Comstock Resources Inc (CRK) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 Comstock Resources earnings conference call. My name is Gina, 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 today's conference (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn today's presentation over to your host, Mr. Jay Allison, CEO. You may proceed, sir.

Good morning, Gina, and good morning, everyone. Welcome to the Comstock Resources 2007 second 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 second 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 second 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 of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

If you'll turn to slide 2, you'll find our 2007 second quarter highlights. Our production in the second quarter averaged 236 million cubic feet equivalent per day, an increase of 32% over production in the second quarter of 2006, and a 6% increase over the previous quarter. Our onshore production increased by 20%, driven by our East Texas, North Louisiana, and South Texas drilling activity. Offshore production was up 47%, which is primarily due to new production from wells that we drilled last year. For the quarter, we had total revenues of $174 million and we generated EBITDAX of $140 million and operating cash flow of $127 million. We also generated a profit of $18 million or $0.41 per share. The second quarter financial results in 2007 were driven by the strong production growth and improved natural gas prices, offset in part by the $20 million write off of dry holes drilled during the quarter and increased DD&A cost.

Our drilling program continues to drive our production growth. Onshore, we drilled 82 successful wells out of a total of 86 drilled. Offshore, we've had three successful wells and eight dry holes. Bois d'Arc announced on June the 5th that it is undertaking a process to review strategic alternatives including a potential sale of the company. This process is being driven by Bois d'Arc's management and board of directors, not by a desire by Comstock to sell its stake in this very successful company. In connection with that process, Bois d'Arc announced today on their conference call that their proved reserves had increased 18% to 404 Bcfe as of June 1st, from 344 Bcfe at the end of last year, a 60 Bcfe reserve increase. The reserve growth and the outstanding production growth Bois d'Arc has produced this year are indicators that Wayne Laufer and Gary Blackie and all the other Bois d'Arc personnel continue to create value for Comstock and our other stockholders, which is what we expected.

On slide 3, we outline our daily production rate by quarter and by region for 2005 and 2006, and the first two quarters of this year. In the second quarter of 2007, our production averaged 236 million cubic feet equivalent per day, 32% higher than our production in the second half of 2006. For the first half of this year, our production is up 30% over last year. Our onshore production averaged 118 million cubic feet equivalent per day in the second quarter, as compared to the 113 million cubic feet equivalent per day we averaged in the first quarter and the 99 million cubic feet equivalent per day we averaged in the second quarter of 2006.

East Texas/North Louisiana region, which has accounted for much of the production gains, was 69 million cubic feet equivalent per day, which was 40% higher than it was in the second quarter of last year. Production in South Texas averaged 30 million cubic feet equivalent per day in production and our other regions was 19 million cubic feet equivalent per day. Not to be out done, Bois d'Arc's production also averaged 118 million cubic feet equivalent per day in the second quarter, as compared to 110 million cubic feet equivalent per day in the first quarter and the 80 million cubic feet equivalent per day in the second quarter of 2006. With our strong start this year in production, we believe we will exceed the production goals set earlier this year. Therefore, we now expect our annual 2007 production will be between 84 and 88 Bcfe, which would represent a 25% to 30% growth over 2006.

On slide 4, we cover our oil prices. Our average oil price decreased 4% in the second quarter of 2007 to $62.42 per barrel, as compared to $64.90 per barrel in the second quarter of 2006. Our average oil price in the second quarter was 96% of the average NYMEX WTI price in the quarter. For the first half of this year our realized oil price was $58.46, which was 5% down from our oil price of $61.52 in the first half of 2006. For the first half of this year, our average oil price was 95% of the average NYMEX WTI price. Slide 5 shows our average gas price. Our average gas price increased 12% in the second quarter, to $7.60 per Mcf, as compared to $6.77 in the second quarter of 2006. Our realized gas price was 101% of the average Henry Hub NYMEX price in the second quarter. For the first half of 2007, our average gas price decreased 2%, to $7.25 per Mcf as compared to $7.40 in the first half of 2006. Our realized gas price was also 101% of the average Henry Hub NYMEX price for the first half of the year.

