Comstock Reports Good Quarter, Conservative, Headsup 2009 In The Cards

It's been awhile since I wrote about these guys (August 2007) and other than the occasional mention they simple fell off my radar, much to my shagrin, in favor of other shiny, but more leveraged, baubbles. I want to rectify that now. 

CRK Reports Ho-Hum 4Q08 Results; Chops Budget;  Increases Focus On Haynesville.

• The 4Q Numbers:
  • Production: 164 MMcfepd (previously disclosed)
  • Revenues of $100.1 mm vs $107mm expected
  • EPS of $0.22 vs $0.31 expected
  • CFPS of $1.77 vs $1.55 expected
• Budget: Falling. On January 5th, CRK announced a budget of $450 mm with the vast majority ($399 mm) focused on  East Texas and North West Louisiana (including 43 planned horizontal Haynesville Shale wells). Last night’s budget has fallen to $366mm with 31.4 net wells planned for the H.S. out of a total of 41 planned company wide. This is down from 2008 drilling levels of 136 wells.
• Operational Update:
  • Haynesville: 2 wells to date, IP of 9 and 14 MMcfepd, decent, not world class
  • 8 more wells in progress (could have results from several of these in the next month).
  • 70,000 net acres in the H.S.
• Guidance: 62 to 67 Bcfe or 7 to 15% growth on 2008 on an apples to apples basis.
• Nutshell: 4Q results were light on the top line due to lower than expected prices. Company going forward looks quite a bit different with a smaller budget, highly focused on the Haynesville, bears watching.

Conference Call Follow Up Thoughts:

• Well attended, hour and forty minute conference call

• Focus on transitioning from Cotton Valley to higher return Haynesville Shale drilling. They will focus on getting acreage into held by production status. They won't be getting into defining appropriate spacing this year. They could grow faster but why bother at these gas prices.

• Balance Sheet Strong and Likely To Stay That Way:
  • Very unlikely to see an equity deal in the near or medium term. No deal since 2003, very stingy with the shares
  • No desire to draw down the revolver, $555 mm available now. They don't see taking availability below $300 to $350 million.
  • Debt to total cap low at 17%
  • Not a lot of interest in M&A at this time.

• Reserves: 582 Bcfe (90% gas) as of year end 2008:
  • Haynesville Shale well type curve of 5 Bcfe is probably light, and they said they hope to get to 6 Bcfe per well but they are playing it safe with the numbers.
  • They put potential reserves on their 70K acres in the H.S. at 3.3 Tcfe.
  • If you look at the 31 net wells they plan for 2009, Haynesville completions can push you toward reserve adds of 150 Bcfe using their numbers and this can close on 200 Bcfe (gross) in additions if:
    • gas prices rise in the 2H09 allowing them to run a 7 rig program instead of the 5 currently planned or,
    • They appear to be bagging the Street on the well costs (at $319 mm for the Haynesville part of the buget the wells run an awefully high $10.2 mm a pop). Get that to $8 and suddenly you have another 9 wells (or 45 Bcfe gross). There is no doubt some gathering costs in the $319 figure but not $2mm per well.
  • Add to that a couple of Wilcox tests in the Fandango field in S. Texas (call it 20 Bcfe total), and you could have net reserves of around 130 to 150 for 2009
  • Could see reserve growth of 15% and 2009 reserve replacement of 225+%.
  • TEV/ Reserves: $3.50 / Mcfe, which decenly priced and set to fall to a pretty low $3 per Mcfe by year end.

• Hedges: 10% of 2009 hedged at $8.20. Would like to see this as a higher number but they are sort of anti-hedge.

• In A Nutshell: Good quarter and year, good conference call. Conservative management, little chance of an equity or debt deal which is refreshing amongst their Haynesville poking brethren. Strong reserve growth for 2009 without the need to panic drill the play to hold onto acreage but the strong balance sheet will allow them to beef up their program quickly should prices moves back up. They are likely bagging the Street on well costs (looks like a sizable over estimate at $10mm ish per well) and probably on reserve adds so we could see some upside surprise to reserve additions with the 2009 report.