Comstock Resources Inc (CRK) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Comstock Resources Incorporated Earnings Conference Call. (Operator Instructions) As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Mr. Jay Allison, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Thank you for introduction this morning. And again, I want to thank everybody that's taking their time to listen to the story today. I know we have a lot of you we know. A lot of you are really good friends. They have been forever and ever and ever. So today is an important day in our corporate life.

We're all human, and we do understand the third quarter results are somewhat disappointing quite frankly, and I can speak for me and for everybody else on the management team, we hate it. And they are disappointing for the reasons that you're aware of. I mean, they're all logical reasons. They're still disappointing, shut ins, curtailments related to Hurricane Laura, non-op curtailments, and there's a litany of other small reasons.

I think our goal this morning is to share what we see for the fourth quarter 2020 as well as 2021 and 2022 and to show you, our stakeholders, how we plan to delever our balance sheet in those years by using our strength of our peer-leading high margins and low cost we've created in the Haynesville in a period of time, quite frankly, when the outlook for natural gas is extremely bullish, really the most bullish it has been in over 10 years.

Our job in the next 45 minutes, really, today is to avoid any disappointments in the future and show you how our high margins in the Haynesville coupled with the right-sized capital program over the next few years can delever the balance sheet and expand our trading multiples so that we all are winners, all based on the commodity gas price outlook that we see today.

So thank you for trusting us. And if we have dented that trust any, please know that the entire Comstock team will work hard to earn it back and even more by giving you 100% of our best as we always have. Now I'll start [going] (added by company after the call) into our third quarter results, and then we'll get to the Q&A. And we'll answer any questions that you have and be accountable for it.

Welcome to the Comstock Resources Third Quarter 2020 Financial and Operating Results Conference Call. You can view a slide presentation during or after this call by going to our website at www.comstockresources.com and downloading the quarterly results presentation. There, you'll find a presentation titled third Quarter 2020 results. I am Jay Allison, Chief Executive Officer of Comstock, and with me is Roland Burns, our President and Chief Financial Officer; Dan Harrison, our Chief Operating Officer; and Ron Mills, our VP of Finance and Investor Relations.

Please refer 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 in such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

If you're following this, you can turn to Slide 3. On Slide 3, we discuss the highlights of the third quarter.

November is the first month where we finally exited the period of very low natural gas prices brought on by the warm winter we had as the November natural gas price closed at almost $3 after hitting a low of $1.50 this summer. The low production levels brought on by the actions of disciplined natural gas producers, combined with the decline in associated gas resulting from low oil prices, have caused the 2021 future natural gas prices to improve substantially.

Since January of this year, we have been focused on reducing our drilling activity and deferring completion activity. Those actions allowed us to generate free cash flow even with the very, very low prices we're receiving for our production.

The reduced activity we had in the first half of the year, combined with the third quarter hurricane activity in our region, negatively impacted our production this quarter as you see. With the stage set for higher prices later this year and into 2021, we collectively decided that we would go back to work in the third quarter. We added 2 additional operated drilling rigs to bring our working rigs back up to 6, which is where we were at the beginning of the year and currently have 3 frac crews working to catch up on the backlog of drilled and uncompleted wells.

Since our last report, we have put 15 new wells on production, which have a per well IP rate of 26 million cubic feet per day. We did have a rocky quarter, as I mentioned, on the production front, which partially was self-inflicted as the ramp-up of activity drove our shut-in percentage up to 7% in the quarter. The higher spending in the quarter reflects restarting of program we put on hold in the second quarter, but it is the right move as we look forward to improved gas prices that we're in.

We did achieve our goal of reducing well costs to just under $1,000 per lateral foot, which is significantly lower than any other Haynesville operator. With recent changes to our completion design, we expect well costs to increase a little bit as Dan Harrison will go over later. While it made sense to bring well costs down as low as we did, with weak gas prices [earlier] (added by company after the call) this year, with gas prices closer to $3-plus now, it makes sense to invest in a little more proppant as we believe the wells will have a higher return.

As we will discuss more today, we recently decided to increase our completion activity planned in the fourth quarter by running an additional frac crew, which moves up the completion of 7 wells that we plan to complete in 2021. The additional investment will pay off in 2021 to allow us to have a little higher production to take advantage of the higher gas prices.

In the third quarter, we completed a follow-on $300 million notes offering to further pay down borrowings on our bank credit facility. We reduced our outstanding bank borrowings from 57% of availability to just 36% of our availability. By freeing up the bank credit facility, we increased our financial liquidity to $928 million.

The low oil and natural gas prices, combined with low production in the quarter did impact the profits we generated in the quarter. Our oil and gas sales, including hedges, were $212 million. Our adjusted EBITDAX came in at $148 million, and our operating cash flow was $93 million or $0.38 per share. We reported an adjusted net loss of $13.8 million or $0.06 a share. With higher production and stronger natural gas prices, we anticipate returning to profitability in the fourth quarter, which is now.

I'll have Roland go over the financial results in more detail. Roland?

All right. Thanks, Jay. On Slide 4, we summarize our financial results for the third quarter of this year. Our production for the third quarter totaled 103 Bcf of natural gas and 354,000 barrels of oil. Total production of 105 Bcfe was 4% higher than the third quarter of 2019.

