Comstock Resources Inc (CRK) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2006 Comstock Resources earnings conference call. My name is Eric and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of the conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn our presentation over to our host for today's call, Mr. Jay Allison. President and Chairman. Please proceed, sir.

Thank you, Eric. You forgot to tell everyone there was a 9 Bcf withdrawal today of gas, so I'll let you by with that.

We want to welcome everyone to the Comstock Resources third quarter 2006 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 clicking presentations. There you will find a presentation entitled third quarter 2006 results. To change the page in the presentation, click on the arrow on the page.

I'm Jay Allison, President of Comstock, and with me this morning is Roland Burns, our Chief Financial Officer; and Mack Good, to my right, is our Chief Operating Officer.

During this call I will review our third quarter 2006 financial and operating results as well as the results to date of our 2006 drilling program. And Mack will go over that in detail at the end of the presentation.

Our discussions today will include forward-looking statements within the meanings 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 would please turn over to slide 2, in the third quarter, we acquired additional shares of Bois d'Arc Energy, which requires us to change our accounting method for our investment in Bois d'Arc. As a result we consolidated Bois d'Arc's results retroactive to the beginning of this year. I will review the impact of the consolidation on our 2006 results on various slides in this presentation.

We had another solid quarter at both Comstock and Bois d'Arc. Our revenues came in at $129 million. We generated EBITDAX of $99 million and operating cash flow of $89 million. We also generated a profit of $16 million or $0.37 per share excluding an unrealized gain on derivatives reflected in reported earnings of $17 million or $0.39 per share.

Our onshore production increased by 3% this quarter over 2005's third quarter, and our offshore production is up 74%. Our onshore drilling program had a 97% success rate with the 76 wells we drilled in the first nine months of this year despite the delays that we had in getting drilling rigs.

At Bois d'Arc we drilled 12 wells with nine successes and three dry holes for a success rated of 75%, including two high-impact wells, Sockeye and Steelhead, which started up production in the third quarter.

On slide 3, you will find the Bois d'Arc ownership chart. During the third quarter, we acquired an additional 2.285 million shares of Bois d'Arc Energy for approximately $36 million. As a result, our ownership increased from 47.6% to 49.5%.

After acquiring the shares, our voting control of Bois d'Arc increased to 48.5%. However, when you combine our voting percentage with the voting percentage held by our directors, we have over 50% voting control of Bois d'Arc. As a result, we are now required to consolidate Bois d'Arc in our financial statements. We believe that consolidation accounting will present a better picture of our operations and our assets. The equity method that we have followed since Bois d'Arc's IPO has made our invest in Bois d'Arc almost invisible in all of our reported numbers.

Slide number 4 outlines the impact that consolidation has on our financial results. Our oil and gas sales for the first nine months of this year increased to $385 million under consolidation as compared to 197 million using the equity method. EBITDAX increased to $294 million, as compared to 147 million. Our operating cash flow increased to $268 million, as compared to 131 million.

Slide 4 also presents pro forma revenues, EBITDAX, and cash flow for the nine months ended September 30th of 2005, using the consolidation method. Our sales increased to $307 million from 210 million, EBITDAX increased to $245 million from 168 million, and operating cash flow increased to $214 million, from 147 million.

We can only apply consolidation retroactive to January 1, so our 2005 numbers will reflect our proportionate share of Bois d'Arc until May the 10th and under the equity method for the rest of 2005.

On slide 5 we outline our daily production rate by quarter and by region. Our onshore production averaged 96 million cubic feet equivalent per day in the third quarter as compared to 93 million cubic feet equivalent per day in 2005's third quarter.

Our offshore production averaged 91 million per day in the third quarter, an increase of 74% from 2005's third quarter production rate of 52 million cubic feet equivalent per day.

We expect our onshore production to average 106 million cubic feet equivalent per day and our offshore production to average 98 million cubic feet equivalent per day in the fourth quarter for a combined total of 204 million cubic feet equivalent per day.

On slide 6, we cover our oil prices. Our average oil price increased 16% in the third quarter of 2006 to $65.95 per barrel as compared to $56.63 per barrel in the third quarter of 2005.

Our average oil price in the third quarter was 94% of the average NYMEX WTI price in the quarter. For the first nine months of the year our realized oil price was $63.06, which was up 24% from our oil price of $50.65 in the first nine months of 2005.

For the first three quarters of this year, our average oil price was 92% of the average NYMEX WTI price.

Slide 7 shows our average gas price. Our average gas price decreased 21% in the third quarter to $6.63 per Mcfe as compared to $8.41 in the third quarter of 2005. Our realized gas price was 101% of the average Henry Hub NYMEX price in the third quarter.

For the first nine months of 2006, our average gas price decreased less than 1% to $7.13 per Mcf as compared to $7.16 in the first nine months of 2005. Our realized gas price was 96% of the average Henry Hub NYMEX price for the first nine months of the year.

If you would turn to slide 8. To best compare oil and gas sales, we have broken out our sales between onshore and offshore on slide 8. The increase in production is the primary reason for the higher oil and gas revenues in 2006.

Despite the lower gas prices, oil and gas revenues were up 12% to $129 million as compared to pro forma consolidated sales of 115 million for the third quarter of 2005.

Offshore sales increased 54%, to $67 million from 43 million in 2005's third quarter. Because of lower natural gas prices, our onshore sales were down 13% to $62 million in the quarter as compared to 72 million in 2005's third quarter.

For the first nine months of this year, our oil and gas sales increased 25% to $385 million as compared to 307 million in the first nine months of 2005. Offshore sales increased 39% to $188 million from 136 million in the same period in 2005. Onshore sales were up 15% to $197 million in the first three quarters of this year as compared to 171 million in the same period in 2005.

