Comstock Resources Inc (CRK) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Comstock Resources earnings conference call. My name is Stacy and I will be your moderator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (OPERATOR'S INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Jay Allison, President and CEO. Please proceed.

Thank you, Stacy. Good morning, everyone. It's a great day to have a conference call. Welcome to the Comstock Resources 2007 third 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 third quarter 2007 results.

I'm 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 third quarter financial and operating results, as well as the results to date of our 2007 drilling program. Our discussion 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.

Our 2007 third quarter highlights. Our production in the third quarter averaged 251 million cubic feet equivalent per day, an increase of 35% of our production in the third quarter of 2006 and a 6% increase over the previous quarter. Our on-shore production soared to 132 million cubic feet equivalent per day, an increase of 38% over last year's third quarter and is attributable to our successful East Texas/North Louisiana and South Texas drilling activity. Off-shore, production was up 31% which was primarily due to new production from wells that we drilled last year. For the quarter, we had total revenues of $171 million and we generated EBITDAX of $133 million and operating cash flow of $116 million. We also generated a profit of $16 million or $0.37 per share.

Our drilling program continues to drive our production growth. On-shore, we drilled 123 successful wells out of a total of 128 wells drilled. Off-shore, we've had six successful wells and eight dry holes. Bois d'Arc announced on June the 5th of this year that it is undertaking a process to review strategic alternatives including a potential sale of the company. We're not in a position to be able to comment on that process today on this call.

On slide 3, we outline our daily production rate by quarter and by region for 2005 and 2006 and the first three quarters of this year. In the third quarter of 2007, our production averaged 251 million cubic feet equivalent per day, 35% higher than our production in the third quarter of '06. For the first nine months of this year, our production is up 32% over last year. Substantially, all of the production growth is coming from our successful drilling activities. Our on-shore production averaged 132 million cubic feet equivalent per day in the third quarter, as compared to the 118 million cubic feet equivalent per day we averaged in the second quarter and the 95 million per day we averaged in the third quarter of 2006. This is the first quarter that our on-shore operations outshined our off-shore operations since the 2005 hurricanes.

East Texas/North Louisiana region, which has accounted for much of the production gains, was 72 million cubic feet equivalent per day, which was 41% higher than it was in the third quarter of last year. Production in South Texas soared 58% to 41 million cubic feet equivalent per day and our production in our other regions was 20 million cubic feet equivalent per day. Bois d'Arc's production averaged 119 million cubic feet equivalent per day in the third quarter, as compared to 118 million per day in the second quarter and the 91 million per day in the third quarter of 2006.

On slide 4, we cover our oil prices. Our average oil price increased 10% in the third quarter of 2007 to $72.57 per barrel as compared to $65.95 per barrel in the third quarter of 2006. For the first nine months of this year, our realized oil price was $63.45, which was 1% higher than our oil price of $63.06 in the same period in 2006. Our average realized oil price was 96% of the average NYMEX WTI price.

Slide 5 shows our average gas price. Our average gas price decreased 4% in the third quarter to $6.35 per Mcf, as compared to $6.63 in the third quarter of 2006. Our realized gas price was 103% of the average Henry Hub NYMEX price in the third quarter. For the first nine months of 2007, our average gas price decreased 3% to $6.93 per Mcf as compared to $7.13 from the same period in 2006. Our realized gas price was also 102% of the average Henry Hub NYMEX price for the first nine months of the year.

On slide 6, we cover our oil and gas sales. Our sales increased 32% to $171 million in the third quarter due to our higher production levels. Sales from our on-shore operations increased 33% to $83 million from $62 million in 2006 third quarter. Off-shore sales increased 31% to $88 million from $67 million in 2006 third quarter. For the first nine months of this year, oil and gas sales increased 28% to $491 million as compared to $385 million for the same period in 2006. Our on-shore oil and gas sales increased 20% to $236 million from 197 million in the first nine months of 2006. Off-shore sales increased 35% to $255 million from $188 million in 2006's first nine months.

