Comstock Resources Inc (CRK) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Comstock Resources Earnings Conference Call. My name is Brandy and I will be your operator for today. At this time, all participants are in a listen only mode and we will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Jay Allison, CEO. Please proceed, sir.

Thank you, Brandy. Good morning, everyone. Welcome to the Comstock Resources 2007 first quarter 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 first quarter 2007 Results. I am Jay Allison, President of Comstock and with me this morning is Roland Burns, our Chief Financial Officer and Mack Good, our Chief Operating Officer.

During this call, I will review our 2007 first quarter financial and operating results, as well as the results to date of our 2007 drilling program. Our discussions today will include forward-looking statements within the Meaning of Securities Laws, while we believe the expectations and such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

On Slide 2, you will see our 2007 first quarter highlights. Our production in the first quarter of this year averaged averaged 223 million cubic feet equivalent per day, an increase of 28 % over production in the first quarter of 2006 and a 13% increase over the previous quarter. Our onshore production increased by 16%, driven by our East Texas, North Louisiana and South Texas drilling activity. Offshore production was up 42% reflecting the return of all of our production which had been shut in due to the 2005 hurricanes and our successful exploration program. For the quarter, we had total revenues of $146 million and we generated [EBITDEX] of $14 million and operating cash flow of $101 million. We also generated a profit of $13 million or $0.28 per share. The first quarter financial results in 2007 were driven by strong production growth offset by the lower oil and natural gas prices. Our drilling program is off to a good start. We no longer are experiencing delays due to unavailability of drilling rigs. We have all the drilling rigs we need to execute this year's program on a timely basis. Onshore, we drilled 44 successful wells. At Bois d'Arc, we drilled 4 wells with 1 success.

On Slide 3, we outlined our daily production rate by quarter and by region for 2005 and 2006, and the first quarter of this year. And the first quarter of 2007, our production averaged 223 million cubic feet equivalent per day. At this rate, our production in 2007 would end up 21% higher than 2006. This is higher than the upper end of our guidance for production this year of 19%. Our onshore production averaged 113 million cubic feet equivalent per day in the first quarter as compared to the to the 101 million cubic feet equivalent per day we averaged in the fourth quarter and the 98 million per day we averaged in the first quarter of 2006. East Texas, North Louisiana region increased by 9 million cubic feet equivalent per day from the fourth quarter and the South Texas region increased by 4 million cubic feet equivalent per day. Our offshore production averaged 110 million cubic feet equivalent per day in the first quarter as compared to to the 97 million cubic feet equivalent per day we averaged in the fourth quarter and the 77 million per day we averaged in the first quarter of 2006.

On Slide 4, we cover our oil prices. Our average oil price decreased 6% in the first quarter of 2007 to $54.15 per barrel as compared to $57.91 per barrel in the first quarter of 2006. Our average oil price in the first quarter was 93% of the average NYMEX WTI price.

Slide 5, illustrates our average gas price. Our average gas price decreased 14% in the first quarter to $6.89 per Mcf as compared to $8.05 in the first quarter of 2006. Our realized gas prices was 102% of the average Henry Hub NYMEX price in the first quarter.

On Slide 6, we break out our oil and gas sales from our onshore and offshore activities. Higher production helped offset the impact of lower oil and natural gas prices this quarter. The 28% increase in production combined with the 13% drop in oil and natural gas prices caused our consolidated oil and gas revenues to increase by 11% to $146 million as compared to sales of $132 million in the first quarter of 2006. Offshore sales increased 23% to $76 million from $62 million in 2006 first quarter. Our onshore sales were unchanged this quarter at $70 million as compared to 2006 first quarter.

As shown on Slide 7, our earnings before interest, taxes, depreciation, amortization, exploration expense and other non-cash expenses are [ EBITDEX] increased 14% in the first quarter to $114 million as compared to $100 million in last year's first quarter. Onshore operations contributed $52 million of the[ EBITDEX] and Bois d'Arc contributed $62 million.

