Comstock Resources, Inc. (CRK)

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Comstock Resources (CRK)

Q4 2011 Earnings Call

February 06, 2012 2:00 pm ET

Executives

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 - Vice President of Operations

Analysts

Brian M. Corales - Howard Weil Incorporated, Research Division

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Kim M. Pacanovsky - McNicoll, Lewis & Vlak LLC, Research Division

Dan McSpirit - BMO Capital Markets U.S.

Jack N. Aydin - KeyBanc Capital Markets Inc., Research Division

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

John Freeman - Raymond James & Associates, Inc., Research Division

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

John M. Selser - Iberia Capital Partners, LLC

Michael Kelly - Global Hunter Securities, LLC, Research Division

Jeffrey W. Robertson - Barclays Capital, Research Division

Kelly J. Krenger - BofA Merrill Lynch, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Comstock Resources Earnings Conference Call. My name is Jeremy, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Jay Allison, President and CEO. Please proceed, sir.

Miles Jay Allison

Jeremy, thank you, and thank you for all those that are attending the conference call. We changed up the format a little bit. Traditionally, we'd put our results out at the end of the day and then we would distribute [ph] with analysts whatever and then we would have the conference call the next morning. I think this format might serve us better. We are flying to a conference tomorrow and we'll have 24 meetings on Tuesday, Wednesday so that's why we changed this format.

I would like to welcome everyone to the Comstock Resources Fourth Quarter and Year End 2011 Financial and Operating Results Conference Call. You can view a slide presentation during or after this call by going to our website at www.comstockresources.com and clicking Presentations. There, you will find a presentation entitled Fourth Quarter 2011 Results.

I am Jay Allison, President of Comstock. And with me this morning is Roland Burns, our Chief Financial Officer; and Mark Williams, our VP of Operations. During this call, we will review our 2011 fourth quarter financial and operating results, report on the results of our 2011 drilling program and discuss our plans and outlook for 2012.

Please refer to Slide 2 in our presentations and note that our discussion today will include forward-looking statements within the meaning of securities laws. While we believe the expectations in such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

The 2011 highlights. Please refer to Page 3 of the presentation where we summarize the highlights of 2011. In 2011, we had a very strong production growth, with production increasing 31% over 2010. The successful Haynesville shale program drove much of the production gains while the Eagle Ford shale program is allowing us to increase our oil production, which made up 16% of our production on the last day of the year as compared to only 4% on the first day of 2011. We had strong growth in our financial results in 2011 despite the 10% drop in natural gas prices by increasing production and lowering our operating cost.

Revenues in 2011 were up 24% to $434 million. EBITDAX was up 35% to $336 million and operating cash flow was also up 35%, increasing to $298 million or $6.25 per share. We had a loss of $33 million in 2011 due to property impairments that we had, which totaled $46 million after tax.

We had very strong results in our 2011 drilling program. We drilled 87 successful wells including 62 Haynesville shale wells and 20 Eagle Ford shale wells. The drilling program was one of the drivers of our 25% growth in proved reserves that we achieved in 2011. It added 228 Bcfe of new reserves and increased our proved developed reserves by 170 Bcfe.

We ended 2011 by closing an acquisition that established a new core area in the oil-rich Permian basin. As we have shifted most of our resources this year to growing our oil production, this acquisition gives us a low-risk vertical drilling program to complement our successful Eagle Ford shale program in South Texas. We also think we're very well positioned to be a significant player in the emerging horizontal Wolfcamp shale in the Permian basin.

I will turn it over to Roland to review the financial results for this quarter in more detail. Roland?

Roland O. Burns

Thanks, Jay.

On Slide 4, we show our oil and gas production on a daily basis the last 4 years and we also separate it by operating region. Production from the Haynesville shale program on the chart is shown in blue and now we're showing the contribution from our Eagle Ford program in yellow. In the fourth quarter of this year, our production averaged 277 million cubic feet of natural gas equivalent per day, 48% increase over the fourth quarter of last year but about 3% lower than production in the third quarter of this year. Oil production of 3,800 barrels per day in the fourth quarter was up 78% from the third quarter. And oil now makes up 8% of our total production, as compared to only 4% in the previous 3 quarters.

Eagle Ford averaged 20 million per day in the fourth quarter, as compared to about only 9 million a day in the third quarter of this year. On December 31, we estimate that oil made up 16% of total production, which we put in the press release, when taking into account the Permian properties that we closed on, on December 29.

Our Haynesville production in the quarter decreased 184 million per day, as compared to the 200 million a day we had in the prior quarter because we had very little completion activity in the fourth quarter. Next quarter, we expect our Haynesville production to increase as we're completing the 14 wells that we carried over from last year.

Production from our Cotton Valley wells decreased slightly in the quarter to 37 million per day. In the South Texan--, the South Texas region, when you exclude the Eagle Ford, also decreased slightly to 29 million per day, and our other regions remained unchanged at 7 million per day.

Looking to this year, we believe production will come in between 106 and 110 Bcfe in 2012, which is 11% to 15% higher than 2011's production. More importantly, we estimate that 14% to 16% of 2012's production will be oil, that's compared to only 5% in 2011. This will give us stronger revenue growth in 2012 than we had in 2011.

Oil prices continued to be very strong in the fourth quarter, which we cover on Slide 5. Our realized average oil price increased 34% in the fourth quarter of 2011 to $100.18 per barrel as compared to $74.75 per barrel in the fourth quarter of 2010. For all of 2011, our average oil price was $95.73, which was 40% higher than our average oil price of $68.35 in 2010.

Our realized oil prices in the fourth quarter averaged 107% of the average benchmark NYMEX WTI price. Improvements to our Eagle Ford differentials account for this premium to WTI. Our Eagle Ford oil is being priced more on the Louisiana Gulf Coast market than it is to the WTI index prices. And then as the Brent prices and WTI come back closer together, we expect this premium will come down in future quarters.

Natural gas prices continue to slide in the quarter, as shown on Slide 6. Our average gas price decreased 9% in the fourth quarter to $3.40 per Mcf, as compared to $3.73 in the fourth quarter of 2010. For all of 2011, our average gas price decreased 10% to $3.91 per Mcf, as compared to $4.35 per Mcf in 2010. Our realized gas price is averaging 96% to 97% of the average NYMEX Henry Hub gas price index.

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