EBITDAX, slide 9. As shown on slide 9, our earnings before interest, taxes depreciation, amortization, and expiration expense and other non-cash expenses, or EBITDAX, increased 6% in the third quarter to $99 million, as compared to 93 million in last year's third quarter. Onshore operations contributed $47 million of the EBITDAX and Bois d'Arc contributed $52 million.

For the first nine months of this year our EBITDAX increased 20% to $294 million as compared to 245 million for the same period in 2005. Onshore operations and Bois d'Arc each contributed $147 million to the consolidated EBITDAX.

Slide 10 covers our operating cash flow. Our consolidated operating cash flow increased 6% this quarter to $89 million as compared to 84 million in 2005's third quarter. Onshore operations accounted for $41 million and Bois d'Arc accounted for $48 million of the consolidated cash flow in the quarter.

For the first nine months of this year, our operating cash flow was $268 million, 25% higher than cash flow in the first nine months of 2005 of 214 million.

Onshore operations accounted for $132 million, and Bois d'Arc accounted for $136 million of the consolidated cash flow in the first nine months of this year.

On slide 11, we outline our earnings. Excluding our mark to market gains or losses from our derivatives, we reported net income of $16 million or $0.37 per share for the third quarter of 2006 as compared to net income of 26 million in the third quarter of 2005, or $0.60 per share. For the first nine months of this year, our earnings are $61 million or $1.40 per share as compared to 79 million or $1.94 per share for the same period in 2005. These results exclude gains or losses from our derivatives, the loss on the pending Kentucky sale, and the charge for the new Texas business tax.

We have also adjusted the 2005 results presented on this slide to exclude the unrealized gains or losses on derivatives and the one-time effect of Bois d'Arc's conversion from a limited liability company to taxable corporation and the gain from its IPO in May of 2005.

We outline our cost structure on slide 12. Our lifting cost this quarter averaged $1.57 per Mcfe as compared to $1.43 in the third quarter of 2005. Our depreciation, depletion, and amortization per Mcf produced increased to $2.35 per Mcfe in the third quarter as compared to $1.73 per Mcfe in 2005's third quarter.

If you would turn to slide 13, for the first three months of 2006, our lifting cost per Mcfe produced was $1.59 per Mcfe as shown on slide 13, compared to $1.32 for the first nine months of 2005. Our depreciation, depletion, and amortization per Mcfe produced increased to $2.11 per Mcfe as compared to $1.71 per Mcfe in 2005.

Slide 14 shows our capitalization. At the end of the third quarter we had 455 million in debt, including 105 million of debt at Bois d'Arc. Our equity at the end of the third quarter was up to $635 million. Our debt to total book capitalization currently stands at 41% at the end of the third quarter.

On slide 15, we break out our onshore drilling expenditures by region. We spent 145 million in the first nine months of this year on our onshore drilling program as compared to 94 million in the same period last year. 74 of the 76 wells drilled in the first three quarters of 2006 were successful, with only two dry holes.

We spent 124 million to drill the 76 development wells. We spent an additional 18 million for workovers, recompletions, and other development costs, and 3 million on acquiring leases. 103 million was spent on our east Texas drilling program. 14 million was spent in south Texas. 28 million was spent in our other regions. We plan to spend approximately $215 million on our onshore drilling program this year.

Slide 16, east Texas, north Louisiana region. We have drilled 50 successful wells in our east Texas, north Louisiana region. And the first nine months of this year is shown on slide 16. They were drilled in 11 different fields. The wells drilled had an initial average production rate of 1.4 million cubic feet equivalent per day per well.

Slide 17: East Texas, north Louisiana drilling rigs slide. We have been behind most of this year on our Cotton Valley drilling program, waiting on drilling rigs. On slide 17 we have a chart summarizing the rigs that we have contracted for this program. We operated four rigs in the first quarter and dropped to 3 and 2/3rds rigs in the second quarter. During the third quarter we increased to 5 and 1/3 rigs.

We expect to run eight rigs for much of the fourth quarter, which will allow us to begin to catch up on this program. We plan to carry these eight rigs over into 2007, which will allow us to drill over 130 wells in this program next year.

Slide 18, our south Texas region. We drilled seven successful wells in our south Texas region in the first nine months of this year. They have been tested at a per well average rate of 4.8 million cubic feet equivalent per day. These wells were drilled in our Ball Ranch and Javelina fields.

Slide 19, our south Texas acquisition, Denali. At the end of the third quarter we completed the acquisition of the Las Hermanitas field in south Texas. We paid $67.2 million for 20.2 Bcfe of proved reserves and an additional 22.7 Bcfe of probable and possible reserves.

The field has three producing wells and 18 identified drilling locations. We plan to drill two of these locations before year end and hope to convert some of the probable reserves that we acquired to proved by year end.

Slide 20, our other regions slide. In the first nine months of this year we drilled six wells in the mid-continent region. Five were successful and one was a dry hole. We drilled six successful wells in our Laurel field in Mississippi. We participated in drilling seven wells in the San Juan in New Mexico. Six of these were successful and one was a dry hole.

Slide 21, Bois d'Arc Energy drilling results. Bois d'Arc has had solid results in its exploration focused drilling program this year. Since the beginning of 2006 they have drilled nine successful wells out of a total of 12 wells drilled for a 75% success rate.

In the third quarter Bois d'Arc had two discoveries, one at Ship Shoal 67 and the other at Ship Shoal 166. The one dry hole at Ship Shoal 103 resulted in a $6.2 million write-off this quarter. During the third quarter Bois d'Arc connected its two largest discoveries made this year to sales. The Sockeye well, at South Pelto 22 began producing at 17 million cubic feet equivalent per day and the Steelhead prospect at Ship Shoal 111 began producing at 6.5 million cubic feet equivalent per day in September.

Slide 22, the outlook for 2006. We continue to be excited about the prospects for the growth of Comstock. We expect to spend $215 million on our onshore drilling program this year, which is a 76% increase from the $122 million we spent on our onshore drilling program in 2005.

