Comstock Resources Inc (CRK) 2008 Q2 法說會逐字稿

Good day, Ladies and Gentlemen. Welcome to the Second Quarter Comstock Resources, Inc. earnings Conference Call. My name is Lekeisha and I'll be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this call. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Jay Allison, President and Chief Executive Officer of Comstock Resources. Please proceed.

Thank you, Lekeisha, and thanks everyone for being present for the Conference Call. Welcome to the Comstock Resources 2008 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'll find a presentation entitled Second Quarter 2008 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 we will review our 2008 First Quarter financial and operating results as well as results to date of our 2008 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.

If you flip over to Tab 2 you'll see the Second Quarter 2008 highlights. We're pleased to be able to report another exceptional quarter and we're very pleased on how Comstock is now positioned for future growth. In this quarter we are accounting for our offshore Operations which relate to our investment in Bois d'Arc Energy as discontinued operations given the upcoming merger of Bois d'Arc with Stone Energy.

This accounting highlights our continued onshore operations which have had tremendous growth this year. Many of the numbers used in this presentation reflect only our onshore operations and exclude the contributions to earnings provided by the offshore operations of Bois d'Arc.

In the Second Quarter our revenues were $172 million and we generated EBITDAX of $145 million, and operating cash flow of $134 million. Our net income was very strong for the quarter at $83 million, or $1.81 per share. This is almost double our net earnings in the first quarter of $41 million or $0.91 per share. Our continuing operations contributed $71 million, or $1.55 per share, with Bois d'Arc contributing $12 million, or $0.26 per share to this blockbuster quarter.

The strong financial results in the Second Quarter were driven by 42% onshore production growth and very strong oil and natural gas prices in the quarter. Our onshore drilling activities have been very successful so far in 2008. 61 of the 62 total wells we drilled were successful. Bois d'Arc has drilled six successful wells out of the nine wells drilled to date in 2008. And we continue to be very excited about the potential of merging Haynesville Shale play. We have increased our holdings to 65,802 net acres in this play, and have offers to further increase our acreage position this year.

On April 30, we announced that our 49% owned subsidiary, Bois d'Arc Energy, has agreed to be acquired by Stone Energy. Comstock will recognize a substantial gain on its investment and will become a significant stockholder in Stone Energy with our 13% ownership of the combined Company. The cash portion of the consideration, combined with the sale of certain non-core properties, for $138 million has allowed us to substantially reduce our debt and will fuel increased activity on our onshore properties, including the emerging Haynesville Shale play.

I will turn it over to Roland Burns to review the financial results in more detail. Roland.

Thanks, Jay. Our excellent financial results are being driven by our strong production growth from our onshore operations this quarter which are shown on Slide 3 of the presentation.

In the second quarter of 2008, our production averaged 168 million cubic feet of natural gas equivalent per day, which was 42% higher than our production in second quarter 2007. Our production for the first half of this year is also 42% higher than production for the same period last year. Production this quarter was also up 5% over production from the First Quarter of this year. Our successful drilling activities, and the South Texas acquisition that we completed at the end of 2007, account for the increase.

On Slide 3, we break down our production into our operating regions and we also separate out the properties that we are selling. The properties that we are selling were producing about 9 million per day in the first half of 2008. We will not have that production next quarter. So, excluding the Gilmer field which we sold in our East Texas region, this region averaged 80 million per day, which was 27% higher than it was in the Second Quarter of last year.

Production in our South Texas region, excluding the fields that we were selling, was up 156% to 64 million per day, as compared to the 25 million per day rate we had in 2007. Production in our other regions averaged 15 million per day in the second quarter, which is down from the 18 million a day that we averaged in 2007 second quarter.

We expect to produce between 56 to 59 Bcfe in 2008 which would represent about a 25% to 30% growth over our 2007 levels, and this is even after accounting for the properties that we sold. Also contributing to the strong financial results were the very strong oil and gas prices that we had in the second quarter.

On Slide 4, we cover our oil prices. Our average oil price increased 87% in the second quarter of 2008 to $105.16 per barrel as compared to $56.10 per barrel in the second quarter of 2007. Our oil price in the second quarter averaged 85% of the average NYMEX WTI price in the quarter.

For the first half of this year, our realized oil price was $93.92, which was 80% higher than the $52.10 we averaged in the first half of 2007. And also for the first half of the year our oil price averaged 85% of the NYMEX WTI price.

Slide 5 shows our average gas price. Our average gas price increased 45% in the second quarter to $10.83 per Mcf as compared to $7.47 in the second quarter of 2007. Our realized gas price was 99% of the average Henry Hub NYMEX gas price in the second quarter.

For the first half of 2008 our average gas price increased 35% to $9.56 per Mcf as compared to $7.09 in the same period in 2007. Our realized gas price was 101% of the average Henry Hub NYMEX price for the first half of the year.

