Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the second quarter 2019, Comstock resources Inc. earnings Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require Operatorship. Please press star zero Kunar Touchtone telephone.
As reminder, this call will be recorded.
I would now like to introduce your host for today's conference Mr. Jay Allison. Please go ahead.
Hi, Chris Thank you and good morning.
Good morning, everyone I would.
I would be remiss. This morning, not to open this call would say thank you.
To the equity and debt holders and our sponsors or golf dog for really walking with us.
The past 12 months to create the second quarter results are being presented today.
Oh to extend a very special thanks.
So Dan of capital for Shelly guess, Covey Park, and becoming a 60% stake holder.
And to Jerry Jones.
In the past 12 months has partially invested around $1.1 billion in comstock, including purchasing 50 million newly issued shares a comp shot common stock.
At $6 per share about three weeks ago, Let's say 300 million dollar purchase.
The Jones family now I don't know 75% stake in <unk>.
Okay.
Well that they're backing we wouldn't have the results today. So thanks, thanks to all of you.
Welcome to the Gulf talk Resources' second quarter 20, not the financial and operating results conference call.
Today, We will review our second quarter 2019 earnings in drilling results as well as update you on our acquisition of <unk> energy, which closed on July the 16th you can view a slide presentation during or after this call by going to our website.
Www Dot Comstock resources Dot com and downloading the quarterly results presentation, there you'll find a presentation entitled second quarter 20, not seen results I am Jay Allison Chief Executive Officer, Comstock and with me is Roland Burns, our President and CEO , Paul Schmidt, Chief Financial Officer, and Dan Harrison, Our Chief operating officer.
Please refer to slide two in our presentation and note that our discussions today will include forward looking statements made and get securities laws. While we believe the expectations in such statements are reasonable there can be no assurance that such expectations will prove to be correct.
No if everyone would turn to slide three the 2019 second quarter summary.
On slide three we cover some of the highlights of the second quarter.
For much of the first half of this year, we have been very very focused on the transformative Kabi Park energy acquisition, which we closed on July 16th.
Combining gulfstar can copy park created the basin later in the Haynesville shale, which is a premier natural gas basin in North America with superior economics, given its geographic proximity to the Gulf Coast.
The operations of Covey Park will be included for 77 days for the third quarter.
Our Haynesville Burger shale drilling program continues to date.
To deliver strong production growth.
Contract can carry park have drilled and completed a combined 174 operated wells since 2015, which have an average IP rate of 23 million cubic foot per day.
Our haynesville shale production in the second quarter was up 83% from the second quarter of last year and up 19% from the first quarter of this year.
We have also been driving down our well cost in the Haynesville to date, our well cost per lateral foot are down 9% from 2018 cost our strong natural gas production growth was offset by weaker natural gas prices in the second quarter.
For the quarter, we reported oil and gas sales of 130 million adjusted EBITDAX of 93 million.
Operating cash flow of 66 million or 63 cents per share and adjusted net income of $12.7 million or 12 cents.
Per share.
If you would flip over to slide four.
Slide four is a good summary of the Cabbie Park energy acquisition.
The combination of the two companies creates a company with substantial scale and the Haynesville. We produced over 1.2 billion cubic feet of natural gas equivalent per day in the second quarter and generated annualized pro forma second quarter EBITDAX.
$926 million.
We'll have 5.4 tcfe of SCC proved reserves.
And 290000 net acres in the Haynesville.
We will have 2000 net drilling locations, which gives us over 20 years of inventory.
Our second quarter pro forma unit cost structure is only 72 cents per Mcf fee, which is one of the lowest in the industry.
And our second quarter pro forma EBITDAX margins of 78% is one of the highest in the industry.
With the merger we have changed our leadership team with half of our department as coming from each company. Our department heads are selecting best practices from each company has put together their team with a focus on creating an efficient low overhead company.
