M&A Announcement

Jun 10, 2019

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. 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 Jacoby and Alan Levine, Co CEOs of Covey Park and Ricky 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 dotcomstockresources.com and downloading the Covey Park acquisition presentation. If you'll go to Slide 2 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 could be no assurance that such expectations will prove to be correct. Now most of you will go to Slide 3. But before that, I want to make kind of an introduction comment. The energy market has made it loud and clear once, and we've listened. Today, we check many of the boxes. Boxes. First of all, we're combining 2 highly complementary businesses would 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 2 strong operating teams that when combined has drilled over 500 Haynesville Shell wells. So we end up with proven operations in quality rock. 3rd, the combined companies create industry leading margins and free cash flow to drive leverage under 2x by 2021. We understand that we need to reduce our debt leverage. We hear you loud and clear. And then finally, and this is I'm looking at the Covey Management and then John, and I'm looking at Roland and Jerry. So over an 8 month time frame, and I think it's really important, 8 month time frame, both Comstock and Covey evaluated each other thoroughly. We've vetted each other's acreage, our drill sites, our gas gathering and marketing arrangements, all areas pass rigorous due diligence. And 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. So what happens is the management from both companies agreed that a merger would create the Blue Ribbon Company. Event, which is what we have today, as one analyst early this morning said, how about them Cowboys? I think that's appropriate. Jerry Jones, our largest shareholder with cumulative investment of almost $100,000,000 along with Denim Capital, a leading private equity fund back in 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. 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 and 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 5 +1000000000 cubic feet equivalent in upside beyond the proved reserves. This transaction is only, and I emphasize, only possible because they support an investment by Jerry Jones. His investment of $475,000,000 brings his cumulative investment in Gobstock almost $1,100,000,000 Slide 4. Slide 4 is an overview of the merger transaction. Comstock will acquire Covey Park in a cash in stock transaction, which values Covey Park at $2,200,000,000 the equity owners of Covey Park will receive $700,000,000 in cash, $210,000,000 in a new 10% perpetual convertible preferred stock and 28,800,000 shares of common stock. Jerry Jones is investing $475,000,000 in the company, which brings his cumulative investment to almost 1 point $1,000,000,000 He is purchasing 50,000,000 shares of common stock for $300,000,000 which values the stock at $6 a share. He is also purchasing $175,000,000 of the new preferred stock we are issuing. We will assume Covey Park $625,000,000 of 7.5 percent senior notes, and we will borrow 7 $98,000,000 under a new $1,500,000,000 bank credit facility to refinance their bank debt and redeem their preferred units and fund part of the purchase price. Jerry Jones will own 70 outstanding common shares and Denham Capital and the Covey Park Equity Owners will have 16%. So at this time, Jerry, can you make a few comments about the transaction? Yes, Jay, and good morning, and it's a great morning. I might be asked why over the last relatively 18 months, 2 years period of time have I put $1,100,000,000 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, they 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 1st shale well. I was an investor in my 1st shale well. I've been in the business for almost 40 years. But I drilled in this basin 3.5 years ago. I put in $600,000,000 and I hear the stories about people investing and where's the money. Well, I not only by the time that I got to Covey Park, that investment I had received back over $300,000,000 and that's in 24 little over 30 months. I fully intend to monetize every dollar that we're putting in the ground, every time we drill a well. And I know there are a lot of perspectives and a lot of ways to look at that. But every time we drill a well in this area, in this Haynesville, I think I'm 3 times in my money. And so that's why I'm doing this. But great to be on with you guys this morning and certainly open to any questions later in this call. Yes. 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 active growth of 2 years. All of us at Cubby Park in conjunction with every one at Comstock Technologies truly believe that this is just an absolutely fabulous transaction. It is the first key step in creating 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 basin. And 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. And we just believe that the company that we're in the process of creating will go on to do many bigger and better things while continuing to manage its balance sheet conservative financial approach. And we are very pleased once again to be a part of it. Yes, 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 bet, 2 great companies. And again, the management says we should consolidate. And then we approach Gerry, we approach Denim. 