The Cotton Valley drilling program has been the major driver for our onshore production growth this year. We have over 400 operated low-risk drill sites to support our continued drill bid growth in the future. Bois d'Arc is performing well with an outlook for strong reserves in production growth this year.

We continue to maintain a very strong balance sheet. Our consolidated debt is only 41% of our total capitalization, giving us a strong balance sheet to support future growth.

With that, Eric, I will open it up for Q&A.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Wayne Andrews with Raymond James. Please proceed.

Good afternoon, Jay, or good morning, depending on where you are.

Just wanted to get an update on your Cotton Valley trend play and as far as number of wells that were drilled and number that were hooked up during the quarter, what you expect to accomplish in the fourth quarter. And I have a follow-up question as well.

Jay, can you hear me?

Can you hear me, Wayne?

Yes, now I can.

Wayne, what I had asked Mack to do, if you don't mind to expand upon that question, I asked him to go through the number of wells drilled in the third quarter, how many expects in the fourth quarter, how many different fields will be drilled in the fourth quarter, and then carry that over into 2007 and even touch on horizontal activities in the area --

Abso -- yes, that was my follow-up.

And I have asked Mac to do that and I thought about having him present something after the formal numbers, so if that's okay, then he may answer a lot of questions that might be asked.

Yes, and also include just the number of wells that have been completed and hooked up, as well.

-- to be connected to sales-- yes. And if me miss something, I'm sure you'll ask us or somebody else will call in and ask.

Great. That sounds perfect.

Thank you, Wayne.

Wayne, and everyone, as you all know, we've waited a considerable amount of time to get the rigs that we wanted to work east Texas, and we started gaining delivery of those additional rigs in the mid-third quarter, and we're now running a total of nine rigs in east Texas, and we have rigs working elsewhere. We're working one in Mississippi and one in south Texas, the Hermanitas field, but specifically, the Cotton Valley program that is the driver for us has really started ramping late in the third quarter.

To specifically answer your questions concerning the wells connected to sales, in the third quarter, Wayne, we connected 18 and we spud 24 wells. In the fourth quarter, we anticipate connecting 25 wells to sales, and spudding 35 wells.

Obviously, the production ramp has been pushed to the fourth quarter and into the first quarter of Y'07 because of the late delivery of the rigs, the number of rigs we wanted to work. We're very satisfied with the performance of the overall program thus far in the multiple fields that we have targeted for development.

I think Jay mentioned earlier, that we're currently drilling in 11 fields. We had seven fields targeted for development in the third quarter, so we're -- with the additional rigs, we're able to drill in some other fields to achieve the ramp that we want.

I know that a number of participants are interested in the Cotton Valley play in east Texas. There has been some interesting activity over the last 12 months, especially. We keep a database here, not to bore everyone too much with technical detail, but we keep a database on the horizontal wells drilled in east Texas through the various reservoirs targeted for horizontal, from -- James Lime being the primary zone of interest, of course, along with the Pettit in east Texas historically has been -- those two reservoirs have been the major targets for horizontal development.

Recently, however, relatively speaking, the Cotton Valley has presented itself in certain fields as feasible targets for horizontal drilling, and we have those targets as well. We're reviewing the cost versus benefit ratios for the horizontal prospects that we have. We anticipate drilling some number of horizontal wells targeting the Cotton Valley and/or Pettit during Y'07 as part of our program.

The program ramp really extends beyond the Cotton Valley, and of course we talk a lot about our Cotton Valley program, because that's the obvious emphasis, but we also have another ramp that's occurring currently, and that's one in Mississippi. We'll be moving a rig into Mississippi -- another rig into Mississippi this month. We'll have two rigs working Mississippi for the remainder of this year, and we anticipate all of next year, and we have one rig currently working, as I mentioned, in south Texas. We'll be moving a second rig into the Hermanitas field probably late November, early December, to drill a four-well package.

So we're ramping in three different areas. The primary ramp, of course, is our Cotton Valley play.

Could you give us the total number of Cotton Valley wells that were connected year to date out of that program that was initially anticipated to be around 100? Just so we can get a feel for what you can have accomplished so far. It sounds like activity levels are picking up. I'm encouraged to hear that.

And then maybe you can discuss sort of what happened with rigs and what you have gotten today versus what you were looking at six months ago.

The first answer is we've connected 39 wells to sales so far this year. We had originally anticipated in our discussions six months ago, that we would have over 60 wells connected to sales by this time. With the late rig deliveries, obviously, that didn't happen and everything gets pushed back into the fourth quarter of this year, first quarter of Y'07.

We had anticipated deliveries from a couple of rig vendors that just didn't happen. And the specific reasons they didn't happen, we're talking about late deliveries on three rigs. The reasons why are multiple, but in general, they had late deliveries on equipment necessary to refurb the rigs that we had contracted.

We had one new build rig that was three months late, and that was specifically late deliveries of pumps and they had some electrical components that were also delivered late.

And so when you add all of those late delivery issues up, it pushed our program back about five to six months in terms of the ramp that we wanted to get on. And so we were contractually committed to those rigs.

Since then, we have looked at our rigs like -- our rig inventory -- as any prudent operator would, in terms of which rigs are the most cost effective to operate.

As you know, a number of companies have announced that they are downsizing their existing programs, and they anticipate that their activity levels in their areas -- and I'm talking about the Barnett, specifically, slowing down a little bit for a couple of operators, and that's going to make additional rigs available immediately that are working rigs, and then there's additional rigs that are going to be hitting the market in the next three to six months that are currently being refurbed and have yet to sign long-term contracts.

So the point I'm making here is that we have some flexibility with the rig inventory that we have that would allow us to improve the quality of that inventory by releasing rigs that are underperforming and not as cost effective as ones that may come to us on a market down the road.

So hopefully that answer some of your questions, Wayne.