With favorable proximity to the Gulf coast demand and over 500 miles about gathering infrastructure. We have we have higher natural gas price realizations. The Covey park assets have higher gas price realizations in cob starch and were currently negotiating new gathering contract to marketing agreements to give us greater access to the premium Gulf coast markets.
We're currently consolidating the Dallas area corporate offices and are implementing a 41% reduction to the combined corporate staff tough.
We are targeting go forward annual GE in a $30 million.
Which is about half of the combined annual DNA, the two companies $61 million and 2018.
With the merger, we are adding data scientists to staff and implementing Taylor draw down for every new well, which we feel will further improve the economics of the Haynesville wells.
Lastly, we are very focused on the balance sheet.
Our leverage metrics immediately improved as a result of the transaction as Rolla will go over later, we plan to reduce the planned drilling activity by releasing one to two operated rigs in the near term. This will protect our balance sheet and liquidity to ensure we can hit our target to generate free cash flow and 2020, but approximately $100 million.
We will also consider potential divestitures of our non core assets or to pay down our debt.
And to improve our current liquidity now I'll have Roland cover the financial results in more detail as Roland.
Thanks Jay.
Slide five illustrates the production growth generated by our Haynesville exposure shale drilling program in the second quarter. This year production from our Haynesville Bowsher wealth is up 83% to 416 million cubic feet of gas per day as compared to the 227 million per day that we produced in the second quarter of 2818.
Production. This quarter was also up 19% from our first quarter production rate of 349 million per day.
We put eight net wells on production in the quarter after adding 6.6 net wells in the first quarter.
On this slide we are also showing covey parks Haynesville bowsher production.
And in the second quarter Kv parks Haynesville Bowsher wells.
Produced 694 million per day.
Which is an increase of 43% over the 484 million per day.
That they produced in the second quarter of 2018.
Heavy part, but 6.1 net wells to sales in the second quarter after adding the 11.7 net wells in the first quarter.
On a combined basis, we produced 1.1 billion cubic feet of net production in the Haynesville and the second quarter.
In the third quarter, we expect to see that rate of growth slowing just a little bit it as on a combined basis, we're going to put 10.5 net wells to sales in the third quarter.
Slide six recaps what production we had shut in for the quarter and we're pleased to say that second quarter shut in volumes decreased to 4% and in most of the shut in volumes are almost 80% related to pipeline curtailment for either maintenance activities or repair activities or in a few instances.
Where we had limited capacity so our wells at full rate.
We are working to expand our options.
For our transportation.
Mainly in our northern Haynesville operations that will bring this percentage down further in the future.
On slide seven we detail our producing cost per Mcf fee produced.
Operating cost per Mcf it fell to 68 cents in the second quarter as compared to the first quarter rate of 74 cents.
Gathering costs were 23 cents production taxes averaged 13 cents and other field level operating costs were 32 cents.
Looking ahead, our producing costs will improve further with the Covey Park operations combined in with ours pro forma for the heavy park merger operating costs fall to 65 cents in the second quarter and that's before we get the benefit of the synergies and cost savings, we expect to create from combining our field operations.
Breaking down the pro forma cost gathering costs were 27 cents production taxes averaged eight sets and field level costs were 30 cents.
We do expect some improvement to our gathering costs rate as new contracts that we've just finished up negotiating.
We will create additional efficiencies.
And give us a little bit lower overall.
Gathering rates and we also hope to see some of the efficiencies and combining our field level offices, where they make sense to combine.
On slide eight we detail our corporate overhead cost per Mcf fee.
Our DNA cost per Mcf fee fell to 14 cents in the second quarter as compared to the second quarter of last year of 23 cents at our first quarter rate of 19 cents.
And one of the more significant benefits of the merger is the improvement will have to this metric on a pro forma basis, the overhead per mcf in half.
Total a seven cents per Mcf fee.
With a reduction in the duplicative personnel from the two organizations.
In the two corporate Dallas offices.
With this very low overhead rate, we will have one of the lowest cost structures in the industry.