Slide 8, covers our operating cash flow. Our consolidated operating cash flow increased 10% this quarter to $101 million as compared to $91 million in 2006 first quarter. Onshore operations accounted for $46 million and Bois d'Arc accounted for $55 million of the consolidated cash flow in the first quarter of 2007.

On Slide 9, we outlined our earnings. We reported net income of $13 million or $0.28 per share for the first quarter of 2007 as compared to net income of $24 million in the first quarter of 2006 or $0.55 per share. The 2006 amount excludes a mark-to-market gain from derivatives.

We outlined our cost structure on Slide 10. Our lifting cost in the first quarter averaged $1.35 per Mcfe as compared to $1.67 in the first quarter of 2006. The lower lifting rates reflect lower rating cost at Bois d'Arc with a cost structure is improving after the run up in oil field service costs in the Gulf of Mexico after the 2005 hurricanes. At appreciation, depletion and amortization per Mcfe produced, increased to $2.82 per Mcfe in the first quarter of 2007 as compared to $1.94 per Mcfe in 2006 first quarter. The higher rate is a result of the higher costs we've experienced both at Bois d'Arc and in our East Texas, North Louisiana region which have increased our DD&A rate.

On Slide 11, you can see our capital structure at the end of the first quarter. On March 31, we had 511 million of debt including 120 million of debt at Bois d'Arc Energy. Our bank credit facilities have a combined borrowing base of $625 million giving us availability of $289 million. Our equity at the end of the first quarter was up to $698 million. The increase in debt funded our drilling expenditures in the quarter. Both our onshore and offshore drilling programs are heavily weighted to the first half of this year. In the second half of the year, in the second half of the year we hope to pay back some of the borrowings that we will make in the first half of the year. Our debt to total book capitalization at the end of the quarter was 42%, illustrating the strong balance sheet that we have.

On Slide 12, we outline our exploration and development costs in the first quarter of 2007 as compared to what we spent in 2006 first quarter. We spent $84 million in the first quarter of 2007 on our onshore properties as compared to the $49 million that we spent in the same period in 2006. We spent $79 million to drill 44 onshore development wells, all of which were successful. We spent an additional $5 million on acquiring leases and for work overs and recompletions and other development costs. We spent $55 million on our East Texas, North Louisiana drilling program, $15 million in South Texas and $14 million we spent in our other regions. Offshore, we spent $66 million in the first quarter of this year on exploration and development activities as compared to $48 million at 2006 first quarter. We drilled 4 wells, 2.6 net to our interest. Only, 1 of these wells was successful. We have budgeted $278 million for our 2007 onshore drilling program as detailed on Slide 13. We currently expect to drill approximately 167 or 117 net onshore wells this year. We have budgeted to drill 115 development wells in the East Texas, North Louisiana operating region for $175 million. We expect to spend $56 million in our South Texas region to drill 21 wells. We have also budgeted $47 million to drill 31 wells on our Mississippi properties and other properties in 2007.

On Slide 14, we focus on our East Texas, North Louisiana region. We drilled 34 wells in this region in 7 different fields in the first quarter. All of these wells were successful. These wells have been tested at a per well average rate of of 1.3 million cubic feet equivalent per day. Our drilling in this region which primarily targets the Cotton Valley formation has allowed us to increase our production in this region in the first quarter by 28% from 2006 first quarter and by 17% from the previous quarter. We cover our South Texas region an Slide 15, and our South Texas region, we drilled four successful wells in the first quarter. These wells have been tested at a per well average rate of of 7.5 million cubic feet equivalent per day. These wells were drilled in our Ball Ranch, Javelina and our recently acquired Las Hermanitas fields. Our drilling in this region has increased production by 10% from 2006 first quarter and by 13% from the previous quarter. We drilled six wells in our other regions during the first quarter as shown on Slide 16. All of these wells were drilled in Mississippi in the Laurel or Maxie fields. These wells have been tested at a per well average rate of of 1.2 million cubic feet equivalent per day. Our 2007 drilling program will expose us to significant reserve additions as outlined on the chart on Page 17. We have 2 South Texas prospect areas with net unrisk reserve potential of 56 Bcfe for each of these plays. We're currently drilling 1 of these prospects at this time. In Mississippi, we have a 14,000 acre prospect in Stone County that we call the Pine Hollow prospect. We estimate the resource potential for this prospect is 600 Bcfe or 450 Bcfe net to us. Adjusting for risk, these projects could add 140 Bcfe to our reserves.