It does. And then I'm going to drop off and let some others ask questions, but hoping to get an update on Mississippi as well. Thanks.

Yes, sir.

Hey, Wayne, one other thing I have noticed in -- Mack, correct me if I'm wrong -- we checked our acreage position in Texas. We have about 290,000 acres that's developed and undeveloped, and probably 60,000 of that 290,000 would be in Double A, Sunflower, Markham, the Ball Ranch, south Texas type areas, so we have got probably 230,000 acres outside of those core areas.

And then in Louisiana, we have about 110,000 acres that are developed and undeveloped, so if you look at the amount of acres that we would own and some of those trends, it's probably 300,000 acres, more or less, so it's a nice lease position that Mack has to work with in the future -- '07, '08, and the future.

Maybe just comment a little bit on sort of where those horizontal wells have been drilled that look so encouraging compared to your existing acreage position.

Sure. The data base that we've tracked shows that a number of wells have been drilled in Carthage, which is in Panola, by Devon, Texaco, Union Pacific, Vastar, EOG, a number of wells have performed at plus 4 million a day rates, and appear to be about three times the typical vertical Cotton Valleys in those performance -- in that field.

Douglass field in Nacogdoches, Sampson has drilled a few horizontals that have targeted, primarily, the James Lime there. We have the Pettit and the Cotton Valley in Douglass that we're looking at, west Douglass, which is nearby in Nacogdoches. Oak Hill, there have been seven wells drilled at Harrison and Rusk counties by a variety of operators, and a number of those wells have also performed plus 3 million a day.

So kind of a general description of where those horizontals that have been drilled that are relevant to our acreage position. So we're looking at multiple opportunities in the Cotton Valley and Pettit and James Lime. James Lime presents itself in Louisiana, primarily, in a couple of our fields.

Great. Thanks very much, gentlemen.

Yes, sir.

Thank you, Wayne.

Your next question comes from the line of Ron Mills with Johnson Rice. Please proceed, sir.

Good morning, Jay, Roland, and Mack.

In terms of the activity levels in -- I'm assuming the 96 wells that you had planned on drilling, you won't get those -- that amount drilled this year, just given the delays. What's -- you know, you have drilled 50 through the end of the quarter. You had eight drilling at that point. Does it look like you'll be able to get somewhere between 80 and 85 wells drilled for the year?

Ron, this is Mack. We currently forecast we'll be able to spud 89 wells in the ArkLaTex region before the end of the year, and obviously the ramp is occurring as we speak. A number of those wells are targeting shallower horizons and we're able to drill those very, very quickly.

We reallocated our drilling program in the third quarter and late in the second quarter to accommodate that fact and switch some of the shallow zones to the -- or shallow target wells to the -- late in the third and fourth quarter.

Bottom line though, to avoid confusion, is that with an 8-rig, 9-rig program working in east Texas-- and keep in mind, and I have made this point in previous conference calls, is that we're able to drill and are drilling in our Cotton Valley wells in a very short period of time. As a matter of fact we just set a company record. The last Cotton Valley well that we've drilled and we drilled it in 10 days. And that's to a total depth of 10,350 feet.

So with the continued improvement in our drilling technologies and drilling program, coupled with, obviously, the higher rig count, we feel comfortable and confident that we can get to that 89 well count.

Ron, the other thing, at the beginning of the year, or really, the fourth quarter of last year, we chose that 96 number. At the end of the first quarter we were behind on that and we reported that, and what we said is that we felt like we probably couldn't get all of them drilled and completed but our commitment was that if we needed to get more rigs to drill more wells quicker, even though they wouldn't be completed, we would do that. We had never planned on adding a seventh, eighth or ninth rig in east Texas.

So although we'll fall short of that 96 well goal, we'll probably fall short by 10 wells, let's say, I think the important thing is we are committed to add the rigs. We do add the rigs and I think more important than that is that the result that we've have had on a per well basis has met or exceeded our expectations.

So it's not that we have slowed the drilling program down because the results were poor, so I think that's the differentiating point right there.

Okay. And versus the -- or related to the 50 wells you have drilled and the ones you have hooked up so far, it sounds like the average production is about 1.4 million a day. I think the second quarter quality average was about 1.5 million a day. Is that kind of the range that you are expecting to be able to still get your -- somewhere in the 1 to 1.5 Bcf per location?

Yes, sir.

Okay.

And then in terms of the production guidance of 106 million a day, that's down a little bit from somewhere a little bit over 110 million a day in a recent presentation Is that -- can that solely be related to the east Texas delays and then some -- by the end of the first quarter you should or could be caught up on your onshore production?

Yes, sir. That's primarily attributable to the smaller number of completions that we able to achieve in the third quarter due to the late arrivals of the rigs and pushing the production ramp build into the fourth quarter, and first quarter of '07.

Okay. And Roland, I don't know if you are there, but if you are, can you address just the accounting change and when you file your Q, are there going to be -- are you going to have the first three quarters broken out on a consolidated basis for modeling purposes?

Yes, Ron. Of course I'm still here.

When we file our 10-Q, probably early next week, yes, we will be presenting pro forma numbers for last year on a consolidated basis and then all of the results for this year will be presented on a consolidated basis.

Will you also provide, though, a breakdown, first, second, and third quarter?

Oh, for the -- we can provide that to you, but I don't think that's really in the 10-Q.

Okay. And as we look forward, modeling, we can apply the -- related to pricing differentials which you talked about on the Bois d'Arc call, to oil and gas, any guidance from your onshore pricing standpoint relative to NYMEX?

No, they have been -- as far as our realizations have been, you saw how they are on a consolidated basis. On an onshore basis, yes, they have been -- our average differential is somewhere around $0.15 to $0.20 less than the NYMEX price. A lot depends on how the gas markets respond versus the index versus the cash market.

But that's kind of how they were in the third quarter and we anticipate that in the fourth quarter.

