Comstock's Entrepreneur-In-Chief

Last November, M. Jay Allison, president and chief executive officer of Comstock Resources Inc., found himself attending a black-tie affair in Palm Springs emceed by Jay Leno. In due course that evening, he was surprised and delighted to be named Ernst & Young Entrepreneur of the Year for 2009 in the energy, chemicals and mining category. For 23 years, these national awards have recognized leaders who show innovation, financial success and personal commitment as they build their companies.

“The entrepreneurial gene is a gift and you have to use it to create value and help America be better,” says Allison. “Whether you win or lose, it’s how you do it.”

The award comes as Allison has led his company, based in Frisco, Texas, through an expansion into gas shales in East Texas and North Louisiana. In 2008 Comstock’s stock rose 39% while most other E&Ps struggled.

Allison has grit. A walk-on at a Baylor University football practice, he became a three-year letter man and part of the 1974 Southwest Conference championship team. Fast-forward to 2009, when Baylor opened the Jay and Jenny Allison Indoor Football Practice Facility, just one result of his successful transition from the gridiron to the oil and gas world.

He started as an oil and gas lawyer who invested in a few wells here and there. Later, he co-founded Midwood Petroleum to acquire and develop properties before his company acquired Comstock in 1986.

Since 1991, Comstock has added 991 billion cubic feet equivalent (Bcfe) of gas reserves through a series of acquisitions in East and South Texas and North Louisiana, focused on conventional formations such as the Hosston, Cotton Valley, Wilcox and Vicksburg. But voilá—today a lot of that acreage lies over the Haynesville shale as well.

In third-quarter 2009, the company produced about 17 billion cubic feet of natural gas equivalent, up 13% from the prior year. In 2009, Comstock intended to drill 41 horizontal wells in the Haynesville and is currently running six rigs in its Haynesville program, to drill about 50 wells this year.

"It's so hard to grow by the drillbit, despite good intention. But Haynesville is different," says M. Jay Allison, president and chief executive officer, Comstock Resources Inc.

“The goal is to have half our growth in the future tied to a shale play,” Allison says.

He spoke with Oil and Gas Investor about his vision for Comstock.

Investor Congratulations on your award.

Allison In life, whether you are a person or a company, you want to leave good footprints behind you. This was a good thing, and I’m grateful to be in their league. When the award was announced, I gave John Pinkerton (Range Resources Corp. CEO) a hug. He was also nominated and is very deserving. Entrepreneurs are the ones who will create employment that pulls America back up off its knees.

Investor You’ve been changing Comstock’s portfolio.

Allison Yes, we sought to change what Comstock is. We have changed our geologic group and our reservoir engineering group to help us make the transition to a resource-play company. We hired a top geologist who came over from EnCana with extensive experience with Deep Bossier exploration. At his urging, we deepened the vertical Cotton Valley wells we were drilling to test the shale just below the Cotton Valley sands.

Investor Comstock was in the Haynesville before it was cool?

Allison Yes. We discovered 303 feet of shale in third-quarter 2007 in our Logansport Field, before anyone was really talking about this shale in Louisiana. We have about 250,000 acres in East Texas/North Louisiana that we’ve accumulated over 20 years. We deepened some of our vertical wells in DeSoto and Caddo parishes, and we discovered the footprint of the shale was a large one. We had bought Double A Wells Field from Tommy Carter (CEO of Black Stone Minerals Co. LP) in 1996. As a result of our relationship we were able to lease his acreage in Sabine and DeSoto parishes in early 2008.

We were looking to increase our footprint in this new play, whatever it was—it wasn’t called Haynesville yet. Then a couple of other companies announced the Haynesville in early 2008 saying it could be the second- or third-largest gas field in the world, once developed. We have 85,000 gross acres in what I’d call the most important part of the play. Since the Haynes­ville was an emerging play we didn’t bet the farm on it early on, but after we sold our interest in Bois d’Arc Energy to Stone Energy in 2008, we drilled our first horizontal Haynesville well in late 2008. Of 582 Bcfe that we had at the end of 2008, only 11 Bcfe related to the Haynesville shale.

Investor And now you’re in good shape?

Allison We think we can add 200 to 300 Bcfe of proved reserves through our Haynesville shale program, which is where we’ll spend 90% of our capex. We operate most of our program with an 80% to 90% interest in the wells we drill. We have six rigs operating now in our Haynesville shale program.

Investor How are you financing this upside?

Allison We haven’t issued any equity in four years and our net debt to total capitalization is only 17%. In October we completed a $300-million debt offering, and that was upsized. We set out to raise $200 million in bonds. In 2008, we monetized our interest in Bois d’Arc for about $700 million net, and we sold some noncore onshore properties for another $138 million. We have ample liquidity. We have $500 million undrawn on our credit line, cash in the bank and Stone Energy shares worth around $100 million.

Investor Are you well-hedged?

Allison Starting in January 2010 we have no hedges. At year-end 2009, we had only 8% hedged. In a weak commodity-price environment like this, we are not drilling our Cotton Valley and South Texas projects. In 2007 and 2008, we drilled probably 215 vertical Cotton Valley wells, but in 2009, we drilled only three. We don’t have to drill these projects since our acreage is all HBP (held by production).

We think if we’re making an acquisition, hedges are appropriate, but we don’t use them on a drilling program where future drilling costs are not fixed. I think the public pays management to take the risk, but not to be reckless.

Investor What’s on tap for 2010?

Allison We looked at the market price for natural gas in November when it was about $5.15 and asked what that does for us. How many rigs can we run? How many wells can we drill, and can we grow production? I think service costs have gone down the majority of the way they can go. At today’s drilling costs, for the Haynes­ville wells we are drilling right now, we can get north of a 30% rate of return on our money. But, not all Haynesville wells are equal.

It sounds good, but don’t blink, because things could change quickly! This is a commodity-based business with instant peaks and instant valleys where you say, What happened? We’ve been committed to a strong balance sheet for decades. We are a blessed company and we never sought to be bigger than we should be at any given time.

We keep three things going on. We have good developmental opportunities, but when commodity prices are low, we pull in the reins, like we did in the Cotton Valley program. Our exploration success was in the Gulf of Mexico (with Bois d’Arc) and in South Texas. The third thing we have is success with acquisitions. But we were fortunate to create value in the Haynesville.

Investor What more can you tell us about it?

Allison We have a solid program and we should have good production growth if gas prices stay moderate. We’ll drill about 50 horizontal Haynesville wells this year. We might add a seventh rig in 2010, but we are disciplined—the more liquidity you have, the more tempted you are to spend it. For a Haynesville shale well, we first gave an EUR of 4 Bcfe per well on our 72,000 net acres, but now, after drilling 36 wells, we are at 5 Bcfe recovery. That’s our comfort zone, and we are not as aggressive on that compared to some other companies. It’s no longer an emerging region but it definitely is not mature yet, either. We have to drill more wells. It will take some time.

Usually if you want to grow production, you have to buy something. It’s so hard to grow by the drillbit, despite good intentions. But the Haynesville is different. We had only 1 million a day of Haynesville production in fourth-quarter 2008, 56 million a day by the third quarter of 2009, and we expected to have more than 80 million in the fourth quarter. That’s with our own people, on our own acreage and with no partners. By the end of 2010, half of our production will come from the Haynesville.