Comstock Resources Inc (CRK) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q3 2008 Comstock Resources Inc. earnings conference call. 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 toward the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jay Allison, Chairman and President. You may you proceed.

Thank you for the introduction. Hello, everyone. Welcome to the Comstock Resources 2008 third quarter financial and operating results conference call. You can view our slide presentation during or after this cal by going to our website at www.comstockresources.com and clicking on presentations. There you will find a presentation entitled third 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 third quarter financial and operating results as well as the 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 in such statements to be reasonable, there can be no assurances that such expectations will prove to be correct.

If you are following this on the slides on slide two, I want to make a comment before we go over the third quarter 2008 highlights. I want to make sure that our record-setting financial results in the third quarter of 2008 which are, they're just phenomenal, I mean oil and gas sales of $164 million, EBITDAX of $139 million, cash flow from operations, $133 million, continuing net income $55 million, and total net income of $225 million which is not a gain from a derivative story, it is the actual gain of increased production onshore and the sale of the successful Company. I want to make sure that that doesn't deter you today from voting. It is election day.

When I read these numbers realizing that Comstock has only about $1.8 billion in assets I just shook my head at the numbers. They were phenomenal. And I driving to work this morning I thought what's it like and I thought it is kind of like asking Santa for a red Schwinn bike for Christmas and receiving that bike plus one for every shareholder, which there are 45 million share owners, I mean, quarters like this maybe everybody happy. It is a really good story. With that let me go back to script.

We are very pleased to be able to report our most profitable quarter in our corporate history this quarter resulting from strong operating results and the profit we recognized from our creation of Bois d'Arc Energy in 2004. We are also very pleased to have the Company so well positioned at this time when credit and capital are difficult to obtain. For the third quarter we reported revenues of $164 million and we generated EBITDAX of $139 million and operating cash flow of $133 million. Our net income from our continuing on shore operations exceeded expectations coming in at $55 million or $1.20 per share including the contribution from our discontinued offshore operations of $170 million, we reported total net income of $225 million this quarter or $4.91 per share. $158 million of the discontinued operations represents the after tax gain on the sale of our stake in Bois d'Arc Energy which closed on August the 28th. The strong financial results in this quarter were driven by 23% production growth and strong oil and gas, natural gas prices in the quarter. The production growth is primarily coming from our successful drilling activities this year. 110 of the 112 total wells that we drilled were successful. We are funding our $425 million in estimated capital expenditures exclusively out of operating cash flow this year.

I am not aware of another E&P Company that has been able to match our production rate that has funded all of their CapEx with operating cash flow. $109 million of our expenditures have been invested to increase our leasehold in the emerging Haynesville shale play. We have increased our holdings to over 70,000 net acres in this play so far this year. And have four horizontal wells underway to begin developing this significant resource potential. In hindsight our best move this year was to complete the divestiture of our offshore operations and the $138 million in noncore properties prior to the onset of two hurricanes, the substantial decline in oil and gas prices and the current credit crisis that we are experiencing. We are now positioned with a very strong balance sheet including an undrawn $590 million credit facility that was just reaffirmed by our bank group last week. I will turn it over to Roland Burns to review the financial results in more detail. Roland.

Thanks, Jay. Our outstanding financial results this year from our continuing onshore operations are being driven by our strong production growth, which is shown on slide three. In the third quarter of 2008, our production averaged 163 million cubic feet equivalent per day which is 23% higher than our production in the third quarter of 2008. Our production for the first three quarters of this year is 36% higher than production in the same period last year. Production is down slightly from our second quarter rate of 168 million per day due to the 9 million per day of production that we sold at the end of the second quarter. Our successful drilling activities and the south Texas acquisition that we completed at the end of 2007 account for the increase.

On slide three, we break out our production into our operating regions and we also separate out the properties that we have sold. Our east Texas, north Louisiana region averaged 87 million per day which is 32% higher than it was in the third quarter of last year. Production in our south Texas region was up 64% to 59 million per day as compared to the 36 million per day that we had in the third quarter of 2007. Production in our other regions was 17 million per day which was down from the 20 million a day in 2007. We expect to produce around 59 to 60 Bcfe in total in 2008 which will represent a 30 to 33% growth in production over 2007. Also contributing to the strong financial results were the very strong oil and gas prices that we had in the third quarter.

On slide four we cover our oil prices, our average price increased 64% in the third quarter of 2008 to $105.15 per barrel as compared to $64.06 per barrel in the third quarter of 2007. Oil prices in the third quarter averaged 89% of the average NYMEX WTI price in the quarter. For the first nine months of this year our realized oil price was $97.74 which is 74% higher than our oil price of $56.15 in the first nine months of 2007. For this period our average oil price was 86% of the average NYMEX WTI price.

Slide five shows our average natural gas prices. Our average gas price increased 62% in the third quarter to $10.16 per Mcf as compared to $6.26 in the third quarter of 2007. Our realized gas price was 93% of the average Henry Hub NYMEX price in the third quarter which reflected the wider differential that we experienced in September as a result of the hurricanes. We had 12% of our on shore gas production hedged in the third quarter which reduced our realized price that we reported by $0.21 per Mcf. For the first three quarters of 2008 our average gas price increased 42% to $9.65 per MCF as compared to the $6.78 in the first three quarters of 2007. Our realized gas price was 99% of the average Henry Hub NYMEX gas price for the first nine months of the year. For the rest of the year and all of 2009 we have approximately 12% of our gas production hedged at $8.20 per Mcf.