Slide 7. EBITDAX. Our earnings before interest, taxes, depreciation, amortization, exploration expense, and other non-cash expenses or EBITDAX increased 35% in the third quarter to $133 million as compared to $99 million in last year's third quarter as shown on slide 7. Bois d'Arc accounted for $70 million and our on-shore production contributed $63 million. For the first nine months of this year, our EBITDAX increased 32% to $388 million as compared to $295 million for the same period in 2006. Bois d'Arc contributed $209 million and our on-shore operations contributed $179 million of the total EBITDAX.

Operating cash flow. Slide 8 covers our operating cash flow. Our cash flow increased 30% this quarter to $116 million as compared to cash flow of $89 million in 2006 third quarter. On-shore cash flow was $53 million and off-shore cash flow was $63 million in the third quarter. For the first nine months of this year, our operating cash flow was $344 million, 28% higher than cash flow in the first nine months of 2006 of $268 million. On-shore cash flow totaled 153 million and off-shore cash flow was $191 million for the first nine months of this year.

On slide 9, we outline our earnings. We reported net income of $16 million or $0.37 per share for the third quarter of 2007, which was the same as our profit for the third quarter last year. For the first nine months of this year our earnings are $47 million or $1.05 per share, as compared to $55 million or $1.25 per share for the same period in 2006. We have adjusted the 2006 results presented on this slide to exclude the unrealized gains on our derivatives in 2006.

We outline our cost structure on slide 10. Our lifting cost in the third quarter averaged $1.47 per Mcfe as compared to $1.57 in the third quarter of '06.. The $0.10 decrease in our lifting rates relate to our higher production levels this year. Our depreciation, depletion and amortization per Mcfe produced increased to $2.69 per Mcfe in the third quarter of '07 as compared to $2.37 per Mcfe in 2006's third quarter. The higher rate is a result of the higher finding costs we have experienced in our East Texas/North Louisiana region which has increased our DD&A rate.

Slide 9 compares cost per unit for the first nine months of this year to the same period last year. Our lifting cost averaged $1.41 per Mcfe for the first nine months of this year as compared to $1.59 in 2006. The improved lifting rate is also due to the higher production level. Our depreciation, depletion and amortization per Mcfe produced increased to $2.76 per Mcfe in 2007 as compared to $2.12 per Mcfe in 2006.

Capitalization. On slide 12, we present our capital structure at the end of the third quarter. At the end of the third quarter, we had $597 million in debt including $100 million of debt at Bois d'Arc Energy. Our bank credit facilities have a combined borrowing base of $725 million, giving us availability of $303 million. The borrowing base on the Comstock credit facility was just increased from $400 million to $500 million. We expect the Bois d'Arc credit facility borrowing base to increase by $125 million next month. Our equity at the end of third quarter was up to $739 million and our debt to total booked capitalization at the end of the quarter was 45%, illustrating the strong balance sheet that we have.

On slide 13, we outlined our exploration and development cost for the first three quarters of 2007 as compared to what we spent in 2006 first nine months. We spent $256 million in the first three quarters of 2007 for our on-shore drilling program as compared to the $150 million that we spent in the same period in 2006. We spent $232 million to drill 124 development wells in the first nine months of 2007 and 121 of these wells were successful. We spent $10 million on four exploratory wells. Only one of these wells were successful.

We spent an additional $8 million on acquiring leases and $6 million for workovers and recompletions and other development costs. We spent $164 million on our East Texas/North Louisiana drilling program, $62 million in South Texas and $30 million was spent in our other regions. Off-shore, we spent $172 million in the first nine months of this year on exploration and development activities as compared to $177 million in 2006 first three quarters. Off-shore, we drilled six successful wells out of the 14 wells drilled.