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 Gerry has always had. So I'm going to ask John Jacoby if he wants to say something right now. John? Hi. Thanks, Jay. I can only say a ditto on both what Alan and Mr. Jones has 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. And we look forward to the partnership, relationship and we certainly intend to work with Comstock to build this company and to being the greatest in its space and one of the best in the country. Thanks, Jay. Yes. John, again, you and Alan, and I want to ask Ricky to say a few words second. We blended in this model over and over and over and 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. So Ricky has worked really hard as CFO of Covey with Roland. They've known each other for 20 some odd years. It's that type of chemistry I want the market to say we're getting. Rick, do you have any comments before I go on the slides? I don't, Jamie. I guess, I think it's a lot said, but the one thing I'd like the market to understand is there's been a lot of time and effort putting this together and we're real comfortable with where things sit. As we 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. So what you've just got, if you're on the call, you got a little bit of what Jerry Jones and Denim has seen for 8 months, and that is the formation of a new team. So I'll go back to script now. If you go back to Slide 5, slide is a good overview of the new Comstock which results from the merger. The combination of the 2 companies creates a company with substantial scale in the Haynesville. We will produce over 1,100,000,000 cubic feet of natural gas equivalent per year. Our annualized pro form a 1st quarter EBITDAX is about $935,000,000 We'll have 5.4 Tcfe of SEC proved reserves and 290,000 net acres in the Haynesville. We'll have about 2,000 net drilling locations, which gives us over 20 years of inventory. We'll have the industry leading producing cost structure with an EBITDAX margin of over 75 percent. That compares with any basin period. Especially important in the current environment, 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 $25,000,000 The larger scale will also allow us to have lower cost from the service companies who drill and complete our wells. Lastly, our plan is to run Comstock to generate free cash flow and continue to position our balance sheet to reach our goal of reducing our debt leverage to under 2x by 2021. Slide 6 shows you our complementary Angel Shale acreage. You can see why the marriage happened. If you're looking at it, the acreage is Covey, the blue acreage is Comstock, and now we're all 1 and the same. Slide 6 is an overview of our extensive Haynesville shale acreage. The 290,000 net acreage 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 sand. Our Haynesville acreage is 94% held by production, so we have the flexibility to drill it when it makes sense for us. Slide 7 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 perspective for the Haynesville Shale. And Moshe will have 7 point 6 TCFE approved reserves of the PV-ten of $4,800,000,000 based upon the Society of Petroleum Engineering's definitions. SEC proved reserves were 5.4 Tcfe with a PV-ten of $4,100,000,000 with the difference being proved on developed wells that fall outside of the SEC 5 year rule. Pro form a first quarter production is 1,100,000,000 cubic feet of natural gas production per day. The company will have almost 2,000 net HaynesvilleBossier drilling locations. If you flip to Slide 8, this is what both companies' management teams look like, which result in the call today. This is what the thought and it was all about. This is the outcome. This is the vetting of both companies. When we vetted it, we created Slide 8. It shows the impact of this transformational acquisition on our financial, operational and credit metrics. Based upon the Q1 results of both companies, our daily production grows by 167 percent to $1,100,000,000 per day. Our Q1 2019 annualized EBITDAX increases 141 percent to $935,000,000 The PV-ten of our proved reserves increases 171 percent to $4,800,000,000 Our proved reserves increased 2 12 percent 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 3.4x to 2.9x, and the debt per flowing barrel declines by 22%. Slide 9 details the almost 2,000 net drilling locations. We have 1271 have lateral lengths of over 5,000 feet and 1798 of the net locations are operated by us. The map on the right shows you where we have drilled operated wells since 2015. This amount shows you why we consolidated. Now 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. So 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 2 companies 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 form a basis, including only $0.09 spent for G and A overhead. The pro form a numbers we're presenting do include expected G and 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 at operating cost. In addition to the great cost structure, we also have the highest margin of the gas producers and which is also higher than many of the leading Permian companies at 76% and an EBITDAX margin. Slide 12 shows the combined reserves as determined by our 3rd party engineers. The SEC reserves that were reflected on the left side of the chart Incorporate and honor the 5 year SEC PUD rule while the Society Petroleum Engineers reserves are based on the same definitions, but they include pre developed locations beyond the 5 year SEC rule. So we have 7.6 Tcfe approved reserves based on the SBE definition and then 5.4 Tcfe using the SEC rules. The PV-ten is $4,800,000,000 of the proved reserves or $4,100,000,000 you incorporate the 5 year rule on PUDs. And then 56% of our SEC PV-ten is PDP reserves. On Slide 13, we lay out at 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. And 