On slide six we cover our oil and gas sales, our sales from our continuing on shore operations increased 97% to $164 million in the third quarter, due to the higher production level and the strong oil and gas prices. For the first nine months of this year, oil and gas sales increased 96% to $464 million as compared to $236 million for the same period in 2007.

Our earnings before interest, taxes, depreciation, amortization, and expiration expense and other noncash expenses or EBITDAX from our continuing on shore operations increased 119% in the third quarter to $139 million as compared to $63 million in last year's third quarter as shown on slide seven. For the first nine months this year our EBITDAX increased 117% to $387 million as compared to $179 million for the same period in 2007.

Slide eight covers our operating cash flow. Our cash flow just from our continuing on shore operations increased 152% in the third quarter to $133 million as compared to cash flow of $53 million in 2007's third quarter. For the first three quarters of the quarter of the year, our operating cash flow was $359 million or 135% higher than the cash flow we had in the same period of 2007 of $153 million.

On slide nine, we outlined our earnings for the quarter and for the first three quarters of this year. We reported net income of $225 million, or $4.91 per share for the third quarter which is of course by far the highest quarterly profit in our corporate history. This compares to $16 million or $0.37 per share for the third quarter of 2007. $55 million or $1.20 per share is attributable to our continuing on shore operations as compared to $10 million or $0.23 per share in the third quarter of 2007. Included in our continuing earnings this quarter is an aftertax gain of $4 million or an $0.08 per share from the sale of certain south Texas properties. For the nine months, for the first nine months of this year we reported net income of $348 million or $7.65 per share as compared to $47 million or $1.05 per share for the same period in 2007. $154 million or $3.40 per share is attributable to our continuing on shore operations, as compared to $32 million or $0.73 per share in 2007. Included in continuing earnings, for the first nine months of this year, is an after tax gain of $17 million or $0.38 per share on the properties that we have sold this year.

We look at our cost structure on slide 10. Our lifting cost in the third quarter improved to $1.44 per Mcfe as compared to $1.53 that we had in the second quarter of 2008. We were up slightly from the $1.40 per Mcfe in last year's third quarter. Our depreciation depletion and amortization per Mcfe produced increased to $3.06 per Mcfe, in the third quarter of 2008 as compared the $2.73 per Mcfe in 2007's third quarter.

On slide 11 we outline our production costs for the first nine months of this year, our lifting costs averaged $1.47 per Mcfe in the first three quarters of this year which is the same rate we had in 2007. Our DD&A per Mcfe increased to $2.93 per Mcfe in the first nine months of 2008 as compared to $2.74 per Mcfe in the same period in 2007.

On slide 12 we present our capital structure at the end of the third quarter. On August 28, we repaid all of our bank debt which reduced our total debt to $175 million, using the proceeds from the sale of our interest in Bois d'Arc. On August -- on October 29, our bank reaffirmed our $590 million borrowing base on this credit availability which means we now have all $590 million available. We ended the quarter with $1.1 billion in equity, reflecting the profits that we made this year. As a result, our percentage of debt to our total book capitalization decreased to 13% at the end of the quarter compared to the 50% level where it stood at the end of last year. The Company is now very well positioned in this period where credit and capital in the capital markets are very difficult and costly to access.

On slide 13, we detail our capital expenditures to date this year. We have spent $309 million in the first nine months of this year for our drilling program as come paired to $287 million that we spent in the first three quarters of 2007. We spent $228 million on our east Texas, north Louisiana region, $55 million in south Texas and $6 million was spent in our other regions. $109 million of the dollars spent in east Texas, north Louisiana was spent to acquire an additional leasehold in the Haynesville shale play.

We announced today that we are increasing our capital expenditure budget this year to $425 million which is detailed on the slide 14, much of the increase is for the acreage acquisition that we're making in the Haynesville shale play. We now expect to drill approximately 140 wells or 77.1 net wells to our interest this year. Turning these wells will be horizontal, drilled in our east Texas, north Louisiana region for either the Cotton Valley Taylor formation or the Haynesville shale formation. Our east Texas, north Louisiana operating region at $327 million accounts for 77% of the 2008 budget, and 116 of the wells to be drilled. We expect to spent $91 million in our south Texas region to drill 18 wells and we have budgeted only $7 million in our other regions to drill 6 wells. I will now turn it back over to Jay to review the operating results in each of our regions.

Thank you, Roland, for that exceptional report on the third quarter financial results. On slide 15, we focus on our east Texas, north Louisiana region, we drilled 96 wells in this region and 11 different fields in the first three quarters of this year. All of these were successful. We have tested these wells at a per well average rate of 2.7 million cubic feet equivalent per day a substantial improvement from our average in 2007 of 1.4 million cubic feet equivalent per day. The prolific wells at Hico Knowles and the Cotton Valley Taylor horizontal wells account for the improved per well results.

Slide 16, 35 of the wells drilled in this region have been drilled in the Hico Knowles field in Lincoln parish in northern Louisiana as shown on slide 16. This field offsets the very prolific Terryville field that Petrohawk has been developing. 32 of these wells have been completed and had initial production rates which have averaged 3.7 million cubic feet equivalent per day.

On slide 17 we have a map of our Waskom field in Harrison County Texas. We have drilled four successful horizontal walls in the Waskom and Blocker field in Harrison County Texas. These wells have a per well average initial production rate of 7.5 million cubic feet equivalent per day. Our average working interest in these wells is 83%.

