale. We'll have about 2,000 net drilling locations, which gives us over 20 years of inventory.
We'll have the history-leading producing cost structure with an EBITDAX margin of over 75%. That compares with any basin, period. Especially important in the current environment that we'll have low cost and flexible gas marketing options. The combination creates significant synergies we focused on, including an expected annual savings of approximately $25 billion. The larger scale will also allow us to have lower costs from the service companies who drill and complete our wells. Lastly, our plan is to run Comstock Resources to generate free cash flow and continue to position our balance sheet to reach our goal of reducing our debt leverage to under two times by 2021. Slide six shows you our complementary Haynesville Shale acreage. You can see why the marriage happened. If you're looking at it, the red acreage is Covey Park, the blue acreage is Comstock Resources, now we're all one and the same.
Slide six is an overview of our extensive Haynesville Shale acreage. The 290,000 net acres shown on the map gives us about 2,000 net drilling locations. We have an average working interest of 77%. Much of the acreage is also prospective for the Bossier Shale. The map also shows the Ridge asset that we're acquiring, which is outside of the Haynesville Shale footprint but has significant upside in the deep Bossier Shale. Our Haynesville acreage is 94% held by production, so we have the flexibility to drill it when it makes sense for us. Slide seven will show you the scale of the company after the merger. We'll have a total of 374,000 net acres, with 293,000 net acres prospective for the Haynesville Shale and Bossier Shale.
We'll have 7.6 TCFE approved reserves with a PV-10 of $4.8 billion based upon the Society of Petroleum Engineers' definitions. SEC proved reserves are 5.4 TCFE with a PV-10 of $4.1 billion, with the difference being proved in developed wells that fall outside of the SEC 5-year rule. Pro forma first quarter production is 1.1 billion cubic feet of natural gas production per day. The company will have almost 2,000 net Haynesville-Bossier drilling locations. If you flip to slide eight, this is what both companies' management teams look like, which result in the call today. This is what the fight and it was all about. This is the outcome. This is the vetting of both companies. When we vetted it, we created slide eight.
It shows the impact of this transformational acquisition on our financial, operational, and credit metrics. Based upon the first quarter results of both companies, our daily production grows by 167% to 1.1 billion per day. Our first quarter 2019 annualized EBITDAX increases 141% to $935 million. The PV-10 of our proved reserves increases 171% to $4.8 billion. Our proved reserves increase 212% to 7.6 TCFE. Our lifting cost improved by 10% to $0.67 per MCFE. Our proved net asset value per share grows by 50%. Our leverage ratio improves from 3.4 times to 2.9 times, and the debt per flowing barrel declines by 22%. Slide nine details the almost 2,000 net drilling locations, with 1,271 have lateral lengths of over 5,000 feet, and 1,798 of the net locations are operated by us.
The map on the right shows you where we have drilled operated wells since 2015. I mean, this map shows you why we consolidated. Slide 10. If all the others are good, this is even better because we'll have the lowest cost in the basin. Slide 10 shows you that we have the lowest gathering cost in the basin at $0.26 per MCFE, which Jerry had mentioned earlier, and limited basis risk due to our proximity to the Henry Hub, our contract price off Henry Hub. We have access to an extensive gathering and transportation pipeline network, including 500 miles of company-owned gathering. We have no unmet minimum volume commitments and have little exposure to out-of-market gathering contracts, which are prevalent in the basin. Now with all that, I will turn it over to Roland Burns to go over some of the numbers. Roland?
All right. Thanks, Jay. On slide 11 in the presentation, this shows our best-in-class cost structure and really the low producing cost structure that Covey Park had is what really attracted them to us, because we think the two companies have had the best cost structure in the basin, and the combination is even a better cost structure. We will have the lowest cost structure of the public gas producers at $0.76 per Mcfe on a pro forma basis, including only $0.09 spent for G&A overhead. The pro forma numbers we're presenting do include expected G&A savings from the merger, but no other savings that we think we will achieve, including lower gathering costs that we hope to realize with the much larger volume of gas we're producing and other savings that we can find in operating cost.
In addition to the great cost structure, we also have the highest margin of the gas producers, which is also higher than many of the leading Permian companies at 76% at an EBITDAX margin. Slide 12 shows the combined reserves as determined by our third-party engineers. The SEC reserves that are reflected on the left side of the chart incorporate and honor the five-year SEC PUD rule, while the Society of Petroleum Engineers reserves are based on the same definitions, but they include undeveloped locations beyond the five-year SEC rule. We have 7.6 Tcfe approved reserves based on the SPE definition, and then 5.4 Tcfe using the SEC rules. The PV-10 is $4.8 billion of the proved reserves, or $4.1 billion if you incorporate the five-year rule on PUDs. Then 56% of our SEC PV-10 is PDP reserves.
