Executive Q&A: Do The Right Thing

[Editor's note: A version of this story appears in the December 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

John Jacobi launched Covey Park Resources in 2013 alongside co-CEO Alan Levande and backed by private-equity firm Denham Capital Management. The Dal­las E&P quickly amassed acreage, scale and cash flow in the Haynesville Shale, becoming one of the largest private operators in the play. But the industry downturn in 2015 and subsequent capital flight by the investment community scuttled early exit models for the maturing start-up, requiring alternative solu­tions to a persistent problem.

Covey Park found its exit in a $2.2 billion sale to Comstock Resources Inc. in July. Com­stock itself had been recapitalized within the past year by iconic oilman and Dallas Cow­boys owner Jerry Jones, now a majority owner, putting it in a unique position to consolidate its existing position in the Haynesville with Covey Park’s. This at a time when public companies are eschewing acreage additions.

Jacobi spoke at Oil and Gas Investor’s A&D Strategies and Opportunities conference in Dallas in October in a Q&A format with In­vestor editor-at-large Nissa Darbonne. These comments were excerpted and edited from his public remarks.

Investor: Is the “pump and dump” model bro­ken?

Jacobi: We coined the “pump and dump” [phrase] many years ago. I liked the model; I was just never very good at it. That was to buy 50,000 acres, drill two wells and sell it to somebody else. That model worked right up until it didn’t. It’s going to be a while before we see many billion-dollar deals where it’s just acreage plays. I think that is dead for a while.

The model that I grew up in, was taught the most about and still understand and love today, is one that the industry talks a lot about today, but it’s all that I’ve ever known. That is to buy things, exploit it—hold and produce for a lon­ger period of time—and hopefully find a buyer for it to create value. It’s been a good model for me.

Investor: Is there too much competition for public or private equity, or capital from all sources? Maybe there are too many companies competing for that?

Jacobi: We’re in a mode of consolidation, there’s no doubt about that. While we [Covey Park] were going through the potential go­ing-public phase, we found out real quickly that timing was a little bit off. We met every model and every goal that a future equity partner would want to invest in. When others were talking about it we were doing it, which essentially was making money in all aspects of it. But then all of a sudden the goalpost was moved. You had to be bigger with more consolidation. It’s just the way equity invests today; that’s how they’re feeling. They want us to approach it that way.

Last year, before we actually did our deal with Comstock, I was scolding these [investment bankers] that I had been visiting with for two years. “You want me to be cash-flow positive? You want me to grow? I’ve done all that. There are less than five [E&Ps] in the entire country that have actually done what you said. What’s the problem? Why do you not want me to go public?” And same old answer, “Well, you’re not big enough.” Before it was about being free-cash-flow positive. Then it became bigger.

So when I left there, I got to thinking that it’s really not their [the equity investor’s] problem. It’s our problem. We created this entity of these exit strategies from an acquisition or going pub­lic as the only way we can exit. And by doing that I do feel like there are probably too many choices for them to invest in. We haven’t done what we said we would do, which causes a lot of problems and angst by them. I do tell them that they’re culpable for this as well. They forced a growth mode, in my opinion, by giving you a bunch of money. But that being said, I think we’re in a phase where we have to be the respon­sible party if we’re going to solve these things.

And for those who are public, I would tell you to figure it out because, ultimately, you’re going to have to be the person in the room that does this. They’re not going do it for you. It’s become a realization that we’re responsible for this. We should take the responsibility. It’s up to you and me to make sure we get that done. And hard decisions are going to have to be made, and you’re going to have to do it.

Investor: Regarding mergers and mergers of equals, should there be more than just one merger, that maybe eight companies should get together?

Jacobi: There needs to be fewer companies. When I started in the Haynesville, there were maybe 10 companies altogether. It could be as few as two, in my opinion, possibly three.

In the Permian? I don’t know. A lot of it has to continue to consolidate. I do think the ma­jors like Exxon are sitting around and letting us drown in our sins and then they’ll take over.

Investor: What about Oxy? Are they taking over?

Jacobi: When you do something like they did, you do have to digest these things. It will take a while to do that. And they may be more the target as it contin­ues to consolidate. She [Occidental Pe­troleum Corp. CEO Vicki Hollub] would say differently, but I think all of those com­panies that get that size ultimately have the responsibility to consider that.

Investor: In the Haynesville, at what point have we reached too much consolidation where it’s actually bad for the basin, considering the sharing of new ideas for best practices?

