Scrimmage Line: Comstock Sells Eagle Ford; Picks Up Cowboys Owner’s Cash

[Editor's note: This story was updated at 4:03 p.m. CT April 3.]

Nearly 20 years after Dallas Cowboys owner Jerry Jones punted on a chance to invest in Comstock Resources Inc. (NYSE: CRK), Jones will buy about 14% of the company as it works to strengthen its balance sheet.

Comstock also plans to reduce its leverage to 3.5x from 5.5x through the divestiture of some of its Eagle Ford Shale assets for $125 million, credit and debt financings and two joint ventures (JVs), the company said April 2.

Analysts fretted that the recapitalization efforts include a “massive share count dilution” that increases its stock count, by some estimates, by 340% to 370%. The company also received less value for its Eagle Ford assets than some had anticipated.

The Eagle Ford assets held for sale had a PV-10 value of $109 million, Comstock said in a January press release. Previous shareholder dilution had already been approved by stockholders, with the exception of Jones’ purchase of 10 million Comstock shares for $75 million.

Comstock’s stock saw a 19% freefall after announcing its plans on April 2, with shares closing at $6.04 after opening at $7.54.

“We think the negative reaction stemmed from Comstock doling out more equity than originally anticipated by the market, which was driven by the Eagle Ford sale falling short of expectations and accepting a lower conversion price on the second lien convertible notes,” Seaport Global Securities analysts said in an April 3 report.

“After we work through the moving parts of Comstock’s balance sheet repair, we still see substantial NAV upside of 82% ($11/share) based on a long-term gas price forecast of $2.75/Mcf,” Seaport said.

USG Energy Producer Holdings LLC (USG) agreed to buy Comstock's producing oil and gas properties in the Eagle Ford Shale for $125 million, Comstock said. However, the two companies also entered a JV in which Comstock will retain a “significant interest” in the property’s future development.

USG will buy 191 gross producing wells in McMullen, LaSalle, Frio, Atascosa, Wilson, and Karnes counties, Texas. Comstock will retain 8,700 net acres of undeveloped acreage and an inventory of 218 Eagle Ford drilling locations.

The Comstock/USG JV encompasses Comstock’s Eagle Ford position of 23,000 net acres in Frio, Atascosa, LaSalle and McMullen counties and the 191 wells purchased by USG.

Comstock’s sale includes average production of about 2,500 barrels of oil equivalent per day (boe/d), of which 80% is oil. The sale equates to roughly $49,500 per flowing boe/d and $14/boe of reserve value based on year-end Eagle Ford reserves of 8.9 million boe, said Phillips Johnston, an analyst at Capital One Securities.

“The price tag is below our $150 million estimate of PDP value at a flat price deck of $60 oil and $2.75 gas,” Johnston said in an April 2 note. “Comstock had originally planned to sell all of its Eagle Ford assets, which we had valued at $260 million.”

Jones’ Arkoma Drilling LP will also enter into a drilling partnership JV with Comstock in addition to buying about 10 million shares for $75 million. The two-year JV agreement allows Arkoma to participate in drilling of wells proposed by Comstock in the Haynesville, Bossier and Eagle Ford.

Comstock will receive a 20% carried interest in Arkoma projects. In the first 12 months of the partnership, Comstock will offer a minimum of $75 million in drilling opportunities to Jones’ Arkoma. In the second 12-month period, it will offer Arkoma $100 million in drilling opportunities.

Jones agreed to pay $7.50 per share for the investment, which is contingent on Comstock’s successful financial restructuring.

Comstock’s debt reduction efforts include Jones’ investment, its Eagle Ford sale proceeds, a new $136 million secured revolver and an expected offering of $600 million in new unsecured notes. The company is additionally offering $152 million in cash and 45.3 million shares to retire $483 million in payment-in-kind (PIK) notes.

Four banks have committed to the new four-year revolving credit facility, which is being arranged by BMO Capital Markets Corp.

By the end of 2019, Comstock’s targeted net leverage is about 3x.

“Comstock’s share count increases by about 370%,” Johnston said. It’s unclear “what the plan means for our $8 NAV estimate, but we expect it could be slightly dilutive given the equity infusion and conversion price are both being struck at $7.50 per share, slightly below our NAV.”

In the past four years, Jones has invested more than $1 billion in unconventional shale drilling. He said he has followed Comstock for years and has watched the company drive the reemergence of the Haynesville Shale.

Comstock’s efforts to refinance and his investment reflect his desire to become one of the company’s largest shareholders, Jones said.

“In 1999, I had the opportunity to make a similar investment in Comstock and I passed,” he said. “Had I made that investment, I could have made over $600 million in profits. Given a second opportunity to invest in Comstock's future, I decided not to miss it this time.”

Comstock CEO M. Jay Allison said the refinancing will simplify the company’s capital structure and allow it to focus on growing stockholder value.

“The resulting lower interest expense and benefits of the new drilling venture will allow us to increase drilling activity and grow production while spending within our operating cash flow,” Allison said.

Darren Barbee can be reached at dbarbee@hartenergy.com.