We now expect to spend $330 million for our 2007 on-shore drilling program as detailed on slide 14. We expect to drill approximately 163 on-shore wells this year. Our East Texas/North Louisiana operating region at $220 million accounts for 68% of the 2007 budget and 125 for the wells to be drilled. We expect to spend $80 million in our South Texas region to drill 24 wells. We've also budgeted $30 million to drill 14 wells in our other regions. We currently have eight operated drilling rigs working at this time. The eight rigs are running as follows. Seven are in our East Texas/North Louisiana area. We have one in Douglas. We have one in Darco. We have one in Logansport. We have two in Hico Knowles. We have two in Waskom, one drilling a vertical well and one drilling a horizontal well. Additionally, we have one in South Texas in our Las Hermanitas field.

On slide 15, we focus on our East Texas/North Louisiana region. We drilled 95 wells in this region in nine different fields in the first three quarters of this year. All of these 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 third quarter about 41% from 2006's third quarter. Our production is up 37% in the first nine months of this year in this region.

On slide 16, we have a map of our Waskom field in Harrison County, Texas. We are currently drilling the Bell #11A-H, our first Cotton Valley horizontal well in the Waskom field. We have a 69% working interest in this well, which is expected to cost $6.3 million to drill and complete. We have just set intermediate casing through the curve at approximately 9,700 feet and are now drilling ahead on the 3,000-foot horizontal lateral. We anticipate being able to test this well in early December.

Devon, our partner in this well, appears to be having a successful horizontal program at Waskom. This well is near Devon Taylor's A-9 horizontal well, which from public records had an initial production rate of 10 million cubic feet equivalent per day. In addition to their Taylor A-9 well, they completed two more successful wells, the Brison 10-H and the (inaudible) 18-H which were tested in excess of 8 million cubic feet equivalent per day, according to our scouts. They are currently completing the Taylor #10, their fourth horizontal well at Waskom. If our well is successful, we will drill additional horizontal wells with Devon at Waskom and we look to incorporate additional horizontal wells in our development drilling program on our other acreage in this region.

Slide 17. A new area of focus for us in this region is our Hico Knowles field in Lincoln Parish in northern Louisiana. Our acreage is just west of the very prolific Cherry/Bell field operated by Petrohawk. Our first well that we have drilled in Hico Knowles was tested at 4.6 million cubic feet equivalent per day. In addition to this well, we had three wells that are currently being completed and two wells that are drilling. We have another 35 operated drilling sites on our acreage. In addition, we have an interest in another 26 drill sites on acreage operated by Petrohawk. We believe that this underdeveloped field can make a significant contribution to our future reserve and production growth in this region.

Slide 18. Our South Texas region is displayed on this slide 18. In our South Texas region, we drilled 18 successful wells in the first nine months of this year and we had one dry hole. These wells have been tested at a per well average rate of 5.9 million cubic feet equivalent per day. Production in this region is up 58% because of our successful drilling program. Six of the successful wells were drilled in our Las Hermanitas field in Duval County which we acquired last year. Five wells were drilled in the Javelina field in Hildago County where we just bought out our partner's working interest and now own 100% of this field. The remaining successful wells were drilled in the Ball Ranch field or the nearby Tom East field. We also drilled two infield development wells in our Double A wells field in Southeast Texas.

Slide 19. We drilled 14 wells in our other regions during the first nine months of this year as shown on slide 19. We drilled 13 wells in Mississippi, eight of which were successful. We also drilled one successful coal bed methane well in New Mexico.

On slide 20, we cover our off-shore drilling results. We have drilled six successful off-shore wells this year out of the 14 attempts. We drilled a successful well at South Timbalier 75 which extended our 2005 Doc Holliday discovery in the first quarter of this year. In the third quarter, we drilled a well at Ship Shoal block 93 to test our Walleye prospect. The well was drilled to a true vertical depth of 12,786 feet and encountered 389 net feet of pay and 11 commercial reservoirs. Our ultra deep well drilled in South Timbalier block 81 to test our Butch Cassidy prospect was also successful. The other three successful wells were drilled in our water flood recovery project in the Ship Shoal 113 unit.