We had 11% of our onshore gas production hedged in the second quarter which reduced our realized gas price for the quarter to $9.39 per Mcf. For the rest of the year, approximately 12% of our onshore gas production is hedged at $8.20 per Mcf, leaving 88% of our production unhedged.

On Slide 6 we cover our oil and gas sales. Our sales from our continuing onshore operations increased 107% to $172 million in the second quarter due to the higher production level and the strong oil and gas prices. For the first half of this year, oil and gas sales increased 96% to $300 million as compared to $153 million for the same period in 2007.

Our earnings before interest, taxes, depreciation, amortization and exploration expense and other non-cash expenses, or EBITDAX, from our continuing onshore operations increased 131% in the second quarter to $145 million as compared to $63 million in last year's second quarter as shown on Slide 7. For the first six months this year our EBITDAX increased to 115% to $248 million as compared to $115 million for the same period in 2007.

Slide 8 covers our operating cash flow. Our cash flow just from our continuing onshore operations increased 147% in the second quarter to $134 million as compared to cash flow of $54 million in 2007 second quarter. For the first half of this year our operating cash flow was $226 million, 126% higher than cash flow in the first half of 2007 of $100 million.

On Slide 9, we outline our earnings. We reported net income of $83 million or $1.81 per share for the second quarter, which is the highest quarterly profit in our corporate history. This compares to $18 million, or $0.41 per share, for the second quarter of $2007 $71 million, or $1.55 per share, is attributable to our continuing onshore operations as compared to $13 million or $0.29 per share in the second quarter of 2007.

Including in the continuing earnings this quarter, is an after-tax gain of about $14 million or $0.31 per share realized on the sale of our net profits interest properties. For the first half of this year, we reported net income of $ 124 million or $2.72 per share as compared to $31 million or $0.69 per share for the same period in 2007. $100 million, or $2.21 per share, is attributable to our continuing onshore operations as compared to $22 million or $0.51 per share in 2007 first half.

We outline our cost structure on Slide 10. Our lifting cost in the second quarter improved to $1.53 per Mcfe produced as compared to $1.64 in the second quarter of 2007. The higher production volumes in the quarter account for the lower lifting rate. Our depreciation, depletion and amortization per Mcfe produced increased to $2.89 per Mcfe in the second quarter of 2008 as compared to $2.80 per Mcfe in the 2007 Second Quarter.

On Slide 11 we outline our production cost for the first half of this year. Our lifting cost averaged $1.49 per Mcfe in the first half of this year as compared to $1.52 in 2007. Our depreciation, depletion amortization per Mcfe produced increased to $2.87 per Mcfe in the first half of 2008 as compared to $2.75 in 2007.

On Slide 12, we present our capital structure at the end of the second quarter. On June 30, we reduced our debt to $494 million out of our excess cash flow and the proceeds from the asset sales. Our onshore bank credit facility now has a borrowing base of $ 590 million giving us availability of $270 million at the end of this quarter. We have excluded $18 million of debt from this slide that relates to our Discontinued Operations. This debt was paid off in full in July by Bois d'Arc.

Our equity at the end of the quarter was up to $892 million. Our percentage of debt to our total book capitalization decreased to 36% at the end of the quarter as compared to the 50% level that we were at at the end of 2007. After the Bois d'Arc merger closes, our debt to total book capitalization is expected to decrease to 17%.

On Slide 13, we detail our drilling expenditures during the first half of this year. We spent $146 million for our onshore drilling program as compared to the $170 million that we spent in 2007's first six months. We spent $104 million on our East Texas, North Louisiana drilling program, $37 million in South Texas, and $5 million was spent on our other regions.

We announced today that we're increasing our onshore drilling budget to $410 million which is detailed on Slide14. Much of this increase is for acreage acquisitions in the Haynesville play. We now expect to drill approximately 133 wells or 78.6 wells net to our working interest in our onshore drilling program. Nine of these wells will be horizontal wells drilled at our East Texas, North Louisiana region for either the Cotton Valley Taylor or the Haynesville Shale formation.

Our East Texas/North Louisiana operating region at $292 million accounts for 71% of our budget and 101 wells which we plan to drill. We expect to spend $111 million in our South Texas region to drill 24 wells and we budgeted $7 million to drill eight well s in our other regions.

I'll now turn it back over to Jay to review the operating results in each region.

Thank you, Roland, for the excellent report on the second quarter financials, again the highest quarterly profit in our corporate history.

If you turn to Slide 15, we focus on our East Texas/North Louisiana region. We drilled 52 wells in this region in eight different fields in the first half of this year. All of those wells were successful. We have tested these wells at a per well average rate of 2.6 million cubic feet equivalent per day, which is a substantial improvement from our average rate in 2007 of 1.4 million cubic feet equivalent per day.

The prolific wells at Hico Knowles and the Taylor Cotton Valley horizontal wells account for the improved per well results. Really our per well rate has almost doubled over what it was in 2007.