Our oil and gas sales, including the realized hedging gains, were $212 million, which was 15% lower than 2019. And this was all driven by the lower oil and gas prices we had in the quarter. Oil prices in the quarter averaged $33.52 per barrel, and that's with the hedging gains we had in the quarter. And our realized gas price, including hedging gains, was $1.95 per Mcf.

Our natural gas price realization overall was down 14%, which offset the production growth that we had in the quarter. Adjusted EBITDAX came in at $148 million, which was about 22% lower than the third quarter of 2019, and operating cash flow of $93 million was about 35% lower.

We did report a net loss of $130.9 million for the third quarter or $0.57 per share, but most of that loss is attributable to the $155.6 million unrealized loss on the mark to market of our hedge positions. And that is all caused by the substantial improvement to futures -- the future natural gas prices since the end of the second quarter.

Our adjusted net income, excluding the unrealized mark-to-market hedging loss and then certain other unusual items, was a loss of $13.8 million or $0.06 per diluted share for the quarter.

On Slide 5, we summarize our financial results for the first 9 months of this year. Production for the first 9 months totaled 349 Bcfe, including about 1.2 million barrels of oil, which is 90% higher than our production for the first -- the same period in 2019. Of course, most of this increase is due to the acquisition of Covey Park Energy, which we completed in July of 2019.

Oil and gas sales, including realized hedge gains, were $716 million, 40% higher than the same period in 2019. Oil prices so far this year have averaged $39.84 per barrel and our gas price is $1.96 per Mcf, both including the hedging gains we had. Overall, this is 18% lower than the prices we had for natural gas in the same period in 2019.

Our adjusted EBITDAX came in at $511 million, which was 35% higher than 2019. Operating cash flow was $367 million, and that's 31% higher than 2019. We did report a net loss of $160.9 million for the first 9 months of this year or $0.77 per share. Again, this was due to the mark-to-market loss, the unrealized mark-to-market loss on our hedge book.

Adjusted net income, excluding the unrealized hedging losses and other unusual items, was $12.9 million or a net income of $0.06 per diluted share.

The third quarter production was adversely impacted by a higher shut-in level than normal, as you can see on Slide 6. 7% of our natural gas production was shut in, in the third quarter as compared to 4% in the second quarter. Much of that shut-in is due to offset frac activity either by our simultaneous operations or other Haynesville operators, but we also temporarily shut in a portion of our production over the course of about a week due to the impact of Hurricane Laura that caused widespread power outages in our region.

And then also in September, for a good part of the month of September and then carried over really into the first 12 to 14 days or so of October, we did experience wide differentials in the daily cash market at Perryville and another index in the southern Gulf region. And this was all due to concerns that the natural gas market had over the high storage levels as we've been -- as we exit the period of storage injections.

So the only gas that's really impacted by these daily prices is what we call our swing natural gas that was not sold during bid-week and are not part of our baseload sales. So we chose to restrict some of the new wells that were coming on in September and then given the very low price that this extra swing gas was getting and these high differentials in the month of September and also the declining overall index prices in that volatile month did cause our overall differential in the quarter to widen by $0.10 in the third quarter.

This situation did continue into October, really only the first couple of weeks of October. And then we took an action in the very first part of October to actually curtail for price reasons 300 million a day of our production. And overall, we did this for about 11 days. That action, along with the start-up of LNG facilities, coming back after the hurricanes, really helped reduce the concerns about storage filling up. And then we saw the -- about mid-October, we saw the daily cash prices go back into a normal relationship and differentials narrow, and then we put all that gas really back into the market.

So I think as October has finished out and as we entered November, we've seen a very healthy situation, which has been supported by very favorable injections to storage and even today, a withdrawal.

We also saw that, obviously, our nonoperated oil production, which is primarily located in the Bakken region, also has continued to experience substantial curtailments, which carried through in the third quarter. We had about 12% of our oil production that was shut in by the operators that operate it due to the very low oil prices or other issues in the Bakken region.

On Slide 7, we cover our hedging program. For the first 9 months of this year, we had 50% of our gas volume hedged, which increased our realized gas price to $1.96 per Mcfe from the $1.60 that we actually received from selling our production. We also had 86% of our oil volumes hedged, which increased our realized oil price to $39.84 versus the $30.35 per barrel that we actually received.

Overall, during that period, we had realized hedge gains of $133 million. But with the improvement in future natural gas prices, we also took that opportunity to continue to add to our hedge book but really at higher levels than we'd hedge before and then also using collars. So we've added about 10 million a day of natural gas for the fourth quarter since we last reported earnings, and we added about 38 million a day of natural gas collars in 2021, and about 12 million a day of collars in 2022, which gives us a good protection level but also gives us exposure to the higher prices.

So as you look ahead for the fourth quarter of 2020, we have 663 million cubic feet of our gas and about 2,800 barrels per day of our oil hedged. The weighted average floor price of our remaining 2020 gas prices is $2.61. And for 2021, we have natural gas hedges covering about 836 million cubic feet of our 2021 production. So we're on target to having 60% to 70% of our 2021 production hedged, and we'll also work as we have this improving gas strip to work with to hedge our 2022 volumes appropriately.