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 85,392 gross acres and 70,004 net acres that we believe is prospective for Haynesville development, based on five test wells that we have drilled and data from other wells drilled by other operators that we have reviewed. Given expected well spacing of 80 acres and expected well recovery of 4 Bcfe per well our acreage would have 2.6 trillion feet equivalent of reserve potential. We have four horizontal wells in process to begin the commercial development of this play. I will let Mack Good, our Chief Operating Officer go over these wells and also contrast the Haynesville horizontal wells to the Cotton Valley Taylor horizontal wells that we are now drilling. Mack?

Thanks, Jay. As shown on slide 19, Comstock targets the upper Cotton Valley Taylor reservoir for a horizontal completion. This completion normally involves between 5 to 7 fracture stimulation stages that are pumped across the horizontal lateral that varies between 3,000 and 4,000 feet in length. The fractured stimulations that we pump are pumped at very high injection pump rates and they're all pumped one right after the other without stopping by using an on the fly sleeve shifting technique that has been developed for these kind of completions. As a result, all of the stimulation stages are popped, consecutively within a 24 hour period. Currently we are drilling our fifth horizontal Cotton Valley well in our 2008 drilling program and we plan to drill an additional two horizontal Cotton Valley wells before the end of the year. The average drilling and completion costs of these wells approaches $5 million per well, and so far this year our average per well recovery has approached 2.9 Bcfe per well with initial rates ranging between 5 million and 10 million per day.

Our 2009 program will include additional Cotton Valley horizontal completion. Our intention is to utilize one of our top drive rigs to drill six Cotton Valley horizontal wells next year. Our program can be adjust ted as conditions warrant, since numerous additional Cotton Valley horizontal locations are available in our inventory for development.

On slide 20 you will see a diagram that will give you a general picture of how replan to complete our horizontal Haynesville shale wells. This diagram shows that we anticipate completing the Haynesville well varying in thickness between 190 to 250 feet, and that we will pump between 9 to 12 fracture stimulation treatments across the wells 4,000-foot long horizontal lateral. It is important to note that the Haynesville fracture treatments are different than those traditionally pumped in the Cotton Valley horizontal wells. The Haynesville completions longer and are more expensive. This is because the Haynesville shale is an overpressured reservoir and like the Cotton Valley, when you pump the fracture treatment, if everything else remains the same, the higher the treatment pressure, the greater the cost of the job.

The Haynesville shale completion is not only treated at higher pressure, they are also more complex and they take longer to finish. This is because the Haynesville horizontal completion requires a wire line service intervention after each fracture treatment in order to set an isolating plug and another wire line intervention to perforate the next stage. The Cotton Valley horizontal completion requires no wire line interventions at all. So since all of this work must be done between stages in the Haynesville horizontal well, only two to three stages can be pumped per day. But an entire Cotton Valley completion involving multiple fracture stages can be done within a single day because no wire line work is required between the stages.

But as with all plays it is the geological work that is the key to determining where to drill and what to target for completion. Our Haynesville shale geological and petrophysical work shows that the primary section targeted for completion is found in the lower part of the overall Bossier shale interval and the depth of this targeted lower lobe interval lies between 10,750 and 12,000 feet deep within our acreage position. Our work also suggests that this lower interval varies between 190 to 300 feet thick across our acreage. Interestingly, our G&G work also reveals that a second Haynesville target exists within the, within certain areas of our play acreage and this secondary target is an upper Haynesville lobe that develops within the same depth interval. But it is not present in all areas of the play. Pardon me. Its thickness and quality is more variable than the lower lobe and we are still working to quantify them though we believe this is prospective.

So far, we have drilled, logged, completed and tested seven vertical Haynesville wells in different parts of our acreage position in the play and the cost of drilling to complete these vertical Haynesville test wells currently approaches $2.2 million per well. The cost of drilling and completing a horizontal Haynesville depends on its location, the depth, length of lateral and the number and size of the fracture treatments to be pumped. Currently we estimate these costs will vary between $8 million to $9.5 million per well. The commercial development of the Haynesville shale definitely requires drilling and completing horizontal wells in order to optimally recover the reserves and to be economic.

We have recently finished drilling our BS&CLA 7 number one, it is our first Haynesville horizontal well and this well is located in our Toledo bin north area which is just south of our Logansport field assets in Desoto Parish, Louisiana. We have an 88% working interest in this well and after drilling the well to an estimated 11,750 foot vertical depth, we then drilled a 4300-foot horizontal lateral targeting the lower Haynesville section that I previously described. We are currently completing this lateral with ten fracture stimulation stages and after completion we will simultaneously flow all of these stages to sales. Comstock is currently drilling its second horizontal Haynesville well and this well is located within our Logansport field acreage. We anticipate starting completion operations on this well some time during early December. We also plan to move two additional rigs in during the fourth quarter of 2008, to drill Haynesville horizontal wells.

Our year 2009 plan is very flexible but our current intention is to drill an estimated 40 Haynesville horizontal wells by running five rigs throughout the entire year. Additionally we intend to ramp up our five rig program late in the third quarter of '09 by adding an additional two rigs the to our Haynesville program. And with that I will turn it back over to Jay.

Thank you, Mack. Slide 21 -- our south Texas region is displayed on slide 21. In our south Texas region we drilled 11 successful wells in the first nine months of this year and we had two dry holes. These wells have been tested at a per well average rate of 3.8 million cubic feet equivalent per day. Three of the successful wells were in the loss from Las Hermanitas field in Duval County. Five were in [Avelena] field in [Edago] County and two were in the Ball Range field and one was in the La Range Ranch field in McMullen County.

On slide 22 we have a map of our field Fandango field, we are drilling our first exploratory well in this field, the Land Anchor number 10. This well is being drilled to a depth of 16,000 feet and will target three potential pay sands, with a total reserve potential approaching 30 billion cubic feet equivalent.