On Slide 16, we have a map of our Wascom field in Harrison County, Texas. We've now drilled three very successful horizontal wells in this field. In the Second Quarter we drilled the Swift Number 13 well. This well was drilled to a total vertical depth of 9,540 feet with a 2,947 foot horizontal leg drilled in the Taylor Cotton Valley Sands. We completed this well with a seven stage frac and it tested at an initial production rate of 8 million cubic feet equivalent per day of natural gas. We own a 49% working interest in the Swift Number 13 well.

Our most recent well is the Bode Well Number 4 which looks to be the best one so far that we've drilled. The Bode was drilled to a total vertical depth of 9,600 feet with a 2,850 foot horizontal leg drilled. This well was also completed with a seven stage frac and tested at an initial production rate of 10.1 million cubic feet equivalent per day of natural gas. We have a 94% working interest in the Bode Number 4 well.

We have eight more identified horizontal drilling sites in this field and we also plan to take the technology over to some of our other 31 East Texas fields this year.

On Slide 17, there's another area we've been very active in, which is our Hico Knowles field and Lincoln Parish in northern Louisiana as shown on Slide 17. This field offsets the very prolific Terryville field that Petrohawk has been developing. We've drilled or participated in 19 wells in the first half of this year. 17 of these wells have been completed and had initial production rates which is have averaged 4 million cubic feet equivalent per day. We still have another 27 locations identified to be drilled on our acreage.

On Slide 18, we have our current view of the emerging Haynesville Shale play in North Louisiana and East Texas. Our acreage is highlighted in green. We currently have 80,593 gross acres and 65,802 net acres that we believe are productive for Haynesville development based on five test wells that we have drilled and data from wells drilled by other operators that we have reviewed. We're continuing to add to our acreage position and to test other acreage we have in order to see if the shale is prospective.

Our goal is to bring our net acreage up to 75,000 acres by the end of this year. Given expected well spacing of 80 acres, and expected per well recovery rate of 3.5 to 4 Bcfe per well, our acreage could have 2.2 to 2.5 trillion cubic feet equivalent of reserve potential. If other operators are correct with reserve recoveries of over 6 Bcfe per well, then the potential is even greater for Comstock.

I'll now let Mack Good, our Chief Operating Officer, comment on our Haynesville horizontal well which we have just started drilling. Mack?

Thanks, Jay. On Slide 19, you will see a diagram that will give you a general picture of how we plan to complete our first horizontal Haynesville well, and as Jay mentioned, we've already spud this well. This picture shows that we expect to encounter a Haynesville section between 190 feet to 250 feet thick in our first well, and that we plan to pump between 9 to 12 fracture stimulation treatments across the wells horizontal lateral.

Our geological work on the Haynesville shows that the targeted shale section is found in the lower part of the Bossier Shale interval and the depth of this Haynesville Shale targeted for development varies between 10,750 feet to 12,000 feet deep. And we believe the shale is between 190 to 300 feet thick across the play area.

We've drilled and completed and tested six vertical Haynesville wells in different parts of our Haynesville acreage across the play and this has given us valuable information. Drilling and completing a vertical well to test the Haynesville currently costs approximately $2.1 million. The cost of drilling and completing a horizontal Haynesville well will depend on its exact location, and because of this we expect those costs to vary between $6 and $8 million. The commercial development of the Haynesville definitely requires drilling horizontal wells in order to optimize reserve recovery and economics.

Comstock is currently drilling our first Haynesville horizontal well in our Toledo Bin North or TBN area. Our TBN area is located just south of our Logansport field assets in De Soto Parish, Louisiana. We'll have an approximate 88% working interest in this well. The well name is the BSMC LA7 Number 1.

We'll drill this well to an estimated vertical depth of 11,400 feet, at which point we will drill an estimated 4,000 foot horizontal latera. And we plan to fracture stimulate this horizontal lateral in 9 to 12 stages and to simultaneously flow all of the stages to sales.

Comstock plans to move in a second Haynesville horizontal drilling rig, to begin operations during the fourth quarter 2008. We will drill an estimated 40 horizontal Haynesville wells during 2009 by running five rigs for the year; however our plan is to ramp to a seven rig program by late third quarter of 2009.

I'll now turn ut back over to Jay.

Thanks, Mack, and as Mack reported, we actually spudded that well, I believe, yesterday.

Our South Texas region is displayed on Slide 20. In our South Texas region, we drilled seven successful wells in the first half of this year and we had one dry hole. These wells have been tested at a per well average rate of 3.8 million cubic feet equivalent per day. Two of the successful wells are in the Las Hermanitas field in Duvall County, Texas, three are in the Javelina field in Hidalgo County, one was in the Ball Ranch field, and one was in the Lorenz Ranch field in McMullen County.

On Slide 21 we have a map of our Fandango field. We purchased this field from Shell at the end of last year. We're currently building a location to drill our first well in this field. This well will target three potential pay sands with a total reserve potential approaching 30 Bcfe. We'll have 100 per pr working interest in this well.