On slide 13, we lay out on a high level our operating plan, both on a combined basis for this year, 2019, and then also for our very preliminary plans for 2020. As Jay mentioned, both teams spent a long time working on a consolidated drilling plan, which you see most of the benefits of that in 2020. We were able to really optimize the two companies' technical staffs on a combined basis. If you're looking at what we're doing on a combined basis this year, the two companies are spending $779 million, and they're drilling 71 net wells. We plan to reduce our spending a little bit on a consolidated basis in 2020, and our preliminary budget is to spend $695 million to drill 65.6 net wells.
Basically, we'll run 9 rigs in 2020, and the current plan that we've put on the table for now allows us to not only fund all our capital expenditures through operating cash flow, but also we're targeting to generate a significant amount of free cash flow that's available to pay down our debt. At a 260 type gas price long-term forecast, we think this plan that we have for 2020 would generate about $75 million to $100 million of free cash flow. On a pro forma basis, we expect the pro forma production for the combined company to be between 1.1 Bcfe a day to up to 1.3 Bcfe a day, and we think that grows around 15%, about 1.3 to 1.5 Bcfe per day under this particular capital program.
If we're wanting to try to keep our production flat in 2020 from where we exit 2019 at, we've calculated that we'll need to spend about $400 million in 2020 to keep production flat. That's the maintenance CapEx number that we've identified for the combined company. On slide 14, we recap our pro forma capitalization. We will have $4.1 billion of total debt and equity capitalization when the merger closes. Our total debt will be $2.7 billion, which will be comprised of Covey's 7.5% senior notes and our 9.5% senior notes and outstanding bank debt. We'll have no bond maturities until 2025.
The new five-year bank credit facility that were put in place will have a borrowing base of $1.575 billion, but we'll elect to use $1.5 billion of that borrowing base, and there'll be $1.268 billion outstanding when the merger closes. We also will have $1.4 billion in total equity. $385 million of the equity will be the new preferred, and we'll have over $1 billion in common equity on a book value basis. The common shares outstanding after the merger will be 184.3 million shares. Our liquidity remained relatively similar to where we had our current level. We'll still maintain $261 million of liquidity. On slide 15, we cover the new preferred stock that we're issuing in connection with the transaction. Part of the acquisition is being financed by this new perpetual convertible preferred stock, which is being issued to our two major stockholders.
The rationale for the preferred was to provide a very balance sheet friendly acquisition type financing. The preferred is being issued in two series. Series A is for $210 million, and it'll be held by Denham Capital and the other Covey Park equity holders. Series B for $175 million will be held by Mr. Jones. Both have a 10% dividend, which we'll pay in cash on a quarterly basis. Both of the series of preferred can be redeemed at any time by the company at face or liquidation value, plus any unpaid accrued dividends. Would ask you to note that the preferreds are not convertible for their first year that they're outstanding. If they're outstanding after a year, the holders can elect to convert them into common stock at $4 per share. On slide 16, we outline our financial strategy and our financial policies.
The cornerstone of our financial strategy is to drill with an operating cash flow and generate free cash flow, which we can then use to reduce our debt and improve our leverage. We also want to preserve our financial flexibility, and we can adjust our drilling and completion expenditures to slow our overall spending in response to market prices. Our overall financial goal is to achieve a leverage ratio of two times in 2021. Our best-in-class cost structure and high EBITDAX margin allows us to accomplish this goal, even in this current environment of low natural gas prices. Of course, the last element of our financial policy is to maintain an active hedging program targeting to have 50%-60% of our forecasted production hedged. A little detail on the hedges we have in place for the combined company, you can see that on slide 17.
We do have hedges covering two-thirds of our total combined 2019 gas production and about 44% of our oil production. In 2019, we do have an attractive gas swap position that fixes the price at $2.94, and then the balance of our hedging is done in costless collars. Our target is to have 50%-60% of the projected production hedged on a rolling 12 months basis. Now I'll turn the call back over to the operator, and we'll see if there's any questions from the research analysts that follow the stock. We'd ask that individual investors call the company directly, and we can answer their questions directly.
Howard, we open it up to the analysts that covers.
Thank you, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star then one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then one on your telephone keypad. Our first question or comment comes from the line of Ron Mills from Johnson Rice & Company. Your line is open.
Morning, guys. Congratulations on getting this deal done. First question relates really to the map on slide six and the overlapping acreage position, and how that moves over to page nine with the inventory. Just curious if you could compare the two in terms of longer laterals. Are there similar percentages in terms of 7,500 and 10,000 foot laterals, and are there any kind of adjacent acreage where on a combined basis you can drill much longer laterals than you could have on a standalone?