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 when we're able to really optimize the 2 companies' technical staffs on a combined basis. But if you're looking at what we're doing on a combined basis this year, the 2 companies are spending $779,000,000 and are 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 $695,000,000 to drill 65.6 net wells. Basically, we'll run 9 rigs in 2020. And the current plan that we put on the table for now allows us to not only fund all of this capital all of our capital expenditures through operating cash flow, but also we're targeting generate a significant amount of free cash flow that's available to pay down our debt. So at a $2.60 type gas price, long term forecast, we think this plan that we have for 2020 would generate about 75 $1,000,000 to $100,000,000 of free cash flow. On a pro form a basis, we expect the pro form a 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. We're wanting to try to keep our production flat in 2020 from where we exit 2019 at, we have calculated that we'll need to spend about 400,000,000 dollars in 'twenty to keep production flat. So that's kind of the maintenance CapEx number that we've kind of identified for the combined company. On Slide 14, we recap our pro form a capitalization. We will have $4,100,000,000 of total debt and equity capitalization when the merger closes. Our total debt will be $2,700,000,000 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 5 year bank credit facility that were put in place will have a borrowing base of $1,575,000,000 but we'll elect to use 1.5 $1,000,000,000 of that borrowing base, and there'll be $1,268,000,000 outstanding when the merger closes. We also will have $1,400,000,000 in total equity. Dollars 385,000,000 of equity will be the new preferred, and we'll have over $1,000,000,000 in common equity on a book value basis. The common shares outstanding after the merger will be 184,300,000 shares. And then our liquidity remained relatively similar to where we had our current level. We'll still maintain $261,000,000 of liquidity. On Slide 15, we cover the new preferred stock that we're issuing in connection with the transaction. As part of the acquisition is being financed by this new perpetual convertible preferred stock, which is being issued to our 2 major stockholders. The rationale for the preferred was to provide a very balance sheet friendly acquisition type financing. The preferred is being issued in 2 series. Series A is for $210,000,000 and it will be held by Denham Capital and the other Covey Park equity holders and Series B for $175,000,000 will be held by Mr. Jones. Both have a 10% dividend, which we'll pay in cash on 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. And I would ask you to note that the preferreds are not convertible for their 1st 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 kind of our financial policies. The cornerstone of our financial strategy is to drill within 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 2x 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 that 50% to 60% of our forecasted production hedged. And 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 twothree 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% to 60% of the projected production hedged on a rolling 12 month basis. So 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. So Howard, we open it up to the analysts that cover Our first question or comment comes from the line of Ron Mills from Johnson Rice. Your line is open. Good morning, guys. Congratulations on getting this deal done. First question related really to the map on Slide 6 and the overlapping acreage position and how that moves over to Page 9 with the inventory. Just curious if you could compare the 2 in terms of longer laterals, similar are there similar percentages in terms of 7,510,000 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? Well, one thing we did, Ron, and I want to kind of call you out. Remember, 2,008, you're the very first one on a conference call just like this to ask if there's an upper lower Haynesville, and we then came back and said it's HaynesvilleBossier. But 11 years ago, Ron, you're the very first to ask that. So again, you're asking this question. Great question. One of the synergies we had is that when you look at the footprint of Ocovi and Gobstalk, we added and we went to the rating agencies who reported this. We added just with the contiguous footprint we have, we added about 115 locations. So that's a synergy that came in. And Roland, if you want to make a comment on any other synergies, but that's a big one. Yes. And that there will be there's an area of overlapping acreage, which will create it won't add new locations, but they'll recast locations that were the under 5,000 foot laterals, 2 longer laterals, either 7,500 or 10,000 foot laterals. So the locations of the 2 companies were very complementary, although somewhat different. Comstock is at a larger position in the southern part of the Haynes fill and Covey Park in the northern part. And so 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. And overall, quality wise, I think if you I think probably Comstock probably had more of our laterals that were in the Bossier as a percentage, where Covey was much heavily more than laterals are in the Haynesville. Combined company than they were more weighted toward the Haynesville in the combined company than they were separately with Comstock. And Rod, if you look at like an existing operation, where are we today, and you want to have this flawless as we transform this into a new company. We're there