Bois d'Arc also participated in the August and October federal Gulf of Mexico lease sales and was the apparent high bidder on the 11 of the 14 blocks on which it bid. If all of these bids are approved by the Mineral Management Service, Bois d'Arc will be awarded leases on approximately 56,000 acres for bids totaling $18.3 million. Nine of the leases are on the shelf in water depths of less than 70 feet and two of the leases cover blocks in water depths of 8,000 feet.

Slide 21. The outlook for 2007. We are on track to having an extremely successful year in 2007 as demonstrated by outstanding production growth and improving cost structure. Our production is 34% ahead of last year's production and we expect for the full year that our production will be 30% higher than the 67 Bcf we produced last year. Our on-shore production was up 38% this quarter as our South Texas region had an outstanding quarter to supplement East Texas, which has been a consistent work horse for us this year.

We expect to spend $330 million on our off-shore 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 drilling in South Texas. We continue to maintain a multi-year inventory of drill sites, both in our East Texas/North Louisiana region and in our South Texas region. We are excited about drilling our first horizontal Cotton Valley well in the Waskom field. A success could enhance the economics of drilling in our Cotton Valley acreage trend.

Bois d'Arc Energy continues to build value since we formed in 2004 and is having an outstanding year growing reserves and production. Production at Bois d'Arc is up 40% so far this year and has significantly exceeded our expectations. Bois d'Arc has had a very successful exploration program, adding over 100 Bcfe to its proved reserve base in 2007. We continue to maintain a very strong balance sheet to support our future growth and the potential sale of our stake in Bois d'Arc would allow us to significantly reduce our debt, invest more in our on-shore properties, fund future acquisitions and allow us to repurchase shares of our common stock.

Stacy, I'll now open up the meeting and turn it back over to you for questions.

(OPERATOR'S INSTRUCTIONS). Your first question comes from the line of Wayne Andrews representing Raymond James. Please proceed.

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

Thank you, Wayne.

Hey, a couple of quick questions for you. You mentioned DD&A rate being up largely because of East Texas/North Louisiana. Could you review economics there? I mean I'm looking at 100 -- what?164,000,095 net wells or I'm estimating around 1.7 million per well and 1.3 million a day. What sort of reserves are you adding? Or is this sort of a net effect from last year's results as well?

Wayne, I'll answer that and I'll let Mack supplement it. This is Roland. Yeah, the DD&A rate is really a carryover of last year's in the way we've booked the reserves in the Cotton Valley, which is, you know, typically a 0.8-type Bcf well and for the dollars spent, and, yeah, that has not increased any more. I think it was fairly level in the third quarter versus the second quarter.

Yeah.

But it really won't be 'til the end of the year that we really see the impact of -- if some of our new drilling activity, you know, improves the economics there.

Great. That's what I thought. Hey, and I also noticed that South Texas was up pretty substantially in the quarter. Can you comment on sort of what areas are contributing the most there and what you see going forward in South Texas?

Sure, Wayne, this is Mack. Hermanitas has been a real plus for Comstock, really starting to build volume into the quarter. As a matter of fact, at Hermanitas, we have laid a loop line in order to get our additional product to sales. We have about 8 million a day right now that's waiting on that loop line. We're about two weeks away from finishing that. And that's a net number. Javelina, as you know, we acquired additional interest in Javelina, and as a result, those net volumes are what you're seeing as well. So, both Javelina and Hermanitas going forward, we expect to continue to be active in both of those fields throughout the year and throughout next year, as a matter of fact.

Great. And maybe another question on your East Texas area. You're -- I know you're working on your first horizontal there, and if successful, you plan to do a few more. Are the current rigs that you have in the play, are they capable of doing this kind of work or do you need to get some different rigs in and could you discuss maybe availability there?