One thing we did, Ron, I want to call you out. Remember 2008 and '09, you're the very first one on a conference call just like this to ask if there's an upper lower Haynesville. We came back and said it's Haynesville Bossier. 11 years ago, Ron, you're the very first to ask that. Again, you're asking this question. Great question. One of the synergies we had is that when you look at the footprint of a Covey Park and Comstock, we added, and we went to the rating agencies, we reported this. We added just with the contiguous footprint we have. We added about 115 locations. That's a synergy that came in. Roland, if you want to make a comment on any other synergies, but that's the big one.
There's an area of overlapping acreage which will create, but they'll recast locations that were the under 5,000 foot laterals to longer laterals, either 7,500 or 10,000 foot laterals. The locations of the two companies were very complimentary, although somewhat different. Comstock is at a larger position in the southern part of the Haynesville and Covey Park in the northern part. Overall, there are some differences, but we saw both companies contributing heavily to the long laterals, as you can see from the chart. We'll create some synergies, like Jay mentioned, from combining some of the areas where we overlap. Overall, quality-wise, I think Comstock probably had more of our laterals that were into Bossier as a percentage, where Covey Park was much heavily more of the laterals are in the Haynesville.
I think you'll see the total composition of the laterals will be more weighted toward the Haynesville in the combined company than they were separately with Comstock.
Ron, if you look at an existing operation, where are we today? You want to have this flawless as we transform this into a new company. Where their four drill sites are today, where they're drilling, they're actually drilling, and where our five active drill sites are today, the nine. They complement each other. They're really on the north, south, east, west. We're kind of in the middle, and on the north, south, east, west also. The nine rigs we have right now, if you look at the footprints on those, I'm sure you'll track those down. They're very complementary to what Covey Park's doing. Again, when you talk about locations, we went through how our quarterly performance looked versus Covey Park's. We did that all the way from October through their first quarter numbers, and they're audited by KPMG.
What they thought they could produce and what we thought we could produce, we've been hitting that the last two quarters. We've done parallel operations for a couple of quarters, and things have worked out good. Absolutely proven synergies, absolutely proven complementary acreage. As I mentioned earlier on, I think it gives us an opportunistic view to look at other great things that can happen with this Haynesville company.
When you went through that process have you all identified, and maybe this is a question for Ron, I don't know. What some of the things that Comstock was doing better versus some of the things that Covey Park was doing better in terms of the way the wells were drilled and completed, or were you all both delivering comparable results at comparable costs? I'm just trying to get a sense in terms of the best practices.
Ron, we made each other better. The things that our experience Remember we drilled 120 of these wells back then, 2008 through 2012, and then the new wells we started in 2015, and then, of course, Covey had bought four, five, six asset packages. I think the way that they had controlled their wells, being the choke control, I think helped us in our operations. I think some of the drilling and completion techniques we've used helped them. It was completely complementary. They thought that they really had cracked the code on the Haynesville. We thought we had. When you blend these two together and you come up with a model. Example, if you look at 2019, 2020, 2021, what we did with the locations that we were going to drill, we blended them in with theirs.
We culled out anything that was similar to tier 2 or whatever, to really focus on tier 1. We came up with a program for 2019, 2020, 2021 that'll produce some incredible results.
Ron, there definitely were I think the answer to your question was there were definitely best practices that both companies were doing and thought they were best practices. During this eight months, which we want to emphasize, it's been a long period of time that the companies have been working to try to put this together and the technical teams working together, that I think we both learned a lot of better practices that the other doing. We think on a consolidated basis, you're going to get overall a better practice. There are other nuances where Covey Park owns a lot of saltwater disposal wells. We don't own any at Comstock, so disposing of the frack water is an expensive part of the well, actually, often.
That's a big cost synergy savings where we can actually utilize those assets versus having to pay a third party to do that. There are a lot of those areas which we think we just touched the surface of. The reason why I think investors are pushing for consolidation is these shale plays, they're very large, complex operations, and that's all about cost control and the best techniques. The more technical experience that you have and the more oil you have, the better results that you can produce. We think that's going to be a big part of this transaction we can't quantify today, but we think will show up in the future.
Well, the other thing, Ron.
Jay
we're public, being the largest publicly traded Haynesville company, I think we're going to have some synergies because most of the midstream companies, we've dealt with them forever and so has Covey. I think the midstream will really focus on us too, because we have such size and scale now and growth, and I think that's why we've already said it. We think our gathering costs will come down. Our service costs have come down, or rather, our drilling rates have come down. I do think it's already shown up in some of the numbers, what's happened.
Jay, can you hear me? This is Jerry Jones.
Yes, sir.
