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Comstock Resources to Buy Covey Park, Triple Haynesville-Bossier Position

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Frisco, Texas-based Comstock Resources has agreed to acquire fellow Haynesville Shale operator Covey Park Energy for $2.2 billion in cash and stock.

The combined firm will have production of 1.1 Bcf/D of gas equivalent and 5.4 Tcf in gas-equivalent proved reserves in the Haynesville-Bossier Shale of North Louisiana and East Texas. The firm will hold 293,000 net acres in the play with 2,000 net drilling locations, including 1,300 net locations with lateral lengths of more than 5,000 ft, the companies said.

After the purchase, Comstock will have a footprint in “the three best parts of the play: Caspiana Core in Louisiana, the Shelby Trough in East Texas, and the emerging Carthage sweet spot," said Greig Aitken, director, corporate analysis, at consultancy Wood Mackenzie in comments after the deal's announcement. “Before the deal, Comstock's best acreage was confined to Louisiana, but inventory was limited. Adding acreage—specifically around Carthage—should have been a big driver for Comstock.

“By our models, the Shelby acreage is a jewel too, with low breakevens,” Aitken added. 

Comstock has built its Haynesville position through several smaller deals in the last few years. Dry gas production in the play has rebounded during that time, led by privately-held operators like Covey Park, their new completions designs, and their desire to take advantage of nearby Gulf Coast LNG export and petrochemical facilities.

The combined firm expects to its fund its drilling plan within operating cash flow and will have access to 500 miles of gas-gathering infrastructure. It said it will see limited basis risk due to proximity to Gulf Coast demand and contracts tied to Henry Hub spot prices; will benefit from low gathering, treating, and transportation costs; and will have no unmet minimum volume commitments.

Dallas businessman Jerry Jones will remain Comstock’s largest shareholder with 75% ownership interest and a total investment of $1.1 billion after contributing another $475 million in cash for the deal. Jones acquired a controlling stake in the company last year.

“I am excited to provide the funding and to team up with Denham Capital to combine the two companies to create the basin leader in the Haynesville Shale,” Jones said. “This combination is another step toward completing my vision to create an industry leading natural gas company.”

Private equity firm Denham Capital, with $9.7 billion in invested and committed capital, will become the second largest shareholder in the company with 16% common stock ownership interest. Dallas-based Covey Park was founded in 2013 as a partnership between members of its management team and Denham Capital.

“After a year of evaluating several potential targets in the Haynesville Shale, we believe we have found the perfect merger partner,” said M. Jay Allison, Comstock chief executive officer. “This merger is an excellent fit with our existing acreage and continues our strategic plan of creating significant scale and resource depth in the Haynesville Shale basin.

“The combined company will have a stronger balance sheet, enhanced by a large inventory of high-quality, low-cost, and high-return drilling opportunities,” Allison continued. “In integrating Covey Park, we plan to focus on operating efficiency and having a combined drilling program that provides for substantial free cash flow to achieve our goal of reducing our leverage."

Upon closing of the deal, expected on or before 31 July, the new firm’s management team will be led by Allison but will include representation from both management teams. John Jacobi, Covey Park chief executive officer, will join the company’s board.

The deal includes the assumption of Covey Park's outstanding debt and the retirement of Covey Park's existing preferred units. Covey Park's equity owners will receive $700 million in cash, $210 million of a newly issued perpetual convertible preferred stock, and 28,833,000 shares of newly issued Comstock common stock at an agreed upon price of $6/share.

Comstock Resources to Buy Covey Park, Triple Haynesville-Bossier Position

10 June 2019

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