On Slide 8, we detail our operating cost per Mcfe produced. And overall, these were pretty comparable to the second quarter. So our operating cost averaged $0.55 in the third quarter as compared to our second quarter rate of $0.54. Gathering costs were $0.21. Production and ad valorem taxes averaged $0.09, and field level costs were $0.25.

The one thing we did do this quarter in order to improve the comparability to us and other producers was to reclassify our ad valorem taxes that used to be showed as part of just lifting cost and include those in production taxes. So you'll see that if you're kind of tracking the old numbers and so it's really about $0.01, so not a big change, but we think that just makes us more comparable to our peers.

On Slide 9, we detail our corporate overhead per Mcfe, and our cash G&A costs were $0.07 in the third quarter, which is slightly up in the second quarter, but that's mainly due to the lower production level in the quarter.

On Slide 10, we detail the depreciation, depletion and amortization per Mcfe produced. Our DD&A averaged $0.95 in the third quarter, which was about $0.08 higher than the second quarter, and most of that impact is due to the much lower SEC type prices that are kind of backward-looking that we used to do the amortization with.

On Slide 11, we recap our third quarter and the first 9 months of 2020 capital expenditure program. So we spent $110 million on development activities in the third quarter and $94 million of that was related to our operated Haynesville shale properties.

For all of 2020 so far, we spent $316 million, including $259 million on the operated Haynesville properties. We've drilled 36 or 28.6 net operated horizontal Haynesville wells so far this year, and we also completed 9.6 net wells that we drilled in 2019. We've spent $56 million on nonoperated activity and for other activity so far this year.

We generated $367 million in cash flow for the first 9 months of this year, resulting in free cash flow of $30 million after we paid the dividends on the preferred shares. After dropping our operated rig count to 4 rigs in April, which was down from 6 back in January, we've increased our operated rig count back to 6 rigs. In the fourth quarter, we expect to spend about $150 million to $170 million this year to drill 17 or 16.4 net operated Haynesville wells and then to turn to sales 22 or 17.6 net Haynesville wells.

We made the decision recently to keep a third frac crew busy in the fourth quarter, which we originally planned to release and then bring back in early 2020. This does add about $30 million to our 2020 spending but -- and the reason for it was to accelerate the completion of 7 wells that before we planned to complete in 2021. And this is in order to take advantage of the higher gas prices, especially that we see for the first quarter of 2021.

And it was just a decision based on if we kept our original schedule, we compare that to keep in this third rig, which was performing well for us and operations asked us to look at that, and we said, we actually make $15 million more by accelerating that completion into kind of the prime, the highest gas price months on the futures curve. And so we said that's the right thing to do.

If you look at the full year for 2020, if you combine the fourth quarter with that, we now expect to spend about $450 million to $500 million this year, which would have drilled 53 or 45 net operated Haynesville wells and turned 55 or 42.2 net operated Haynesville wells to sales. We also participated -- we also plan to participate in 18 or 1.3 net non-operated Haynesville wells and turn 3.8 net wells to sales. At the end of this year, we now expect to have about 16 or 15.4 net DUCs or drilled and uncompleted wells.

So as you look ahead to 2021, we expect to increase spending a little bit over the 2020 level in response to these higher natural gas prices that we see. And we expect to spend between $525 million to $575 million and drill 70 or 56.5 net operated Haynesville wells and turn 65 of those wells or 56.6 net wells to sales in the year.

Our initial plans right now are to add a seventh operated rig, and we would do that in the second quarter of next year. Obviously, as we get to that point, we'll assess the natural gas market in our region and decide if that's still a great course of action. If not, as we've shown in the past, we don't have long-term commitments for drilling or completion services or any kind of volumes to meet, so it's clearly an economic decision on when we spend the CapEx. And we can react -- as we did this year, we can react to the market and adjust our level of spending as is appropriate.

But we still remain focused on generating significant free cash flow, and we see next year as having a bounty of that with the plans we have, and we target to have a minimum of at least $200 million of free cash flow as we plan for any future capital spending.

On Slide 12, we show our balance sheet at the end of the third quarter. And during the third quarter, as Jay mentioned, we issued $300 million of new unsecured notes to term out a portion of the borrowings outstanding under our credit facility. So we ended the quarter with about $500 million drawn on our credit facility, and we do expect to continue to pay that down with free cash flow generated during the rest of 2020 and into 2021.

With the quarter ending cash position of $28 million, our current liquidity now stands at $928 million. We have just over $2.25 billion of senior notes outstanding, and that's comprised of $619 million of our 7.5% senior notes due in 2025 and $1.65 billion of our 9.75% senior notes due in 2026.

So I'll now turn it over to Dan to cover the third quarter drilling results in more detail.

Okay. Thanks, Roland. Over on Slide 13, this is just our updated outline of our current acreage position, which has increased this quarter up to 309,000 net acres. We control the majority of the acreage with a 91% operated position and have an average working interest in the acreage of 81%.

We currently have 1,943 net future drilling locations identified on the acreage with 96% of the acreage is currently held by production. Since resuming our completion program at the very end of June, we have turned 15 additional wells to sales. This now brings our total D&C count up to 252 wells since early 2015.

