Comstock’s $115 Million Liquidity Booster Already On Descent To Earth

Comstock Resources Inc. (CRK) started out the month pocketing $115 million for its East Texas Eagle Ford assets in and around Burleson County, Texas.

But analysts say the money will quickly scorch a hole in Comstock’s britches.

The East Texas transaction clearly signals Comstock’s commitment to pursue long laterals in the Haynesville as the company shifts production to gas. In the July 1 deal, Comstock sold assets producing 1,900 barrels per day (bbl/d) of oil and 5.5 million cubic feet (MMcf) per day of natural gas.

Mike Kelly, analyst, Global Hunter Securities (GHS), seemed largely unimpressed. Comstock’s undeveloped Eagle Ford leasehold, which included 125 future drilling locations in the oil window, brought in a meager $500 per acre.

“That’s well below our prior expectations set at $4,000 per acre,” Kelly said in a July 7 report. The GHS estimate assumes a 50% first-year decline and $40,000 per barrel of oil equivalent (boe) on existing volumes.

The Eagle Ford assets represent around 10% of overall production and 4% of reserves, leaving Comstock with two major producing plays: the South Texas Eagle Ford and Haynesville, as well as acreage in the Tuscaloosa Marine Shale (TMS).

“Going forward, we expect the focus to remain on the Haynesville/South Texas Eagle Ford,” Kelley said. The Haynesville will command 48% of the budget and South Texas 46%. Sale proceeds are intended to fund the company’s $238 million drilling program, analysts said. The company is projected by Baird Equity Research to outspend cash flow by an estimated $175 million in 2015.

M. Jay Allison, Comstock CEO, said the sale would strengthen the company’s balance sheet, “providing us with an opportunity to further improve our liquidity during a period of low oil and natural gas prices."

While liquidity will be boosted, the company’s leverage will remain in question long term, said Jeffrey W. Robertson, analyst, Barclays.

Liquidity should rise by 14% to $330 million by year-end. However, projected net debt in 2016 will be an estimated 5.86 times of EBITDAX, up from 5.34 times.

Comstock’s first debt maturity is $400 million in 2019, and the company has nothing on its revolver, Robertson said.

The problem remains spending.

“We expect Comstock to continue to outspend cash flow through 2016 in an effort to grow gas production and stem oil production decline,” Robertson said, adding he estimates the company will outspend 2016E cash flow by 50%, or $34 million.

Kelly echoed the concern, saying that Comstock’s liquidity is enhanced in the short term but its 2015/2016 net debt/EBITDA will settle at 7.2x/7.3x, virtually unchanged from 7.3x/7.1x previously.

Comstock’s sale may have repercussions beyond its own borders. The company appears to have sold its properties at proved developed producing (PDP) value with undeveloped acreage coming essentially for free, Tudor, Pickering, Holt & Co. said in a note.

“While CRK’s sale price may have been impacted by need for liquidity or to refocus portfolio, this deal doesn’t provide an encouraging outlook on acreage value in the play in this environment,” Tudor, Pickering, Holt said.

Nearby public E&Ps include Apache Corp. (APA), Anadarko Petroleum Corp. (APC), Clayton Williams Energy Inc. (CWEI) and Halcón Resources Corp. (HK).

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.