On Slide 22, we cover the sale of our net profits interest properties in East and South Texas, as well as two other fields in South Texas that we plan to sell in the third quarter. The net profits interest properties are non-operated properties that we originally acquired when we purchased DEVEX in 2001.

We sold our interest in the JC Martin AWP and East Seven Sisters field in South Texas, and the Gilmer field in East Texas to two separate buyers in June. The estimated prove reserves attributable to the properties were around 44.3 Bcfe. This works out to a sale price of $2.75 per Mcfe.

Production in the first half of 2008 attributable to our interest in these properties was 8.4 million cubic feet equivalent per day, and these properties contributed $7.9 million to our operating income before income taxes.

We realized a gain of $13.9 million or $0.31 per share after income taxes on these sales in the second quarter. We've also accepted offers to sell interest in our East White Point and Markham fields for $16.4 million. The sales are expected to close in August of 2008 and in fact one of them closed yesterday. These properties have estimated proved reserves of 15.3 Bcfe and we're producing slightly less than a million cubic feet per day in the first half of 2008. We expect to realize an after-tax gain of $3.9 million in these sales in the third quarter. We've utilized a like-kind exchange structure for these transactions so we will not have a current tax liability on the sales.

On Slide 23, we show the impact on Comstock of the proposed merger of Bois d'Arc Energy with Stone Energy that we expect to close on August 28th. Under the terms of the merger agreement, Bois d'Arc shareholders, including Comstock, will receive $13.65 in cash and .165 shares of Stone common stock for each share of Bois d'Arc. Comstock will receive $440 million in cash and 5,317,069 shares of the common stock of Stone for its stake in Bois d'Arc. Using the average market value of Stone stock during July, the shares of Stone that Comstock will receive have a value of $307 million, making the total consideration paid to Comstock for our shares of Bois d'Arc approximately $747 million.

We will recognize a gain of $358 million before income tax and $233 million after income taxes. That equates to a gain of $5.16 per share. The final gain that we recognize will be based on the closing market value of Stone stock on the day the merger closes. The cash portion of the sales will create a current tax liability of $150 million for Comstock.

We plan to use the after-tax cash proceeds of $290 million initially to reduce debt and ultimately for onshore acquisitions and increased onshore drilling activity. Completion of the transaction is subject to approval by the Bois d'Arc Energy and Stone stockholders at special meetings of their respective stockholders to be held on August 27, 2008. We've entered into a stockholder agreement with Stone in which we have agreed to vote in favor of the merger.

Slide 24, the 2008 outlook. Really in summary, the Company is extremely well positioned right now to continue to grow and add value for our stockholders. Our expanded onshore drilling program will be funded exclusively from operating cash flow and will position us to continue our growth into 2009. We now expect to spend $410 million on our onshore drilling program with the increased spending in our East Texas/North Louisiana region.

As Roland said, we are targeting to have 25 to 30% onshore production growth in 2008, and are on track with two excellent quarters so far this year. Our position in the emerging Haynesville Shale play exposes us to somewhere between 2.2 trillion cubic feet and 2.5 trillion cubic feet of potential reserves.

Unlike many of our peers, our substantial unhedged production provides us exposure to higher cash flow and earnings in the current strong oil and gas price environment as opposed to having to explain away a large loss created by derivative trading activities like investors are hearing about this quarter. The hedges we do have were carefully constructed to qualify for hedge accounting, unlike much of the trading activity that many of our peers have engaged in.

And lastly, our upcoming divestitures of our stake in Bois d'Arc Energy, and to a lesser extent the non-core properties, provides us an extremely strong balance sheet that will allow us to aggressively support the continued growth of our onshore operations, which is increasingly important given the tight credit environment that we're all faced in.

We have not had to dilute our stockholders with numerous equity or convertible offerings like many of our peers in the Haynesville play. We think that's an important element to Comstock. As we approach the closing of the Bois d'Arc merger, we look forward to continuing to add shareholder value by being able to focus our growth exclusively onshore. I will now open the meeting up for questions, Lekeisha.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Wayne Andrews from Raymond James. Please proceed.

Thank you, and good afternoon, gentlemen. Congratulations on a nice quarter.

Thank you, Wayne.

I have a couple of questions for you. The first relates to the timing of your Cotton Valley wells. Those are two very significant wells you announced in the quarter, excellent volumes at what, 8 and 10 million a day. And maybe Roland you could tell us a little bit how long they were on in the second quarter so we can get a feel for their contribution to the quarter and what to expect next quarter.