Now like Roland mentioned, we have added 2 additional rigs since our last call, and we're now running a total of 6 rigs. Due to the break in the frac activity in Q2, we started out the third quarter with a total of 21 DUCs. We've since worked that down to 16 wells currently. Our go-forward DUC count should remain roughly at this level through year-end and into next year.

We started out the quarter with 2 frac crews. We ramped up the 3 frac crews in early September and we will continue to run these 3 frac crews through the end of the year. Based on our current 6-rig schedule [this year and] (added by company after the call) for 7 rigs next year, we anticipate running on average 2.4 frac crews in 2021.

Over on Slide 14. This is our latest Haynesville/Bossier itemized drilling inventory at the end of the third quarter. Our gross operated inventory currently stands at 2,401 locations with our net operated inventory at 1,763 locations. This represents a 73% average working interest on our operated inventory.

Our nonoperated inventory is at 1,352 gross locations with the net nonoperated inventory at 180 wells, and this represents a 13% average working interest.

For the gross operated inventory, we have 494 short laterals and 905 medium laterals and 1,002 long laterals. Breaking this down by the gross operated inventory by zone, we have 54% of our locations are in the Haynesville, and 46% are in the Bossier.

We are focused on converting our short laterals to long laterals. While the total number of locations has not grown, the number of 8,000 foot and longer Haynesville laterals has increased to 420, up from 389 at the end of the second quarter. This inventory provides the company with over 30 years of drilling locations based on our current activity levels.

Slide 15 is a map outlined in summary of the 15 new wells that we've turned to sales since the last call. The new wells were spread out fairly evenly across our Greenwood-Waskom, our Logansport and Elm Grove acreage. The wells were tested at rates of 16 million a day to 35 million a day, with a 26 million per day average IP.

The wells were drilled with lateral lengths ranging from 6,049 feet up to 9,869 feet. And we averaged 9,088 feet for the quarter. All of these completions were completed with 2,800 pounds per foot.

As mentioned earlier, we have 3 frac crews working today, and we'll maintain that level of completion activity through the end of the year. The current DUC count as [mentioned] (added by company after the call) before stands at 16, and that should maintain through the end of this year and into next year also.

On Slide 16 is a chart. This illustrates the progress we continue to make driving down our D&C cost. These results track only our medium- to long-term laterals, which have the lateral lengths of greater than 7,000 feet. Our D&C costs continue to trend down in the third quarter and is starting to flatten.

We again achieved our lowest all-in D&C cost to date at $998 a foot. Contributing to this low D&C cost were 2 record low-cost wells that averaged less than $900 a foot. This D&C cost is 17% lower than the same quarter a year ago, and it represents a 2% cost reduction from the previous quarter.

The story is really the same. Our current service costs, coupled with our really high completion efficiency and the smaller jobs has really been the driver for the low cost. Since the last call, we've generated enough production history on the earliest wells completed with the reduced frac intensity to evaluate performance. We have observed a slight reduction in our EURS, which we expected to a small degree and which made sense with the low gas price environment we were in earlier in the year.

Starting in September, we have shifted back up to our original job size in the 3,500 to 3,600 pound per foot range as we have entered a much better gas market. Based on our most recent well costs, we're still aiming to keep our costs relatively flat in the 1,000 to 1,050 foot range.

Going forward, the market demand on services will play a large part in our cost structure. With that being said, we do believe our current cost structure will maintain through the end of the year, but we acknowledge that us and the rest of the industry may be facing some upward pricing pressure in 2021.

That kind of recaps the operations. I'm now going to turn it back over to Jay for some final comments.

Okay. Thank you, Dan. And also, Roland, thank you. If everybody would go to Slide 17, I'll go over this slide and then turn it over to Ron for some guidance. So I'd like to direct you to Slide 17 where we summarize our outlook for the rest of this year and our initial thoughts on next year.

For the first half of this year, we've remained primarily focused on free cash flow generation and managing the company through the low oil and natural gas price environment we've been in. While natural gas prices remained relatively low through October due to elevated levels of gas and storage, the outlook for natural gas has improved substantially for late 2020 and 2021, driven by expectations for significant declines in natural gas supply due to a continued reduction in natural gas directed drilling and completion activity and less associated gas production from related activity in oil basins resulting from the collapse of oil prices.

Starting in the third quarter, we went back to work and resumed completion operations with 3 frac crews in order to work through the backlog of DUCs that Dan had talked about. And we've added 2 additional drilling rigs to generate production growth late this year and more importantly, in 2021, to coincide with improved natural gas prices.

We also recently made the decision to accelerate well completions originally planned in 2021. We're keeping a third frac crew working in the fourth quarter, which moves about $30 million to our 2020 budget from 2021 in order to complete 7 wells 3 months earlier.

The rationale is that we can produce the gas related to these wells earlier in 2021 in the higher gas price months. The strength that we lean on this year is our industry-leading low-cost structure and well economics. With all our focus on reducing activity and delaying start-up for the new wells, we expect to have about a 2% pro forma production growth this year.

Next year, we expect a balanced growth of probably 6% to 8% while generating substantial free cash flow that we'll use to pay down our debt and reduce our financial leverage. We've hedged almost half of our production over the remainder of 2020 and 64% of our 2021 production and have strong financial liquidity of $928 million following our recent bond offering.