Jay, I'm going to step in right here, because we're talking about Covey Park. If you will look at how they've been managed. You look at how outstanding they've been on their acquisition of putting their company together. John Jacobi, to me, is a star, and Alan, and how they've managed. Here's the thing, they, last year, paid money back to their investors, yet they've drilled very significant wells relative to their base assets. They've done that. The fact that we're here today, and the fact they're paying their investors off, says everything about the management of Covey Park. They not only know how to put it together, they find it, and they also reward their investors. That had a big impact on me because earlier, Jay mentioned, or it might've been Roland, he said that we can maintain our reserves with $400 million of expenditures.
That gives you all kinds of possibilities of how to build a great oil and gas company. This is really It took something to shake me loose from the kind of capital that I'm putting in here. It had everything to do with this management team. To me, that's as big a asset as the assets that we've got in acreage.
Yeah, great comment.
Great points.
Ron?
My follow-up, Jay, is just as it relates to the last comment. In terms of synergies, I think you highlight $25 million of G&A synergies, I don't think you factored anything else in, can you just from a high level think or pass along thoughts on whether there are D&C synergies due to your increased scale or increased or improvements on the gathering side? You referenced the saltwater disposal I hadn't thought of, I think your base case is just G&A savings without anything else factored in. What do you think in terms of further synergies we can expect over time?
Yeah, I think that the G&A is the only one we've built into the numbers we're presenting because it's hard to quantify the others. We've priced the capital budget out at our current service rates that each company has. As a combined company, we think we'll have more scale. We'll have much more purchasing power. We'll be able to purchase pipe for less. We've already said just the amount of pipe purchasing we're doing. I think all of those scale will come in with better pricing in all our procurement activities. The longer laterals, overall, we'll be drilling longer laterals, which that it creates an efficiency because it's our highest IRR type projects.
Well, it's exactly what Jerry said, Ron. Covey was able to pay part of their pref off. We've said that we're going to drill. We've got another 115 longer laterals. Both companies have performed. Our goal is to deliver you a company that makes money, that has free cash flow positive in the second half of 2019, all 2021. A company that's a basin leader, the premier gas basin, we think. Great marketing flexibility, great relationships with the CEOs of the midstream companies. You talk about you've seen these slides on our robust IRRs. We're going to have a lot more of them. We have 2,000 of them. Low break-even cost. 2,000 locations. It's not new acreage either. It's 94% HBP, and we operate 71% of that or so. That's what we're adding. You don't see any of that.
In the $25-plus million, that's just synergies between the two companies combining. That's the beginning. It's like an A in alphabet. It's A, you got to go all the way to Z. We just started this thing. That is why that analyst said, "How about them Cowboys?" That's exactly the point, they'll get it.
Thank you.
Thanks, Ron.
Thank you. Our next question or comment comes from the line of Mike Kelly from Seaport Global. Your line is open.
Morning, guys. Congrats to you all.
Mr. Kelly.
Hello. Congrats for orchestrating what looks like a highly accretive deal for Comstock shareholders. My first question is really on the M&A front. I'd love to ask this to Mr. Jerry Jones, if he'll entertain it. Question is, whether this transaction gives you the scale you're looking for in the basin or if you still see the opportunity for further consolidation across the Haynesville? Thanks.
Yes to both. It's critical to us. Forget, if you will, the market, which I'm so appreciative of. The things that we need to do in this company are very friendly to what we think the market is asking for, as Jay started. As we sit here this morning, this company is really positioned to sit right where it is and basically get its debt paid and put in more comfortable position, at the same time, develop this great acreage. It's certainly going to have opportunities. I've never really had a day in my life that we didn't have some opportunities, certainly over the last year or so relative to this area. I think we're going to sit here and drive the bus daily. We're going to make every decision in the best interest of our stockholders.
Goes without saying, I'm on the incentive plan for my input here. I certainly think that just the cash flow and the free cash flow and the base of assets that we've got give us an opportunity in this climate. We all know it's soft right now. If it hadn't have been soft, I'd have never bought the Cowboys. I bought it when everything was down and out. I got in the oil business back 40 years ago. It was a down and out time. This is opportune times, especially when you can deal with a world-class asset located where it is. I believe in natural gas in a big way. I don't think I have to be told that you're just putting words, show me money where your mouth is. I think we are showing that.
Bottom line, I think we can sit right here with this great asset base, drill these wells, and pay this debt.
Great answer.
One thing, Mike Kelly, and Jerry Jones and I were talking about it, when he invested in the Bakken, he got a quick payout. What happens, he comes, and he calls Comstock and says, "Can I JV?" And we, like Covey Park, said, "No, you can't JV with us." Why? Because we didn't want anybody JV-ing our tier 1 acreage. What happens, Mike Kelly, you've been along this trail for a year and a half or so, Jerry Jones ends up buying 84% of the company, and he contributes 14,000+ barrels of oil per day, $620 million. He saw results quarter after quarter after quarter after quarter. We introduced him, and Jerry Jones can make a comment, probably February, March of 2018, we introduced him to the Covey Park name. What happens? He said, well, now he owns 75% of what?