On Slide 18, we cover our offshore drilling results. So far in 2007, we drilled three exploratory wells and one development well. We drilled a successful well at South Timberlier 75 to extend our 2005 Doc Holiday discovery to date this well has been drilled to a depth of 16,236' feet and has encountered pay in several new reservoirs. We have set protective casing and are deepening the well to test additional prospective targets. Our exploratory well drilled at South (Marsh) island 220 and a development well at Vermilion 50 were not successful. We also participated in another operators exploratory deepwater prospect which was not successful. We had 3 wells currently drilling, and in addition to the deepening of our second Doc Holiday well, we're currently drilling an exploratory well to test our Dog Bone prospect at South Palt 7 and we're participating in a second non-operated deepwater prospect.

On Slide 19, we detailed Bois d'Arc's 2007 exploration program. Bois d'Arc expects to spend $200 million in 2007 to drill 15 wells or 10 net wells. This program gives us exposure to 275 Bcfe of reserve potential. After adjusting for risk, we think this program could add over 100 Bcfe of reserve growth. We're currently drilling the 100 Bcfe potential Dog Bone prospect and expect to start the other high impact prospect, Butch Cassidy in late June. We are pleased with the first quarter results.

On Slide 20, we summarize our expectations for this year. In the first quarter, if the first quarter is an indication, we are on track to achieve our production growth targets for this year. Without any additional increases, we will have 21% production growth if we maintain the first quarter rate. We expect to spend $278 million on our onshore drilling program this year in a balanced program which targets both low risk development drilling in our East Texas, North Louisiana region, and high impact exploration in our South Texas and Mississippi regions. The onshore exploration projects expose us to 140 Bcfe of reserve additions on a risk basis. Bois d'Arc Energy continues to build value since we formed it in 2004 and has a strong out look for reserve and production growth this year. Bois d'Arc has a high impact exploration program with projects that expose us to 102 Bcfe of risk adjusted reserve growth.

We continue to maintain a strong balance sheet to support our future growth. Now, I will open the meeting up for any questions, Brandy.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Wayne Andrews with Raymond James. Please proceed, sir.

Good morning, Jay, Roland. Nice job on the quarter. I wanted to get just a quick update from your activity levels in let's start with East Texas, with the number of wells you drilled in the first quarter it looks like you're pretty front end loaded and ahead of plan there and it looks like the IP rates at 1.3 million a day average, could you give us detail first on the level of activity you expect to keep up during the course of the year and what that 1.3 million a day IP rate might translate into as far as reserve additions go?

Wayne, this is Mack.

Hi.

We plan to drill approximately 25-30 wells a quarter for the remainder of the year. You're right, we have front end loaded East Texas with the drilling rigs that we had available. We're starting to concentrate on some Western Louisiana fields that hold a lot of promise. We anticipate the IP rates as a result based on first quarter numbers that we're seeing should increase. We've been the first quarter primarily targeted Beckville Blocker, Logansport, also West Douglas and Darco fields and translating that into reserves of course is very early but we're encouraged by the initial results that we're seeing in all of those fields. As you know, we feel that our reserves were slightly under stated, if not greatly understated last year, in a number of fields and we're seeing results that certainly support our contingent.

Very good, and then maybe is there any detail you can give us on Pine Hollow and how does that fit in with Laurel field, maybe just an update on activity in that region?

Yes, sir. We're excited about Pine Hollow, as Jay mentioned earlier, it holds significant reserve promise. We plan to spud our first exploration well next week, and we currently have plans to drill two initial test wells for evaluation. Those wells will take a little longer to drill and evaluate than the subsequent wells if the first two are successful, of course, because we're going to conduct extensive testing on those wells for evaluation purposes. That region is South of Laurel, about 70 miles or so, and we , if successful, will very eagerly and aggressively install the infrastructure and the pipeline to connect that to sales , but right now, we think it's a first quarter ' 08 event for production. This year will be spent drilling several wells in the area, in that particular region to evaluate the prospect. So we're excited about

Great. And then generally, in Laurel area, I know you were trying a couple of new things there. How is that progressing?

