Comstock Resources, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Comstock Resources Incorporated Earnings Conference Call. At this time, all participants are now listening. After the speaker's presentation, there will be a question and answer session. To participate on that portion of the call, you will need to press star 1 on your telephone. And please be advised that today's conference is being recorded. If you require any further assistance, please press star and 0. Now it's my pleasure to turn the call to Jay Allison, Chairman and Chief Executive Officer. Please go ahead.

Thank you. And everyone that's on the call, welcome to the Comstock Resources second quarter 2020 financial and operating results conference call. You can view a slide presentation during or after this call by going to our website at www.comstockresources.com and downloading the quarterly result presentation. There you'll find a presentation titled, Second Quarter 2020 Results. I have Jay Allison, Chief Executive Officer of Comstock, and with me is Roland Burns, our President and Chief Financial Officer, Dan Harrison, our Chief Operating Officer, and Ron Mills, our VP of Finance and Investor Relations. If you'd go to slide two, it's a disclaimer. Please refer to slide two in our presentations and note that our discussions today will include forward-looking statements, within a meeting of securities laws. While we believe the expectations and such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. Before we hit slide three, I want to make some comments. First of all, it's a privilege to be able to talk to everybody. You know, when each of you on this call this morning have an inbound call to you from someone that has proven that they can create great wealth, you take that call and listen if you're wise. Two and a half years ago, Comstock Resources received that phone call from Jerry Jones and his family, which is why we as the Comstock management can report the quarterly results that we have today. You know, every train has a conductor, and ours is Jerry Jones. He believed in natural gas in America. He believed that the Hainesville-Bossier Shale in the United States was a Tier 1 natural gas plate. and he put his billion dollars into Comstock because the Hainesville Boat Show has close proximity to the Gulf of Mexico, geological predictability, availability of midstream pipelines, and proven historic well results. The second quarter of 2020 was the stress test quarter for the energy sector and revealed weaknesses that all of us don't ever look forward to seeing again. But the vision set for two and a half years ago is coming to fruition as shown in this quarterly report that Comstock has a best-in-class low-cost structure with high margins and a tier one area for natural gas in America. Without the Jones's commitment, we would not have had the second quarter results that we will give you because we would not have been able to do the transactions that we'll report to you that we executed on during the valley last quarter. We commit to you, the owners of this company, who own either equity or debt of Comstock, that we will continue to make wise decisions on how to spend your money. The second quarter of 2020 may go down as one of the most difficult 90 days in the history of oil and gas. Yet during that 90 days, we were laser focused on enhancing our financial strength. In May, we executed Comstock. on an underwritten equity offering that gave us the financial ability to redeem the $210 million Series A convertible preferred stock issued that we entered into as a part of the Covey Park acquisition. Then in June, we issued $500 million in a senior notes offering that we used to repay borrowings under our revolving credit facility that greatly improved our financial liquidity, as Roland will report on. We as a company, and that's all 207 of us, the Board of Directors, say thank you to the buyers of the equity and to the buyers of the bonds for trusting Comstock's management to continue to deliver industry-leading low-cost to oil economics. Your support during trying times in the oil and gas industry is greatly appreciated. We commit to you, our financial backers and equity stakeholders, that we will continue to focus on free cash flow generation over growth, focus on paying down our debt and strengthening our balance sheet and managing comp stock through the current low oil and natural gas price environment with our best-in-class cost structure, leading margins, and depth of drilling inventory, we're very well positioned for the future. And, in fact, we're eager to see what unfolds in the next 18 months because we see natural gas fundamentals strengthening during that window of time. Now, if you'll go to slide three. Operationally, the second quarter was a fairly quiet quarter for us as we released our completion crews in April and we reduced our operated drilling rigs down to four. As low natural gas prices have continued following the warm winter, we had planned for the lower activity in the quarter to prioritize free cash flow generation. We were very busy in the second quarter working to enhance our financial strength. In the current volatile and uncertain environment we're in with this COVID-19 pandemic, we were able to complete the first upstream common equity offering since 2018, larger than $50 million. The offering was also the first natural gas common equity offering since 2016. The offering allowed us to redeem our Series A convertible preferred stock at its face value of $210 million and avoid the potential dilution associated with this conversion. We followed that offering up with a $500 million senior notes offering to pay down borrowings on our bank credit facility. We reduced our outstanding bank borrowings from 89% of availability to 57%. By freeing up the bank credit facility, we increased our financial liquidity from $116 million at the end of the first quarter to $612 million currently. We further de-risk our business plan by increasing our 2021 hedge position by 182% during the second quarter, taking advantage of the improvements to natural gas futures in 2021. On the operations front, We are capturing reduced drilling and completion costs, which Dan Harrison will talk about momentarily. Our second quarter drilling and completion costs for lateral foot are down 26% from second quarter 2019 costs. We expect well costs to decline further in the second half of the year as