In July 2004, Gary Blackie and Wayne Laufer found themselves at a crossroads in a Gulf of Mexico joint venture, in which they had been involved since 1998. It was time to exit, but they wanted to keep at it. With Frisco, Texas-based Comstock Resources Inc. and other investors, Bois d'Arc had developed a large amount of acreage and associated infrastructure in the Gulf, promising years of exploration opportunities. And, the partners knew the upside potential too well to walk away. Laufer and Blackie began their E&P careers in the 1960s and 1970s, respectively, prospecting in the Louisiana marsh. In 1984, they drilled their first well together. It was a success, but energy prices plummeted soon after. A dry hole followed, but the pair dug in their heels, and by 1988 they had drilled some 25 wells with a 65% to 70% success ratio. They sold the assets, collected the capital and re-started, and by 1997 had grown a new company to production of approximately 7,000 barrels of oil and 35 million cubic feet of gas per day. In 1997, they sold again, this time to Comstock Resources. With the proceeds, they began Bois d'Arc Offshore Ltd. and entered a joint exploration venture in which Comstock signed on as a major participant. At year-end 2004, the venture had amassed proved reserves in the Gulf totaling 305 billion cubic feet of gas equivalent and 111,563 net acres, 97% operated. Production in fourth-quarter 2004 was 52 million cubic feet equivalent per day from 104 producing wells, in which the venture had an average working interest of some 70%. Meanwhile, undrilled leases totaled more than 140,000 net acres. Blackie and Laufer decided in 2004 against just selling the assets only to jump back into the unknown. "We had a very unique situation offshore because most of our acreage was contiguous. It's not a shotgun pattern on the map-pretty much all the acreage is contiguous along a trend," says Blackie, president of Houston-based Bois d'Arc Energy Inc., which Blackie, Laufer and Comstock took public in May. He, Laufer and the Bois d'Arc staff had come to know the acreage considerably well during the many years of exploring it. They were applying that wisdom in developing more and more prospects. "That was one of the big reasons we didn't want to sell; we wanted to maintain continuity. If you sold everything, you'd come into the office Monday morning with nothing to do but start over. We did that in 1997, and through that experience we learned that you lose a lot of momentum and it takes a long time to build a prospect inventory again." Explorers by nature, they wanted to continue operating the properties via large working interests, but the holes were getting deeper and more expensive. The company's acreage is in less than 100 feet of water, but the pair began to see significant opportunities for deep-shelf plays at depths greater than 15,000 feet. Meanwhile, the Minerals Management Service requires surety bonds from Gulf operators and Bois d'Arc did not find an underwriter willing to provide more than $15 million in coverage. The company was consistently pushing that limit. Laufer, Bois d'Arc chief executive officer, says, "So we were having to swap plans around, and bonding requirements were starting to dictate which wells we could drill. That's not a good situation. You want the economics of a prospect to dictate which wells you drill, not an artificial barrier." Blackie and Laufer also couldn't shake a sense of overexposure. As debt and costs rose, their worry about the drilling program became persistent. Blackie says, "I think I woke up in the middle of the night realizing I had a personal working interest in a directional well drilling at about 20,000 feet and we were on our third sidetrack. "I was 55 at the time. I was just thinking, 'What the heck am I doing?' Not that we're risk-averse; Wayne and I are both risk-takers. But costs were going up, we had $10-million facilities here and there, and every time a hurricane was coming toward the Gulf, I found myself holding my breath." Comstock, Blackie and Laufer, and other joint-venture participants decided to combine their assets in the joint venture into Bois d'Arc Energy LLC and take it public. Bois d'Arc Energy Inc. shares were priced at $13 each and began trading on the New York Stock Exchange as BDE in May 2005. Underwriters were Raymond James & Associates; Friedman, Billings, Ramsey & Co.; Johnson, Rice & Co.; Harris Nesbitt, Petrie Parkman & Co.; Calyon Securities USA; Hibernia Southcoast Capital and Keybanc Capital Markets Inc. Post-offering, shares outstanding totaled more than 64 million. The public offering raised a net of $144 million to Bois d'Arc, which it used to reduce the $158 million of debt it owed Comstock. At press time, shares were trading at $15.51. The company's market capitalization was roughly $1 billion, its debt was some 2% of total capitalization and it owned more than 50 million barrels of oil equivalent of proved reserves. Comstock's role The existing investors, including publicly held Comstock, received more than 75% of shares of Bois d'Arc. Comstock had a 59% interest before the offering and 48% after. Other partners in the joint venture were mostly individuals, including several Bois d'Arc employees, which totaled 13 at the time of the IPO. Bois d'Arc management owns 27% of outstanding shares currently. "The discoveries made under the original venture were the asset base that was combined under one company instead of being owned by the different investors," says Roland Burns, chief financial officer for Comstock and Bois d'Arc. "This was done with the idea that having a company that has adequate capital and control of facilities and properties could better execute in the future, versus operating under the joint venture." Comstock, whose traditional core areas are onshore East and South Texas and Louisiana, could have sold its considerable stake in the Gulf properties. But it knew a large equity stake in the new public company would prove profitable. "Historically, the growth in Comstock's Gulf of Mexico operations has