Wayne, this is Mack. The well that came on at 10 million a day has been on for about two weeks so it really didn't contribute significantly to the second quarter average. We're drilling a third horizontal well in Woodlawn Field now , and we expect to get that flowing to sales this quarter, and our current plan is to drill three more horizontal wells for Cotton Valley targets throughout the

Well, very good. If you have continued success like that it should have a significant impact. Next question, just revolves around the Haynesville Shale expansion of acreage. Now, I know you've started out with some pretty conservative estimates of what portion of your acreage might have Haynesville potential, and it's expanded. Can you elaborate on if any of that expansion was related to just the outline of the play moving, and then versus how much was actually acquired as far as additional acreage?

Wayne, we haven't moved our play boundary significantly, although it has moved certainly. The acreage that we acquired recently is, it has nothing to do with our legacy acreage. And you're right. There may, in fact, be some legacy acreage that we're not counting, especially on the West side just based on how we've mapped it, but the additional acreage that we've acquired is not a legacy acreage, and it's in Louisiana.

Well that certainly sounds encouraging. And can you mention, obviously I'm sure it's a pretty difficult environment to try to acquire acreage, and what makes you think you're going to be able to continue to compete in that area if the dollars continue to ramp up?

Well, you're right again. I mean the competition is fierce, especially for core acreage. I think the competitive advantage we have is that we have rigs that are available to joint venture with certain groups. We have a number of offers that we're considering to do that. And we're not in a position where we're facing a clock issue with a lot of our leases, unlike some others. So we're in a fairly enviable position as far as being able to negotiate with some of these other entities as far as partnering.

You know, Wayne, one thing, as you know, I mean, over 17 years we've got a great network and reputation in East Texas/ North Louisiana. We've had a lot of smaller companies that have come and said that we would still like to own some of our mineral rights, can we drill some wells with you. We've got an inventory of transactions like that that we've looked at. We do have a lot of people call in that have 400 acres, 1,000 acres, maybe even 10,000 acres, and we continue to look at those tracks. Usually those are all on a bid basis and the company that pays the most gets the acreage.

We've been pretty disciplined on the royalties. Most of the royalties are a quarter or less. We think 30% royalty is too much. So we do have some guidelines there, and even with those guidelines, two things. One, we've gone from 50,000 net acres to 65,000 net acres, and I think we've done that with discipline. We've done that with free cash flow or from properties that we've sold.

That's one of the important kind of bullet points of Comstock. We've not diluted the potential return of the Haynesville, much less the Cotton Valley Taylor return, by either issuing some kind of convertible instrument or by issuing equity. And I think at the bottom line, we can create more shareholder value by staying disciplined like that.

We do think that we can acquire another 10,000 acres between now and year-end or we wouldn't state that which is -- it's unusual for us to even give a goal like that. As you know, you've known us for 13 years or so, so we're pretty confident we can do that within our parameters of what we think is acceptable.

Very good. Well, that's one of the benefits of having operated there for so long. Thanks. I'll let some others ask questions.

Thank you, Wayne.

Our next question comes from the line of Kim Pacanovsky from Collins Stewart. Please proceed.

Hi, Kim.

Hi. Are you there, good morning. Sorry about that. Hi, Jay, how are you?

I'm good.

Good. Okay, a couple questions here. First of all, what parishes in Louisiana did you acquire that additional acreage in?

That would be Caddo and Bossier Parish.

Okay, and Mack, I'm just curious as how you came up with your first location for your horizontal in Toledo North and if you can just go through the process of why you picked this location?

Sure. The geological correlations gave us a real good idea of the Haynesville thickness that we were targeting and the process of developments within that thickness. We also have about a 12,000 acre block that this first well will provide a good test. It's by no means going to test the whole block, but it was a good place to get started. Almost within 45 to 60 days from now we're going to be moving into Logansport and drilling our first Haynesville horizontal there.

Okay.

And you said nine wells total for the year between the Cotton Valley Taylor and the Haynesville. So if I did the math right, is that just two Haynesville wells to be drilled in '08. Is that correct? No. We're going to be spudding six, actually. We're going to TD and start completion on four of those six horizontals.

I think the two, what we would consider will be completed this year, completed and producing, there will be a bunch in process at year-end.

Oh, okay, all right, that makes sense. And have you heard anything new on Shell and BPs activity in Toledo South?

Yes. Shell has drilled a very nice well to the East and slightly North of our Toledo bin North acreage block. It's in between our North and South blocks. It really supports that region. In Canada, of course, over in Red River Parish, announced a very nice well, plus 10 million a day type rates. So the data is supporting our play boundary outlines, which we like.

Okay. And if we could just shift over to the Cotton Valley horizontals, you show about eight other locations on your Wascom map in your presentation. Are you going to drill those locations up before you head out of Wascom, and what's the average interest in those locations?

We're not going to drill those up before we move out of Wascom with the rig. We're staggering our drilling opportunities there. We plan to drill four in a row.

Okay. In Wascom?

In Wascom, after we get through with the current well we're drilling which is in Woodlawn. And the average interest in those wells, Kim, is about 80% to 100% working interest.

Okay. Great. Well thanks, guys. Nice quarter.