Sure, Wayne. We -- every rig we have in our inventory is capable of drilling horizontals in Waskom and elsewhere that we're looking at. The rig that we have out there now, just to brag a little bit on the crew and the drilling engineering here at Comstock, we're ahead of the time, drilling time curve by about a week that we had anticipated, and obviously, that goes straight to the bottom line. We're under budget. We're spending less money than we had anticipated, so we're extremely happy about that. We would like to keep that rig or at least bring it back for a second horizontal in Waskom if that's what we decide to do but -- because it's an excellent rig, excellent crew. Availability is not a problem. But we have rigs in our fleet that can do the job.

Glad to hear that. Thank you. And maybe just one more question, and I'll let some others ask you. Mississippi oil play, any progress there? With oil prices where they are today, that's probably looking pretty interesting for you.

Sure. We're taking a real hard look at both Laurel, additional opportunities as well as in our Maxie field area. We think we've got a couple of ideas there that we'll probably be drilling in the fourth quarter or first quarter of next year.

Very good. Congratulations. Thanks for your time.

Thanks, Wayne.

Thank you Wayne.

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

Good morning. A question on Hico Knowles. I may have missed the very beginning of it. The -- it sounds like you drilled two wells, one of which is tested and you're -- you have a couple of other wells completing. Can you just walk through what your prior activity has been at that area?

Prior to drilling this year, we have been inactive in the Hico Knowles. We made an agreement with an operator to exchange interest. We improved our acreage position where we thought the most potential was and is. We also reestablished some units, so we could co-mingle reservoirs that are targeted for production and we're drilling our sixth well right now in that field. One has come online, the other one is completing and testing, and we have two waiting on completion -- pardon me, three waiting on completion right now or in the process of being completed and we're drilling our sixth.

And any infrastructure issues in that area?

No, sir. No. Petrohawk is extremely active in that area and -- as we are, of course, and so, the infrastructure issues have been addressed all along.

And, you know, based on Petrohawk, I know that area has been both Hosston and Cotton Valley, and they've also chased, you know, some more structural play in the gray sands. The first well they tested at 4.6 million a day. Is that Hosston, Cotton Valley co-mingling? Is that a Hosston formation?

Cotton Valley only.

Cotton Valley only.

And we have some (inaudible).

Okay. Is the plan to eventually co-mingle production or are you not able to do that from a pressure standpoint?

We want to draw down that pressure and then co-mingle at a later date. You're exactly right.

And then, how about on the deeper potential? I know it's more seismically driven, but do you all have seismic in -- on the area to the extent there is some potential gray sand?

Yes, we have some access to seismic and we think we have potential as well.

Okay. And going back to the Waskom area where you're drilling the horizontal well right now, any idea on -- in terms of given your acreage position to the extent it works, how many potential locations you could drill horizontally in that area?

Preliminarily, we've identified 13 additional locations with multiple other probable opportunities. You know, part of the issue when you drill a horizontal of course is that you're drilling across lease tracks, so you have to equalize interests and establish an equal playing field between all of the ownerships and we're well into that process on multiple horizontal project targets. But of the preliminary pile that we've identified right now, we don't think we'd have a major issue going forward and then there's some additional opportunities as well on the western part of our acreage that we're looking at. So we have -- bottom line, we have identified enough Waskom horizontal potential to keep a rig busy all next year, at a minimum.

Okay. And then, just to follow up on one of Wayne's questions, in East Texas, especially given the continued -- at least production results you're seeing from the wells you've drilled, are you feeling comfortable that the 0.8 B's of reserves that you had gotten bookings for on your East Texas, do you think that could move higher based on production history, on your activity over the past 12 months.