2,000 locations, we're going to de-lever it. Even in his quote, Mike Kelly, he says, "This combination is another step toward completing my vision to create an industry-leading natural gas company." That's in the quote. Jerry Jones, you may have any more comments on that.
I will say this. The answer is yes, I'd rather have these assets candidly as far as future value than any asset I have. I'm talking about the location of our leases in the combined companies. The key always was, I've got some great associates that I've been with for 30 or 40 years, we've always known that cash flow was the king. The key to our early success in the Bakken was by the time I was writing a check, we were just weeks from getting the check back. The check was coming back. I didn't write a bunch of checks for acreage and a bunch of things that held my money out for a long period of time, that kills you. I'm not giving anybody an economic lesson here.
I was able to initially put $hundreds of millions in something that was coming back at me almost just quickly. I really mentally didn't even think I had the risk that you would have if you drug this out over many months. The trick to have the early success we had was to go right in, get the wells drilled, and get the gas, or the oil in that case, hooked up. We turned around. We had the opportunity to get with Comstock. We turned around and put that cash flow, and that was a matter of 18 months. Now then, we're turning around. We're sitting here with this combined company. That cash is coming through the door yesterday. Yesterday, not 18 months from now. We are putting hole in the ground yesterday.
This cash is going to be coming back at us. That makes everything happen. You wouldn't be in the doldrums you're in right now in this sector if everybody had the cash flow, of course. That's what this asset is. It's huge value in the assets, the future of the assets, but it has us a way right now to, with cash flow, step out here and develop. Certainly, we'll have our options. We're sitting here with an inventory that is unbelievable. You can't ever tell. Somebody might come up, and we'll drill another well that we're not even looking at today. It will be drilling a well. It won't be buying acreage.
Got it. Appreciate that, and God, I hope you've once again caught the same tree at the bottom. Roland, I'm going to switch to you real quick. You gave the 2 times debt to EBITDA metric in 2021, and I'd love if you could tell us what general assumptions you have running through the model to get there. Thanks.
Mike. Basically, we used a longer-term forecast for gas, which is of 260 for a NYMEX price, and that's probably the biggest assumption and the biggest variable. I think even at a lower price, we still get there because I think in our model, we get well below the 2 in 2021. I think that, again, I think each year we're looking at the market, looking at what we think is there for gas prices and oil prices, and what are the current service cost and coming up with a budget that makes sense. We have almost no required drilling we have to do. All this acreage is 97% virtually held by production. It gives us tremendous latitude to try to optimize the drilling program. We've taken great steps to that, worked on that for months.
I think as the teams come together, they'll continue to optimize it like they do all the time. Again, the leverage goal is very important to our two major stockholders. We think it's important to the market. Every step we take, like this step, this merger immediately brings us closer to that goal. I think you would think if we're doing other large steps, they would have to check the same box. They're going to have to also contribute toward reducing leverage.
By the way, I'm going to unmute here, this is Jerry Jones again, just for a second, but I want to be real clear. I don't raise money. I don't have investors. This is all my money. My point is, I've always thought when you have decision makers that have a lot at stake, and I don't know of any individual, you probably could tell me some that have put the kind of money I've put in this project, as much money as I put in this thing with $1 billion and $1 over the last couple of years.
Roland, just in 2021, the CapEx and production profiles are pretty similar to what you laid out in 2020?
Yeah. Of course, we're not going out with official guidance 2021 because it's so far out. I think, again, I think we would just generally see a similar type, just initially targeting 15% type growth in production, and then matching the CapEx to the cash flow generated, and generating probably a higher target of free cash flow. That's how we'd see getting there. Of course, a lot of things can change on the way to getting to 2021. We have enormous amount of tools to use. We can adjust the drilling anytime. I think this combined company, even though it's much larger, has just the same kind of flexibility we had as a smaller company.
I think that's why we thought this combination was the perfect combination because it took two companies with the lowest cost structure versus having to have a dilutive to the cost structure. If you're at the top of the list, it's hard to find many that wouldn't hurt your cost structure. That's why I think we worked this one so hard to put it together because it gives Comstock all the tools it needs to be very self-sufficient and accomplish all its goals in this environment.
Mike, you can't stress, each combined management teams, we drilled over 500 horizontal Haynesville Shale wells. You can't go by that. We've merged into it and at one time back in 2010, 2011, we were operating seven rigs in the Haynesville. We're not telling you that we're trying to do something we hadn't already done before. We'll have eight or nine rigs, but it's quite the company that's been birthed. It's a refreshing story that the whole sector needed.