Thank you, Kim.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Ron Mills from Johnson Rice. Please proceed.

Good morning, guys.

Hi, Ron.

Just go back to the Haynesville for a couple questions. Jay, you mentioned your lease expiration shouldn't be an issue. Can you walk through, of your acreage how much of it is held by production since you have so much legacy acreage in the area versus how much is on a drilling clock so to speak?

Ron, this is Mack. About 40% of our acreage is HBP, and the remainder are three year term leases.

All right, and I know it's been a hot topic with a lot of people in the play. I don't know, if Mack, this is maybe for you. Can you talk a little bit about takeaway capacity in the area and what Comstock is doing to secure takeaway capacity?

Sure. I can't go into details about that because we're having negotiations at the moment with a number of purchasers and pipeline operators. But the bottom line, to get to your question, is certainly that's something that we're addressing.

The take away capacity currently is sufficient to handle the anticipated volumes that, based on all of the public data from the various operators that are in the play, that we think will be hitting the pipes. But as the play very quickly ramps up, and I'm going into, deep into next year, those volumes are obviously going to increase very quickly. So a number of Operators, pipeline Operators, are planning to loop their lines and lay new lines for the takeaway capacity, increasing their take away capacity. So steps are underway to address that anticipated problem. We're getting firm capacity, I can tell you that.

Okay. And you talked about you have one rig now, you have a second rig coming, I don't know, probably October-November time frame, and you expect to, it sounds like, average five rigs next year with a hope to exit at least seven in 2009. Do you have agreements on those rig deliveries, or are you just hoping to line up the access to those rigs just looking at where you stand in that regard?

No, we've got contracts on those rigs, Ron, and we should exit this year with four operating, and very quickly get to that fifth rig in the first quarter of next year, and then we'll add rigs six and seven moving deeper into the year. But we have all of them on contract.

Okay. And with Hico Knowles being the other real big driver here in terms of onshore production, it looks like, can you talk about what your activity plans are there? I know the operator of a portion of it has been fairly aggressive with their activity in Hico Knowles. Any signs that Petrohawk 's activity will slow down in this play, and what your plans are given the high productivity of those wells?

Yes. We plan to drill an additional six wells in Hico Knowles. Petrohawk's plans, of course I hesitate to speak for them, but they have been running between two to four rigs for the majority of the year in the field. They've acquired additional acreage that we also have some interest in to the west, so they very may well move into that acreage next year.

Ron, we have not heard what their plans are for next year. I think they will have, as our release indicates, we estimate 27 more locations are available between them and us, and a few of those, of course, will be drilled throughout the reminder of the year. And then how they plan to allocate their dollars next year given their activity in the Haynesville, for example, I don't know yet.

And then lastly for you, Roland, and Jay you can comment too, but your CapEx increased to $410 million versus the $278 million that you originally budgeted. It looks like, using your growth targets and assuming the costs going forward remain in line with the second quarter, that you should be more than funding that increased budget internally. Is that a fair assumption for my model?

Ron, that's a good assumption. We're at least projecting that we'll have cash flow in excess of what that capital budget is going to require for the remainder of the year. And I think there's still some potential that we could increase the budget some more, especially based on opportunities we have to pick up acreage in Haynesville, because that's been one of the biggest components of the increase has been acreage that we've acquired, and then just additional cost of horizontal wells which may have displayed some of the other wells that we're drilling.

Do you know about how much of the $135 million, $140 million increase is related to acreage versus drilling for Haynesville?

I would say about $80 million of that increase is on the acreage side.

All right, well congratulations, guys, thanks.

Thank you, Ron.

Our next question comes from the line of Dan McSpirit from BMO Capital Markets. Please proceed.

Thank you, gentlemen. Good morning.

Hi, Dan.

I recognize that it's early innings in the Haynesville Shale play and that you'll find a distribution of possible values with respect to the recoveries per well. And yet, other operators are very comfortable with stating 6.5 B per well recoveries, yet you folks are holding to this tighter range of 3.5 4 Bs. I don't want to go so far as to say that 3.5 Bs could prove meaningless here over time, but why are you sticking to that range? Why be so conservative versus others?

Dan, I'll address that quickly. We think that all of the data that we have in our shop more strongly supports 3.5 4 Bcf estimate than it does a 6 to 6.5 Bcf estimate. In order to get to the 6.5 Bcf estimate, you have to include an upper bench in the Haynesville, and completing that upper bench mechanically, and combining it with the lower bench mechanically, requires a certain completion approach that we think isn't cost effective. So we're sticking to the 3.5 to 4 Bcf until we get some more data that we think supports a higher number. Now, certainly, using that upper bench as a basis you can get to that higher number but getting the recoveries is a question.