On slide 23, we cover the sale of our net profits interest properties in east Texas and south Texas as well as two other fields in south Texas that sold in the third quarter. The net profits interest properties are not operated properties that we originally acquired when we purchased Devex Energy in 2001. We sold our interest in the JC Martin AWP and East Seven Sisters field in south Texas and the Gilmore field in east Texas to two separate buyers in June. The estimated proved reserves attributable to the properties that were sold, is 44.3 Bcfe. This works out to a sale price of $2.75 per Mcfe.

Production in 2008 from the net profits interest properties is 8.5 million cubic feet equivalent per day and these properties contributed $8.5 million to our operating income before income taxes. We realized a gain of $13.9 million or $0.30 per share after income taxes on these sales in the second quarter. We have also sold the interest in our east Widepoint field and Markom fields for $16.4 million. These properties have estimated proved reserves of 15.3 Bcfe and we are producing 0.8 million cubic feet equivalent per day in 2008. We realized an after tax gain of $3.5 million or $0.08 per share on these sales in the third quarter.

Slide 24, on slide 24, we show the impact on Comstock as the sale of our stake in Bois d'Arc Energy to Stone Energy that closed on August the 28th. We received $440 million in cash and 5.3 million shares of the common stock at Stone in exchange for our controlling interest in Bois d'Arc The shares of Stone that Comstock received were valued at $211 million, making the total consideration paid to us for our shares of Bois d'Arc approximately $651 million. We recognized a gain of $243 million before income tax and $158 million after income taxes. This equates to a gain of $3.48 per share. The cash portion of the sale will create a current tax liability of $146 million for Comstock, that we will pay in the fourth quarter. We used the after tax cash proceeds of $294 million to reduce our debt.

2008 outlook, slide 25. In summary, Comstock is very well positioned to continue to grow and add value for our stockholders especially in the challenging environment that we are in today. Our expanded on shore drilling program will be funded exclusively from operating cash flow and will position us for continued growth in 2009. We expect to spend $425 million on our drilling in 2008 with the increased spending in our east Texas, north Louisiana region primarily used for expanding our Haynesville leaseholdings. We are targeting to have a 30 to 33% production growth in 2008. Our position in the emerging Haynesville shale play exposes us to 2.6 trillion cubic feet equivalent of reserve potential. The divestitures of our stake in Bois d'Arc Energy in the noncore properties that we completed, provide us an extremely strong balance sheet that will allow us to aggressively support the continued growth of our on shore operations which is increasingly important given the tight credit environment that we are in today. We are well positioned for future growth in 2009 with a large inventory of drilling locations in the Cotton Valley and the Haynesville shale in east Texas and north Louisiana and in the Vicksburg and Wilcox trend in south Texas. At this time I will turn the meeting back over to you and open it up for questions.

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

Good morning, gentlemen. And congratulations on an outstanding quarter. I have some, a couple of questions just detailing a little bit on Haynesville and your capital spending plans. I know as you enter a budget process for next year, you, fortunately you have the ability to spend as you see fit. As you allocate capital, I was just kind of curious, Jay are you looking more at just the mix change in your production and development wells that you drill versus exploration and holding acreage and I have a follow-up question after that.

What we do, we look at again like if you look at 2008, I mean we started out the year saying we would have about $278 million in our CapEx budget and that's what we thought our free cash flow from operations would be, at the end of the first quarter commodity prices were higher we increased that CapEx budget to $327 million then at the end of the second quarter as you know, commodity prices continue to be higher and we increased that to like $415 million, today it is $425 million, and all of that is funded out of free cash flow. What we are doing now is we are kind of attending to our knitting. Between now and year end, our goal is to complete the Line Decker well. We want to TD it and complete it and if it works we have several years worth of drilling there, so we will allocate dollars in '09 accordingly, and then I think the same way with the Haynesville wells. We have got four that are spudded. We hope to have a couple completed by year end, hopefully connected to sales, that's our goal. I don't if we will achieve that goal, but we are trying to do that. I think we will allocate dollars to drill these 40 wells in the Haynesville, and a lot of that depends upon the outcome. As you know, you've noticed for 13 or 14 years, or however many years, we operate most of the wells that we propose to drill. So we kind of shuffle those dollars around. I think if cash continues to be king, then I think we are going to be stronger as the next months or years go on because of our balance sheet. And I think that we will see some opportunities to maybe acquire some acreage in the Haynesville that is maybe a little more enticing than it has been in the past. But we are going to continue to run the Company not to grow a giant Company but to create value to the shareholders on a per share basis. We are going to be moving those dollars around.

Maybe just a follow-up there, you spent a significant portion of your budget this year on acreage. Could you envision that being a similar proportion of spending next year? And then I know a lot of your acreage has been held by production because of your early entry into east Texas and north Louisiana. I would assume you don't have a large amount of spending that's required to hold acreage but maybe you can comment on that and just what your thoughts are as far as accumulating additional acreage here? And even, just if you can, a quick, just, update on maybe what's the prices that are paying and I'd expect that you've seen some moderation there?

If you look at our divestiture of the four or five properties for the $140 million in '08, we took those dollars and we reemployed those in the Haynesville area as you know. So we didn't, we didn't borrow money to increase our acreage, and we didn't issue shares, we just got out of some areas that were not core to us and we reemployed those dollars in our core area. What I think you will see us do this year in '09 is you will see us spend a lot more money drilling and completing and producing wells. We went from maybe 30,000 acres or so, 35,000-acres in the Haynesville to a little over 70,000. I think we acquired those acres the right way, but I think now is the time to start drilling and create the value. I don't think we created the value by acquiring the acreage. I think we create the value proving that the acreage is good and producing. So I think you will see our CapEx budget skewed a lot more toward drilling and completing and producing the acreage that we acquired in 2008. As far as the cost of acreage, I will turn that over to Mack. I've got an answer, but I'll let Mack tell you what the acreage is currently going for from what we're seeing in the Haynesville.