So with that, now I'll turn it over to Ron to provide some specific guidance for the rest of the year. Ron?

Thanks, Jay. On Slide 18, we provide financial guidance for the fourth quarter of 2020 and our initial guidance for 2021. This guidance reflects the impact of the timing of our drilling and completion schedule as well as the shut-ins discussed earlier in this call.

For the fourth quarter, we anticipate spending $150 million to $170 million on our drilling and completion activities, which will result in 2020 total spending being $450 million to $500 million. That's higher than we discussed in the second quarter call due to laterals getting longer, some additional workover activity, some nonoperated activity and some minor leasing costs.

Fourth quarter 2020 production is expected to average 1.15 to 1.25 Bcfe per day, and our 2020 production is expected to average at the low end of our prior guidance of 1.25 to 1.30 Bcf a day despite the impacts of the shut-ins and the hurricane impacts previously discussed.

Looking ahead to next year, we're providing initial CapEx guidance of $525 million to $575 million and production guidance of 1.325 to 1.425 Bcf a day, which anticipates the addition of the seventh rig by the middle part of next year. LOE is expected to average $0.21 to $0.25. Gathering and transportation costs are expected to average $0.23 to $0.27.

The production and ad valorem taxes are expected to average $0.08 to $0.10. Our DD&A rate is expected to be $0.90 to $1, and the cash G&A is expected to be in the $0.05 to $0.07 range on a unit basis.

For the rest of the call, we'll turn it over for questions and answers.

(Operator Instructions) Our first question comes from the line of Derrick Whitfield from Stifel.

All right. With regard to the 2021 outlook, would it be fair to assume you'll see minimal production from the seventh rig you're adding in 2021 and the real impact will be felt in 2022, where that activity increase could sustain growth in that, call it, 6% to 8% range?

Yes. This is Roland, Derrick. That's a good observation. I think really, if you look at the way that the shale companies, especially how we're developing the shale, the capital that we spend today really doesn't generate production until 4 to 6 months later because we always drill on pads just because it increases the drilling efficiency so much. So you have 2 to 3 wells kind of waiting before they come online.

I think as we look ahead into 2022, we wanted to create some guidance that, even though it didn't add a lot of production to '21 and probably the action we did to actually to spend additional dollars in the fourth quarter probably has a great impact on '21. But with adding an extra rig there really isn't a lot of production that gets on in time to really move the numbers. But what it does, I think we have a set the stage for a very sustainable program into 2022 versus having a higher growth rate in '21 and then going back to hardly any growth in '22.

So I think that given the outlook for gas and the company's kind of exiting this period of very low gas prices and been very defensive, we wanted to set kind of a more sustainable program out there that makes sense for the overall achievement of our goals, which is to get leverage below 2 and use the strength, like Jay pointed out, of the very high margins that these wells can generate in this gas price environment.

We are sensitive to the fact that the market doesn't like additional spending and growth. But I think if you focus really on that we're a natural gas company and the outlook is somewhat stronger next year, it's not the same case as an oil company that's looking at a more uncertain commodity and not a favorable kind of future. So we think it's the best action for the company as to how we achieve our goals, and it also sets expectations into something that we think we can really outperform next year and also outperform in 2022 and that it's not overly short-term focused on just getting the maximum results next year.

Well, and again, our goal is to figure out on a quarterly basis, how we should spend our capital dollars. That's why we've looked at 2021 commodity prices. We looked at fourth quarter 2020, and we said we should keep a frac crew busy. We should lean into 2021 because, again, if you look at the advantage we have, I mean, we have advantaged access to the demand market of the Gulf Coast. We're favorably exposed to Henry Hub, right?

So when we look at that, we need to lean into that, the market that we have. And you see the LNG exports, I mean, they're at an all-time high right now. So we think with the weather, where it is and where commodity prices really are and where our leverage is and our low-cost, I mean, now Dan has given us low cost and high margins. We've got to give you an outlook for the fourth quarter as well as '21 and '22, so we don't have any disappointing quarterly results to you again. That's what we're doing today. We're correcting everything.

That certainly makes sense. And as my follow-up, referencing Slide 6, you guys were clearly impacted by several uncontrollable events in Q3. As you look out to Q4 and then into 2021, how do you envision that shut-in metric trending over that period?

Yes, that's a good question. I mean, a large impact is always the simultaneous operations, which happens now because we have to protect your offset production from offset frac activity, either we create it or [some] (corrected by company after the call) of our neighbors create it.

So yes, I think it's probably realistically a 5% number, pretty flat. I mean especially as -- if we keep a more consistent program, I think it stays more consistent. It doesn't have the kind of gyrations. And the unknown is there are power issues or pipeline issues that are caused by other events.

And then I think what -- for the first time ever, really in this late September-October period, as a major producer in the Haynesville Basin, we, for the first time, withheld gas from the market because of the market struggling with the storage levels before it became comfortable with that level. And it's the same thing that the large producers did in Appalachia, and it's our responsibility to do that.

And our actions allowed that market to recover pretty quickly and also allowed us to realize, instead of realizing a very low price for the gas, to save it and then produce it a week later at a higher price. So I think we're also going to have to be mindful of that in controlling the flow of gas, especially the swing gas that's opened into a market.