On slide 6, we cover our oil and gas sales. Our sales increased 40% to $174 million in the second quarter, due to the increased production and improved natural gas prices. Sales from our onshore operations increased 29%, to $83 million from $64 million in 2006 second quarter. Offshore sales increased 53% to $91 million from $60 million in 2006 second quarter. For the first half of this year, oil and gas sales increased 25%, to $320 million, as compared to $256 million for the same period in 2006. Our onshore oil and gas sales increased 14% to $153 million from $135 million in the first half of 2006. Offshore sales increased 38% to $167 million from $121 million in 2006 first half. EBITDAX -- our earnings before interest, taxes, depreciation, amortization, and exploration expense and other noncash expenses are EBITDAX -- increased 47% in the second quarter to $141 million as compared to $96 million in last year's second quarter, as shown on slide 7. Bois d'Arc accounted for $78 million and our onshore operations contributed $63 million. For the first six months of this year, our EBITDAX increased 30% to $255 million, as compared to $196 million for the same period in 2006. Bois d'Arc contributed $140 million and our onshore operations contributed $115 million of the total EBITDAX.

Slide 8 covers our operating cash flow. Our cash flow increased 46% this quarter, to $127 million, as compared to cash flow of $87 million in 2006 second quarter. Onshore cash flow was $54 million and offshore cash flow was $73 million in the second quarter. For the first half of this year, our operating cash flow was $228 million, 28% higher than cash flow in the first half of 2006 of $178 million. Onshore cash flow totaled $100 million and offshore cash flow was $128 million in the first half of this year. Earnings. On slide 9, we outline our earnings. We reported net income of $18 million or $0.41 per share for the first quarter of 2007, as compared to net income of $15 million in the second quarter of 2006, or $0.34 per share. We have adjusted the 2006 results presented on this slide to exclude an unrealized gain on our derivatives. For the first half of this year, our earnings are $31 million, or $0.69 per share, as compared to $39 million, or $0.88 per share for the same period in 2006.

We outline our cost structure on slide 10. Our lifting cost in the second quarter averaged $1.41 per Mcfe, as compared to $1.54 in the second quarter of 2006. The lower lifting rate reflects lower operating costs at Bois d'Arc, where the cost structure is improving after the run up in oil field service costs in the Gulf of Mexico after the 2005 hurricanes. Our depreciation, depletion and amortization per Mcfe produced increased to $2.77, per Mcfe in the second quarter of 2007, as compared to $2.02 per Mcfe in 2006 second quarter. The higher rate is a result of the higher finding costs we have experienced, both at Bois d'Arc and in our East Texas/North Louisiana region. Slide 11 compares costs per unit for the first half of this year to the same period last year. Our lifting costs average $1.38 per Mcfe for the first six months of this year, as compared to $1.61 in 2006. The improved lifting rate is due to lower cost at Bois d'Arc. Our depreciation, depletion and amortization per Mcfe produced increased to $2.79 per Mcfe in 2007, as compared to $1.98 per Mcfe in 2006.

Capitalization, on slide 12, we present our capital structure as of June 30th. At the end of the second quarter, we had $594 million in debt, including $125 million of debt at Bois d'Arc Energy. Our bank credit facilities have a combined borrowing base of $625 million, giving us availability of $206 million. Our equity at the end of the second quarter was up to $719 million. The increase in debt funded our drilling expenditures and our $32 million acquisition that we made in the second 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, we hope to pay back some of the borrowings that we made in the first half of the year. Our debt to total book capitalization at the end of the quarter was 45%, illustrating the strong balance sheet that we have.

Exploration and development cost. On slide 13, we outline our exploration and development cost in the first half of 2007 as compared to what we spent in 2006 first half. We spent $170 million in the first half of 2007 for our onshore drilling programs, as compared to the $92 million that we spent in the same period in 2006. Onshore, we spent $155 million to drill 83 development wells in the first six months of 2007. 81 of these wells were successful. We spent $8 million on three exploratory wells, only one of these were successful. We spent an additional $8 million on acquiring leases and for work-overs and recompletions and other development costs. We spent $113 million on our East Texas/North Louisiana drilling program, $35 million in South Texas and $23 million was spent in our other regions. Offshore, we spent $125 million in the first half of this year on exploration and development activities, as compared to $116 million in 2006 first six months. Offshore we drilled three successful wells out of the 11 wells drilled in the first half of this year.