Wayne, as you know, the cost of the acreage has come down, just simply because of the land grab episode is basically over, at least for the moment. Various companies have stepped back at the end of the year from pursuing, aggressively pursuing additional acreage. So we're seeing substantial reductions in the cost of this acreage. Now, having said that, a lot of the acreage that we're seeing is on the fringe of the play, it's on the edge. We do have our sights set on a few additional fill in acres where we think it's appropriate, but the cost definitely has come down substantially from the hey day of the 25,000 to $30,000 per acre and we're seeing tremendous falloffs from those levels, that's for sure.

Maybe just a little comment on how much your acreage is already HBP because of your early entrance into the area.

We have about 35,000 HBP and 35,000 acres net acres of course is on the three year clock. We have got a really good jump start on protecting that acreage this year. We plan to drill six Haynesville penetrations and get four horizontals built before the end of the year. That's our goal to go into sales. So all of the wells that we're drilling are in different areas, so we're protecting acreage in each of those areas.

As an operator in each of our areas, we are trying to understand each of our core areas. We are not bringing in a partner to develop our acreage, we are developing it ourself. I don't think we acquired too much acreage so that we didn't understand it. I think we acquired probably about the right amount so we could develop it on our own time frame. We wouldn't have a lot of wells that we would have to drill to hold acreage that might be expiring.

Great. Excellent results, and it looks like a bright future. Thanks for your comment.

Your next question comes from Ron Mills of Johnson Rice, you may proceed.

Good morning.

Hi, Ron.

Wayne is a tough act to follow. Question start off with a little different with your just Texas, north Louisiana drilling, particularly on the vertical program. You talked about higher return areas in the Logansport and Hico Knowles. They've had a dramatic difference in terms of your vertical Cotton Valley well activity in the past. As you look at Logansport and Hico Knowles, what does that inventory look like going forward and the economics in those areas, can you walk through your cost and reserves for those areas?

Sure, Ron. This is Mack. We have an excellent inventory remaining in Logansport. And we, we definitely drilling a number of wells in our next year budget planning. The cost of drilling to the Cotton Valley and the completion is around 2.1 million per well. That's for vertical of course, we are seeing reserve recoveries anywhere from 0.75 to 1.5 Bcfe, average is probably a little over 1 B. The economics are excellent. We are getting -- there's different parts of Logansport that give us different performance profiles, but we are quite pleased with this year's program, and it has set up a significant number of additional drilling opportunities going forward.

As you look to the horizontal program, it sounds like you are planning on drilling six wells next year targeting the Cotton Valley. What is the depth of your horizontal inventory, I know that's, less of a blanket opportunity if you will, and more specific, i.e. Blocker and Waskom, just curious as to how much more opportunity you have on the horizontal side?

We think we've got a substantial inventory remaining going forward. We've tailored back a little bit our Cotton Valley horizontal program this year to make room for some Haynesville tests, but we have got substantial opportunities remaining in Waskom. We have also drilled one in (inaudible) that we are quite pleased with, we have remaining opportunities there. I can't give you an exact remaining inventory in the Cotton Valley horizontal but certainly it would be a multiple year program with one to two rigs, that's for sure.

And on the Haynesville you talk about once again the kind of upper and lower lobes, just for clarification, the 190 to 300 feet of Haynesville pay that was discussed earlier, is the 190 to 300 feet primarily in the lower lobe and in the areas that you have the upper Haynesville that is incremental or is that included in that figure?

The 190 to 300 is just the lower lobe alone, Ron, and the upper lobe is much more variable, but on average about 150 feet thick for the upper lobe is what we are seeing.

And, it sounds like that varies over your acreage. Of your acreage, any guesses to via your seven, excuse me, vertical tests how much of it is subject to that second lobe versus just lower, and I am asking does it, the question is how do you then effectively develop the upper lobe as well?

Great question.

On development.

Absolutely. That's a great question. Currently, it is more cost effective to drill a second well for that upper lobe. All of the Petro physical data suggests it would be economic to do so but right now, for obvious reasons we are targeting the lower lobe. It is thicker, it is more predictable and until we get more data on the upper lobe, as I mentioned earlier, we are still working on identifying and quantify that upper lobe, where it is, and the quality of it, et cetera. But there is no doubt that we will be drilling a well targeting the upper lobe in the not too distant future. All, like I said, all of the data that we have thus far indicates that it is highly prospective, and it would be economic to drill a well. Now, having said all of that, we are investigating the different mechanical options that might be available for a multiple lateral, off of a single well bore and to date we haven't found a solution that we think is cost effective.

Okay. And then Roland, in terms of your outlook for the 2009 budget, to follow on Wayne's question would you expect overall to spend a similar amount of capital in 2009, just with much preponderance on the drilling side rather than the leasing side just trying to get a sense as to what it's going to look like, I would assume that you plan on spending a little bit more than your cash flows, given the current commodity environment to maintain your activity levels, particularly in the Haynesville?