What we've done is we've drilled horizontal targeting a particular reservoir. We're in the process of completing that well. The initial results are quite favorable. What we've decided to do is release the rig in Laurel for a specific period of time to allow us to evaluate the wells that we've drilled and to fold all of the data into the geological model that we have, and with the express idea of developing additional prospects for late this year, early next year.

Very good. So I guess we're still waiting on results that horizontal well in Laurel.

Yes.

And then maybe just in general, any progress on, I know you've been looking at some competitors activities with horizontal drilling in the Cotton Valley. Maybe you could give us an update on your thoughts there?

Yes, sir. We've put together a database on all of the wells that are drilled within 50 to 100 miles of our East Texas properties and we found that most of the Cotton Valley horizontal wells are not performing and there are a couple of exceptions obviously, but we're extremely cautious in our approach to jumping on that band wagon, but having said that, we've evaluated a couple of areas that appear at this point to hold some promise but right now, we're still conducting a couple of tests. I think it's prudent for any operator to take a look at what's going around, going on around his properties and to properly evaluate it and if after our evaluation shows that there's promise there, Wayne, we'll be as aggressive as anybody as I think you know in executing the horizontal drilling program but right now, we think it's prudent to step back and take a hard look at it rather than get out there and drill the well that we will be sorry that we drilled.

I can certainly understand that. I appreciate the update. Very helpful and congratulations on a nice quarter. Thanks.

Thank you, sir.

Thank you.

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

Good morning. Wayne did another good job of asking most of the good questions. Can you expand a little bit on Pine Hollow though? Is that an oil play or a gas play? How did you get into that play a little bit of history, if you could.

Sure. This is Mack. We believe it's primarily a gas play, although there could be, it could be a condensate rich gas source in a couple of the reservoirs that we're targeting and our entry into the play, I can't go into all of the details there for obvious reasons. We're still interested applying the technique and approach to other areas if this is successful, but our interest was basically stirred by a regional evaluation that we conducted in a broad sense, away from our Laurel field and Maxie fields looking for opportunities, and there were some specific data that were available to us that we believed indicated that there was some potential to go forward. We found that the leases were open and we made the internal decision obviously to gain a strong leasehold position based on our valuation of that data, and we believe there's multiple reservoir opportunities there and the first two wells that we plan to drill are quite a distance from each other, so it's a good test of the southern half of our acreage position there.

Okay, and from a gross reserve standpoint, at least from your slide the 2 Bcf per well, I'm assuming that would be total from all the wells combined or zones?

Yes. That's a fairly conservative estimate. Basically, the analog is Pistol Ridge, Maxie fields to the North of our prospect region, and Maxie, Pistol Ridge produced over 600 Bcfe and 6 million barrels of oil. So just using that as the analog, which is a good analog, you can see how the numbers were derived.

Okay. And then Mack, maybe for you as well. The East Texas plans that I think Wayne touched on, the front end loaded portion of the program, is the expectation to let go of one or two of your rigs later in the year in East Texas or just what are some of your plans with the rigs ?

Yes, sir. When we ended last year, we exited the year with 10 rigs running and the Arclotex region and as a result of that front end evaluation on the wells that we were drilling, we've reached a decision to reallocate some of our activity to fields that have shallower reservoirs and offer very quick drilling timeliness, so as a result of that reallocation, we obviously don't need the greater number of rigs that we would need if we were drilling the deeper target, slower drilling fields, so yes, you're exactly right. We've already released one of our rigs and anticipate possibly doing that again in the very near future.

And then lastly, South Texas exploration program, the South Ranch and Southwest Ranch, are those related to the De Nali acquisition, and if not, what are some of your initial thoughts on the Denali acquisition?