Slide 14. We expect to spend $301 million for our 2007 onshore drilling program, as detailed on slide 14. We expect to drill approximately 171 onshore wells this year. Our East Texas/North Louisiana operating region, at $188 million, accounts for 62% of the 2007 budget, and 120 of the wells to be drilled. We expect to spend $78 million on our South Texas region to drill 22 wells. We have also budgeted $35 million to drill 29 wells in our other regions. We currently have ten operated drilling rigs working. Seven are in East Texas and three are in South Texas. On slide 15, we focused on our East Texas/North Louisiana region. We drilled 66 wells, or 53.3 net wells, in this region in eight different fields, in the first six months of this year. All of these wells were successful. These wells have been tested at a per well average rate of 1.3 million cubic feet equivalent per day. Our drilling in this region, which targets primarily the Cotton Valley and Hosston formations, has allowed us to increase our production in this region in the second quarter by 40% from 2006 second quarter and is generating most of our onshore production growth this year.

Slide 17, Cotton Valley horizontal well. On slide 16, we have a map of our Waskom Field in Harrison County, Texas. Our acreage is highlighted in red. We plan to drill our first horizontal Cotton Valley well in this field in September. Our partner in part of our acreage, Devon, came to us and encouraged us to suspend drilling vertical wells on our jointly-owned acreage given the strong results they have had in drilling horizontal wells in this area. We agreed with Devon and jointly identified several potential horizontal well projects at Waskom. The first of these is a Bell 11A-H well, which is expected to cost $6.3 million to drill and complete. The well is near Devon's Taylor A-9 horizontal well, which from public records had an initial production rate of ten million cubic feet equivalent per day. We have also permitted a second Bell horizontal well. Comstock will have a 69% working interest in this first well and will operate the well. If successful, we will drill additional horizontal wells with Devon, and we look to incorporate additional horizontal wells in our development drilling program on our other acreage in this region.

Slide 17. Our South Texas region is displayed on slide 17. In our South Texas region we drilled nine, or 6.4 net successful wells in the first six months of this year. These wells have been tested at a per well average rate of 6.5 million cubic feet equivalent per day. Three other wells were in our Las Hermanitas field in Duval County, which we acquired last year. Three wells were in the Javelina field in Hidalgo County, where we just bought out our partner's working interest and now own 100% of this field. The remaining wells were in the Ball Ranch field, or the nearby Tom East field. Our latest well drilled in our Las Hermanitas field, the Shovlin #2, is currently producing 7.5 million cubic feet equivalent per day from a lower sand completion. The most recent Javelina well, the Reithmeyer #3, is currently producing 7.4 million cubic feet equivalent per day from its two-stage completion.

Slide 18. During the second quarter, we acquired additional working interest in the Javelina field, which is displayed on slide 18. We paid $32 million for approximately a 50% working interest in this field, with ten producing wells and 19 drilling locations. Two of the producing wells were drilled after we purchased the interest and we are currently drilling another well in this field. We acquired prove reserves of 10.6 Bcfe, and an additional 8.1 Bcfe of probable and possible reserves. Slide 19. We drilled 11 wells, or 7.4 net wells in our other regions during the first half of this year, as shown on slide 19. We drilled eight wells or 7.3 net in our Laurel and Maxie fields in Mississippi, six of which were successful. Five of the Laurel wells were tested at an average per well initial production rate of 183 barrels of oil per day. This successful well at Maxie tested at 1.5 million cubic feet of natural gas per day. We drilled two exploratory wells to test the Pine Hollow prospect in south Mississippi. Neither of these were successful. We do plan to drill some additional wells to continue to evaluate this prospect. We also drilled one successful coal bed methane well in New Mexico.

