Comstock Resources, Inc. (CRK)

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Comstock Resources (CRK)

Q4 2012 Earnings Call

February 12, 2013 10:30 am ET


Miles Jay Allison - Chairman, Chief Executive Officer and President

Roland O. Burns - Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Secretary, Treasurer and Director

Mark A. Williams - Chief Operating Officer


Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Cameron Horwitz - U.S. Capital Advisors LLC, Research Division

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division

Mario Barraza - Tuohy Brothers Investment Research, Inc.

Richard M. Tullis - Capital One Southcoast, Inc., Research Division



Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Comstock Resources, Inc. Earnings Conference Call. My name is Erica, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Jay Allison, President and CEO. Please proceed.

Miles Jay Allison

Thank you, Erica. And, everyone, welcome to the Comstock Resources Fourth Quarter and Annual 2012 Financial and Operating Results Conference Call. You can view a slide presentation during or after this call by going to our website at and clicking Presentations. There you'll find a presentation entitled Fourth Quarter 2012 Results. I'm Jay Allison, President of Comstock. And with me this morning are Roland Burns, our Chief Financial Officer; and Mark Williams, our Chief Operating Officer.

During this call, we will discuss our 2012 operating and financial results. Please refer to Slide 2 in our presentation and note that our discussions today will be including forward-looking statements within the meaning of securities laws. While we believe the expectations of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

I know that there are probably 34 slides in the presentation. I'd like to give you kind of an overview right now from our perspective as far as the year and 2012 and 2013. And I know Roland and Mark will hit on some of the highlights and details in a moment, but just to kind of give you an overall view.

Slide 3 summarizes the highlights of 2012. 2012, as well as 2013, are transition years for Comstock as we are changing the company from a 98% natural gas company to one with a more balance between oil and natural gas. We started 2012 with a partially proven Eagle Ford oil play and added the Permian properties in Reeves County as a new oil basin for us.

In 2012, we saw natural gas prices decrease 36% from 2011, and our gas production dropped 9%. But then in 2012, we saw our oil production grow 175%, with the Eagle Ford becoming our main oil growth engine as we de-risked our acreage and brought in KKR as a JV partner.

In 2013, the Eagle Ford will continue to be our largest oil growth engine, with a 3-rig dedicated program to focus drilling into better portions of our Eagle Ford acreage. In 2012, in West Texas, we drilled 46 gross vertical wells that have enabled us to de-risk portions of our 42,000 net acres, and we drilled our third horizontal well, the Gaucho State 15 #H, targeting the Wolfcamp A interval. The Gaucho has been fracture-stimulated now, with a 6,837-foot lateral in 18 stages and is expected to start flowing back later this afternoon. Comstock owns 100% working interest in the Gaucho well. This well will allow us to begin to evaluate the Wolfcamp A horizontal play, which offset operators have been very successful in developing. Mark Williams will go into more detail about this well and the offsetting wells later in this conference call.

Concerning our 80,000 net acres in the Haynesville/Bossier play in East Texas and North Louisiana, where we have 6 Tcfe of upside, we have allocated $32 million in 2013 to drill 3.6 net wells versus the $107 million we spent in 2012. So in 2013, 94% of the net well drilled will be oil wells and 92% of our budget will be spent on oil projects.

Also, I need to point out that a key component to Comstock in 2013 is to delever our balance sheet by bringing in a partner in our Permian drilling program later this year. We think a good partner will create a win-win situation in the Permian and allow us to delever our balance sheet and enable the Permian to be developed on a more consistent scale, incorporating both vertical and horizontal well programs.

I will now turn it over to Roland and Mark to cover our financial and drilling results. Roland?

Roland O. Burns

Thanks, Jay. The first item I want to cover is the announcement we made yesterday to restate our financial results for the first 3 quarters of 2012. So if you refer to Slide 4.

And while our oil hedging program has been a big economic success in 2012, we were required to change our accounting from hedge accounting to mark-to-market accounting. The net impact is that we have to include unrealized gain or loss related to the value of the oil hedge position in our income statement, instead of just an equity. As a result, we've recognized an unrealized loss of $10.2 million in the first quarter and unrealized gain of $34.8 million in the second quarter and an unrealized loss of $1.1 million in the third quarter.

For the 9-month period, this accounting change has us reducing our loss after income taxes to $21.9 million as compared to the $29.4 million loss we previously reported. Even though the hedges were effective throughout all of 2012, our underlying documentation that designate the contracts as hedges were not completed in a timely manner. The technical requirements to use hedge accounting are unforgiving, and we failed to live up to them. We do want to apologize to our stockholders for any confusion this restatement has created.

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