Our merger is a great example of the benefit of combining the two best shale operators in the same basin and the value that can be created from a combination.
On slide nine we detailed the depreciation depletion and amortization per Mcf we produce.
This noncash expense increased to one dollar four per Mcf fee in the second quarter as compared to 99 cents in the first quarter.
On a pro forma basis, we we see our DDNA rate coming back down and we think averaged somewhere around 86 cents.
For MCV produced.
Slide 10.
Summarizes the second quarter financial results that we reported this morning.
Our production in the second quarter was 45.1 Bcf fee, which includes 695000 barrels of oil.
This is a 103% higher than our production in the second quarter of 2018, and its 19% higher than what we reported for the first quarter of this year.
Our oil and gas sales were $130 million, which was 108% higher than the second quarter.
Of last year.
Weaker oil and gas prices offset some of the impact of the higher natural gas production in the quarter, our realized oil price was $52.12 per barrel and our realized gas price was $2.29 per mcf.
Differentials for our natural gas prices continue to be wider this quarter than normal.
For our natural gas, we sell more than half of our production in the quarter in the daily market. The average day prices were 11 cents less than the first of month index reference price for Henry hub gas.
In the quarter, our EBITDAX came in at $93 million, which was 110% higher than the second quarter of last year operating cash flow was $66 million, which was up 151%.
And we reported adjusted net we reported.
Net income of $21.4 million or 20 cents per share, but if you exclude the unrealized mark to market gain on our hedge contracts of 12.8 million.
In the quarter and the $1.4 million and cost we expense relating to the merger. Our adjusted net income per share was 12 cents per share for the quarter.
On slide 11, we summarize our financial results for the first six months of this year.
Our production for the first half the year was 83 Bcf fee, including 1.5 million barrels of oil.
This 84% hired in the same period in 2018.
Oil and gas sales were $262 million.
Which was 92% higher than last year.
In our oil prices for this period averaged $48.71 per barrel and our realized gas price averaged $2.55 per mcf fee.
Adjusted EBITDAX was $190 million or 94% higher than last year and operating cash flow was $137 million up 120% from 2018.
We reported net income of $35 million for the first two quarters or 33 cents per share and if you adjust that to exclude the unrealized mark to market loss and the hedges and that merger transaction costs.
That ever would have been 34 cents per share for the first two quarters of this year.
On slide 12, we cover the operating results, which are pro forma for the Covey Park acquisition.
So pro forma production for the second quarter was 113 Bcf fee with oil and gas sales of $312 million.
On a pro forma basis, our natural gas price improved to $2.54 per Mcf.
For the six month for the first six months of this year, our pro forma production was 214 Bcf fee with the oil and gas sales of $622 million to pro forma natural gas price for this period was $2.67 per Mcf.
One of our major priorities is protecting enhancing our natural gas price realizations, while at the same time looking to improve flow assurance for our growing production in the basin.
On slide 13, we outlined some of the initiatives we are undertaking in marketing our gas.
We just put new gathering contracts and has carried almost 75% of our haynesville production that will lower our current gathering costs as well as providing for additional capacity to support that drilling plan.
We're also negotiating to improve our access to premium Gulf coast markets, they're looking to tie our sales to these indexes, which have much tighter correlation to Henry hub, then in basin hubs at prevailing Carthage.
Two thirds of the acquired Covey part production is marketed off these premium Gulf coast indexes.
Which is why they are net realized gas price before hedging was 22% or 22 cents higher than comps stocks in the second quarter.
Our pro forma natural gas price realization improved by 12 cents per Mcf in the quarter. When we are combined with heavy park.
We also have a near time go to market more of our natural gas. Our first of month index pricing, which also will improve the correlation of our realized prices to our hedges.
And speaking of hedges on slide 14, we summarize the hedge position that we have in place for oil and gas production.
For the rest of this year, we have about 717 million cubic feet.
