In a bid to bolster Haynesville acreage, Comstock Resources Inc. CRK is set to acquire Dallas-based Cover Park Energy LLC, a privately-held company, for $2.2 billion. The combined entity will have substantial scale advantage with attractive organic growth opportunities, going forward.
Amid weak gas prices, many of the companies operating in the Haynesville play exited the region in favor of more lucrative Marcellus shale, wherein gas is closer to the surface and therefore easily accessible. However, with superior drilling technologies on the rise and higher gas demand, Haynesville has started making a comeback, as is evident from a 22% year-over-year increase in output from the region.
Comstock's major position in the prolific Haynesville/Bossier shale play complements Cover Park's properties, strengthening the former's foothold in the region.
The cash and stock transaction, which is valued at $2.2 billion, includes the assumption of Covey Park's outstanding debt and retirement of the existing preferred units, aggregating $1.1 billion. Per the deal, equity owners of Covey Park will receive $700 million in cash, 28.8 million shares of newly issued shares of Comstock stock at $6 apiece and $210 million of newly issued perpetual convertible preferred stock.
Dallas Cowboys owner Jerry Jones, who is the top shareholder of Comstock Resources, will invest $475 million in cash, as part of the deal. In exchange for his cash infusion, Jerry Jones will receive $50 million newly issued shares of Comstock at $6 apiece and $175 million of newly issued shares of perpetual convertible preferred stock. The latest cash infusion by Jerry Jones brings his total investment in the company to $1.1 billion. Post the deal's completion, he would own a 75% stake in the firm, retaining the title of Comstock's largest shareholder. Private equity giant Denham Capital will be the second-largest shareholder of the company, holding a 16% interest.
The agreement has been unanimously approved by the board of directors of both the companies. Subject to satisfactory closing conditions and other regulatory approvals, the deal is set for closure within Jul 31, 2019.
Post the completion of the deal, Comstock's board will include John Jacobi, Co-CEO of Covey Park, and Denham Capital Managing Partner Jordan Marye.
Its complementary asset base has been the key driver of the deal. The buyout will integrate the premier assets of both the companies, thereby bolstering the scale and leadership position of the combined entity in the region. Markedly, the Covey Park takeover would make Comstock the largest natural gas producer in the Haynesville region.
While the company's acreage was initially limited to Caspiana core in the Haynesville shale play, the deal would expand the firm's position in the Carthage sweet spot and Shelby Trough.
The deal will enable the companies to pool their expertise in the region and share their best practices, thereby enhancing buying power in securing services in the region.
The deal adds 248,830 acres of complementary holdings to Comstock's Haynesville/Bossier portfolio, expanding the total acreage of the company in the Haynesville/Bossier shale play to 293,216 net acres. Post the acquisition, total net acreage of the firm will be 373,935 net acres, with 1,999 drilling locations. Comstock's proved reserves will more than double from 2.4 trillion cubic feet equivalent (Tcfe) to 5.4 Tcfe. On being the No.1 producer in the Haynesville play, the company will have an output capacity of more than 1.1 billion cubic feet equivalent per day.
The strategic acquisition is expected to lead to significant commercial, financial and operational synergies, owing to integration of assets, systems and staff. The deal is expected to result in annual overhead savings of $25 million and free cash flow generation of $75-$100 million in 2020.
Other explorers like Chesapeake Energy CHK , Encana Corporation ECA and Murphy Oil MUR , which were once majorly gas-weighted, have slowly started pumping more oil to gain from the rebounding crude prices. However, Comstock has shifted deeper into gas, as is reflected by crude output that accounted for 9% of the firm's total production in 2018 versus 39% in 2014.
Although this merger appears to tick all the right boxes on paper, stubbornly weak gas prices and Comstock's elevated leverage and high proportion of undeveloped reserves raise questions over the Zacks Rank #3 (Hold) company's target of generating free cash flows in 2020. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
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