And should we use that kind of differential or should we use a percentage of NYMEX?

You could do it either way. I think that -- like in the end of third quarter, you saw Bois d'Arc actually a had a premium to NYMEX.

Right.

A lot of that's attributable to the fact that Bois d'Arc's production has sold about 50% in the index market and 50% in the spot market, and if the spot market outperforms the index, then that generates that premium.

So I think just on an overall basis, yes, I would just use -- instead of a percentage of NYMEX I would use the $0.15 or $0.20 below the NYMEX average, and we should be a little better or little worse, with that kind of depending on how volatile the markets are that quarter.

Two last ones: In terms of the rigs, it sounds like, Mack, you are now at nine rigs, but it sounds like you are going to be going to eight rigs. Can you address -- a little more information on the flexibility in your current rig contracts in terms of how many are long term and to take advantage of some of the slow-downs you mentioned, when do you have rigs rolling off so that you wouldn't potentially break contracts?

Yes, we have the flexibility of renegotiating contracts at the end of this year for two rigs, and another of the rigs that we have under contract rolls off in April. We have five rigs that are on two-year contracts, so they are into 2008. So that kind of gives you a picture of our flexibility.

We have got currently nine rigs running in east Texas. One of those rigs will go to Mississippi, so we'll continue with an eight-rig program in east Texas, and the anticipation is we'll work at least eight rigs in east Texas throughout Y'07.

In Mississippi our anticipation is that we'll run two rigs there throughout the remainder of this year and throughout '07, and in south Texas, we currently have a rig -- getting ready to spud a well there, and a second rig delivered late this month, early December. So by the end of the year we will be running 12 operated rigs, eight in east Texas, two in Mississippi, and two in south Texas.

In addition, we're participating with partners on three large working interest percentage wells. One in east Texas and two in south Texas.

So we're currently looking at the end of the year at having 15 significant projects ongoing at the end of the year, and then of course 12 of those will be operated.

And as Wayne asked -- and I'll just end on this one -- can you give us a little bit of an update on what is happening in Mississippi, especially in light of you wanting to increase your activity level in that play? Thank you all.

Sure. We have a rig dedicated to continued development of Laurel oil field. We have multiple objectives and opportunities there. We have significant horizontal drilling opportunities that we've identified and we're designing those plans now to do so in Y'07. And we have some exploration opportunities in Laurel.

We have two wells currently being completed and one currently being drilled. And we have what we're calling north Gitano area, just north of Laurel. We have had a significant leasing program going on for approximately the last 10 months. We have acquired about 4,000 acres in that region, and the rig that I'll be moving from east Texas will be going directly to the Gitano area to start the first of a five-well package for evaluation there.

We also have prospects to drill in our Maxie Field region. We have additional leases that we have acquired there. And we'll be drilling the first of those wells in the first quarter of '07.

And then we have a number of other opportunities that I can't be more specific about because we have ongoing leasing in those areas, but we plan to target a couple of exploration wells and some development in addition to that with the rig that I'm transferring from east Texas.

So that kind of gives you a flavor, hopefully, of the activity planned for the rest of this year and throughout '07 for Mississippi.

That does. Thank you, guys.

Yes, sir.

Thank you, Ron.

Your next question comes from the line of Rehan Rashid with Friedman, Billings, and Ramsey. Please proceed.

Good morning, Jay. On the -- not to belabor the point, but going back to the east Texas, north Louisiana. So, 89 wells drilled this year. Question would be how much again will be connected by year end? And the 130 wells that you have planned next year? Just a thought that how many of these do you think you will be able to connect in '07 to sales?

Well, as I mentioned earlier, we anticipate connecting 25 wells in the fourth quarter to sales. We'll have approximately 30 wells to be connected out of the '06 program in January and February of '07. So that's a significant ramp in the first quarter, obviously.

We have not finalized our program for '07, but of the 120 to 130 wells that will be drilled in that region, we should be able to get 80% of them connected before the end of the year, if you assume a three-stage frac in every well, which is our average

Got it, Mack. And should we assume an even connection throughout the year or just based on planning that you are looking at. I understand very preliminary, but should it be kind of coming on line evenly or back-end loaded.

No. I wish it were that sample. Fundamentally, the connection times vary from field to field. We have some fields that are very easy to connect wells to. We have the infrastructure designed so that its simplistic. In other fields, it's multiple tight points to multiple purchasers and it's a little more time consuming to get those wells to sales in some of our fields.

So it won't be evenly distributed. I wish it were, but it's not.

Okay. Okay. Going back to Cotton Valley, I know you're monitoring what other folks are doing, but any thoughts on when would you want to attempt the first wells on your acreage?

As soon as possible.

Okay.

Given some of the results that we have seen, I think the thing to keep in mind, and it's -- you know, it's obvious, but to put it simply, is the Cotton Valley is not the same everywhere.

Sure.

And what is being targeted in Carthage, for example, is substantially different than what we would target. What is being targeted in the Pettit or in the James Lime is a little bit different than what we would be targeting in our Pettit and James Lime. We have a little different set of circumstances.

But having said that, we feel it's highly probable that we will have an excellent candidate and perhaps multiple candidates in the Cotton Valley. The first of which I would like to see executed in the first quarter. Now, whether or not there are certain land considerations, lease considerations, et cetera, that have to be resolved as well before you just take off and start drilling a horizontal, because you will be crossing multiple lease boundaries, et cetera.

So we have some issues to resolve there as well before we execute a program.

Okay. That sounds pretty good.

[Inaudible].

Rehan, one other kind of a comment on that, and it's just the magnitude of our onshore growth, our CapEx budget.

Yes.

We looked in the past and years 2000 through 2004, we spent about $42 million in each of those years onshore. The rest of it went offshore. When we looked at 2005, our budget's about -- it was $122 million, and when you look this year, it's going to be 210 million, and at a conference the latter part of November, early December, we'll tell the market what our '07 CapEx budget will look like in detail, but it will be significantly greater than what we spent in '06.