Okay, one thing we do say, Dan, though is like we were in New York and Boston about a month ago, and had a bunch of meetings. We've always said that the company that maybe has spent the most and has the most information hopefully has the most accurate numbers. So that's why we put in the presentation that these are our numbers, this is our first blush look at it. And the finding costs, of course, are less than $2. And if the peer company numbers are correct, it will be even a more profitable play. So, like Mack said, we independently came up with our own numbers, and hopefully they're conservative, but they're what we're going to stick to right now.

Got it, got it. I appreciate the fact that these wells are wildly economic at 4 B's, even at $8 gas, believe it or not. But with respect to completing the upper bench, what's involved there? Could you help me understand the mechanics of that?

Sure, Dan. As you know, the Haynesville Shale is abnormally pressured. It has a higher core pressure so in order to frac these wells, the pump pressures required are quite high. And so, in order to get the rate, the pump rate, to create the appropriate fracture systems around the targeted shale interval, you've got to go to these high pressures. In order to complete two benches, you've got to be able to isolate, mechanically pressure isolate, one lateral, the lower bench, from the upper lateral so you can get an appropriate frac.

We think that doing that mechanically is extremely difficult. It can be done, but at a very high cost. And so I think what's going to happen is that you're going to drill one well, drill the lateral into the lower bench, and drill a second well with the lateral into that upper bench. And that is yet to be done, to our knowledge. So that's why we take a more conservative approach to our reserve estimates. Because not a lot of data is available to us on the upper bench yet.

Perfect. Thank you.

Yes, sir.

Our next question comes from the line of David Snow from Energy Equities Inc. Please proceed.

Yes, hi. I'd like to go back to the 8 and 10 million a day Cotton Valley wells. What acres facing is those horizontals? Would that be 80 acres?

Yes, sir.

And how much of the, you have about 222,000 acres of Cotton Valley. Is that right?

Actually, through, across several fields we have considerably more than that. I can't give you an exact number but in Wascom, we have about that.

That was from when you were at the New York IPAA and it's probably increased as a function of more acreage? Or that wasn't the full amount that you specified then?

Well, --

Yes, we have over 200,000 net acres in this region, and not all that is Cotton Valley because I think, what do you think is Cotton Valley, Mack?

Oh, we have, I haven't got a total but we have several thousands of acres that have been identified for the horizontal drilling program.

Is there any reason it would be several thousands rather than the whole shooting match?

Yes, because the targeted section in the Cotton Valley is called a Cotton Valley C interval and it's continuous and bounded by some shale barriers that contain the frac heights growth, and you don't find that throughout the entire area.

Okay, all right, so the rest of it is done on 20 to 40 acre vertical spacings?

Yes, sir.

And your average recovery on those would be more in the range of 1.3 gross or something like that?

1 to 1.5 Bs, yes, sir.

And what would be the average of the spacing on that?

On the verticals?

Yes.

Probably 40 to 60 acres.

Okay, all right. And then in your Haynesville, are you in a deeper part of the play? It sounds like you are.

Well actually, we're in the shallower portion as well in northern De Soto and Caddo, but we do have some deeper acreage positions. As you go further, as you probably already know, as you go further South, it does deepen, and we have some nice blocks there. And, just parenthetically, that's where Shell and EnCana have drilled some very nice wells in that deeper section. As you go deeper your pressure also increases in the Haynesville.

Your first well is going to be in the south or the northern end?

We're going to be in the south end of our acreage block.

Okay. Do you have, can you give us some idea what the porosity is?

We're seeing where from 14% to 18%.

Okay, well it sounds like it's a conventional porosity almost.

Yeah, but it's trapped in a shale. That's what makes it very interesting.

How much of the -- what's the in place reserves per section, the resource per section, on these two benches that you're looking at?

Boy, it depends on how you want to calculate that. We think it could get up to 160 to 200 Bs per section, and then what recovery factor you want to apply to it. That's the big question mark that everyone is focused on right now. I think everybody gets to the, pretty close to the same in place gross numbers. What do you think you can recover.

And that 160 to 200 is for both benches? Or what portion of the section is included?

Well the lower bench is probably about 120 Bs of that.

Okay and the rest is upper bench?

Yes, sir.

Okay, wonderful. Thank you very much.

You're welcome.

Thank you.

Our next question is a follow-up question from Ron Mills from Johnson Rice. Please proceed.

Hi, Mack, just on the porosity that you threw out there, is that what you've seen in the six vertical wells that you've drilled?

Yes, sir.

And can you give us an idea as to where those six vertical wells were drilled in terms of Toledo Bin North versus Logansport?

We've drilled in Logansport, we've drilled in Wascom, and we've drilled in Woodlawn. We have other data from other wells to the South.

Okay. And then Roland, just one question for you. In terms of the operating costs and DD&A and G&A, is the second quarter a good proxy as to how things should look for the remainder of the year?

Yes, I think the second quarter, Ron, is a good proxy, other than maybe production taxes may not be quite as high, as gas prices are lower in the third or fourth quarter than they were in the second. But otherwise the cost structure, now that we've got it separated between with the onshore Continuing Operations separated, it's a good proxy for how we look.

