Comstock Resources Inc. (NYSE: CRK) said on April 26 that, as previously reported, it is in negotiation with Dallas businessman and owner of the Dallas Cowboys Football Club Ltd., Jerry Jones, to make a substantial investment in the company.
Under a letter of intent entered into by the Comstock and Arkoma Drilling LP and Williston Drilling, LP, Comstock will acquire interests in certain properties in North Dakota in exchange for common stock in the company. Comstock is acquiring the properties for $620 million.
Arkoma is owned by Jones and his family. "I am excited to be partnering with Comstock by contributing my oil and gas properties to Comstock which will allow them to strengthen their balance sheet,” Jones said in a statement. “This combination provides Comstock with substantial cash flow to invest in their high return Haynesville shale drilling program and the capital to grow their already substantial inventory of drilling prospects."
"The Arkoma investment in Comstock will allow us to refinance and simplify our capital structure and equip us with all the tools to substantially grow stockholder value," added Jay Allison, CEO of Comstock. "The proved reserve value and related cash flows from the North Dakota properties when combined with our properties will support the refinancing of our debt as well as fuel an expanded drilling program in the Haynesville shale. The strong balance sheet resulting from the combination will allow us to play offense after spending the last three years on defense."
The company said in a news release there is no debt associated with the properties.
RELATED VIDEO: Comstock CEO Jay Allison Talks Return Of Haynesville Shale
The collective of Comstock, Arkoma and Williston Drilling (Arkoma) will receive approximately 88.6 million newly issued shares of Comstock common stock based on an agreed upon share price of $7 per share. Upon completion of the transaction, Arkoma will own approximately 84% of the Comstock’s pro forma outstanding shares. The acquisition is subject to the parties entering into a definitive purchase agreement, which will be subject to a number of closing conditions, including the approval of the issuance of the common stock by the Comstock’s stockholders.
Comstock said it expects to enter into a purchase agreement within the next several weeks and will seek stockholder approval for the transaction as soon as practicable thereafter. The effective date of the acquisition of the properties will be April 1.
The oil and gas properties being acquired by Comstock in the transaction are located in North Dakota's Bakken shale basin. The properties are currently producing 10,500 barrels of oil per day (bbl/d) and 20 MMcf of natural gas per day and have proved reserves as estimated by Comstock's independent reserve engineers of 22.5 MMbbl and 48.5 Bcf of natural gas. Comstock will be acquiring 332 (52.5 net) producing oil wells, 128 (13.0 net) drilled uncompleted wells and 10 (3.0 net) undrilled locations. The properties are expected to generate approximately $200 million of operating cash flow in 2018.
Strategic drilling venture
Comstock has also entered into the previously announced strategic drilling venture with Arkoma. Arkoma will participate in drilling projects proposed by Comstock in the Haynesville and Bossier shale in East Texas and North Louisiana and the Eagle Ford shale in South Texas.
Comstock receives a 20% carried interest for projects that Arkoma participates in and Arkoma will only earn an interest in the well bore for projects it participates in and will not have rights to any related acreage. The new venture has a two-year term.
Comstock will offer a minimum of $75 million in opportunities in the first twelve months and $100 million in the second twelve months. The first six projects under the new venture represent a $34 million investment by Arkoma.
The strategic drilling venture will enable Comstock to grow its prospect inventory, increase its capital efficiency by 20% for venture projects, and provide capital to address drilling required to maintain leases. The new drilling venture with Arkoma will also allow the company to implement a larger drilling program, which will create efficiencies and lower service costs while also keeping Comstock's capital expenditures within operating cash flow.
Refinancing plans
Comstock also announced that it is withdrawing the tender offers to repurchase all of its secured notes, including the Senior Secured Toggle Notes due 2020, the 7.75% Convertible Secured PIK Notes due 2019 and the 9.5% Convertible Secured PIK Notes due 2020. Comstock now plans to retire these notes following the completion of the acquisition of the North Dakota properties with a new revolving bank credit facility and new senior unsecured notes.
Pro forma for the acquisition and the pending divestiture of the Eagle Ford shale properties, Comstock expects that its annual EBITDAX, or earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other noncash expenses will approximate $400 million in 2018 based on current market prices for oil and natural gas.
Comstock believes that its increase in cash flow from the acquisition in combination with the interest cost savings from refinancing the company's outstanding debt will allow a significant increase in Comstock's cash flow available for reinvestment in the Haynesville shale properties.
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