On slide 20, we cover Bois d'Arc's drilling results. Bois d'Arc has drilled 11 wells so far this year with three successes. A deep well at South Timbalier 75, successfully extended the 2005 Doc Holliday discovery. The other two successful wells were drilled in the M-8 Sand Waterflood recovery project in the Ship Shoal 113 unit. Bois d'Arc is now producing over 1,000 barrels of oil per day from this project. Bois d'Arc is currently drilling a Walleye prospect at Ship Shoal block 93. The well will be drilled to a total depth of 15,000 feet, protected pipe is currently being set in the well below 13,000 feet, five prospective reservoirs have been encountered so far, and the well looks to be successful. Bois d'Arc is also drilling its ultra-deep Butch Cassidy prospect, which is now drilling below 15,000 feet. Butch Cassidy exposes Bois d'Arc to over 90 Bcfe of unrisk net reserves.

Now, if you will turn to slide 21, our 2007 outlook. We are on track to having a very successful year. Our production is 30% ahead of last year and we expect for the full year that our production will be 25% to 30% higher than the 67 Bcfe we produced last year. We expect to spend $301 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 other regions. We continue to maintain a multi-year inventory of drill sets, both in our East Texas/North Louisiana region and our South Texas region. We are excited about drilling our first horizontal Cotton Valley well in the Waskom field with Devon. A success could enhance the economics of drilling in our other Cotton Valley acreage trend. Bois d'Arc Energy continues to build value since we formed it in 2004, and it is having an outstanding year growing reserves and production. Production is up 45% and has significantly exceeded our expectations so far this year. With the announced review of strategic alternatives at Bois d'Arc, a new third-party engineering report was prepared, which estimates Bois d'Arc's proved reserves at 404 Bcfe, an increase of 18% since the end of the year, or 60 Bcfe reserve increase since the end of last year. We continue to maintain a strong balance sheet to support our future growth. And finally, the potential sale of our stake in Bois d'Arc would allow us to significantly reduce our debt, invest more in our onshore properties, fund future acquisitions, and allow us to repurchase shares of our common stock.

With that, Gina, let me turn it back over to you for questions.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Wayne Andrews of Raymond James. You may proceed.

Good afternoon, gentlemen, and congratulations on an outstanding quarter.

Thank you, Wayne.

I have a couple of quick questions for you. First, it sounds like the IP rates, just even on your vertical wells in East Texas averaging 1.3 million a day, is that consistent with your thoughts on the 0.8 Bcf per well that were you granted at reserves last year? I have a couple of follow-up questions, also.

Wayne, this is Mack. Yes, sir, those IP rates are right in line with the 0.8 B forecast.

And then can you elaborate a little bit on the relationship here with Devon? It sounds very encouraging. I know it is right next door to an area where they're having great success. And maybe just elaborate on the relationship and where it could go maybe over the course of the next year or so?

Sure. Devon came to us, as Jay mentioned, and indicated that they had done a significant amount of work in Waskom that suggested that a horizontal well on acreage that we both have interest in would be prospective. And as you said, Wayne, and exactly right, they'd success about a mile and a half away from this acreage track that we both have interest in. So we suspended drilling vertical wells on that acreage, along with a number of other tracks, as well. We've signed an agreement with Devon to go forward, drilling on this particular tracked acreage, and if successful it opens up other opportunities to drill additional horizontal wells on that same acreage with Devon, as well as on adjacent tracks on acreage that's primarily owned by Comstock and we would operate all of those projects.

Excellent, sounds very encouraging. Next question, maybe for Jay, following the thoughts on the potential sale of Bois d'Arc and you mentioned debt reduction, fund acquisitions, and potentially repurchase shares. It sounds like South Texas has been showing some excellent results, and is that an area where you'd have additional interests and potentially any other areas where you'd see potentially extending Comstock following the sale of Bois d'Arc?