And then your gas prices being roughly Henry Hub despite your activity being in South Texas and East Texas/North Louisiana, is that a function of the BTU content?

Right. The BTU content typically has been pretty strong and then you've gotten really strong prices in the North Louisiana area on top of that. But overall, we've been averaging very close to Henry Hub, sometimes a slight discount to that number.

Sure, and then you're hedging -- you still only have the 17 million a day you hedged related to the Shell acquisition, correct?

Right. That position runs through the end of 2009. It's about roughly 12% of the production.

All right thank you.

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

Good morning, guys. I'll say, as a current shareholder, I do commend you for generating all this nice growth and outlook within your cash flow internal. It's nice to see. Most of my questions have been answered. I'm just curious, Jay, maybe conceptually, given what's happened to the E&P sector, in the stock market anyway, at some point does it make sense to use some of your cash to buyback some of your own stock, even with all of the nice growth avenues that you have in front of you?

Yeah, absolutely I do. I think it does. If you look at the company, as you get through this one hour conference call, I mean, I know the sector hasn't been trading well for maybe a month, but I mean we did report an exceptional quarter. It's the highest quarterly profit in our corporate history, $83 million. As Roland had said earlier, we didn't have mark-to-market issue or derivative issue. We didn't have to explain some kind of mythical loss. We had $83 million in profits, period. And for a Company our size, it's pretty phenomenal.

And then going back to your statements, in other words, do we feel comfortable in purchasing stock. Well just look at the underlying foundation of the Company. East Texas/North Louisiana, we've increased our budget maybe $130 million, $135 million this year. A lot of that is in East Texas/North Louisiana, probably, as Roland said 80% to 90% of it. And then you say, well what about the quality of our wells. Well, we drilled 52, we've hit 52 and the IP rates have almost doubled. We were 2.6 million a day this year. Last year for the year, we averaged 1.4 million. So we're very comfortable with our exposure in East Texas/North Louisiana.

We've added another 15,000 net acres and we didn't put out press releases to tout it. We went under the radar to do it, and we kept our discipline. At the same time, we didn't issue equity to everybody to pay for it because we don't have to.

Quite frankly, before we even sold Bois d'Arc -- and I hope that occurs on the 28th -- we were able to create our own internal cash flow because we haven't been hedged, and we did sell these net profits, and we reduced our debt-to-cap to 36%. And hopefully on the 28th, which is not many days from now, we'll be at a 17% debt-to-cap. And we are in a very tight credit market.

And then you look at our availability, we'll almost have no commercial bank debt. We'll have, I think, a $590 million credit facility, and we might have $560 million of availability, which, again, that goes back to the question of if the stock drops should we buy shares back, and I think the answer is yes.

Do we need those dollars in order to grow our production? I think that we got this 25% to 30% onshore production growth and we're well ahead of that. I think we can deliver on that. The question is, do we need to issue any equity in order to hit our numbers and to grow? No, we don't have to. We don't even have to do a convertible offering. We've got a ton of money.

It's nice to be able to create shareholder value the old fashioned way, and that is, instead of issuing equity to buy things, we actually created a company called Bois d'Arc. Hopefully it sells on the 28th of this month and we've made almost $800 million. And you take those dollars and you put it back into creating shareholder value.

And I think the one thing that no one has asked a question on which I thought someone would, is how about the future of South Texas? I mean, we closed Fandango last year with Shell. I think it added $1.00 to cash flow, $0.12 or $0.13 for earnings, at a $7.00 gas price for a 12 month cycle. Well, it was just one sentence but we said we're going to spud our first well probably in the next 30 days or so, and we think that well has straight potential sands to add about 30 Bcfe of reserves. Well, we're going to produce 55 Bcfe or so this year. That's a pretty big well that maybe we should focus on a little bit. But we will be a Company that's exclusively onshore.

So all of those things tell me that I'm very comfortable with the treasures that Comstock has. I don't think we have much trash within all of the treasures. And if we believe that as a management group which is Mack and Blaine and Gary and Roland and me and Mark, and you name them, I mean, it's the Comstock people. If we believe that, then I think we should take a look at buying stock back. Hopefully it it will rebound and go back up, but if it doesn't, we're in a position where we could do that. So that's a long answer but I'm very compassionate about it.

I appreciate that. Thanks and good job, guys.

Lekeisha, is that it? That's an hour or so.

At this time, we are running out of time. I would like to turn the call back over to Jay Allison.

All right again, I want to thank all of you, for especially hanging on for the call for the very end. I know that the sector is not trading very well. There's nothing we can do about that. We do plan on delivering good results, and if we don't, it won't be because we didn't try. So, thank you again for all of the questions, they were good questions, and for the support that we've had and continue to receive from each one of you. Thank you.

Thanks for your participation in today's conference. This concludes the presentation. You may now disconnect.