Comstock Resources, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 Comstock Resources, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Jay Allison, Chairman and Chief Executive Officer. Please go ahead.

Jonathan, thanks for giving us that warm welcome. As most of you know, our home office is in Frisco, Texas, which is just north of Dallas. And today, if you looked at our windows, you would think that we're in snowy Alaska or reporting from the ski slopes in Colorado. In fact, Alaska is probably warmer than the recent sub-zero temperatures that we've seen here with the wind chill factors. Our offices have been closed for three days now, and only probably four of us are here today reporting from the office. You know, this Arctic freeze in Texas and the mid-continent creates challenging days in the world of natural gas. We've experienced idle frack fleets, idle drilling rigs due to the freeze-offs, as well as record demand just to keep the power on in our homes. In fact, millions are still without power as we speak. With 99% of our reserves being natural gas, which is the cleanest fossil fuel, and our world-class Hainesville-Boger gas fields being located in close proximity to the Gulf Coast LNG market and near major petrochemical plants and close to the industrial demand corridors, I can tell you that Comstock is well-positioned to help meet the existing and future needs for predictable and reliable energy in America. With 2020 being such a whipsaw year, I'm pleased that all 204 employees of Comstock who work for you have delivered solid results for the year and expect 2021 to be outstanding. Thank you for trusting us as we continue to seek to close out every day as a stronger company. With that, I'll start the welcoming part. Welcome to the Comstock Resources fourth 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 results presentation. There you'll find a presentation titled Fourth Quarter 2020 Results. I am Jay Allison, as Jonathan said earlier, Chief Executive Officer of Comstock. 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, is joining us on the phone. Please refer to slide two in our presentation. Note that our discussions today will include forward-looking statements within the meaning of securities laws. While we believe the expectations of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. If you'll turn over to slide three, we will recap some, not nearly all, but some of our 2020 accomplishments. The most significant accomplishment is our successful navigation of one of the most difficult years for our industry ever. Despite realizing $1.80 for our gas and $32.36 for our oil, we still were able to turn in profitable financial results, excluding unrealized hedging losses. You know, we completed an accretive $207 million equity offering in May, which is the first natural gas common equity offering since 2016. The offering allowed us to redeem our Series A preferred stock and save $21 million per year from the elimination of dividend payments. The 41.3 million shares we issued in the offering eliminated the need to deliver 52.5 million shares in the future for the conversion of the preferred. We also completed two successful senior notes offerings totaling $800 million to repay bank debt. This increased financial liquidity from $166 million to $930 million. We also reduced our usage of our bank credit facility from 88% to 36%. We had another year of strong results from our 2020 Hainesville Bossier Shell Drilling Program We drilled 55 or 46.1 net successful wells that we operate. We've turned 54 or 40.9 net operated wells to sales with an average IP rate of 25 million cubic feet per day. In 2020, we were able to lower our well cost by 16%. Our two-mile laterals, which Dan will talk about in a minute, averaged $1,026 for completed lateral footed 2020 versus 2020. 1,215 in the prior year. This allowed us to grow our approved reserve base by 3% at a low-end finding cost of 66 cents per MCFE. Despite having to use very low prices to determine our SEC approved reserves, they grew by 3% to 5.6 TCFE. Our reserve additions replaced 159% of our 2020 production. If you'll go over to slide four, we cover some of the highlights of the fourth quarter on slide four. We resumed completion activities in the third quarter and our natural gas production increased by 6% from the low third quarter level. The production in the quarter was still impacted by a high shut-in level of 6.6%. Now, this is mainly due to actions we took in October to shut in $300 million a day of our operated production in response to very low natural gas spot prices. We turned 22 or 16.4 net Hanesville wells to cells with an average lateral length of 8,899 feet the fourth quarter. We're well positioned for continued production growth in the first quarter of 2021 and throughout the remainder of the year of 2021. Our conservative operating plan in 2021 is focused on reducing our leverage ratio by both growing EBITDAX and reducing debt. We're targeting to generate over $200 million in free cash flow in 2021, The higher production and improvement to oil and gas prices allowed us to return to profitability in the fourth quarter. We reported oil and gas sales of $277 million. Our EBITDA came in at $211 million, and we generated $155 million, or 56 cents per share, in operating cash flow. Our adjusted net income for the quarter was $35 million, or 14 cents per share. Lastly, we ended the year with very strong financial liquidity of $930 million. So now I'll turn it over to Roland to cover our financial results in more detail. Roland?