Wayne, I -- first of all, I would say that our CapEx budget this year has been increased probably by $50 million from the beginning of the year, so we have a need for excess dollars, so we'll use some of that to increase our CapEx budget in '08. And as you can see in East Texas/North Louisiana, we're drilling more wells, they're successful, they're very profitable and at the same time we've been growing in South Texas. In the last year I guess, through selective acquisitions we've acquired about 100 Bcfe of acquisitions, two different acquisitions totaling $100 million. We see that probably we'll continue to do that on a selective basis. And we've bought out some of our partners in Javelina. We've got about a 10,000-acre exploration area that we're drilling some wells in right now, and I do see the real need for some increased expenditures in South Texas, along with East Texas. And -- I mean again, you look at Comstock and we've had $100 million of acquisitions in the last couple of years just in South Texas, so you couple that along with repurchasing some of the shares if the stock doesn't trade at an industry multiple, then I think you will see a real need for those dollars, if in fact that sale happens. If it doesn't, the other hand, you've got an interest in a very strong company that continues to create value for us and the other stockholders at Bois d'Arc.

Sounds very encouraging. Keep up the good work. Thanks, Jay.

Thanks, Wayne.

Your next question comes from the line of Ron Mills of Johnson and Rice. You may proceed.

Good morning, guys. Just a question on East Texas. It's a big area for you all, what are some of the other areas that you're looking at expanding into? Now I know you have a lot of acreage in North Louisiana, as well, some of it surrounding where Petrohawk and KCS have been very successful. Any plans on looking at what they're doing, at some of their acreage and applying it to some of yours?

Yes, absolutely. We're -- as a matter of fact, as mentioned in the text, that Jay read, we were front-end loaded in East Texas with this year's drilling program. The second half of the year will be more focused on our acreage in West Louisiana and North Louisiana, specifically Logansport, Bill Bowers, Spider Fields, as well as [Hypleknolls] area. And with regard to the particular technologies involved, we followed very closely some of the technologies that Petrohawk and some of the other operators that are out there that have had some mixed results, but we're certainly interested in, for example, smaller integral fracs that are specifically applicable to those kinds of reservoirs in West Louisiana and North Louisiana. So we will be moving most of our rig inventory into those areas, those fields, during the second half of the year.

And I don't know if you can expand on what the small integral fracs do, but some of the results in the North Louisiana area have seemed to be a little bit better than some of the areas in East Texas. Is there something geologically, or just technically that makes some of the North Louisiana at least rates versus and EURs versus East Texas look a little bit better?

Yes, sir. As usual, there's a number of variables involved. But just in general terms, if you can isolate those fracs and keep them in zone -- in other words treat what you want to treat rather than have the frac grow out of zone and communicate with additional water production -- then, of course, your performance will improve from that well. So those surgical fracs or small integral fracs are the way to go, but it's not applicable in every case. You have to look at the reservoirs that are involved, and the type of sands that appear to be productive within the well bore. But obviously, we're very interested in applying that technology and we have done some of that this year, with very good results in Logansport.

Okay. And then South Texas, Wayne touched on, it being a pretty successful area for you all. In addition to the increased interest that you bought in the second quarter, how much more inventory do you have down in South Texas and do you plan on maintaining the activity levels down there that we've been seeing?

The answer to the first question about inventory, that is changing as we drill. If you noticed in the exhibit, one of the slides that specifically have land there's a number of probable and possible locations that are marked on that map, and as we drill we prove offset locations up, which we've done since our purchase of our partner's interest. So our inventory is increasing as we drill, both in Javelina and Hermanitas for that very reason. So I am very optimistic that we'll maintain a very aggressive activity level in South Texas, as we go through the year 2008.

Okay. I'll let someone else jump on. Thank you.

Yes, sir.

Your next question is from the line of Rehan Rashid with FBR. You may proceed.

Good morning, Jay.

Hi, Rehan.

On Bois d'Arc, just a quick question on tax basis, any thoughts on that front for Comstock?

Roland?

Yes, on what our tax basis is?

Yes.