Yes, that's correct, Ron. The, I think we will be continuing to look at what we are going to spend in 2009 based on how the outlook for natural gas prices turn out and we will probably make our, set our final budget in early December, and submit that to the Board for approval. I would think that the lower end of the range that our budget could be would be an amount similar to what we spent this year. And we have numerous more opportunities for drilling in 2009 probably more than we have ever had in the Company's history but I think we want to be prudent about our spending and given the tight credit market and the tight capital market and while we might overspend our cash flow by a small amount we don't plan to overspend by multiples. So I think even though the opportunities are there we want to be very judicious about how we use the balance sheet and maintain that strength because that's an important strength as long as we are in this pretty vulnerable type economy.

Okay. And Jay in south Texas the Fandango well going down, success based, what kind of opportunities do you see in that area, in terms of future development?

Well, just pertaining to the Land Deck well, remember the wells have got a 9 million, that's our initial estimate, and the well should be drilled between 16,000 and say 16,200 feet in depth, and there's three different packages that we hope to penetrate and again if you remember when the field was developed in the late 70s some of those wells came 40 Bcfe and when they came back in the late '80s they came to about 12 Bcfe. So, we are not trying to discover something that hasn't been discovered in the past. I think we have taken a field that Shell had owned they had not spent a lot of time developing it. We used the same type technology we did in offshore in the shallow waters which is the 3D and we have used that in south Texas. We have been very successful since '05 in using it. We have applied it to the Fandango, and we expect it will work to some degree. In our budget out there, we drove it out and it could be a $9 million dry hole or we think the upside is somewhere 30 Bcfe or greater. It is the type prospect Ron, that we have been good at in the past. And I think it complements the horizontal program which is the Cotton Valley Taylor and the Haynesville in east Texas, north Louisiana. Mack, do you want to make any other comments on that? We can't give a micro update on it yet.

We are happy with what we have seen to far in the Line Decker, Ron. We have got a zone behind pipe and suffice it to say that we could stop right there and be happy with the well. We have two other zones that we want to go for, and we are about 2,000 feet or so away from CD, give us another few weeks and we should have some good news.

Would that set up multiple drilling locations?

Absolutely.

All right. Thank you.

You bet.

We want to get another Schwinn bike for Christmas. It is that type of well.

And your next question comes from the line of Kim Pacanovsky of Collins Stewart LLC. You may proceed.

Good morning, guys.

Morning.

I was wondering if you would take about when the shareholders will get their Schwinn bikes.

There's 45 million shares out there and we want everybody to have one. We chose red. You might want pink.

I have, first of all I want to say congratulations, not just on the operating results but on the balance sheet, and I truly do think you are in a unique position among your peers with your balance sheet. Congratulations on that.

Thank you.

As far as the bread and butter business is concerned what are your rig commitments looking like and what is your ability to cut CapEx should gas pricing get really ugly in '09?

Well, that's a good question and I appreciate you asking it because that is another advantage, I think that Comstock has going forward in that we have a flexible rig inventory, we have four rigs currently committed on long term contract. We have three other rigs, pardon me. We have four other rig that is are going be available for early release. So, we can mix and match. We are extend contracts, subject to more favorable terms, we can release rigs, we can move rigs that are available for horizontal Haynesville drilling into our Cotton Valley horizontal program. And even if we wish, we can also move them into a vertical drilling program. So, with less expensive wells. So, we are at a very enviable position I think. Some of the other companies that we compete with have obligated to significantly greater rig inventories at contract costs that were locked in several months ago at higher rates. So we have a, we have four of those that we are currently committed to for long term. And we have, like I mentioned numerous others that are far more flexible that we can release early.

Good deal. Just on -- can we go other the rig situation for Haynesville. You have three operated rigs, correct, and one nonop; is that correct.

Currently we have for the Haynesville three rigs that are operating, drilling Haynesville and we have one all of these rigs I mentioned are equipped to drill horizontal wells. One rig that is drilling in the Cotton Valley that could come over to the Haynesville if we desire. The other rigs that are drilling vertical wells, two of those three are drilling what we call vertical set up wells for the Haynesville, that's to help us ramp up our initial testing of the Haynesville. These rigs will drill the vertical section of the holes and then later we will have a horizontal rig come in and drill the lateral.

Okay. So that is why, in your press release that, Bois -- I don't know if I am pronouncing it correctly the Bois d'Arc wells. Is that why that well is waiting about 30 days or so before the horizontal kick out starts?

That's exactly right.

Okay. So, now the five rigs that you are going to have on all year next year, that is, does that include the, let's see. It is the three that you have now and then there are two more coming on before the end of the year?

Yes, I will tell you it gets confusing when you start talking about our rig schedule but we will have a rig coming in next month that will put us at four rigs drilling Haynesville horizontal wells exiting the year. And then very early probably January we have another rig arriving that will give us our fifth rig that we will be running in the Haynesville all year. Then we have two additional rigs scheduled for delivery in the late third quarter.

Right. Okay.

Of next year.

And are those rigs on, are the Haynesville rigs on long term contract?

Four of them.

All right. Okay. And I know you don't, you haven't officially issued a 2009 budget or guidance, but when you look at your internal models, what sort of per well rate assumptions are you guys going to be using on your Haynesville wells?

On the IPs you mean?

Well, the IPs or first three months production.

The first 30 days we are assuming around 5 million a day, Kim.

Okay.

Now, that assumption is based on looking at some of the available long-term production data, and believe me there's not a whole lot of Haynesville, but long term meaning three to six months, a little longer. There are numerous wells that I am sure you are familiar with some of them that in the last 60 days have come on at 10 plus million a day, first 30 days average. There's a couple of other wells out there that have 60 day averages that are around 8 million a day, and an argument could be made based on where you are in the play, what's your targeted interval, what it looks like compared to those excellent wells. As to what the rate will be but we are fairly conservative as you know, on the EURs and the IP rates on the Haynesville compared to some of the other press releases that are out there.