Right.

It will still be out of free cash flow, but it will focus on any of the horizontal wells that Mack would want to drill, either in the Cotton Valley trend or east Texas, north Louisiana, or in Mississippi.

He'll focus on drilling the Vicksburg Wilcox wells in south Texas. Hopefully, we will have spudded and maybe TD'd one of the Hermanitas wells, but I think you'll see that we'll start to blossom now that the rigs are there, and even you go back to staffing, I think since mid '05 when we kicked off really this focus of growing onshore, we have added four engineers or so, we have add three or four geologists, we've added more to the technical staff, and that's just to grow the onshore assets.

So hopefully all of that now is coming together, and you can see it, and we try not to be 10 wells behind from here on out.

Okay. And in terms of economics, Jay, any kind of particular commodity price that might not meet desired rate of returns?

Rehan, this is Roland. Yes, when we're looking at the Cotton Valley, we think that $5 gas price is not adequate to meet a good return on those projects, for the most part. There are probably some that we could find that would, and there are a lot of them that wouldn't. So that's a pretty key number for us. And at $7, the current gas market is a good attractive return for the program as being back.

Okay. All right. Thanks.

Yes, sir.

Thank you.

Your next question comes from the line of Eric Hagen with First Albany Capital. Please proceed.

The first question is for Roland, in regards to the consolidated results. So as I interpret it, it's fully consolidated, you'll just net out the interest you don't own in a minority interest line. Does that apply also to the cash flow line?

Yes -- well, the cash flow statement.

Statement, yes.

Yes, Eric, the cash flow statements that we will produce will be consolidated because we'll also show all of the capital expenditures and uses that both companies have, so --

What I was getting at is in the past your interest in Bois d'Arc was accounted for as non-cash, so it always made you look kind of expensive on a cash flow multiple. Going forward, since it's consolidated, you will get that sort of economic value reflected in your statements. Is that accurate, Roland? Or --

That's correct. In the past our investment in Bois d'Arc, as far as earnings, was reflected and -- because -- either equity or consolidation, earnings is the same number, but what has happened in our industry, our sector, is that earnings aren't really looked at very hard. A lot of people look at substitute cash flow, look at production numbers, and I think in those kind of instances, equity method really was invisible to the numbers.

So I think that's where we think it might be superior, at least that such a large part of our assets will at least show up in the cash flow numbers and production numbers in the future.

Okay. In terms of reserves reporting, so you will -- will the 10-K reflect your interest in Bois d'Arc? So if we're going to run a net asset value instead of, you know, in the past we've had to value your interest separately. Will we will be able to value those reserves -- your ownership in their reserves just like we value your current onshore ones now?

That's correct. And as far as the reserve presentation that shows up in the annual report. It would be a consolidated presentation. But there is a supplementary disclosure, the reserves, that relate to the minority interest portion. So you could probably take that and you'd subtract that portion.

Right now under the equity method, we show just the onshore reserves and then we have a supplementary disclosure just for our share of the Bois d'Arc reserves. The same information is there it's just kind of how it's presented.

Okay Moving on to Bois d'Arc, the recent transaction, going forward, now that you are fully consolidated and that's not so much of an issue in terms of market perception, would you do future transactions like that? If you see an opportunity to fund, say, one of Bois d'Arc's investments like Ship Shoal 113, I understand that was the rationale behind that transaction -- or not.

I think on that particular transaction there were a lot of factors there that supported doing a private placement with Comstock and Bois d'Arc, but I think in the future, yes, we would probably want to try to maintain Bois d'Arc's capital structure on a more independent basis. So I think that would not be our desired way at either company, would be do another placement of that nature.

But it's always -- if circumstances dictated that it was in the best interest of both company's stockholders, that's an option that is there, and -- but I wouldn't think that would be a trend that we want to always be there to always provide the capital. That's really why we did this initial public offering, was to establish the ability for the company to have its own capital base.

Two more quick ones. Given some of the asset packages coming on the market in the Gulf of Mexico, I think Dominion has a fairly significant Gulf of Mexico shelf -- you know, acreage. Would you be looking at getting more aggressive in terms of acquisitions with Bois d'Arc going forward?

Well, we do -- when Gulf packages come out or properties that we operate that other people own, like the Ship Shoal 113 interest out there, we do look at that. I think the overall business plan and what Bois d'Arc is really great at is expiration, and those type acquisition opportunities, if they can support the exploration prospects, that's when they are real interested, but they are not as interested in just being an aggregator of reserves and shifting a lot of the company's focus into operating properties for low returns, overall.

So I think that we always look at all of it, but it really doesn't have a lot of upside and as it were, using the capital on that versus using the capital for the large inventory prospects that are there already.

Okay. Thanks, Roland.

The last one is for Mack. In terms of the 2007 drilling program in east Texas, getting the completion services, take-away capacity, do you see any challenges there? And to what extent have you already lined those up? Thank you.

Eric, yes. You bet there's challenges. We have segued our current vendor relationships into Y'07 agreements. We are building additional capacity with third-party vendors for Y'07. We feel comfortable that we will have the available services we need to accommodate the program size that we're putting together.

Take-away capacity is being addressed, has been addressed for the last two quarters, been assured by marketing that, through the additional take-away points that we're signing contracts now on, that we will have the capacity that we need in certain areas.

Some other areas there are no issues, but there are a few hot spots that are being addressed right now as far as take-away, capacity, compression is an issue for a lot of operators. We're no exception. And we're addressing that with look-forward agreements with certain vendors to provide additional compression service.

Okay. Great. Thanks.

I actually lied. Just one more for Roland. Roland, going forward are you going to continue to break out onshore versus offshore production? And also just the cost structure, LOE and DD&A, so we can track those trends?