Every year, so far, there has been a sensitive period for gas as it exits the injection period and storage fills up and as October is just -- it's been that transition now. We had it last year in 2019 but not as severe and then this year, too. But the good news is it seems like we've made the good adjustment through it and operators like us responded and very proactive to keep in that situation workable.

I think you won't see the impact of the private equity backed Haynesville players, but they'll have the same type of shut-in issue. I think the good thing for Comstock, you noticed we did add about 4,000 or so acres to our footprint. So we've got 309,000 acres.

We do spread our drilling program out north, southeast, west, both in Texas and Louisiana, and when you look at our drilling program, we kind of have a pool of information from the offset operators, and we figure out when they're going to drill, when they're going to complete, and we try to toggle all of our programs around because of our large footprint to not have quite as much exposure to these shut-ins.

But again, I think Dan will tell you that it's probably 5%, Roland will say 5%. And then that's kind of where we are right now with our footprint. We'll -- we've put out our model and our guidance. Ron has done that, and he's kind of stuck that type of handicap in for the future.

And we didn't focus on that much, Derrick, in our conversation earlier like we normally do. But we do have initiatives going on in '21 that we're going to be able to really get less and less gas sold at Perryville, which is more vulnerable to, especially for gas coming out of basin like it did in disrupting that basis.

So we've always had a goal of removing ourselves from that market. And I think next year, there are several initiatives. The big one obviously is Acadian line opening up. But we also have been working with our midstream partners to give us some other ways to bypass Perryville and move gas more to the Gulf or at least have the flexibility to respond to that.

Our next question comes from the line of Dun McIntosh from Johnson Rice.

I had a question. I understand the pickup in activity and that attacking leverage can be a little easier from the EBITDA side sometimes. So how -- under this new program, where do you see leverage over '21 and '22 and targeting that we've talked about 2.5x at the end of next year, but getting down under that 2x. Does this get you there faster? Or what do you see...

Yes, it does. We -- Roland gave you some numbers, I think, but we will delever faster and it's all because of the market demand and the prices we get at Henry Hub. Now we do delever. We had all of our one-on-one conference calls, we said the only reason we would add a rig or complete wells earlier is if it allowed us to delever quicker. That's the reason you do it. So Roland, do you have a number?

Sure. I think we're getting very close to getting down to our 2x as we finish up '22 with this plan. And I think by investing a little bit into '21, it actually allows us to hit that goal there versus just being shy of it if we let 2022 just have kind of have more of a flat production profile.

Again, we're -- it's been erratic for the company, obviously, to go from growing at a 34% rate back in 2019 to 2% this year is probably what it's going to end up being with all the -- and then back to more sustainable levels, the 6% to 8% and -- but we're really targeting to try to get to more of a 5% growth to balance some growth, to improve EBITDAX, to get that leverage ratio down faster, at the same time, though, also reduce the overall level of debt and keep a lot of free cash flow as a big target.

And the strip today gives us that opportunity to achieve all that with this program in this 2-year period.

And then that gives us a growth in 2022 of maybe 5%. So what our goal today, again, it's to reset the program for the fourth quarter '20 and for 2021, 2022. That's exactly our goal. So that was a great question. It is all about delevering with where we are in the locations we have and the profits that we make.

All right. And then for my follow-up, on the -- you mentioned in the call, maybe moving to a little [higher] (corrected by company after the call) proppant. What are kind of the drivers behind that decision? Is that more of an EUR base? Or is that more to bring volumes on faster at the front of the curve to kind of try to capture this higher pricing environment that we look like we're heading into?

Yes, this is Dan. So yes, you hit on it there at that first point. I mean it's all EUR driven, which basically is hand-in-hand with our performance. So back earlier this year, when we went down to these smaller jobs, we were in the lower gas price [environment] (added by company after the call).

And we did anticipate maybe a 5% reduction in EUR, which we ran the numbers that made sense to basically test that size. We're seeing EURs more like maybe 8% to 10% smaller for -- and this is really for the wells maybe that are over in that state line area, the Greenwood Waskom area.

And so when you run it at higher gas prices, I mean, it's clearly you need to pump the bigger jobs, which also means you're pumping more water. It's just a matter of the economics. I mean the wells deliver better PV-10 value when you do that at the higher gas prices.

Yes. I think it's a good question, too, because we intentionally -- we set the bookings. We look at companies that use 5,000, 6,000, 7,000 pounds of proppant. We didn't think that would be what we need to do. We dropped down to the lower bookings of this 2,400, 2,500, 2,600 pounds and water, like Dan said. And so we've kind of tested the bottom at a low gas price. Then you should do that because you do save precious dollars right upfront.

But when you have a gas price of [$2.90] (corrected by company after the call), $3.10, $3.20, and you look at the PV value and you look at how quick these wells pay out, and increase volume and it's easier to say the right thing to do is to spend a little bit more money. We're still in that $1,000 to $1,050 for completed foot to have a much better performance, which drives our leverage.

And so it's our job to tell you that, too. We didn't try to hide that. We said we should probably go back up there because we did test it, and we know what we need to do. Great question.

Our next question comes from the line of Umang Choudhary from Goldman Sachs.