Jacobi: Being an acquirer and builder through acquisitions, I wanted it all. So, in my personal opinion, one’s enough, but for selfish reasons and not necessarily technological reasons. Our commodity is bloated, both on the gas side and the oil side; obviously that’s the reason it’s low. So producing less means higher prices. We haven’t learned that yet.

But as a whole, you’re going to see this con­solidated even more. You have Comstock now looking to grow in the basin—very bullish on gas with their primary owner who wants to continue to consolidate that. Then you have the Osakas of the world that have their own specif­ic business models. The reason they’re there is to hedge their position as they buy gas across the world and move it into their country.

Ultimately, I think there’ll be three or so, ex­cept for the smaller companies that are continu­ing to exploit the new technology, longer later­als, better frack techniques and more efficient drilling. They’re beginning to get it on the outer edges of those positions and take advantage of the lease costs, the infrastructure that’s already in place to move their gas efficiently. And being close to the market, they can make a living there.

Investor: You mentioned Osaka, which is basi­cally using the Haynesville as a hedge on what they’re paying for LNG overseas by owning this super low-cost feedstock, but meanwhile paying multiples of 10 or 15 once that’s deliv­ered across the Pacific. So is Osaka potentially the ultimate owner of the whole Haynesville?

Jacobi: Wow, I guess. They have the money if that’s what they want to do. Right now they’ve put their toe in it. They’ve been around quite a while. We’ve dealt with them as well as others in the basin, and they’ve been very interested in gas for a long, long time. They finally found a posi­tion that met their goals economically. I would call that investment an experiment. It is an actual hedge to them in the future. That’s the way they see it and the way they run their business.

If demand goes up, the Haynesville could very well be owned by an international orga­nization.

Investor: Going back to consolidation and this idea of yours of “getting less big when you get bigger.” What more can be done on G&A?

Jacobi: In this case specifically, Comstock’s G&A was about $30 million a year, and our G&A was about $30 million a year. We were almost twice as big as they were, with a lot less wells but a lot more NAV. They were able to find the very best of those two companies and put it together, and now they have a G&A of about $30 million.

We were going to generate close to $100 million of free cash flow this year. The merging of these two companies essentially made their debt-to-cash-flow ratio go down tremendously. So it helped in that respect, but also added another $30 million a year of posi­tive cash flow to their balance sheet when you combined these two companies. So it was a win for their investors.

Investor: What was the pitch?

Jacobi: If you looked at Comstock around July of this year, they had EBITDA of about $395 million while ours was $575 going to $625 by end of this year. The two combined companies create $1 billion of EBITDA for the year. Net production: theirs was 446 (Mcf/d); ours was 750 and growing, adding up to a net produc­tion of 1.2 Bcf a day.

Total acreage in this particular play is now 300,000—we had 250, they had 50. They have an additional 100,000 in the Eagle Ford and in the Bakken. But in the Haynesville only they became the biggest acreage holder as well as the largest producer. Nearly 7 Tcf [trillion cu­bic feet] of proved reserves. Proved locations are now approximately 2,000.

The cool thing about this deal is it helped them reduce their debt tremendously. It helped their free cash flow. It was a great merger. I would disagree with whoever said that PDC [Energy] and their merger was the best per­forming stock of the year. It’s by far Comstock. With Jerry’s promotion of it, it is even better.

And it was a fantastic exit for my partner Alan and me. We got a big cash payment; we got a preferred interest loan from them that paid off in June, and then we took additional stock. For us and our partners, what was ini­tially a little over 2x deal, now as the stock can begin to trade at higher levels, the value of our return to our investors continues to increase.

So it was a great deal in this environment, and I would advise all of you to be mature enough to consider more of it depending on which end of it you’re on. It’s important to our industry.

Investor: When you founded Covey Park in 2013, your intention was to sell it to an MLP and then that went away. Then you filed your S-1 to go public, but started looking at reverse mergers instead when that went away. What would you advise anyone in the industry today looking to start or exit a company?

Jacobi: “Plan A” is easy. That’s just a model on a spreadsheet trying to show yourself you’re full of yourself. “I’m the best ever, and I’m the smartest ever.” Our Plan A was the perfect world. This is what I’m going to do; this is how I’m going to handle it.” It’s the same way all of you have approached your investors.

But what’s going to define you is Plan B, Plan C and Plan E—how you handle the situa­tion you’re in today.

In our case, we were in the process of getting too big. We were in the private-equity world with a very good partner. We accumulated the very best assets in our particular basin. The best assets are not necessarily in resource, but were by far the best money-making assets in the basin. We did the math, and we bought them for specific reasons. That part wasn’t luck. And we had cash when others didn’t. But as we got bigger, we became one of those that got caught in that situation where, who in the heck was going to buy us?