All right. Thanks, Jay. On slide five, we summarize our reported financial results for the fourth quarter of 2020. Our production for the fourth quarter totaled 109 BCF of natural gas and 340,000 barrels of oil. This is 11% lower than production from the fourth quarter 2020. of 2019. Our oil and gas sales, including realized hedging gains, were $277 million, about 10% lower than 2019 due to the lower production level. Oil prices in the period averaged $44.47 per barrel, and our realized gas price averaged $2.40 per MCF, including hedging gains. So overall, our natural gas prices were up 4%, in the quarter, and our oil prices were down a little bit. Looking at the cost side, our lifting costs were down 11% in the quarter, and our depreciation, depletion, amortization, and G&A were both down 7% in the quarter. Our adjusted EBITDAX came in at $211 million, or 10% lower than 2019's fourth quarter. Our operating cash flow was $155 million, which was 18% lower than 2019. And we reported a net profit of $77.5 million for the fourth quarter, or 30 cents per share. The net income for the quarter did include an $80.2 million unrealized gain from the mark-to-market of our hedge positions, which was mainly driven by the change in natural gas prices since September 30th. Adjusted net income, excluding the unrealized hedging gain and certain other unusual items, was a profit of $34.6 million, or 14 cents per diluted share for the quarter. On slide six, we summarized the financial results for all of 2020. Our production for 2020 totaled 460 BCFE, which that includes 1.5 million barrels of oil. That's 49% higher than 2019's production. The increase mainly reflects the acquisition of Covey Park that we closed in July of 2019. Pro forma for the Covey Park acquisition, our production increased 2% year over year. Our oil and gas sales, including realized hedging gains, were $993 million, which was 21% higher than 2019. Oil prices, including hedging, averaged $40.88 in 2020, and our realized gas price, including hedging, averaged $2.07 per MCF, which was 12% lower than 2019. Adjusted EBITDAX for the year was $722 million, an 18% increase over 2019. Operating cash flow was $521 million, which was 11% higher than 2019. Overall, we did report a net loss of $83 million for the year or $0.39 per share, but that loss was entirely due to the mark-to-market unrealized loss on our hedge positions. Excluding unrealized hedging losses and other unusual items, we had a net profit of $49.6 million or $0.23 per diluted share for 2020. Despite a year of very low oil and gas prices, we were able to have a profitable year and we did not have any impairments or other write-downs of our assets, which is, I think, an unusual, you know, compared to many other companies in our industry. That says a lot about the quality of our assets and our low-cost structure. On slide seven, we cover our hedging program. And during 2020, we had 51% of our gas volumes hedged, which increased our realized gas price to the $2.07 for MCF I mentioned, as compared to the $1.80 that we actually received from selling our production. We also had 84% of our oil volumes hedged. That increased our realized oil price to the $40.88 per barrel versus the $32.30 per barrel we actually received. Overall, our realized hedging gains totaled $134.5 million in 2020. With the continued strength in natural gas prices, we've continued to add to our hedge book. Since we last reported earnings, we've hedged another 90 million cubic feet of our production for the second half of 2021 and another $100 million per day for the first half of 2022. For 2021, we have natural gas hedges covering almost $900 million a day of our gas production, which is around 65% of our expected 2021 production. The weighted average floor price of our 2021 gas hedge is $2.51. Going forward, we're primarily focused on adding to our 2022 hedge position. We continue to target having 55 to 70 percent of our production hedged for the upcoming 12 to 18-month period. Slide eight, we recap how much of our production was shut in during the last quarter of the fourth quarter. So, we had 6.6 percent of our natural gas production shut in in the fourth quarter. compared to the 7.2% we had in the third quarter. As we had talked about at our third quarter call, in early October, we voluntarily shut in 300 million a day of our production, really during the first two weeks of October, due to the very low spot market gas prices. The remaining of the shut-in in the fourth quarter is really due to offset frack activity. We also had 2% of our oil production curtailed or shut in in the quarter, That's a big decrease from how much was shut in earlier in the year. On slide nine, we detail our operating costs per MCFE produced. Our operating costs per MCFE averaged 56 cents in the fourth quarter as compared to the third quarter of 55 cents. Gathering costs were 26 cents, our taxes averaged 9 