You mentioned that gas prices are driving your decision to grow EBITDA to meet your leverage goals. Can you philosophically talk to what would drive a shift to lower activity and spending in favor of more free cash flow? Is there a gas price point at which you will reduce activity? And how has that price point evolved given recent reductions to well cost?

Well, I think that there is definitely gas prices that are a factor in how we look at the whole picture. And obviously, gas prices are not what the futures market is anticipating for 2021 and they underperform that. We would definitely reassess our spending because I think that free cash flow goal, we're going to maintain it.

And so I think that is definitely a big factor. And I think we think we've gotten -- overall as the market seems to be fairly comfortable that at least in '21, the stage is set for this $3 kind of area of gas price, and we'll certainly reassess adding a rig by midyear next year if it's not at that level anymore.

So we're not at all locked into one strategy, but we wanted to present more of a balanced program that didn't just focus on '21 and absolutely maximize '21, which the 6-rig program really can do. But that comes at the expense of '22, and you stop making the progress towards your leverage goals in '22 if you don't make any investment for it. So that was the goal today.

Again, the beauty is we don't have any firm transportation obligations that cause us to drill. We don't have any minimum volume commitments that cause us to drill. 96% of our acreage is held-by production. So our CapEx budget is just driven internally by what we need to do to improve our balance sheet and pay down our debt.

And we'll be very reactive to the changing environment. And as we were this year playing defense in the first half of this year, we could be very reactive because we don't have long-term obligations that drive us to have to drill any wells at all.

The other thing people forget, I mean, our denominator is the consistency of our wells. I mean, we have 30 years of inventory at this rate. I mean, we -- usually people worry about the quality of your locations. Nobody ever asked us about that. So we've taken that off the table.

They just say how can you delever. I mean how can you delever? And where we are, we're the only pure Haynesville [public] (corrected by company after the call) company, at this size, we say, well, again, our advantage is this access to the Gulf Coast. And we do have great gas prices. So let's use our strength. We can't act like another company in another basin. We've got to act like a company we are in our basin.

And that's why we've got to tell you, we're going to reset the whole program for the fourth quarter of this year and in '21, '22. We also tell you that whatever we need to do to -- if we need to shut in the swing gas because the prices are low. You've now seen that we've done that. We demonstrate that we will do that. If we need to go back to lower proppant, prices are lower, we'll do that. We need to go back to higher proppant, then we'll do that. Again, our goal is to be very transparent with you as a partner as we create even a greater company.

(Operator Instructions) Our next question comes from the line of Kevin Cunane from Citi.

Just a quick one on 2021 expectations. Obviously, as you and a few others increase growth next year in light of higher prices, what are you looking at as far as non-op spending for the year? And are you seeing any of those private equity-backed companies kind of gearing up for higher production growth next year as well?

Yes, we have very limited touch points with other companies. So the non-op part of our portfolio has always been fairly small. And basically, we really like to do acreage trades to try to even make it smaller.

And I think that we actually finished some really good acreage trades that you saw kind of come through the location numbers and acreage numbers this quarter with GeoSouthern and Indigo that really improved our overall lateral length overall and reduced our nonop potential activity in the future and also actually gave us more locations at our very, very best lowest transportation cost area. So it was really a big win. And I'm sure that we also met their goals and things they were trying to accomplish. And so yes, we still see non-op as not a big part of our budget.

And frankly, if a non-op project doesn't meet our high expectations, we've now got good partners that want to buy those interests. And so we're very tuned on saying, "Hey, if we can't generate a really good return from nonop, we'll sell down the wellbore to people that are interested in investing in that. So I think we probably always have budgeted -- I mean, Ron, you might say that we have a potentially $35 million to $40 million of non-op activity that we kind of always expect to have.

That's about right. It is typically average kind of in that 6% to 8% of the total budget.

So we're very proactive at trying to disarm that before it becomes a big number. Because nobody -- we just never like being in nonop properties generally.

Our next question comes from the line of Phillips Johnston from Capital One.

I also wanted to ask about the '21 program. I think it was only a month or 2 ago, you guys were talking about running 6 rigs throughout next year and growing only by 3% to 5% for about $450 million in CapEx. Now it sounds like you're talking about adding a seventh rig in the second quarter, spending closer to $550 million and growing by 6% to 8%.

It sounds like the change in tact mainly relates to just the stronger gas prices that you're seeing on the strip. And obviously, that helps your leverage ratio if the strip plays out. But of course, that's only if the strip sort of holds true or if you actually hedge the strip.

So I guess my question is, why chase those higher prices that you're seeing with higher activity. Why not just let the higher prices flow straight to the bottom line in terms of additional free cash flow? And if you like the prices and actually want to grow by that amount, why not just hedge the majority of your production for both '21 and '22?

I think it's because for '21, I think your suggestion would be a way to optimize it. But we think that's very short-term thinking and if you're focused on '22 is, I think the people will become more focused on it as we get in the middle of '21. Yes, the underinvestment really means no growth in production in '22. And so I think that we're really making that additional investment really for '22. And we can defer it.

If the prices are weaker, we won't add the seventh rig. We're not committing to it in advance at all but it is to present you a more balanced program in '21 that's sustainable versus a program in '21 that's absolutely just maxed out to produce short-term results because, before you know it, you'll be in '22. And then all of a sudden, it'll be like, well, these are -- you're no longer making any progress toward delevering because you haven't made to get enough investment. So...