Eric, actually, I'll just talk -- I think the current press release schedule, if you have seen that, will continue to provide that detail. We're going to break our onshore area into the three regions now, east Texas, north Louisiana, which is the Cotton Valley for the predominant part of the activity that's going on there, and then we're going to present the south Texas area as a region, including the Double-A wells field as one region, and we'll continue to present that.

And then all of the other properties will be in Other for now. To the extent Mississippi becomes a larger percent, we might break it out separately. And then -- of course then we'll show Bois d'Arc as a separate piece. So we'll provide all that detail every quarter in our supplemental schedules.

And then Eric, remember on slide 9 where onshore operations and Bois d'Arc each contributed $147 million to the consolidated EBITDAX. I mean, those are the exact identical numbers. So every now and then you'll get -- it's like double vision, because I said, Roland, are those exactly the same? And they are. Both of these companies are pretty competitive in their numbers.

So just know that all of those have been double checked even if they are the same number for both companies.

Okay. Thanks for that clarity, Jay. Appreciate it.

Your next question comes from the line of Ray Deacon with BMO Capital Markets. Please proceed.

Yes. Hey, Jay.

I had a question about your comment on adding the engineers and the geologists, three to four geologists, since the spinoff. But is there -- so what percentage of the south Texas drilling locations would you say are generated by Comstock at this point? Ballpark, I guess.

Ray, this is Mack. I would say approximately half of them.

About half.

Double A and of course Hermanitas representing that portion, and our joint venture with [Avico] continues in Ball Ranch and Javelina Fields and we anticipate drilling multiple exploration prospects with [Avico] next year.

Okay. Great. Those are pretty healthy IP rates. Is there a target reserve range that you go for for an average prospect?

Well it's really kind of all over the map. To kind of give you some ideas about the targets, we have six exploration prospects that we feel are highly probable for next year's execution, and we're looking at those -- the reserve total for those six approaching 250 Bs.

Okay.

We've got additional wells to drill in Ball Ranch and Javelina, and typically those are anywhere from 2 to 5 Bcf type targets.

Okay. Got it. Okay, great. That's all I had. Thanks a lot.

Thank you, Ray.

Your next question comes from the line of Kim Pacanovsky with KeyBanc. Please proceed.

Hi, good morning, everyone -- good afternoon, actually.

First, a simple question. What is the DD&A rate for onshore only?

Hey, Kim, it's Roland.

Hi.

The onshore DD&A rate is about $2.20 for this quarter.

Okay.

You guys are going to drive us up the wall going back and forth between equity method, partially consolidated, consolidated. I hope you are going to stay this way now.

We wanted to try all of the different methods.

Yes. Just -- I don't know, more of I guess a statement than a question, when you go to consolidated, yes, you are going to get the benefit of all of the cash flow, but did you consider that you are also probably going to trade at a lower multiple because you'll be seen as an offshore company again?

Well, I think the key is just that we trade higher versus the multiple over all, but I think that the Company's composition is still the same. It's it's still -- we have got really half interest in Bois d'Arc and always have.

Yes.

And it is a pure offshore company that's been very successful, and then the balance of the company is onshore. The two companies themselves have a production rate almost very similar, like Jay said, generated almost identical EBITDAX, and cash flow numbers, they're going to be kind of neck and neck as far as the levels of contribution.

The way I look at it, Kim, is that we are what we are, we haven't changed because we consolidated. We have the same ownership of Bois d'Arc except now it's reflected, and you know, we're probably 1.8 or so billion in assets versus 1.1 billion. You're going to see that we have grown, and our investment in Bois d'Arc has worked.

Yes. Well, I mean, no, you haven't changed but I guess I thought that some of the thinking when Bois d'Arc came public and you changed the structure of the company was that Comstock would then be viewed as kind of like more of and an onshore only type of concern and receive a different multiple in the marketplace. But I understand your point.

Finally, let me just ask if when you looked at the financing for Bois d'Arc for the acquisition, what were the other options you looked at? And why was the private placement the best option?

Kim, what we looked at, we looked at an all-debt financing, and that was looked at very seriously, and we did consider at that time what a -- of course we also considered not making the acquisition, but we thought it was a very compelling value and hated to let it slip through our fingers. It was a preferential right. And then the other option was to do a private placement with institutions, unregistered stock, because the company did not have a registered shelf in place at the time. And our feedback with that was a fairly weak market and we didn't want a small placement to lower the value of the stock for the stockholder.

Yes,

That's why really the sale to Comstock made the most sence, because it was going to be at market price and wouldn't affect the market at all, and I think it achieved different objectives for both companies, We viewed it as a fairly small transaction.

Yes,

And it kind of fit the needs, but it would not -- we probably would not look to do something like that in the future. We would look for Bois d'Arc to have a more independent capital structure.

Okay. All right. Thanks a lot, guys.

Hang on. One thing, Kim, on that -- well, actually the Bois d'Arc IPO, Bois d'Arc had a $100 million credit facility and then several months thereafter, even after the hurricanes, and production went from, say, mid-70 million a day down to probably 20 million a day equivalent. The bank credit facility increased to $150 million and then probably a month ago we had another bank meeting, and it -- literally yesterday or day before yesterday, I think, we closed on the new credit facility, which was an amendment, and it's $200 million.

So you know, we look at the growth of Comstock -- or Bois d'Arc and its stability, and it's continued in spite of the hurricanes. It has continued, one, to have improved credit statistics.

Yes.

And it's at all an all-time high production rate, with seven wells not completed, which should add another $20 million a day equivalent net to Bois d'Arc's growth.

Yes, one of the factors, also, when the transaction happened, is that we were still in hurricane season and of course we hadn't -- and we were trying -- we didn't want this acquisition plus our drilling program to take away almost all of our liquidity under the credit facility because if we had a repeat of 2005 --

Right.