Okay. And I know that Chesapeake runs seismic on everything that they do. Do you guys see any need for running any seismic over your acreage and I don't know if seismic is potentially helpful when you're looking at this upper lobe?

Well, we have looked at that, and we have run vertical seismic or micro seismic during the fracturing of a couple of our vertical tests that has given us some valuable information on fracture orientation et cetera. We are not quite sure as to whether or not 3D seismic is, would be all that helpful in the Haynesville play. But we are still studying that issue.

Okay. And finally, well almost finally I have two more questions. When you have a rate on that Toledo north are you going to issue a separate press release for that or do we have to wait a really long time?

If it is a good rate.

Okay. So if we don't hear anything we know?

No, most likely given the fact that we weren't able to get it tested for this conference call and then the year end conference call is even further away, and it is a quarterly one, I would think we would come up with an update, probably after, typically after Thanksgiving, and somewhere around December we will come out with an update obviously what the budget we are going to go into 2009 with. That would be a drilling update that will come out before the end of the year along with a press release on the budget.

That would probably include south Texas also.

Right.

We have a big south Texas well.

Right.

They're all big.

Is that well cleaning up now, are all of the frac stages done? What's the actual status right now?

On the horizontal Haynesville well?

Yes.

We are still completing it.

You are? And for Hico Knowles, and this really is my last question, your average for the nine months was 3.7 million a day per well average, IP rate; right? And at the end of the second quarter it was 4 million a day. So, are you, did you drill the best first and we are looking at the rate coming down because the--?

Yes. That's correct. That's always what we try do is drill the best first, Kim. That's what Petrohawk has done.

Okay. But there's nothing weird going on there?

No, not at all. And the difference is marginal when it comes to the economics.

Great. Thanks a lot. That's all I have.

Your next question comes from the line of David Snow of Energy Equities. You may proceed.

Yes. Hi. Just trying to see the incremental changes in your Haynesville, the CapEx and the cost per well went from 6 million to 8 million to 9.5 million. What was the factor in that that?

Multiple factors, one locations costs, building the location, that increased. As you probably know, pipe has increased by 60 to 80% over this time last year. We are starting to see some softening in that, but rig rates went up and the cost of additional, or the other services, pumping services, wireline services et cetera went up significantly as well. And the initial costs and most operators did this were modeled after the Barnett, and after finding that the Haynesville, as I indicated earlier is an abnormally pressured reservoir requiring high pressures to pump the jobs away, the number of stages increased from four to six to ten stages on the lateral. All of these things added up to increasing the cost per well.

Okay. What would be an IRR on a Haynesville well now if you say you had a 750 flat price?

It is going be plus 20%. At the $9 million level. And it depends upon how you front end load your production profile. Different type curves have different front end loading, different assumption built into that. So, that will obviously affect your rate of return, but we use a 20% internal rate of return hurdle that we measure all of our projects by and most operators have similar hurdles.

I am just trying to get an idea of what the difference in rate of return would be, internal rate of return on the Haynesville versus the Cotton Valley Taylor horizontal at a given price that you could give us?

Well, again, they're different profiles et cetera but to try to answer your question, we are looking at the Haynesville obviously generating a significant rate of return because the, and it is early in the game and it is based on sparse data as I mentioned earlier but the production from the Haynesville is very much front end loaded. You get 70% of your production to 80% of your production in the first two years, you are talking higher EURs, you are also spending more money, but those EURs, everything else being the same, the Haynesville EUR at 4 Bcf conservatively is front end loaded in the first 18 months is going to give you theoretically a higher ROR than an average Cotton Valley well, but the caveat here is that we know a lot more about the horizontal Cotton Valley performance profile than we do about the horizontal Haynesville profile. So, it is, that's why it is called an emerging play to be frank and we are very confident, optimistic about the results going forward, but I am afraid I can't be more specific in answering your question because I don't have the information yet.

And the other thing that you have increased is the thickness was 198 to 250, and I think in your last conference call that 120 in the lower bench and now you're at a very attractive increase to 190 to 300, and it is all lower bench. So have you added to your database or what happened to cause that change, that incremental change?

That's a good question, too. And your statement is correct. We have added significantly to the database, and how we have evaluated the logs and the core data that we have available has changed with additional information. So rolling all of those comments you are exactly right. We have more data to base our thickness estimates on.

Okay. And then just trying to get an idea, you've got around 200,000 net acres in the Cotton Valley overall, how much of that would be applicable to the lower Taylor horizontal?

I can't give you an acreage count on that.

Just roughly a percentage.

I would say 20%.

Okay.

What we do on that, David, we think we have several years of drilling we have not quantified it. I don't think Mack really can quantify it.

I really can't.

Because we have never done that. We have a couple of years of drilling in a couple of years ask again and we will tell you.

Okay. And is the rate of return I would think significantly better for Taylor horizontal than for the Cotton Valley vertical? What incremental difference in IRR would you have on that?

I can't giver you that number either. But I can tell you that the rate of return is substantially greater. It depends on where you drill the vertical, what kind of vertical you are talking about. What the location is.

Do you have any idea what the plan on Petrohawk will be for the Terryville next year?

I think they're going to fall back quite a bill. They drilled a lot of wells this year and I think they're going to transition over to a couple of other fields and also, allocating dollars into the Haynesville.

Okay. And then last, what do you think your year end cash will be? I mean you have a lot of moving efforts, you have to pay the tax on your gain and so forth, you will be about even at the end of the year?

