The deal by Comstock Resources Inc. (NYSE: CRK) to swap out 88.6 million shares for Jerry Jones’ Bakken oil production is being viewed positively by analysts and investors as shares rose after the announcement.
Analysts from Seaport Global and Coker Palmer said the deal, which calls for Jerry Jones, owner of the Dallas Cowboys Football Club Ltd. to own 84% is a step in the right direction for Comstock Resources and brings about significant upside as shares of the stock nearly doubled the day after the deal was announced.
“We’re convinced that getting married to the owner of the Dallas Cowboys (Jones now has 84% of the equity) was actually an excellent path to go down,” said Seaport Global in a research note.
The deal, announced on April 26, is valued at $620 million with shares of Comstock Resources being valued at $7 per share. The oil and gas properties being acquired by Comstock are located in North Dakota's Bakken shale basin and are 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 assets that Comstock Resources is acquiring from Jones are oily, non-operated Bakken properties, generating about $200 million in cash flow, David Beard, CFA and analyst for Coker Palmer Institutional, told Hart Energy.
“We feel this acquisition sets the company up to emerge as a lower levered, higher growth, Haynesville focused exploration and production company with substantial opportunity to make acquisitions in the Haynesville over time,” he said. “With this acquisition, Comstock Resources seems to have taken a bold move by acquiring an asset which generates substantial cash flow.”
For over a year, Comstock Resources had been attempting to complete the restructuring of their balance sheet. The most recent plan was to sell assets and give bondholders a combination of cash and stock.
“However, as is often the case, a deal such as this, which looks good on paper, is often hard to get enough bondholder votes to pass,” Beard said.
The acquisition of the assets is a good move because it puts the company in a better position to refinance their balance sheet and spend more money drilling and acquiring gas assets in the Haynesville. The company has enough cash flow and reserves to easily refinance about $1.1 billion in debt.
The combined company should have lower leverage and enough reserves and pro forma cash flows to increase their revolving credit facility and possibly refinance both senior and junior bonds,” he said.
Comstock Resources appears to be paying around three times cash flow for the asset, which is an “inexpensive price and accretive,” Beard wrote in a research note.
“The implications are that Comstock Resources should be able to add drilling rigs in the gassy core Haynesville play and possibly do additional acquisitions in the basin, which is ‘log-jammed’ relatively to asset sales and acquisitions, and eventually perhaps sell the entire company,” he wrote.
Comstock Resources could emerge in the future as the “consolidator” in the Haynesville, Beard wrote.
“If we step back and think big, we could see where Comstock Resources breaks the financial logjam in the Haynesville by acquiring several private operators and/or packages of land for sale,” he wrote. “They might grow production by two to three times and perhaps sell to a utility or LNG exporter.”
This deal could prove to mean that as the company’s 2019 pro forma EBITDA reaches $450 million, Comstock Resources’ leverage should be around 2.4 times, which is “more normal and in line” with its peers, Beard said.
Before the deal was finalized, with net/debt EBITDA nearing six times in 2018, “things were starting to look dire for the company despite an extremely attractive 68,000 net acre footprint in the Haynesville and operational momentum starting to build,” wrote Seaport Global in a note.
“What Jones brings to the table is some much-needed cash flow; his Bakken production will more than double Comstock Resources’ operating cash flow and allow for the company to ramp back up its Haynesville activity,” the note said.
Now the company is moving from a three-rig program to a five-rig program by year end 2018, which will significantly increase Comstock Resources’ pace of production growth while simultaneously pushing leverage lower—we now see net debt/EBITDA exiting 2019 at three times.”
After the deal was announced, Comstock Resources received “multiple incoming calls from private Haynesville companies looking to discuss such potential—these operators were eager to explore being part of an operation run by CRK/Jones,” Seaport Global wrote.
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