for drill sites are today where they're drilling. They're actually drilling in where our 5 active drill sites are today, the 9. They complement each. They're really on the north, south, east, west. We're kind of in the middle and then on the north, south, east, west also. So our the 9 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 what Covey is doing. And again, we went through when you talk about locations, we went through how our quarterly performance looked versus Covey's. We did that all the way from October through their Q1 numbers and they're audited by KPMG. And what they thought they could produce and what we thought we could produce, we've been hitting that the last two quarters. So we've done it kind of done parallel operations for a couple of quarters and things have worked out good. Absolutely proven synergies, absolutely proven complementary acreage. And 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. And when you went through that process, did you have you all identified, maybe this is a question for Dan, 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 that we started in 2015 and then of course Covey had bought 4, 5, 6 asset packages. And I think the way that they had control 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. And it was completely complementary. I mean, they thought that they really kind of had cracked the code on the Haynesville we thought we had. But when you blend these 2 together and you come up with a model, example, if you look at 'nineteen, 'twenty, '21, what we did with the locations that we were going to drill, we blended them in with theirs. We called out anything that was similar to Tier 2 or whatever to really focus on Tier 1. And we came up with a program for 'nineteen, 'twenty, 'twenty one that will produce some incredible results. So Ron, yes, 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. And then during this 8 months, which is 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 we I think we both learned a lot of better practices that the other are doing. And so we think on a consolidated basis, you're going to get overall a better practice. And so there are other nuances where Covey Park owns a lot of saltwater disposal wells. We don't own any at Comstock. So disposing of like the frac water is an extensive part of the well actually often. And that's a big cost synergy savings where we can actually utilize those assets versus having to pay a third party to do that. So there are a lot of those areas, which we think we just touched the surface of. But again, I think it's 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 and the more technical experience that you have. And the more you have, the better results that you can produce. So we think that's going to be a big part of this transaction. We can't quantify today, but we we'll show up in the future. Well, the other thing, Rod, we're public. So being the largest publicly traded Haynesville company, I think we're going to have some synergies because most of the midstream companies, I mean, we've dealt with them forever and so is Covey. So I think the midstream will really focus on us too because we have such size and scale now in growth. And I think that's why we've already said that we think our gathering costs will come down. Our service costs have come down or rather our drilling rates have come down. But 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, Jerry. I'm going to step in right here because we're talking about Covey Park. But if you will look at how they've been managed and you look at how outstanding they've been on their acquisition of putting their company together. John Jacoby, to me is a star and Alan and how they've managed. But here's the thing, they last year paid money back to their investors, yet they drilled very significant wells relative to their base assets. They've done that. But 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 might have been Roland, he said that we can maintain our reserves with $400,000,000 of expenditures. Well, that gives you all kinds of possibilities of how to build a great oil and gas company. And this is really it took something to shake me loose from the kind of capital that I'm putting in here. And it had everything to do with this management team. But to me, that's as big asset as the assets that we've got in acreage. Yes. Good. Great comment. Good. Good. Good. Good. And then my follow-up, Jay, is just as it relates to the last comment. In terms of synergies, I think you highlight $25,000,000 of G and A synergies. But any I don't think you factored anything else in, but can you just from a high level think or pass along thoughts on whether they're D and C synergies due to your increased scale or increased or improvements on the gathering side you referenced saltwater disposal I hadn't thought of, but I mean I think your base case is just G and A savings without anything else factored in. But what do you think in terms of further synergies we can expect over time? Yes. I think that the G and A is the only one we've kind of built into the numbers we're presenting because it's hard to quantify the others. And we've priced the capital budget out at our current service rates that each company has. But as a combined company, we think we'll have more scale. We'll be able to we'll have dry more we'll have much more purchasing power. I'm just I mean, even our yes, we'll be able to purchase pipe for less. We've already said just about a pipe purchasing we're doing. So I think that will kind of I think all of those scale will come in with better pricing in