been driven by our participation in the joint venture with Bois d'Arc," says Burns. "We don't look at the transaction as a sale or a divestiture; the joint venture we were in has just changed capital structure to be more efficient and effective. "We now have an investment in a public company that explores for oil and gas in the Gulf of Mexico versus having just a participation in a private joint venture." Laufer and Blackie, who continue to lead Bois d'Arc, could have bought Comstock's stake, but they wanted Comstock's continued involvement in the business. "We've been working with them since 1995," says Blackie. "They're a known entity, they're good partners and they understand our philosophy. We would move rigs around as we saw fit and Comstock, even as a public company, understood why and would never inundate us with phone calls and requests for meetings. It was a very efficient partnership." Also, while trying to make the leap from private to public, a close involvement with an existing publicly held company was a bonus. "Comstock had a lot of experience in the public markets," Burns says. "It had a lot of relationships with investment banks, commercial banks, rating agencies-the whole public world-and was able to bring that experience to the table in an initial public offering. "A lot of private companies go through the transition from private to public with a huge learning curve to get over. Bois d'Arc already knew Comstock very well and there is a lot of trust between the two companies. There's a continuation of that in the new vehicle." Part of the support Comstock provides Bois d'Arc is in Burns' role as chief financial officer for both companies. Taking a company public in today's post Sarbanes-Oxley world is no easy task. "Our staff was a little concerned with going public; they didn't sign up with Bois d'Arc with the intent of going public," says Blackie. "They saw a nice, independent operation answering to ourselves and not the public, so they were a little concerned when we decided to do this. "My promise to them was that I was going to make this a non-event. 'I swear when you come in Monday morning, after we go public, it's going to be the same as before we decided to do this.'" For the most part that's been true. "There is more reporting and some rules and regulations to follow, but for the most part it's business as usual. Our intent is to run this public company as much as possible with a private mindset and see how that goes as far as exploration efforts." Where to from here? The deal has extended Bois d'Arc's life expectancy. "We were getting over-exposed," Blackie says. "We were paying out of pocket for all these mega-million-dollar platforms and wells and I think we would have been forced to sell something. It could have caused some heartache to put some properties up for sale. "This way, just rolling them all up, in essence, Wayne and I have, to some degree, liquidated our properties. Now it's in the form of stock, which is a tradable asset down the road, and the company is better capitalized." Blackie and Laufer try not to feel pressure to acquire or to hurry in drilling just to make favorable quarterly reports. "I think a lot of public companies will try to make things happen to propel their stock forward or propel growth," says Blackie. "Certainly we want to do that-we want to grow the company, but we're not going to force it. We're going to do it like Wayne and I were still signing our own checks to pay for these ventures. That way you don't do something that you'll later wish you hadn't done." Bois d'Arc's success rate has been around 75%. "Occasionally we'll get in a rut and we'll drill three or four dry holes in a row, but that just happens." The company has plenty of prospects. "We do look at deals if they come our way, but we don't have to have outside-operated or third-party deals to fuel our growth," Laufer says. "We have ample supply in our shop, so we can pick the right mix of prospects to drill to accomplish our goals." With proceeds from its IPO, Bois d'Arc virtually eliminated its mound of debt. At press time, debt was less than 2% of total market capitalization. It has a new four-year, $175-million line of credit with Bank of Nova Scotia, with an initial borrowing base of $100 million, and it is generating substantial cash flow to fund the exploration program. First-quarter 2005 production was 70 million cubic feet equivalent per day, up 40% from fourth-quarter 2004. Brad Beago, an analyst with Calyon Securities (USA), had a Buy on BDE shares at press time with a 12-month price target of $18. "Given the company's historical exploration track record, prospect inventory, larger base of cash flow to invest, and the fact that the company has essentially no debt, we believe the stock is in a sweet spot for appreciation," Beago says. Beago adds that many of the company's prospects are near infrastructure it owns. "This generally implies that the company is drilling in areas that it knows very well," he says. "In addition, successful wells can be developed more quickly, generating higher rates of return." He estimates Bois d'Arc's reserve-addition potential from 48 existing exploratory prospects and 24 planned development wells is more than 1.1 trillion cubic feet equivalent. What are Comstock's plans for its stake in Bois d'Arc? "The investment in the Gulf of Mexico through the Bois d'Arc joint venture has been one of our best investments and is a big part of our company, so we are not looking at all for an exit to that," Burns says. "In the future, maybe it will make sense to distribute the shares to our stockholders, so they will own it directly." The revised relationship with Bois d'Arc gives Comstock shareholders an opportunity to see the company's value more clearly, he adds. "We have one investment in this Gulf of Mexico exploration company and then our remaining operations are all focused onshore, primarily in Texas and Louisiana. The market looks at the companies differently and investors can now look at Comstock's onshore operations separately."

Comments