Per day of our gas production hedged at about 3250 barrels of oil hedged and our plan is to continue to keep 50% to 60% of our production hedged on a rolling 12 month basis.
On slide 15, we recap our spending in the first six months on our drilling and development activity and what we expect to spend.
On drilling for all of two of this year, including drilling on the heavy park assets.
So the first half of this year, we spent $182 million.
Development activities.
$165 million was in the Haynesville shale program, we drilled 20 or 15.3 net operated horizontal Haynesville wells. We also completed eight operated wells or two net wells that we drilled in 2018.
We spent $16 million drilling four or 2.2 net Eagle Ford oil wells.
And for the entire year, we're estimating that we will spend $538 million on capital activity.
And we'd be which is basically running eight to nine operated rigs in the haynesville.
In response to the lower natural gas prices were now working on a new capital plan and we expect to release one to two of these drilling rigs before the end of the year.
For each rig we release, we can reduce capital expenditures next year by $75 million to $85 million.
Which would generate free cash flow of $40 million to $50 million for each rig that we release.
So dropping two rigs.
Would add $100 million of free cash flow to 2020 and will help offset the impact of the lower natural gas prices.
We're seeing right now.
With a smaller drilling program are expected natural gas production growth in 2020.
And we're looking at this growth on a pro forma combined basis of the two companies would be Dow back from the 15% range that we discussed when we announced the Kv Park acquisition.
To have 10% to 11% if we release.
Two rigs.
Again, we'll be working on well, we're going to optimize our drilling program and then.
Before we when we announced the third quarter, we will have a new approved budget, which we suspect will be lower than the budget that we had announced back when we announced the kind of the park acquisition.
On slide 16, we present, our balance sheet at the end of the second quarter and then also what it look what it looks like pro forma for the closing of the Cabbie Park transaction, which happened 16 days after the end of the second quarter.
So we had $47 million in cash at the end of the quarter and $1.3 million in total debt.
Comprised of a five year credit facility and the $850 million in senior notes. This was pretty much the same balance that we had outstanding at the end of the first quarter.
We ended the quarter with $277 million in total liquidity.
So after closing the merger in July 16th our pro forma debt.
Is $2.7 billion with $1.26 billion.
Outstanding under a new five year credit facility and $1.475 billion in senior notes.
Our equity increased almost $1.5 billion, including the $385 million of the new preferred equity that we issued.
And our liquidity improved to $287 million.
I'll now turn it over to Dan to kind of report on the drilling results from the border.
Thanks Roland.
On Slide 17, you will see our new acreage map, highlighting our new 293000 net acre position as a result of that.
Acquisition.
Since reentering the play in 2015, the newly combined company has now drilled and completed sold 174 operated wells.
With an average IP rate of 23 million cubic feet a day.
To date this year the combined companies have drilled 44 gross operated wells.
And plans to drill a total of 79 gross operated wells by year end.
With an average lateral length this year of 8000 feet.
These wells have been and continue to be very success.
Overall slide 18, you'll see the location of the 18, new operated wells for both companies that have been completed since our last update.
This includes 10, new wells completed by Comstock in eight new wells completed Cub pork.
The green Borchers denote the latest denote the latest Comstock completions in the Red markers to note the latest covey par completions.
Ill Comstock wells were completed using our latest gen three frac design.
Which is using 3800 pounds per foot of sand loading at 15% to 20 foot cluster spacing.
The lateral lengths on these Comstock wells range from 4426 fleet to 11319 fee.
With an average lateral length of 6970 feet.
The initial production rates ranged from 20 to 28 million cubic feet per day.
With an average of 24 billion cubic feet today.
The new company for Wells completed in the second quarter were completed using an average sand loading of 3400 pounds per foot.
And at 24 to 40 foot cluster spacing.
The lateral lengths ranged from 55200 feet to 9320 feet with an average length of 77 to.
The initial production rates range from 12 to 30 million cubic feet.
The 21 billion cubic feet a day.