all our procurement activities. The longer laterals, I mean, we can overall, we'll have to be growing longer laterals, which that it creates an efficiency because it's our highest IRR type projects. Well, it's exactly what Jerry said, Ron. I mean, Covey was able to pay part of their prep off. We've said that we're going to drill we've got another 115 longer laterals. Both companies have performed. I mean, our goal is to deliver you a company that makes money, that has free cash flow positive in the second half of 'nineteen, all twenty twenty one. I mean, a company that's a basin leader, the premier gas basin, we think, had great marketing flexibility, great relationships with the CEOs of the midstream companies. I mean, 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 breakeven cost. I mean, 2,000 locations, it's not new acreage either. It's 94% HBP, and we operate 71% of that or so. I mean, that's what we're adding. You don't see any of that. And the 25 $1,000,000 that's just synergies between the 2 companies combining. I mean, that's the beginning. It's like an A in alphabet. It's A, and you got to go all the way to C. We just started this thing. That's that is why that analyst said, how about them Cowboys? That's exactly the point, and they'll get it. Thank you. Thanks, Ryan. Thank you. Our next question or comment comes from the line of Mike Kelly from Seaport Global. Your line is open. Good morning, guys, and congrats, Jamie. Hello. Congrats for orchestrating what looks like a highly accretive deal for Comstock shareholders. My first question is really on the M and A front and I'd love to ask this to Mr. Jerry Jones if I'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. Yes to both. It's critical to us the way forget, if you will, the market, which I'm so appreciative of. But 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. But this 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 and 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, but certainly over the last year or so relative to this area. And so 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 from my input here. But 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 been soft, I'd 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. So this is opportune times and 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 just put words and show me where your money where your mouth is. I think we are showing that. So bottom line, I think we can sit right here with this great asset base, drill these wells or and pay this debt. Great. One thing, Mike, and Jerry and I were talking about it. When he invested in the Bakken, I mean, he got a quick payout. So then what happens, he comes and he calls Comstock and says, can I JV? And we, like Covey, said, no, you can't JV with us. And why? Because we didn't want anybody JV in our Tier 1 acreage. So then what happens? And Mike, you've been along this trail for 1.5 years or so. Jerry ends up buying 84% of the company, and he contributes 14,000 plus barrels of oil per day, dollars 620,000,000 But he saw results quarter after quarter after quarter after quarter. And then we introduced him and Jerry can make a comment probably February March of 2018, we introduced him to the Covey Park name. So what happens? He said, well, now he owns 75% of what, 2,000 locations, and we're going to delever it. And even in his quote, Mike, he says, This combination is another step toward completing my vision to create an industry leading natural gas company. That's in the quote. So Jerry, 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. And I'm talking about the location of our leases in the combined companies. But the key always was, my I've got some great associates that I've been with for 30 or 40 years and we've always known that cash, cash flow was the king. And the key to our early success in the Balkan was by the time I was writing a check, were just weeks from getting a check back. The check was coming back. We didn't I didn't write a bunch of checks acreage and a bunch of things that held my money out for a long period of time and that kills you. And I'm not giving anybody an economic lesson here. But I was able to initially put 100 of 1,000,000 of dollars in something that was coming back at me almost just quickly. And so I really mentally didn't even think I had the risk that you would have if you drug this out over many, many, many months. And so 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. Well, then 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. And now then we're turning around, we're sitting here with this combined company. Well, that cash is coming through the door yesterday, yesterday, not 18 months from now. And we are putting hole in the ground yesterday. And so this cash is going to be coming back at us. That makes everything happen. You wouldn't be in the dundrums you're in right now in this sector if everybody had the cash flow, of course. And so that's what this asset is. It's huge, 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 and certainly we'll have our options. We're sitting here with an inventory that is unbelievable. Well, we you can never tell somebody might come up and we'll drill another well that we're not even looking at today. But it will be drilling a well. It won't be buying acreage. Got it. Appreciate that. Got to hope you're once again caught the same street at a bottom. Roland, let me 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 kind of what general assumptions you have running through the model to get there. Thanks. Yes, sure, Mike. I mean basically, we used