Dan will go over. We deferred our completion activity in the quarter to better align new production with anticipated strong natural gas prices in late 2020 and 2021. Despite the very low oil and natural gas prices we had in the second quarter, we still generated $36 million in free cash flow, bringing our total free cash flow in 2020 to date to $51 million. The low oil and gas prices did limit the profits we generated in the quarter, Our oil and gas lease sales, including hedges, were $233 million. That's 79% higher than sales in the second quarter of 2019. Our adjusted EBITDAX came in at $162 million, which was 74% higher than 2019. Operating cash flow was $117 million, or 53 cents per share, and was 77% higher than 2019. We did panic. to have adjusted that income of $1.7 million or one penny per share for the quarter. If you go over to slide four, on slide four, we recap the equity and senior notes offerings we completed in the second quarter. In May, we issued 41,325,000 shares in an underwritten equity offering, which was priced at $5 per share. We used the proceeds from the offering along with $13 million of cash from the balance sheet to redeem the $210 million Series A convertible preferred stock at its face value. The Series A convertible preferred stock was convertible into 52.5 million shares beginning on July 16th of 2020. The offering was accretive to the company as we saved the company from 11,175,000 shares that would have been issued if the preferred stock converted. The redemption saved us $21 million per year by eliminating the 10% dividend we were paying. In April and May, we exchanged $5.6 billion of our 7.5% senior notes to 2025 with certain holders for 767 and 96 newly issued shares of common stock. The exchange was done at market values of both securities. Effectively, we issued the shares in the exchange at $7.30 per share. In June, we used proceeds from a $500 million senior notes offering to repay $441 million in borrowings under our revolving credit facility. The offering addressed our need to improve our financial liquidity. We used the bank credit facility heavily when we acquired Covey Park last July, and we had intended to term out a portion of the borrowings. The tight financial liquidity was a primary reason for our credit rating that was downgraded in March by two of the agencies. The completion of the successful notes offering led to an upgrade to our rating by both Moody's and S&P. I will now have Roland Barnes summarize our financial results for the quarter. Thank you, Roland.

All right. Thanks, Jay. On slide five, we combined Comstock and Covey Parks production from the Hainesville-Bossier since 2016. And in the second quarter of 2020, production from our Hainesville-Bossier wells was 1.2 billion cubic feet per day and was 9% higher than the 1.1 billion cubic feet per day that's Comstock and Covey Park produced in the second quarter of 2019. Low completion activity in the quarter caused production to decline slightly from the first quarter. We only had 5.7 net wells turned to sales during the second quarter. Given the continued weakness in gas prices since our last conference call, we've adjusted our completion schedule to allow us to continue to generate free cash flow despite low gas prices. While we still plan to complete a similar number of wells in As before, the timing of returning the wells to sales has moved to later in the year in order to align more of the new production to the winter months when we expect natural gas prices to improve. As a result, we expect our third quarter production to decline a little further. We did add back two frack crews at the beginning of the third quarter, and we plan to add a third frack crew later this year. We plan to turn 25 net wells to sales in the last six months of this year. Much of the new production for these wells will be on late this year, setting us up for a strong exit rate and for some growth in 2021, but not in time to show growth in the third quarter. Slide six recaps the production we had shut in for the quarter, principally for offset frac activity. Our non-operated oil production experienced substantial curtailments in the second quarter. We had 23 percent of our oil production curtailed or shut in in the second quarter, due to the very low oil prices. Four percent of our natural gas production was also shut in in the second quarter, as compared to five percent in the first quarter of this year. Given our completion activity was low in the quarter, we expected the shut-in percentage to be closer to two to three percent in the second quarter. But given the significant amount of offset operator completion activity, the shut-in activity, you know, came in at this four percent. On slide seven, we cover our hedging program. During the first six months of 2020, we had 49% of our gas volumes hedged, which increased our realized gas price to $1.96 per MCF from the $1.59 per MCF we received from selling our production. We also had 90% of our oil volumes hedged, and that increased our realized oil price to $42.59 per barrel versus the $31.72 per barrel that we actually received. Our realized hedge gains totaled $98.7 million in the first six months of this year. With the improvement in futures natural gas prices that we saw in the second quarter, we have added substantially to our hedge book. Since we last reported earnings, we've added 10 million cubic feet a day of natural gas swaps for the third quarter of this year and another 20 million of additional swaps for the fourth quarter. And then we've also added 25 million cubic feet of natural gas collars in the fourth quarter of this year. But most substantially, we added up 128 million cubic feet of natural gas collars in 2021, which protect us at an average floor price of $2.47, but give us exposure to the higher prices that we are expecting for next year. For the rest of 2020, we have 608 million cubic feet of our gas collars and about 2,892 barrels of our oil hedged. The weighted average floor price of our remaining 2020 gas hedges is $2.61 per MCF. For 2021, we now have hedges covering 668 million cubic feet of our expected 2021 gas production, and the weighted average floor protection price for those hedges is $2.51. Our 2021 gas hedged increases to $864 million cubic feet per day and an average floor price of $2.51 if certain swaptions are exercised in the fourth quarter of this year. We are targeting to have 55 to 70 percent