Our plan was to sell it to MLPs at the time. They were the hottest thing going. Our model at the time was to get into a position where it’s making a whole lot of cash flow and give it to them for a whole lot of money. Well, 2015 came along. One day they were kicking our heads in, and the next day they were out of business and it happened that fast. So we had to go to Plan B.

The new idea was for all these private-equi­ty companies to be public exits. They couldn’t sell to each other, and there were no people that could buy deals that big, so they had to go public. We missed that window by just about six weeks.

We bridged it with a financial acquisition and then went to the public market and essen­tially became partly public when we took on public debt. Our intention was to go public six weeks later. Well, the market fell against us, so there went Plan C.

Then we were going to do reverse mergers, but that became harder. What we kept running up against was, “John, I’ve got all these em­ployees and, by the way, I need a job too. I just can’t do the responsible thing for my partners.” It was a people problem and still is today. They know they’re in a bind, but they’ll run these companies into the ground instead of figuring out how to solve these problems.

That’s just the way it is. We ran into that issue.

So Plan E took about a year to accomplish. It started out as a reverse merger. Allen went to play golf at Pebble Beach [with Comstock CEO Jay Allison], and I give him all the credit for getting that communication started. Jay had not quite found Jerry yet, but the process began in discussing that. Ultimately, it became a sale and a quite good one. Jay and his team were great to deal with.

All I would say about all of that is that you’ve got to keep grinding. And even as you’re build­ing a company, and you’re running it daily you always have to solve problems. They’ll always come up when you least expect them. You’re going to be judged on Plan B, C, D and E, and not on what you create in a model the first day you sell yourself. So good luck and do a good job of it.

Investor: You said the industry has a respon­sibility to take ownership of its current plight. What did you mean by that?

Jacobi: Not only was the market going against us, those of you that were going through all this knew that you were getting beat up by hedge funds because you weren’t doing what you were “supposed” to do. The only mistake you made was doing what they said you should do. I hope all of you remember that. When you run these companies, you should run them as if they are going concerns. Investors come and go, but you have the responsibility to run these companies. Run your company the way you should and do not let any particular individual tell you what to do.

There’s a lot of inexperience in the public are­na. I was in it a long time, and a lot of us went public for an exit strategy. But I do want you to know that you have a responsibility to run these companies. You know what they’re like, and you do have to make hard decisions. Some hedge fund doesn’t really know. And I’ve heard the story, “Well, my stock may go down.” Well, your stock’s going down. They hate you any­way. Run your company for better times. Build your NAV, get your debt down, do all the things you’re supposed to do.

You know what’s amazing to me? It’s always been about making money. Who ever thought that growth was the only metric to making mon­ey? We lost billions of dollars for these people. Do the math. They’re culpable, but you share responsibility. This is not an equity investor’s problem to solve. We need to solve it and then go back to the equity investor, and I do believe the money will come back into responsible companies.

It’s this simple in my world, and it should be this simple in yours: In our company, we al­ways focus on having more money at the end of the month than we do at the beginning of the month. And that’s how it starts. This is about a team, an organization. It’s about an industry that I love very much.

And when I sit here thinking about when and where I start over and I have to deal with the lack of reputation that we’ve caused in our in­dustry, you bet I get emotional about it. So do the right thing.

Investor: You’re not retiring after this deal?

Jacobi: No, it’s not in my nature. Now we’re getting back into an era I’m more comfort­able with, where you really have to know what you’re doing. We have an industry of engineers and geologists that don’t know how to make money. I want to take a good group of young men and women and put them in a situation to teach them how to be responsible operators from cradle to grave. I’d say less than 5% of our industry knows how to operate those assets and make money.

Investor: You mentioned to “not let any partic­ular individual tell you what to do.” How does that work when Jerry Jones is the owner?

Jacobi: What I learned immediately was it was a great deal as long as Jerry gets his way and it was his idea. [Laughs.] Now, in all seriousness, in all the deals I’ve done in my life—and I’ve dealt with interesting people, from the chairman of Exxon to the smallest of individuals and ev­erybody in between—I can’t remember when it was just a handshake deal and it got done. Not that there was no paperwork, but I hadn’t done that in a long, long time, where you look each other in the eye, make a deal and know it’s going to get done regardless of the mistakes each of us made. So that experience was phenomenal. I can personally tell you it was a professional, gentleman’s agreement from beginning to end.

But he does own 75% of that deal, he has put $1 billion in it, and therefore I think he has a say.