a longer term kind of forecast for gas, which is of 2.60 dollars for NYMEX price. And that's probably the biggest assumption and the biggest variable. But 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. So I think that again, I think each year we're looking at the market, looking at what do we think is there for gas prices and oil prices what are the current service costs and coming up with a budget that makes sense. We have very, very almost no required drilling we have to do. All this acreage is so is 97% virtually held by production. So it gives us tremendous latitude to try to optimize the drilling program. And that's we've taken great steps to that, worked on that for months. But I think as the teams come together, they'll continue to optimize it like they do all the time. So again, the leverage goal is very important to our 2 major stockholders. We think it's important to the market. And every step we take like we like this step, I mean, this step this merger immediately brings us closer to goal despite so I think you would think if we're doing other large steps, they would have to kind of check the same box. They're going to have to also contribute toward reducing leverage. By the way, I'm going to hand me you 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. And so this is all my money. And 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 put in this project as much money as I put in this thing with $1,100,000,000 over the last couple of years. Richard, Roland, just in 2021, the CapEx and production profiles are pretty similar to what you laid out in 2020? Yes. Of course, we're not going out with fiscal guidance in 'twenty one because it's so far out. But I think again, I think we would just generally see a similar type I mean, just initially targeting 15% type growth in production and then matching the CapEx to the cash flow generated, and that's and generating probably a higher target of free cash flow. So that's how we'd see getting there. Of course, a lot of things can change on the way to getting to 2021. But we have enormous amount of tools to use. So we're not on any we can adjust the drilling anytime. So I think that I think this combined company, even though it's much larger, has just the same kind of flexibility we had as a smaller company. And I think that's why we thought this combination was kind of the perfect combination because it took 2 companies with the lowest cost structure versus having to have a dilutive to the cost structure. And if you're at the top of the list, it's hard to find many that wouldn't hurt your cost structure. And then 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. And then Mike, you can't stress. I mean, each combined management team, we drilled over 500 horizontal Haynesville shale wells. I mean, you can't go by I mean, we've merged into it. And we at one time back in 2010, 2011, we were operating 7 rigs in the Haynesville. So we're not telling you that we're trying to do something we hadn't already done before. I mean, we'll have 8 or 9 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 just the how should we think about the value of Covey's midstream assets, just kind of 500 miles of gathering pipeline? And 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. But again, it's just another great asset to it. It is very valuable. But we wouldn't want to do, Mike, is to hurt that cost structure because we think that's critical. And 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. And so what you don't want to do is try to create a short term event of selling like 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. So I'm not saying we wouldn't look at something, but it would have to we're not going to jeopardize the cost structure because we're we take great pride in being we want to be the standard for having the best cost structure. We think that's the best place to invest. And a down commodity is the safest place to invest. So Yes. Well, we've met each other. We've already shipped I probably should pay in here as well. It is nowhere on my horizon when I was figuring this investment. There was nowhere on my horizon to do anything with the pipeline like that cost structure too. Yes. One thing Gary looked at, Mike, is a lot of the Tier 1 acreage is burdened by heavy firm transportation, old obligations. And the one thing that we bet it got beyond they bet it us on, do you have any of those burdens because that destroys your economics. Some of those burdens are $1,000 $1.50 per 1,000 cubic foot. So that is the reason that these two companies make a lot of sense. And that is a reason that we can we'll have this free cash flow. That is a reason we make money. I mean, you get rid of that and you don't make any money. All right. Thanks, guys. I'll hand it over. Congrats. All right. Thanks, Mike. I know it's a little longer than normal, but it's worth the longness. Our next question or comment comes from the line of Welles Fitzpatrick from SunTrust. Yes, sir. On the basin level consolidation, you guys mentioned and obviously, Covey is very clean from a gathering and an ST perspective, they've done a great job there. But how important do you think it is going forward for A and D that some of these other privates have pretty onerous gathering contracts that you mentioned or onerous Feet. 