Let me sneak one more into. How should we think about the value of Covey's midstream assets? This is kind of 500 miles of gathering pipeline. Have any thoughts been given to potentially monetizing this? Thanks, guys.
We're going to work it and see what's best for the company. We'll make those decisions once we close it.
we would-
it's just another great asset to have.
Right.
It is very valuable.
What we wouldn't want to do, Mike, is to hurt that cost structure because we think that's critical, especially in the lower price environment. You want to be the lowest cost producer, and we think we are of natural gas in North America, virtually. What you don't want to do is try to create a short-term event of selling all your gathering and putting a big tariff on it because that's the exact same thing all these producers have done, and that destroys so much long-term value. I'm not saying we wouldn't look at something, but we're not going to jeopardize the cost structure because we take great pride, we want to be the standard for having the best cost structure. We think that's the best place to invest. In a down commodity, it's the safest place to invest.
Yeah, when we vetted each other.
I probably should say in here as well. It is nowhere on my horizon when I was figuring this investment. It was nowhere on my horizon to do anything with the pipeline, like the cost structure too.
Yeah. One thing Jerry Jones looked at, Mike Kelly, is a lot of the tier 1 acreage is burdened by heavy firm transportation, old obligations. The one thing that we vetted Covey Park on, they vetted us on, do you have any of those burdens? Because that destroys your economics. Some of those burdens are $1, $1.50 per 1,000 cubic foot. That is the reason that these two companies make a lot of sense, and that is a reason that we'll have this free cash flow, and that is a reason we make money. When you get rid of that, you don't make any money.
All right. Thanks, guys. I'll hand it over. Congrats.
All right. Thanks, Mike.
Thank you.
I know the call is longer than normal, it's worth the longness.
Thank you. Our next question or comment comes from the line of Wells Fitzpatrick from SunTrust. Your line is open.
Hey, good morning, and thank you for taking my question.
Yes, sir.
On the basin level consolidation, you guys mentioned, and obviously Covey is very clean from a gathering and an FT perspective. They've done a great job there. How important do you think it is going forward for A&D that some of these other privates have pretty onerous gathering contracts that you mentioned or onerous FT? Is that something that can be negotiated out of, or is that something that maybe in the 2020, 2021 timeframe starts to roll off and then a roll-up of the basin starts to look a little bit better? Can you talk to that, please?
Yeah, Wells, I think it's a great question because it gets to the heart of the basin.
That's the opportunity question you've asked.
Some of it does roll off over time. That's something to monitor. Some of it, unfortunately, some of the prime acreage in the play still has a long way to go. I think the real answer is, I think that is the problem to solve, is to figure out how to make a win-win for the two parties, the person that holds the contract and the producer in the future. That's the riddle to solve that would really help the consolidation of this basin, maybe other basins. In our view, that's why when we focused on opportunities, as Jerry was saying, he's going to help us grow the company on a larger scale. We zeroed in right on the one that didn't have those issues because we said we think it's critical in the environment, especially the gas price environment.
You need to be able to make good money at where gas is now, not just hope it's going to go up in the future.
Well, again, I would say, Jerry can comment on this, we brought the Covey concept to him back in February of 2018, we never let it go, because he said, "Tell me which one's the best?" In our opinion, we had this part of the press release one time. We think that if you get a haystack out there, Covey's looking, we're looking, we think we found the needle of the Haynesville. That's what we said. We think we found that, we found Covey. We do.
Wow.
A lot of that is firm transportation and locations. The synergy. I'll tell you, Jerry hit it. It's the people. These three guys that run Covey, they feel like they've been part of our team forever and ever and ever. It's that synergy that made it work. This thing went on and off, on and off two or three different times, but it made because the people. I hadn't brought up Carl or Jordan's name, but the Denham guys, they connected with Jerry, and they made it work. We are all looking to do the same thing, and that is make money, pay down this debt. A lot of these other companies, if that firm transportation burden's there, you can see their rig count's gone down because they don't make any money. It's not worth a whole lot of money.
Jay, just another way to say the same thing. If you're going to address a weakness, an opportunity, and production or prospects with heavily burdened transportation obligations can be just that opportunity. If you're going to do it, do it with the strength of sitting on top of about $20 billion worth of prospects, which we are now with the Comstock and Covey. Those are those 2,000 prospects, and that's about $20 billion worth of drilling. You can sit there with that core base of assets that are really unmatched in terms of what we're talking about, as well as just the rocks. You can sit there and work off of that. When the low-hanging fruit comes or when the opportunity comes, you can take a look at it. The main thing you don't ever do is sit here and not take care of.
