Comstock to divest certain East Texas assets

Comstock Resources Inc. (NYSE: CRK) has entered into a definitive purchase and sale agreement with a private company to sell Comstock's oil and gas properties in and around Burleson County, Texas, for a sale price of $115 million.

The sale is expected to close in July and will have an effective date of May 1. Comstock intends to use the proceeds from the sale to fund its 2015 drilling program and to enhance the company’s liquidity, as well as for other corporate purposes.

The properties being sold are producing approximately 1,900 barrels of oil per day and 5.5 million cubic feet (MMcf) per day of natural gas. As of Dec. 31, 2014, Comstock’s proved reserves included 3.7 million barrels of oil and 3.9 billion cubic feet of natural gas related to the interests being sold. The company expects to realize a pre-tax loss on the divestiture ranging from $100 to $110 million. 

Taking the divestiture into account, Comstock revised its 2015 oil production guidance to 9,000 to 9,500 barrels per day and its natural gas production guidance to 125 to 150 MMcf per day. The company has also recently added 10 MMcf per day of natural gas hedges at $3.20 per MMcf for the 12 months beginning on July 1. 

BMO Capital Markets served as exclusive financial advisor, and Locke Lord LLP served as legal advisor to Comstock on the transaction.

Analysts from Global Hunter Securities commented, “CRK nets ~$115MM for its East Texas Eagle Ford assets (6.7x 2016E cash flow on our math), implying substantially less NAV than previously thought for the undeveloped portion of the company’s 32K net acres in the play (we had originally dialed in ~$4K/acre in our NAV, but we estimate CRK netted less than $500/acre). In addition, while liquidity is enhanced in the short term, we see 2015/2016 net debt/EBITDA settling at 7.2x/7.3x, virtually unchanged from 7.3x/7.1x previously.”

Additionally, analysts from Stifel commented, “Pro Forma the sale, we project CRK will have approximately $270 million of cash on its balance sheet, no outstanding borrowings on its credit revolver, and $1.395 billion of long-term debt with no maturities until 2019-2020. However, we project the company’s YE15 debt/TTM EBITDA will increase to 6.5x, up from 2.4x at YE14.”

The Stifel analysts noted that Comstock’s focus continues to be on its Haynesville shale play assets. “Last quarter, CRK announced initial results on its first two extended-lateral enhanced-completion Haynesville Shale wells in De Soto Parish, Louisiana,” they said. “The Pyle 6-7 #1-Alt H and the Shahan 5-8 1-Alt H were drilled with 7,598' and 7,421' laterals, cost $10.8 million and $11.2 million, and had initial 24-hour IP rates of 26 MMcfe/d and 22 MMcfe/d, respectively. However, management has yet to provide extended production rates. The company has completed and is producing a total of four recent vintage wells, is in the process of fracking its fifth, and recently spud its sixth well. CRK plans to drill and complete 9 gross (8.3 net) Haynesville Shale wells during 2015. Using a $10 million CWC, management estimates the play requires approximately $2.75/MMBtu to generate a threshold return of 20% pre-tax IRR.

“CRK’s assets are generating marginal returns at current commodity prices, but the company’s liquidity puts it in position to ‘wait it out’ until the commodity storm blows over,” the Stifel analysts added. “Due to natural gas price headwinds and operational risk as the company re-starts its Haynesville program, we are maintaining our Hold rating on CRK shares.”

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