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? Yes. Well, it's a great question and because it gets to the heart of kind of the basin. That's the opportunity question that you've asked. Some of that 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 has very still has a long way to go. But I think the real answer is what you I think that is the problem to solve, is to figure out how to make a win win for the 2 parties, the person that holds the contract and the producer in the future. And that's the riddle to solve that would really help the consolidation of this base and maybe other basins. And 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, yes, we want to we think it's critical in the environment, especially in the gas price environment. You need to be able to make good money at where gas is now, and I just hope it's going to go up in the future. Well, and again, I would say, and Jerry can comment on this, we brought the Covey concept to him back in February of 2018, and we never let it go because he said, tell me which ones which is the best. And in our opinion, we had this part of the press release one time, we think that if you get a haystack out there, Covey is looking, we're looking. We think we found the needle of the Haynesville. That's what we said. We think we found that and we found Covey. And we do. And a lot of that is farm transportation and locations, the synergy. And I'll tell you, it's very hit. It's the people. I mean, these 3 guys that run Covey, I mean, they feel like they've been part of our team forever and ever and ever. So it's that synergy that made it work. This thing went on and off, on and off 2 or 3 different times, but it made because the people and I hadn't brought up Carl Jordan's name, but the denim guys, I mean, they connected with Jerry, and they made it work. But we are all looking to do the same thing. And that is make money, pay down this debt. And a lot of these other companies, if that firm transportation burdens there, you can see the rig count has 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. But if you're going to do it, do it with the strength of sitting on top of about $20,000,000,000 worth of prospects, which we are now with Comstock and Covey. Those are those 2,000 prospects and that's about $20,000,000,000 worth of drilling. And so 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. And you can sit there and work off of that. Now when the low hanging fruit comes or when the opportunity comes, you can take a look at it. But the main thing you don't ever do is sit here and not take care of. This is John Jacoby's famous up and going to sleep thinking about your asset, not somebody else's asset and you're milking that for everything you've got. That's the way we'll do this. Yes. Well said. That's great detail. And maybe to follow on that, Mr. Jones, I know 90% plus of acreage is HVP ed, great free cash flow number in 20 20. But with a run rate of, call it, 80 wells per year, you have almost a century quarter century, excuse me, of running room. That's not getting me wrong, that's a great problem to have. A lot of people would love to have it. But what avenues might you guys explore to bring some of that value to you and others about what a great business this can be. And it can be. It can be in soft times and it can be in times that have gotten fund to be in higher prices. But it can be outstanding business in low price times as well. But you've got to have a big front door and a small back door, so to speak, with kind of smiling with you here this morning. But we've got to show that the same thing, the principles that I use in running the Cowboys or the principle I use in running any business, we can't pick our times in the economy. And so 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. And I can and have we're making more money in what we're doing in Comstock and what we're going to in Covey Park than any other thing that I'm involved in. And you have to take a long term approach for natural gas. Like Roland said, we're going to make it profitable with gas prices where they are. But if you look at 2022, 'twenty three with LNG growth, the industrial demand growth, the exports of Mexico, I mean, we want to position it so not only do we make we have that type of inventory, too. And since we operate most of this, we can toggle it. We can add rig. We can get rid of rigs. We can adjust this. That's the beauty of having the scale that we have. So yes, we'll just manage it properly. And the inventory, I mean, that's a good problem. I'll give you 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. 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, can 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? Yes. That's John, that's a good question. Now 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. So we'll assume all the obligations of the bond. So it'll be a very 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? Yes. I think the I think ideally, we'd like to have a little more liquidity. I think that we have sets the borrowing base lower than what the properties would earn as a borrowing base, mainly to keep we want to keep our ratings the best they can be for the bonds. So that gives us a lot of comfort that when the borrowing base really should be larger than it is, that also gives us a lot of comfort with the new credit facility. And then over I think given our business plan of really 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. And that's why I think that's a paramount part of the strategy. But overall, in this market, we think this is a good capital structure for this transaction for this particular company. Understood. And then just lastly for me, just looking at the kind of forward plan there, it 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, the trade off as you kind of think about the right equilibrium, if you