At this time, we have eight additional wells between both companies that are in the process of being completed.
On Slide 19, Slide 19 is a summary of our new expanded.
Haynesville mid mosher drilling inventory.
With the Cobi Park acquisition, our total gross operated inventory has now increased to 2387 locations.
With an average net interest of 76% or.
1823 net operated locations.
This represents 30 years' worth of drilling based on our current.
Drilling activity levels.
The gross operated inventory consist of 860 610000 foot laterals.
910, 7500 foot laterals of 611 4500 foot laterals.
The 2387 gross operated.
Since consists of 1450 haynesville locations and 937 mid Bowser locations.
In addition to that in addition to the 2387 gross or gross operated locations we have 1530.
Gross non operated locations with an average net interest of 13%.
For 200.
Net non operated locations.
The company closed on a significant acreage trade at the beginning of the second quarter, which reduced our 4500 foot well inventory about 25 wells.
And increased our 7500 foot well inventory by 20 wells.
We currently have another acreage trade in the works that will further add to our operated core inventory and increase our overall level of planes.
In the future we will continue to pursue acreage trades that will further consolidate our core acreage position and enhance our lateral links.
I will now turn it back over to Jay to summarize our outlook for the rest of the year.
All right again excellent reports from rollover and Dan. Thanks, both of you should look at the 2019 outlook go to slide 20, we summarize our outlook for this year.
For the rest of this year, our primary focus is to complete the integration of Covey Park and a comp stock.
Our goal is to have that substantially complete by year end and it is going very well as I discussed earlier.
We are confident that we will deliver on the substantial value, adding synergies that the combination of the two haynesville shale operators can offer.
Our Haynesville drilling program continues to generate economic returns even in the low natural gas price environment. We're in today.
Combined with Kv Park Comstock now has the industry, leading low cost structure and natural gas well economics the drilling program is.
Digital production growth this year as Dan said.
Our natural gas production is expected to average 1.1 to 1.2 Bcf per day in second half of this year.
With heavy parts production being added for 77 days of the third quarter.
Our oil production is expected to average 7500 8500 barrels per day in the second half of 2019 with new production from four new wells being added and the Eagle Ford starting in early July .
These four wells had an average per well happy right, a 1034 barrels of oil equivalent.
We will put in a conservative Opco operating plan to 2020 as Roland has described.
That internally as funded the drilling program and we will prioritize free cash flow generation over production growth.
We're high grading our drilling program now and we'll look to drop one to two of our operated rigs in the Haynesville for the end of the year.
We continue to maintain an active hedging program targeting the next 12 months or production.
And lastly.
We will protect our liquidity, which is currently $287 million.
And we will look to enhance it would non core asset sales and free cash flow generation. So we can pay down our bank debt.
For the rest of the call will take questions from the analysts who follow the company So Chris turn it back over to you.
Thank you.
Ladies and gentlemen, if you have a question at this time, please press to strong the one key on your Touchtone telephone.
If your question has been answered or you wish movies. So from the queue. Please press the pound key.
To prevent any background noise. Mr. Please. Please your line on mute what's your question as you stated.
One moment for questions.
Yes, yes.
Yes, Jay.
It was subject okay, because that's a complete reported today that.
I think we answered all the questions. You know we had a conference call to two months ago, and Oh, Jerry was on the call and others were on the call.
When we announced the merger.
Again, I want to thank yous, a pretty heavy docket today at 10 o'clock, there are four or five other companies reporting.
I want to tell you that we're going to continue to be consistent we're going to continue to drill the low risk wells that have high return.
We're going to be consistently strong we've got some great legacy advantages.
And again the market there were shaking his a Gulf coast, which is the market where the greatest demand.
So thank you for listening to the call and for exposing yourself to Comstock story, we're disciplined and we don't plan on disappointing any body, we're going to give you our best effort. So thank you for the morning.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude todays program. You may now disconnect everyone have a great day.
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