cents, and our field level cost averaged 21 cents. The fluctuation between our lifting costs and gathering costs is related to where the new wells were completed during the quarter, but we continue to expect those costs to remain within the guidance ranges that we have been providing. On slide 10, we detail our corporate overhead for MCFE. Our cash G&A costs in the quarter were $0.04 per MCFE, which is down from the third quarter, primarily due to year-end accrual adjustments. We do expect our cash G&A costs to return to a more normalized level of five to six cents going forward. On slide 11, we detailed the depreciation, depletion, and amortization per MCFE produced. Our DD&A averaged 94 cents in the fourth quarter, about one cent lower than the 95-cent rate we had in the third quarters. Slide 12 shows the balance sheet at the end of 2020. We currently have $500 million drawn on our $1.4 billion revolving credit facility, and we do expect to use our free cash flow that we are targeting to generate in 2021 to continue to pay that down. We have just over $2.25 billion of senior notes outstanding, comprised of $619 million of our 7.5% senior notes due in 2025. and $1.65 billion of our nine and three quarters senior notes due in 2026. With a quarter end cash position of $30 million, our current financial liquidity stands at $930 million. On slide 13, we summarize our fourth quarter and full year 2020 capital expenditures. We spent $169 million on development activities in the fourth quarter, of which 151 was spent on the operated Hainesville Shell properties. We also spent $6.5 million to lease new Hainesville acreage in the quarter. For the full year, we spent $484 million on all development activities, including $410 million, which was spent on our operated Hainesville Shell properties. We drilled 46.1 net operated horizontal Hainesville wells, and we turned 40.9 net operated horizontal Hainesville wells to sales in 2020. We also spent another $82 million in 2020 on non-operated wells and other development activity. And we spent a total of $7.9 million in 2020 on leasing new Hainesville acreage. So right now we're currently utilizing six operated rigs for our 2021 drilling program, but we do expect to drop one of our operated rigs later this year due to the faster drilling times that we're achieving as Dan's going to go over with his operating results. Based on our current operating plan for 2021, we expect to drill 51 net operated Hainesville wells and turn about 50.5 net operated wells to sales in 2021. At the end of 2021, we expect to have about 17.9 net ducts to carry into 2022. We estimate our total development capital expenditures will come in between $510 million and $550 million, and we're also budgeting to spend an additional $7 million to $10 million on the leasing program. We remain focused on generating significant free cash flow and will continue to target over $200 million of annual free cash flow generation as we plan our drilling activity. On slide 14, we summarize our oil and gas reserves at the end of 2020. We grew our approved reserves from 5.4 TCFE at the end of 2019 to 5.6 TCFE on an SEC basis at the end of 2020. Our 2020 drilling activity added 366 BCFE to our approved reserves, and we had 367 BCFE of positive performance-related provisions driven by the strong well performance of our Hainesville wells. Depositive reserve revisions more than offset negative price-related revisions, which were 86 BCFE, that related to using the low first-of-the-month 2020 average prices to determine reserves. Our all-in finding cost for 2020 came in at a very attractive 75 cents per MCFE, or 66 cents if you exclude the price-related revisions. Our reserves were 99 percent natural gas, and then 36 percent of our reserves were developed. Ninety-five percent of our approved reserves are in the Hainesville-Bossier, two percent are in the Bakken, and three percent are in other regions. The PV10 value of our approved reserves was $2 billion, using the SEC prices of $1.99 for gas and $39.57 for oil. And 67 percent of that PV 10 value is related to our developed reserves. Using a NYMEX reference price of $2.75 for gas and $50 for WTI oil, which is more reflective of our current price outlook, the PV10 value of our approved reserves increases to $4.4 billion. And the quantities of approved reserves with those prices would increase to 5.8 TCFE. using that $275 and $50 reference prices. In addition to those approved reserves, we have an additional 2.4 BCFE approved undeveloped reserves, which are not included in our approved reserves, as we're not currently expecting to drill those within the five-year window required by the SEC rules. We also have another 4.6 TCFE of 2P or probable reserves, and 6.8 TCFE of 3P or possible reserves for a total reserve base of 19.6 TCFE on a P3 basis. I'll now turn it over to Dan to cover the fourth quarter drilling results in more detail.