will? Right. And that's a big balancing act because I think it has the ability to do both now that the scale we'll have after combining that. So we kind of look at what does growing the asset do to create more cash flow and EBITDAX. That can have a pretty powerful delevering effect, too, maybe quicker. But we're also looking at balancing that into reducing the overall level of debt. So I think we can and we've adjusted downward maybe. The original plans were maybe to grow it more in the over 20%. But we said, hey, let's start to scale it back. We want to make sure that the free cash flow is definitely there. And given as we look as we put the countries 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? And I think we can reduce the CapEx all the way down to that $400,000,000 area if we don't want any production growth. And so I think those 2 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. So I'll send my congratulations as well. Thank you. Yes, sure. 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. Good morning, gents. Yes, would echo the sentiment here. The industrial logic behind the combination makes a lot of sense. So congrats. Just quick few questions. The first one would be just from a technical standpoint, as you integrate the company, any particular milestones to keep in mind, any particular technical talent that you believe will be very important for consolidation and kind of what would you keep do to keep the team together? That's just one philosophical question. And then 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. Ray, on 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, models and we do our due diligence on the gathering and marketing and acreage and can blend in land, etcetera, etcetera. We've integrated a lot of that. That's the numbers you see today is that integration. We'll just take a different another step and we'll keep commitment. We'll keep diligent. We'll 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. And 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. And you've watched us do that for a long, long time, Rehan. We've never messed up on that. So we'll take care of business. Roland? Yes. I think Rehan, yes. The PDP the SEC 10 of the PDP is $2,300,000,000 there. That's based on the December 31 combined independent reports. And then I guess your third question, you asked about what the nature of the completions or the nature of the makeup of the drilling program next year. Yes. So no, no, no, no, no. The PDP decline curve, like what's the decline curve? Are the combined assets? And then, yes, just kind of any cadence to completion for this year, next year, the drilling program? Yes. I think the overall decline curve or the PDP is about just somewhere around 30%, 31% in a kind of on a consolidated basis. And so that's obviously the part of the company that you're that you want to if you want to keep that flat, that's kind of where we came up with the kind of 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 will mix in some of the shorter laterals as they make sense along the way. I think we're still going to drill 60%, try to target closer to 60% of the project being the 10,000 foot laterals and then fill in some of the section and a half laterals and a few of the shorter laterals. And 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 program would be, would be to like, you don't want to drill all your wells in the same place because then you have so much shut in time for the frac activity. So 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 can be 5% to 6% to 7% of your total production is a key one of the key parts in optimizing that. And so given the bigger scale, you have 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. Just a few questions, TBIs, just as we close. We do 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. And then our target is we again, all the stockholders pretty much have already agreed to this transaction. So we do expect to close this in a period of 30 to 40 days from today. So relatively quick time to actual closing, there's a few regulatory matters to get through. But there is no real big contingencies to this transaction closing. And then 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. And his initial wealth came from natural gas. And that's how he bought the Cowboys. And now the $1,100,000,000 man is back, and I assure you that he will be an active stakeholder just like he was active on the phone call today. And 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. So it's a tremendous statement and refreshing to have him back. So Jerry, you want to close this? Yes. We all no one deliberately gets involved in something that isn't potentially very have a good appetite if we don't have good experiences because we'll get written about. So it's important that everything that I get into has high quality and are with the right kind of people. And most of the people on this call have some background here with Comstock Management. But 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 Jacoby and Allen that have had their success. But here's my point. I trust everybody involved here, not just trust, but they're great people. It inspires me. It has inspired me. But I will also say that these assets are some of the finest assets that I can have imagined or have seen. And so 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. Yes. Again, thanks everybody on the call for probably an hour or 40 or so. It's a long call. It should have been. We got a lot of good things to talk about. So 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.