That's a great question. We think we can move it higher. We know we can. We already are. We're active in Hico Knowles as well as Logansport. Waskom we're seeing tremendous result. And as a consequence of that, we think our per well recovery average is going to move up. We're also not drilling some of the fringe test wells that we did at the first part of this year, and of course, we drilled several of those last year to test acreage that we had purchased from insight. The bottom line is, in answer to your question, yes, we feel very confident that our 0.8 will hold in the wells that we've already drilled, and going forward, we're already seeing some significant increases in reserve estimates on the wells that we're drilling in Logansport, Waskom, Hico Knowles, and a couple of other East Texas fields.

And when you look at your program, you drilled 95 wells so far. You still plan on 120 to 125. How many of those are -- you know, had prior -- had been PUDs versus unbooked locations, and if you look to 2008, I'm assuming you'd have a pretty flat program at least, if not growing, because of Hico Knowles, you know -- how much of it would have already been booked versus unbooked?

We think we have multiple opportunities to add reserves, not only in setting up PUDs and existing reservoirs that are productive, but also, we have some opportunities on deeper horizons that are not booked.

Okay. I'm going to let someone else jump on. Thank you, guys.

Sure.

(OPERATOR'S INSTRUCTIONS). Your next question comes from the line of Kim Pacanovsky. Please proceed.

Hi, guys.

Hi, Kim.

How are you? I have a couple more questions on Hico Knowles. First of all, the -- I looked on Petrohawk's website. I don't follow them, but I see that it's about just a little over $500,000 to deepen into the gray sand. What are the potential reserves in the gray sand?

Depends on where you're drilling. I'll give you a range. Anywhere from 1 to 10 Bcf.

Wow.

It's a tremendous reservoir if you hit the sweet spot.

Okay. And Roland, you said earlier that those wells -- your wells were costing about $3 million PetroQuest is about $2.5 million. Does that mean that there's room for improvement in your cost structure there or are you just giving something different or maybe going a little bit deeper or something like that?

We're testing some deeper sections and we're also setting intermediate a little -- meaning casing to protect shallow underpressured zones a little deeper than Petrohawk. And in addition, our Frac technology approach is a little different, but there's always room for improvement. I would never suggest otherwise and we're looking hard at our costs in every field.

Okay. Great. And what's the average working interest for your 50 locations?

I think it's around 75%. I know that the most recent well we had at 86% and we got some at 60%.

Okay.

On the operated side --

Yes?

Operated area, I think our interest is 40% -- 30 to 40%.

Okay. And I think I had one more question. Oh, yeah. Just a general question about gas and oil prices right now. When you look at the -- what prices have done and where the strip is at, do you guys even get tempted to do some hedging?

We're never tempted.

(LAUGHING)

We look at -- we walk the straight and narrow. We use hedging very much with our acquisition program, and so, to the extent that we're buying a property at a higher gas price environment or oil price, that's when we put on hedges and been consistent with that. We just haven't made a lot of acquisitions recently, you know, so we don't have any positions out, but that's historically where they come from.

Okay.

We try to direct our drilling activity in the market, and if it's going to be a high gas prices market, that's when we want to drill those wells. If it's not going to be, you know, we're going to deploy our capital probably toward acquisitions or other activity.

Okay. Fair enough. Thanks a lot, guys, and very nice quarter.

Thank you.

Thank you, Kim.

(OPERATOR'S INSTRUCTIONS). At this time, there are no further questions in the queue. I would now like to turn the presentation back over to Mr. Allison for closing remarks.

I would just like to, you know, thank everyone for participating in the call. You know, it's nice to give stockholders solid financial results. It's also nice to I mean really see a positive future. I mean, we've got the potential sale of Bois d'Arc. We've got the Hico Knowles program, the horizontal program with Devon and other regions. We've got Logansport. You know, if you look at the core areas South Texas, our production is up 58% from the third quarter of last year. In East Texas, it's up 41%. I think right now, you know, it's a very bright time for Comstock and I like conference calls where the stock goes up before the call and hopefully stays up and goes up more after the call. So, we are always thankful for good calls like this. Stacy, thank you, and thank you for pronouncing Kim Pacanovsky's last name properly. You're the first one that's ever done that so thank you.

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