We thought we would level it out. Again, that's accelerating a little bit of CapEx in the fourth quarter to level out the beginning of 2021 and be really consistent when prices are high right now. We have 64% hedged in 2021 and then propel you over into 2022 with a 5% production growth. And at the same time, we do think that we balance 2 things.

We balance the growth properly, and yet we delever quicker at the same time. So it's not that we have to make a big correction sometime in the latter part of 2021 to change what we're doing in 2022 because if you don't spend a decent amount of money drilling, your production will drop off.

Any of these shale companies, whether they're Appalachia or oil, it doesn't matter, you do have to have a decent amount of spending. And where we're located, it tells us that we need to balance this budget today and reset it today, Phillips, and you've been very nice in your writings about what you expect us to do.

And again, we don't want to disappoint anybody, and we want to make sure everybody knows why we're laying this out and knowing we can change it. We need to change it, we can change it. Prices go a little higher, we change it. If they go lower, we change it. But we think this is the right way for the next 2 years and 2 months.

Yes. The free cash flow is not being sacrificed. I mean, given the prices that we see, we are still going to have very substantial free cash flow, at the same time, have the right investment. So then you look up and say, you know what, '22 looks pretty good, too. It's not like this is a 1-year wonder. And I think that's the opportunity.

But as we answered the question before, we're looking at prices every day. We're looking at the NYMEX prices and the future strip where you can hedge, and then also the cash prices, and we will be very reactive to that and not -- and not end up accelerating capital expenditures in a declining price environment. That's something we definitely will not do.

Yes. I mean I guess the concern is it was only less than 30 days ago, we're shutting in volume because of low spot prices, right? And then we're talking about adding an additional rig next year. So I guess my follow-up would be would you look to hedge more '21 -- sorry, '22 volumes before you added that seventh rig?

Oh, definitely.

Absolutely.

And hence, by the time we add it, our hedge positions need to be more established for '22.

Remember, our hedge positions, we want to be between 50% and 70% and maybe 60% to 70%. So...

Over the next 12 months, so yes.

Absolutely, Phillips. Great question.

We will not be going into on an unhedged basis. So we'll continue to deliver on the hedges and the time frame that we continue -- that we promised, which is basically for 12 to 18 months. So yes, and we have to be able to establish those to support that rig. If not, it won't happen.

Yes, with the leverage we have, I mean, we have to hedge. We should do that. So yes, it's a commitment to you.

Okay. That makes sense. And then maybe just also if I could just -- I guess, there's been some -- obviously, some large corporate mergers announced in the last 90 days or so. Just wanted to get your latest thoughts on just potential consolidation in the Haynesville.

Well, our goal is we -- hopefully, today, we've reset the program. I think that if we continue to execute, I think the stock price will perform. I think that you're going to have some stranded Haynesville producers that will need to do something.

Hopefully, what we've done -- look, we've set ourselves in the middle of kind of a square where to go, to exit, you've got to at least talk to us or look at us, and we can evaluate if there's an opportunity for us to grow and then have higher market cap and more size but at the same time, continue to delever and to continue to have our high margins. So if we can't do that, then we're not interested in any of those opportunities.

I think we've been smart enough to say yes, on the Covey Parks of the world and some others, and we're not going to lose that edge that we have because that edge is everything. So we're not going to lose it. And yet, we're not going to go stand in the corner or not look at opportunities to expand. If, in fact, those make the equity owners stronger and the bondholders stronger and our banks stronger, we'll keep shopping all the time, and we'll keep executing.

Our next question comes from the line of Kashy Harrison from Simmons Energy.

So just 1 or 2 quick ones for me. So I was wondering if you could give us a refresher on how to think about corporate base declines. I'm assuming since you pretty much shut down activity over the last few months, you have improved visibility onto what that corporate decline looks like. And then maybe how we should think about that expectation -- your corporate decline expectations over the next several years.

What we've messaged in the past is that the corporate decline rate is about 40%, upper 30s to 40%. If we look out over the course of the next year, it's around that 40% level. Then it will improve kind of by 5% to 10% in the second year and then continue to flatten out as we have more of the established production base in -- at a lower decline. So that -- in terms of the first 12 months, kind of that plus or minus 40% is going down to, I guess, 25% to 30% and then kind of flattening out there.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jay Allison for any further remarks.

Yes, and again, everybody that stayed the whole hour on the call, we're -- you can't imagine how thankful we are that you've spent an hour with us. And again, our goal is to reset the program for the fourth quarter of this year, and then in 2021, 2022, give you something that we think we can really beat. And we want to adjust this CapEx structure to maximize our advantaged access to this demand market that we have in the Gulf Coast.

That's a great advantage we have. It's a material geological advantage we have. We just have some great exposure to Henry Hub prices right now. We want to use that. If we need to change this budget, it will be pulled back. But it's real and it's been reset, and it's good. And again, we thank you for being a partner with us.

And I think the brighter days are ahead of us. Our rearview mirror is pretty small and our windshield is really big. And gas prices look really good, and you've got a really good team here committed. And we take -- if there's a good day or bad day, we take whatever good day is, and we're accountable to you. So thank you, thank you. We'll give you our best.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.