This is John Jacobi's famous line. You never quit waking up and going to sleep thinking about your asset, not somebody else's asset, and you're milking that for everything you got. That's the way we'll do this.
Yeah. Well said.
That's great detail. Maybe to follow on that, Mr. Jones, I know 90%+ of acreage is HBP'd. Great free cash flow number in 2020. With a run rate of, call it, 80 wells per year, you have almost a century, a quarter century, excuse me, of running room. Don't get me wrong, that's a great problem to have. A lot of people would love to have it. What avenues might you guys explore to bring some of that value forward quicker?
Well, we really are going to put confidence into you and others about what a great business this can be. It can be. It can be in soft times, and it can be in times that have gotten fun to be in, higher prices. It can be outstanding business in low price times as well. You've got to have a big front door and a small back door, so to speak. I'm smiling with you here this morning. We've got to show that the same thing, the principles that I use in running the Dallas Cowboys or the principle I use in running any business, we can't pick our times in the economy, we've got to show you, and we are.
We are since the day we got into Comstock. We're showing you that this is the way to make money. We're making more money in what we're doing in Comstock and what we're going to do in Covey Park than any other thing that I'm involved in.
You have to take the long-term approach for natural gas. Like Roland said, we're going to make it profitable with gas prices where they are. If you look at 2022, 2023, with LNG growth, the industrial demand growth, the exports to Mexico, we want to position it so not only do we make money now, but if gas goes to $3, $3.15, three whatever. We have that type of inventory too. Since we operate most of this, we can toggle it. We can add rigs, we can get rid of rigs, we can adjust this. That's the beauty of having the scale that we have. Yeah, we'll just manage it properly. The inventory, that's a good problem. Give me that problem any day. I like it.
Fair enough. Thanks and congrats on a great transaction. It's good to see the Haynesville front and center in the gas world again.
Thank you.
Thank you.
Thank you. Our next question or comment comes from the line of Sean Sneeden from Guggenheim. Your line is open.
Hi, good morning, and thank you for taking the question. Roland, could you talk a little bit about the structure of the transaction? I guess specifically, is the plan for Comstock to guarantee the Covey Park area and vice versa, or are you contemplating keeping Covey as kind of a standalone separate box, if you will?
Yeah. Sean, that's a good question. Our plan is to merge Covey Park into Comstock, and so it will not be kept separate. We'll put the bonds together at the top level. We will assume all the obligations under their bonds. We'll have a very simple corporate structure. No complexity at all. We like to keep things simple.
Got it. That makes sense. I guess when you think about the amount of secured debt or draw on the revolver, I guess, what gives you comfort around that, and I guess how did you come about that as the right structure for the deal?
Yeah. I think ideally, we'd like to have a little more liquidity. I think that we have set the borrowing base lower than what the properties would earn as a borrowing base, mainly we want to keep our ratings the best they can be for the bonds. That gives us a lot of comfort that when the borrowing base really should be larger than it is. It also gives a lot of comfort with the new credit facility. Over, I think, given our business plan of spending within cash flow and generating free cash flow, we think we'll add to our liquidity basically by paying down some of that revolver debt and building up the liquidity that way. That's why I think that's a paramount part of the strategy.
overall, in this market, we think this is a good capital structure for this transaction for this particular company.
Understood. Lastly for me, just looking at the kind of forward plan there, looks like you're growing production call it 15% a year. I guess, how do you guys think about trying to continue to grow the asset versus harvesting that free cash flow and paying down debt? I guess, what's the trade-off as you think about the right equilibrium, if you will?
Right. That's the big balancing act, because I think it has the ability to do both now that the scale we'll have after combining that. We look at what does growing the asset do to create more cash flow and EBITDAX? That can have a pretty powerful delevering effect too. It may be quicker, we're also looking at balancing that into reducing the overall level of debt. I think we've adjusted downward, maybe the original plans were maybe to grow it more over 20%, we said, "Hey, let's start to scale it back." We want to make sure that the free cash flow is definitely there.
As we put the companies together and approach the end of this year, we will definitely be looking at it again and say, "Do we want to have more free cash flow?" I think we could reduce the CapEx all the way down to that $400 million area if we don't want any production growth. I think those two will continue to be something we look really hard at.
Perfect. I appreciate all the color, guys. Thank you.
Thank you. Our next question or comment comes from the line of David Beard from Coker & Palmer. Your line is open.
Good morning, gentlemen. Thanks for the time, and you've answered most of my questions and gave us considerable scope in terms of the acquisition. I'll send my congratulations as well. Thank you.
Yes, sir.
Thank you, David.
Thank you, David.
Thank you. Our next question or comment comes from the line of Rehan Rashid from B. Riley FBR. Your line is open.