-- and that was a big consideration. We didn't end up having any disruptions and now we have more availability. So it was just the timing of it is partly what really lead to our ultimate decision.

Okay.

Might be different now. They have more credit capacity now. They might have just borrowed this time around.

Right. Right. Okay. All right. Thanks so much.

Thank you, Kim.

Your next question comes from the line of Matt McGeary with Sentinel Asset Management. Please proceed.

Good afternoon. I think you said on your last call, just looking at my notes, that at that time you thought you still could get the 95 to 96 wells done but you hadn't had a couple of rigs delivered yet, so you really weren't sure. At what point did you know in the quarter that there was a delay, and -- I'm just trying to get some clarity here because we have another significant disconnect between street expectations and production and what you actually delivered.

Well, as far as the well count that we anticipated being able to drill, that we anticipate being to drill, that's a dynamic. It changes all the time. At the time we made the statement, we were targeting, like I said, shallow wells and deep wells, a proportion of them, and the amount of time that it was taking us to drill. That's -- with the number of rigs that we had available and anticipated the delivery schedule, that was the number that we referred to.

After updating the deliveries of the wells, and the types of wells we're currently drilling in the various fields, we've reduced the number by seven. And --

There were further delays between your second quarter conference call and what you thought at that point in terms of rig delivery and when the rigs actually got there?

Well, a combination of all of the above. The rigs being delivered doesn't mean that they have spud. There's rig-up issues. There's delays in getting the equipment operating and functioning. There are drilling problems that occur. Every operator has them. And of course that changes the outlook as well.

Okay. Sure. Thanks.

Sure.

How are you feeling about your cost structure at this point? Someone asked earlier about what sort of commodity price you feel comfortable with in terms of a reasonable return, and I just sort of wanted to get some commentary about how you feel about your cost structure now.

I think that cost structure is a concern for every operator who has an active and aggressive program. But we have seen that this cost structure has flattened over the last three months. I think Roland referred to our threshold on commodity gas price to yield a reasonable rate of return at $5, and that's right there.

So relative to the economics, you know, we're comfortable at this point. But, you know, we're always reviewing and evaluating kind of the cost structure and trying to find ways and are finding ways to stabilize that, and one fundamental and obvious way is to spend less time drilling the wells. And I referred to that in an earlier comment that I made about the 10-day record that we set for a Cotton Valley well. That saves a considerable amount of drilling dollars, personnel dollars, and we get the added benefit of getting the well connected to sales quicker than originally anticipated.

So we're reviewing our vendor relationships and looking at volume discounts, et cetera, for our Y'07 program to further stabilize cost structure. But you ask a good question. Hopefully that provides you some indication of our approach to it.

Sure. Your guidance of -- what did you say, 106 a day for the fourth quarter? Do you have all the rigs, crews, and equipment you need for that? Keeping in mind obviously that things can happen operationally, but do you have the equipment that you need to get there?

Yes, sir. That's the short answer.

We do at this point in time. Crews -- and you raise another question that is endemic in our industry, and it is a problem for every operator, and that's qualified personnel at the field level, and at the corporate level. Jay mentioned we hired some engineers and geologists, we feel like we got a very high quality staff edition there. Field issues, in terms of personnel, that's a problem, and weather issues present themselves as well in terms of getting well locations built, getting the pipelines laid, et cetera.

So there are risk elements to any forecast, and those are some of ours, and other operators as well. We all fight the same gremlins.

Sure. Jay, when you were going through one of the early slide on the ownership in Bois d'Arc, I don't know if this was your intention, but it sort of sounded a little bit like we bought these shares and then when we added up the directors' shares, it turned out that we had more than 50%. Is that how it happened or am I assuming that you did these transactions with the intent --

That's exactly how it happened or I would tell you otherwise. We bought the 2.25 million shares, a new accountant came in and looked at it and said, have you considered the voting of the Comstock directors? We said no, it was immaterial, they added it back up and it was 50 --

No, we made an additional purchase of shares to get over that number. The actual original transaction, we did not have over 50% of the voting shares. The 2.25 million, we consciously bought -- because it was so close and because we could account the directors' share, we bought the additional 30,000 shares at the end of the quarter because we felt like consolidation accounting was going to be superior and it was such a small cost to do that.

Sure.

We ended up so close after buying the Bois d'Arc shares, that we had not looked at the directors' ownership in Bois d'Arc. It was so close -- it was like 20,000 shares --

Right.

-- and we thought that it was so close that we should go ahead and buy another 35,000 shares and consolidate it, but when we bought the initial Bois d'Arc shares, we did not -- I did not look at the voting control, period. It was not an issue that was ever raised.

Okay. That's fine. I just was curious how that dynamic went.

And I know, just sort of echoing what Kim was saying, I don't disagree with how you guys think about the structure of your company, but you know, in a public market where you are competing for capital, it's very confusing to keep going back and forth, particularly for people who are looking at your company for the first time. It's very confusing, and I think it keeps some people away and I think will effect your multiple in a negative way. Just a comment.

Thanks for your time.

Thank you, Matt.

Due to time constraints we are unable to take any more questions. At this time I would like to hand the call back over to Mr. Allison. Please proceed, sir.

Eric, thanks again.

We're always thankful for everyone that participates in the conference call, that owns Comstock shares. In fact we look forward to the conference calls, and we're accountable for what we execute and what we don't execute.

I wanted to really involve Mack today, to give his perspective to you on what we think we can do in '04 and then maybe into '07.

As we said before, if you look at our balance sheet and you look at the regions that we own, acreage in, you look at the prospects and you look at the success rate we have had, everything looks pretty rosy.

We are probably 10 wells or so behind. If I had that set of problems in the center of table, I would choose that problem every time. It hasn't been because of well performance and it hasn't been because Bois d'Arc hasn't been highly successful.

So with all that we're eager to continue to grow the Company and that's our charge. So thank you for participating in the conference call.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.