It's probably -- it's somewhere around $100 million, but it's lower than our book investment. And dependent on -- if Bois d'Arc is sold, what it's sold at, will depend on the amount of the proceeds that might have to go to pay current taxes. But it's probably in the neighborhood of about 20% of the proceeds is what --

What you're thinking.

-- would have to go to pay current taxes if it's done in a taxable transaction.

Right, right. Plus you can also shield some of this through like-kind exchanges and stuff, if you make acquisitions?

Potentially, but not really. The like-kind exchange rules don't apply to securities. Our holdings in Bois d'Arc is through owning the stock.

Got it. Okay.

But there are maybe some things we can do, but it would really depend on just what the transaction looks like.

Okay. Fair enough. On East Texas, Jay, what could the drilling program look like next year, keeping in mind that you have some incremental proceeds from the sale of Bois d'Arc potentially?

Well, we're developing that as we speak, Rehan -- this is Mack -- and the program for next year will certainly be robust. It will be focused on drilling the higher performing areas identified in West Louisiana, and North Louisiana. Certainly we've got additional opportunities in East Texas and we will capitalize on those opportunities. Horizontal drilling efforts targeting deeper sections in the Cotton Valley, again this would be targeting North Louisiana properties. So the number of wells I certainly can't speak to that at this point because of the dynamics involved in developing our program, but I can assure you we'll have a very robust program next year.

And on the partnership with Devon in the Waskom area, how much acreage are we talking about that could lend itself to horizontals?

In general, it is about a section and a half. About 850, 900 acres, somewhere in there, where we both have interest. And the exciting part of it to us is the application outside of those regions.

Sure.

And of course, I have to note that there are a number of other fields that we have been evaluating over the last several months for horizontal potential, and Waskom, given Devon's strong presence and expertise in that area, suggests or presents itself as the right place to drill our first well.

And how much more work needs to be done before you get a better feel for the potential for horizontals throughout your -- or most of your acreage in the area?

I'd say we've got another couple of months to complete our analysis, to get a firmer handle on that. Other operators are drilling and we are certainly are incorporating that data into our model as well, Rehan.

Rehan, you know we have been patient in the horizontal and I think hopefully it will pay off. I know Devon has been drilling those wells for years and years, and they are one of the leaders in the industry and they create value for their shareholders. And when they approached us they brought their "A" team in and they said, here is what we do and how we do it and it's to educate us and it's also to help create value for their company as well as Comstock. So I think our strategy -- I think it will pay off, and it is with an industry leader and we do have a big acreage position there. So when you ask about the '08 program, a lot of that will depend upon how successful we are with the Devon horizontals and horizontals elsewhere, and these smaller interval fractures or these surgical completions that we're doing. But you can see the production rate in East Texas/North Louisiana is already responded and fortunately we don't have any rig issues as far as availability.

That makes sense. Makes sense. Thank you.

Thanks, Rehan.

Your next question is from the line of Kim Pacanovsky with Ferris, Baker and Watts. You may proceed.

Good morning, guys.

Good morning.

How long has that Devon well been producing, the one that is a mile and a half from you? And what have they indicated that EURs look like on it?

It has been producing about five months, and I'm not privy to Devon's internal estimates on the reserves for that well, but our evaluation puts it around 4 Bcf, perhaps a little more.

Okay. And on the well that you have planned, what is the -- what's the planned vertical depth and the horizontal kickout on that?

The vertical depth is going to be around -- total vertical depth will be 10.5 to 10.7 and we plan on drilling a -- approximately a 3,000-foot horizontal kick.

Great. Okay, thanks a lot.

You bet.

Thanks, Kim.

Due to the time restrictions for this call I will turn the call back to Jay Allison for final closing remarks.

Gina, thanks for your time, and everyone. It's always nice to have excellent results and I guess the vision for the future is -- as we had mentioned, it's continue to focus on our core areas, continue to look at the cost structure, and really continue to hire quality people to help to continue to create value for the stockholders. And as the Bois d'Arc divestiture occurs, one way or the other, we'll keep everyone updated. Thank you for your time.

That concludes the presentation for today. You may disconnect. Have a wonderful day.