Morning, gents. Yes, would echo the sentiment here. The industrial logic behind the combination makes a lot of sense. Congrats. Just quick few questions. The first one would be just from a
technical standpoint, as you integrate the companies, any particular milestones to keep in mind? Any particular technical talent that you believe will be very important for consolidation? What would you do to keep the team together? That's just one philosophical question. Second, Roland, what would be the PDP of the combined companies and maybe just for modeling purposes, any particular cadence to well completions this year, next year that we should incorporate in our models? Thanks.
Rehan, the first question, the key to success is blending both management groups together, which by the way, we've been doing since October. We come up with the models, and we do our due diligence on the gathering and marketing and acreage and blend in land, et cetera. We've integrated a lot of that. That's the numbers you see today is that integration. We'll just take it another step, and we'll keep commitment, we'll keep diligent. The one thing Jerry will always hold us accountable for is to make sure we treat everybody right, and our talent set is the best possible for Comstock in the weak sector we're in. I mean, we'll have good talent, good people, and we'll keep executing this. We will not take our eye off the ball, which is performance. You've watched us do that for a long time, Rehan.
We've never messed up on that. We'll take care of business. Roland?
I think, Rehan, yes, the PDP, the SEC 10 of the PDP is $2.3 billion there. That's based on the December 31 combined independent reports. I guess your question you ask about what the nature of the completions or the nature of the makeup of the joint program next year?
Yeah. No, no, too quick. The PDP decline curve, what's the decline curve of the combined assets? Yes, just any cadence to completion for this year, next year, the drilling program.
Yeah. I think the overall decline curve or the PDP is about just somewhere around 30%-31% in a consolidated basis. That's obviously the part of the company that if you want to keep that flat, that's where we came up with the maintenance capital that you need to do that. Beyond that, the type projects that the companies are drilling, they're probably very similar to what they've been doing, especially where we've evolved to now. I mean, predominantly the longer laterals. We'll mix in some of the shorter laterals as they make sense along the way. I think we're still going to drill at 60%, try to target closer to 60% of the project being the 10,000-foot laterals, fill in some of the section and a half laterals and a few of the shorter laterals.
Again, with the big inventory that we have, you can even be more selective. I think the other ways when they're trying to optimize what a project would be, would be to you don't want to drill all your wells in the same place because you have so much shut-in time for the frack activity. Being able to try to manage of optimizing where you drill, where you complete wells, and the timing of that to minimize the shut-in time, which it can be 5% to 6% to 7% of your total production is one of the key parts in optimizing that. Given the bigger scale, you got a lot more to work with, and we don't have any constraints about you have to do something in a particular year.
Thank you.
Thanks, Rehan.
Thank you.
Just a few housekeeping items just as we close. We will be filing a full information statement on the merger and the acquisition within the next couple of days, which will give you quite a bit of data on that. Our target is, again, all the stockholders pretty much have already agreed to this transaction. We do expect to close this in a period of 30-40 days from today. Relatively quick time to actual closing. There's a few regulatory matters to get through, there is no real big contingencies to this transaction closing.
Again, Jerry, I'll let you have the final say, but let me say something. I know Jerry Jones is known as a businessman who knows how to create wealth. He's done that. He's always done that. His initial wealth came from natural gas, and that's how he bought the Cowboys. Now the $1.1 billion man is back. I assure you that he will be an active stakeholder, just like he was active on the phone call today. He's not going to, and we're not going to take our eyes off the ball. He doesn't own any stock in any other public company but this one. It's a tremendous statement and refreshing to have him back. Jerry, you want to close this?
Yeah. No one deliberately gets involved in something that isn't potentially very positive. Candidly, with the visibility that I have with the Cowboys, I really don't have a good appetite if we don't have good experiences because we'll get written about. It's important that everything that I get into has high quality and are with the right kind of people. Most of the people on this call have some background here with the Comstock management. I'll assure you that your quality and the character of the people that you involve with have everything to do to the success. It's the reason Covey Park with people like John Jacobi and Alan that have had their success. Here's my point. I trust everybody involved here, not just trust, but they're great people. It inspires me. It has inspired me.
I will also say that these assets are some of the finest assets that I can have imagined or have seen. We've got a tremendous asset play, but we've got an opportunity to use it to make money with effort, hustle, hard work, a little bit of risk-taking. All of that can come, and this is, in my mind, a tool, a vehicle to really create a story that when we're sitting here 10 years from now, we'll talk about taking advantage of the opportunity that is even more than the very assets that we've talked about today. That's it.
Yeah. Again, thanks everybody's on the call for probably an hour 40 or so. It's a long call. It should've been. We got a lot of good things to talk about. Everyone, thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.