Yes, David. This is Roland. We will be paying $144 million tax liability on December 15. A lot of the cash on our balance sheet at the end of the quarter, the $118 million has been earmarked for that. We typically would, will have 5 million to $10 million of just cash on hand for working capital. We anticipate having to draw anywhere from really 30 million to $60 million, that kind of range under the credit facility to fully fund the CapEx and the tax payments in the fourth quarter. It really depends on gas prices continue to be and other factors.

Okay. Thank you very much.

Thank you, Dave. One other thing, Petrohawk did and has done a good job in the development of the Terryville area.

They have.

Yes.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Dan McSpirit of BMO Capital Markets. You may proceed.

Thank you, gentlemen. Good morning.

Hi, Dan.

Your acreage, or the estimates that you think is perspective for the Haynesville, and is now what 70,000 net acre, how much upside is there to that number assuming no acquisitions and as you continue to march through your acreage position and testing the rock?

Is the question how many additional acres do we think we could acquire?

Not acquire assuming no acquisitions, how much upside is there to that estimate today of 70,000 net acres assuming no acquisitions and just simply based on drilling results and continued testing of the acreage, of your land position? Is there.

We have got several hundred thousand net acres in that core area and what we do on adding quote Haynesville perspective acreage is we see what the peer companies do t the north, south, east, and west, being Devon in Canada and the others, based upon their success or lack of we can adjust our acreage, but we think we have a solid 70,004 acres right now and unless we actively acquire additional acreage which we do. We do that daily. We have offers out daily. But I think it is a pretty solid number Dan.

Okay. Okay. And then one last question on the balance sheet maybe more theoretical than anything I recognize that your financial strength equates or implies financial flexibility but do you think you are too conservatively financed or capitalized at this time and if you were to conduct an acquisition are the capital markets either equity or debt capital markets open to Comstock to permanently finance such an acquisition?

I think right now, if you look at the strength and weaknesses of companies, Comstock generates, for the size Company we have, very meaningful cash flow on a per share basis. We have very limited exposure to the credit market constraints because we just had our borrowing base redetermined, and I think we have very limited execution risk because we don't rely upon partners to execute our business plan. And we don't rely upon the equity market to pay down acquisition or land we have just acquired. And I do think to kind of answer your question,I think that in a corporate life span f an E&P company you have to have some kind of a rare event to boost who you are and to separate you from peer companies and I think that the creation and the sale of Bois d'Arc did that for Comstock.

It took our bank debt to 0. It reaffirmed our borrowing base. In fact I think we can have asked for an increase if we wanted to pay a few more dollars and we didn't want to pay a few more dollars. The way we acquired on a nondilutive basis our acreage on the Haynesville and other areas, I think lends itself in 2009 to create wealth on a per share basis and you are asking about additional acreage. I think that some of these companies don't have an upper and lower lobe. We mentioned that a quarter or two ago and it was a weird thought. But we were not a newcomer to the Haynesville. We have been there since probably the middle of last year. And we just reported what we saw. We didn't repeat what we heard. And I think that's a big difference in who we are. So you add all of those elements together. You always say timing is everything and our divestiture of those properties and our divestiture of Bois d'Arc happening when it happened, I think that if there is a Company out there that has a chance for creating real wealth, even without acquiring acreage it is us.

We have three sources of dollars. We have free cash flow from operations to spend to grow. That's not dilutive. We can use part of our borrowing base, that's why it's are, I think a Company that has 35% debt to cap is not overlevered, particularly if you have high cash margins like we have. So we can use our borrowing base and then I think a year from now, we have the right to sell our Stone shares. Now that's not a plan that we have, but if the Haynesville or the Wilcox or the Vicksburg or Cotton Valley Taylor is blowing and going for us corporately and we think we can add more value by divesting ourselves of Stone and redeploying those dollars into our own account, we can do that and that's not dilutive either. And you are talking about hundreds and hundreds and hundreds of millions of dollars and the Company's asset base is only $1.8 billion. That's a pretty strong Company. That's what we will continue to do.

Dan, on your question about the capital markets and the credit markets being available and at this point, at this time, I would say that they are probably available to the strong companies and I don't think Comstock is in that category. I think the cost of the capital either credit or equity or any type of capital you want to get is substantially increased now even for the strong companies. I do think we are in a market where the weak companies won't have access to those markets or be very, very expensive almost to the point where it is not going to be worthwhile to do.

Well, even going into that, on October the 16th, Dan, and this was one of those positive pleasant surprises, when S&P notified us that Comstock had been placed on the S&P midcap 400 US indices, we had a bunch of investment bankers call and say these index funds we have to buy and hundreds and hundreds and hundreds of millions of dollars of Comstock. Do you want to raise equity. So, as recently as two or three weeks ago we were invited to do that and we again I think that goes back to your question of would we be able to. I don't know but I think if any Company would have the numbers to do that, we certainly would have those.

Agreed. Thank you.

Thank you.

There are no further questions at this time. Gentlemen, I will turn the call back over the to you for closing remarks.

Again, we have had an unbelievable quarter. We are very thankful for that quarter and I guess in closing, it is kind of a simple comment, but if we are all out there kind of participating in a weight lifting contest, it is kind of nice to have some meat on your bones and right now, Comstock has a lot of muscle on its bones. I think its technical group has never been more effective and we've never had greater depth in all of our departments. It is the employees that create the wealth and we truly work for you. We do try to put in a good days work and sometimes the outcome is good, sometimes it is bad. It is our intention to always have it good. Thank you for your time, I know it is valuable. Remember to go vote. Thank you.

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