Comstock To Acquire Haynesville Operator Covey Park For $2.2 Billion

[Editor's note: This story was updated at 2:46 p.m. CDT June 10.]

Comstock Resources Inc. said June 10 it will become a Haynesville Basin leader with the acquisition of privately-held Covey Park Energy LLC.

In a joint statement, the companies announced an agreement for Comstock to acquire Covey Park in a cash and stock transaction worth roughly $2.2 billion. The transaction also includes the assumption of outstanding debt and the retirement of existing preferred units for a total of $1.1 billion.

Comstock plans to fund the acquisition through a combination of debt under its revolver and an investment from its shareholder and Dallas Cowboys owner Jerry Jones.

Covey Park is a Dallas-based private independent with properties in the Haynesville and Bossier shale plays of North Louisiana and East Texas. The company was founded in June 2013 as a partnership between private-equity firm Denham Capital and is led by John Jacobi and Alan Levande.

Analysts with Tudor, Pickering, Holt & Co. (TPH) said combined with Covey Park, Comstock will be the largest Haynesville operator at 293,000 net acres.

“We continue to see the need for additional industry consolidation of the basin to gain meaningful scale,” the TPH analysts said in a research note on June 10.

Comstock CEO M. Jay Allison said the transaction follows a year of evaluating several potential targets in the Haynesville shale. He noted that with Covey Park he believes they have found the “perfect merger partner.”

“This merger is an excellent fit with our existing acreage and continues our strategic plan of creating significant scale and resource depth in the Haynesville shale basin. ...  In integrating Covey Park we plan to focus on operating efficiency and having a combined drilling program that provides for substantial free cash flow to achieve our goal of reducing our leverage,” Allison said in a statement.

Pro forma the Covey Park acquisition, Comstock expects its position to total roughly 374,000 net acres with over 1.1 billion cubic feet equivalent per day of net production. In the Haynesville, the company said it will have about 2,000 net drilling locations, including roughly 1,300 net locations with lateral length over 5,000 feet.

The deal pushes Comstock further down the gas cost curve, according to Greig Aitken, director of corporate analysis at global natural resources consultancy Wood Mackenzie.

By acquiring Covey Park, Aitken said Comstock will gain access to the three best parts of the Haynesville: the Caspiana Core in Louisiana, the Shelby Trough in East Texas, and the emerging Carthage sweet spot.

“Before the deal, Comstock’s best acreage was confined to Louisiana, but inventory was limited,” he said in an emailed statement. “Adding acreage—specifically around Carthage—should have been a big driver for Comstock.”

He also called the Shelby acreage a “jewel” with low breakevens per WoodMac models.

Jerry World

The acquisition of Covey Park also comes roughly a year after Comstock, which is based in Frisco, Texas, teamed up with Jerry Jones, owner of the Dallas Cowboys Football Club Ltd.

Last year, Jones rolled his and his family’s interests in the 424 Bakken-producing wells into the Haynesville gas producer in exchange for 88.6 million—that is, 84%—of outstanding shares. The transaction closed in August 2018.

RELATED: Executive Q&A: Jerry Jones

In a statement on June 10, Jones said: “I am excited to provide the funding and to team up with Denham Capital to combine the two companies to create the basin leader in the Haynesville shale.  This combination is another step toward completing my vision to create an industry leading natural gas company.”

Jones will remain the company’s largest shareholder following Comstock’s acquisition of Covey Park with 75% ownership interest and a cumulative investment of $1.1 billion. He also agreed to invest an additional $475 million in cash for 50 million newly issued shares of Comstock stock and $175 million of newly issued shares of perpetual convertible preferred stock.

Additionally, Denham Capital is set to become the second largest shareholder of Comstock as a result of the transaction with roughly 16% common stock ownership interest.

As part of the acquisition agreement, Covey Park’s equity owners will receive $700 million in cash, $210 million of a newly issued perpetual convertible preferred stock and about 28.8 million shares of newly issued Comstock stock at $6 per share.

Following closing of the Covey Park acquisition, expected by July 31, Comstock will continue to be led by Allison. The company’s leadership will also include representation from both management teams, according to the companies’ joint release.

Also in connection with the transaction, Comstock appointed BMO Capital Markets to arrange an amended and restated $2.5 billion bank credit facility with an initial borrowing base of $1.575 billion and a maturity of five years from closing.  The company plans to elect to set the borrowing base at $1.5 billion at closing.

Wells Fargo Securities LLC is lead financial adviser to Comstock for the transaction. BMO Capital Markets is also acting as a financial adviser to the company. Locke Lord LLP is the company’s legal adviser. BofA Merrill Lynch and Barclays are lead financial advisers to Covey Park. Citigroup Global Markets Inc. and Goldman Sachs & Co. LLC also provided financial advice to Covey Park. Vinson & Elkins LLP is the company’s legal adviser led by partners Doug McWilliams and Shamus Crosby.

Emily Patsy can be reached at epatsy@hartenergy.com.