of our anticipated 2021 production hedged. On slide eight, we summarize our financial results for the second quarter of this year. Our production for the second quarter totaled 119 BCFE, including 360,000 barrels of oil. This is 163 percent higher than our production in the second quarter of last year. Our oil and gas sales, including realized hedging gains, were $233 million, which was 79 percent higher than 2019. Oil prices in the quarter averaged $37.89 per barrel, and our gas prices averaged $1.88 per MCF, including our hedging. Our natural gas price realization was down 18%, offsetting some of the substantial production growth we had in the quarter. Adjusted EBITDAX came in at $162.1 million, which was 74% higher the second quarter of 2019 operating cash flow was 117.5 million which was 77 higher we did report a net loss of 60 million dollars for the quarter or 29 cents per share but that loss was mainly attributable to 65.6 million dollar unrealized loss from the mark to market of our hedge positions And that change in the value of our hedge positions was mostly driven by the higher future prices for natural gas that we've seen since the March 31st ballot sheet. Adjusted net income, excluding that mark-to-mark hedging loss and then certain other unusual items, was $1.7 billion, or one cent, per diluted share for the quarter. On slide nine, we summarize our financial results for the first half of this year. Production for the first six months was 244 BCFE, including 814,000 barrels of oil. That is 194% higher than production for the first half of 2019. Oil and gas sales, including real house hedging gains, were $504 million, or 92% higher than the same period in 2019. Oil prices averaged $42.59 per per barrel, and gas prices averaged $1.96 per NCF, including hedging gains. Overall, our natural gas price realization was down 23 percent in 2020 versus 2019. Adjusted EBITDAX came in at $364 million, or 91 percent higher than 2019, and operating cash flow was $273 million, which was 100 percent higher than 2019. We reported a net loss of $30 million for the first six months of 2020, or 15 cents per share. But again, that was mainly due to the unrealized hedging loss from the second quarter. So excluding that, the unrealized hedging loss from the mark-to-market and other unusual items, the net income for the first half of the year was $28 million, or 14 cents per share. On slide 10, we detail our operating costs for MCFE. Our operating costs averaged 54 cents in the second quarter as compared to the first quarter rate of 50 cents. Gathering costs were 22 cents for MCFE, production taxes averaged 5 cents, and field level costs were 27 cents. The taxes and the field level cost in the second quarter did include some prior period ad valorem and franchise tax adjustments that we recorded in the second quarter. On slide 11, we detail our corporate overhead costs for MCFE, and our cash G&A costs for MCFE averaged six cents in the second quarter, which is exactly unchanged from what we had in the first quarter. On slide 12, we show that our depreciation, depletion, and amortization per MCFE produced, that averaged 87 cents in the second quarter, which is 1 percent lower than the 88 cents that we had in the first quarter. On slide 13, we recap our second quarter and the first six months of 2020 capital expenditures. We spent $75 million on development activities in the second quarter, of which $61 million was related to our operated Hainesville Shale properties. For the first six months of this year, we spent $205 million, including the $165 million spent on our operated Hainesville Shale program. We drilled 26 or 20.1 net operated horizontal Hainesville wells so far this year. We also completed 15 or 9.6 net wells that we drilled in 2019. We spent about $40 million on non-operated or other activities so far this year. We generated operating cash flow of $273 million in the first six months of this year, resulting in free cash flow of $51 million after we paid the dividend on the preferred shares. We continue to maintain very responsive to the changing natural gas prices, and remain focused on generating significant free cash flow. After dropping our operating rig count to four rigs in April, which was down from six in January, we've added back a fifth operating rig this week, and we plan to add a sixth rig by the end of the year. We expect to spend approximately $400 to $440 million this year to drill 67 or 42.8 net Hainesville wells and to turn 79 or 42.3 net Hainesville wells to sales. At the end of this year, we expect to have 17 or 15.3 net drilled uncompleted wells to carry over into 2021, and we also think we'll be in various stages of drilling on six or 5.2 net operated wells at the end of the year. We remain focused on generating significant free cash flow as we look ahead in planning our capital expenditure activity, and we're targeting to have $150 million to $200 million of annual free cash flow as we set our drilling and completion activity for 2021. Slide 14 shows our balance sheet at the end of the second quarter. During the second quarter, as Jay said, we were very active in the capital markets issuing 41.3 million shares of common stock to redeem the Series A preferred stock and issuing $500 million of new unsecured notes to term out a portion of the borrowings outstanding under our credit facility. We also completed some debt for equity exchanges totaling 5.6 million in exchange for 767 and 96 newly issued common shares. We currently have $800 million drawn on our evolving credit facility, and we expect to pay it down further with the free cash flow we're generating for the rest of 2021 and what we'll generate in 20 – I mean, what we'll – the free cash flow we'll have for the rest of this year and then what we will generate in 2021. With a quarter-ending cash position of $12 million, our current liquidity now stands at $612 million. We have just under $2 billion of senior notes outstanding, comprised of $619 million of the 7.5% senior notes due in 2025, and then $1.35 billion of our 9.75% senior notes due in 2026. With no debt maturities until 2024 and no senior note maturities until 2025, our current leverage ratio remains below our covenant ratio four times, So we are very well positioned to continue to weather the current low oil and gas price environment. I'll now turn it over to Dan to cover our second quarter drilling results and more details. Okay.