They aren't related to the Denali acquisition. The exploration is independent of that, and obviously, I don't want to talk a whole lot about those exploration ideas. We're in competition with some other folks for some additional leases, etc, But we're excited about those opportunities. They've been in development and the idea stage and the execution of them for about the last year and a half, so we're at the point of actually drilling our first well to test those exploration ideas. The Hermanitas acquisition has been a good one for Comstock. We've drilled four wells, all of which have met expectation and we're looking for another rig to move to Hermanitas probably next month, if not sooner, depending on the time to start another three, so Hermanitas, though the average rates are around 4 million a day from the field on IP's, so our initial expectations have been met on the Hermanitas program so far.

All right, great. Thanks.

Yes, sir.

Ladies and Gentlemen, as a reminder, please press star one to ask a question. Your next question comes from the line of Leo Mariani of RBC Capital Markets. Please proceed, sir.

Yes, good morning, gentlemen. I guess you folks kind of discuss where you thought you had some potential upside and promise and results in some of your western Louisiana Cotton Valley fields here. I guess if I'm just looking at your map, it looks like you've got drilling you did in Logansport and the Longwood field. Can you give us a sense of where you are in terms of the process of testing those fields, is this kind of the first initial wells you drill in these fields here in the first quarter, and give us a sense if you know you guys had booked any reserves in any of these fields at year-end and what your acreage position is and to give us a sense of what the upside could be in reserves.

The upside is considerable. Logansport, Wascum areas offer potential for increased reserves. We've drilled five wells, for example, in Logansport. All five have been extremely encouraging, and that has really spurred us to reallocate some of our resources to developing those reserves in Logansport. Hypo Mills also offers us some additional opportunities so in terms of quantifying those reserve adds I'm not prepared to do that at this point for obvious reasons. We need to get a little more Dale a before we feel comfortable doing that, but certainly encouraged by the initial results pro forma numbers are extremely attractive and in short is the justification for reallocating our resources to those fields. We have drilled eight wells in Logansport total, three of the last quarter of last year and then five this quarter. All of them have been extremely attractive producers. We're completing a couple of wells right now. We have a rig drilling in the field. We plan to really aggressively develop Logansport. We've added to our acreage position there and we're constantly reviewing additional opportunities to do more of the same, both around Logansport, and elsewhere in the Western Louisiana area.

Okay, I guess could you give us the same rundown in terms of Longwood? Would those two wells drill in the first quarter, was there any previous activity?

Yes.

And also about-Hypo Mills.

We have not drilled in that area yet. We're basing our evaluation of Hypo-Mills on development to the West of us and to the South of us. We have the geology. We have the acreage. We're putting all of that together for a third quarter development program, but the results offsetting us are extremely encouraging and support an active program for Comstock in that area. The other areas that you mentioned, we've drilled in Longwood last year. We've had some mixed results. I think we've targeted the areas that we think hold the higher promise and that's what we're targeting for '07.

Okay, and I guess could you give us a sense of your acreage position in these three areas over here?

I don't have in front of me our net acreage position in those individual fields. I know in Logansport, we have several thousand acres of position. I don't have the exact number. Hyco Nolls, we are probably around 1,500 acres. All of these fields are drilled on 40s and specific areas of those fields, especially Hyco Nolls is a 40 acre spacing field. Logansport is a little different because it's multiple reservoirs depending on your target that will dictate whether or not you're drilling on 80s or 40s, but does that answer your question?

Yes. That definitely helps me with some color here.

I don't have the exact numbers on our acreage position on those individual fields other than just those general numbers that I gave you.

Okay. Well, thanks a lot for your help. Appreciate it.

You bet.

At this time, there are no more questions. I will now turn the call over to Jay Allison for closing remarks.

Yes, ma'am. I just want to thank everybody for listening in to the entire conference call and I hope that it's always nice to be able to exceed our upper limit on our growth targets. At the same time, I know we had been visiting on some road shows where we have tried to in 2007 expose Comstock topside to the drill bit exploration upside. That's 100 plus Bcfe, about 140 Bcf of upside, again in our core areas and you kind of tag that along with Bois d'Arc's success. 2007 looks extremely good for the Company. So thank you for participating in the conference call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.