Comstock Resources Inc. (CRK) has signed a deal with Eagle Oil & Gas Co. and certain other parties to acquire acreage in Delaware Basin in West Texas. Comstock will have to shell out approximately $332.7 million for the acquisition.
The to-be purchased properties comprise nearly 68,000 gross (44,000 net) acres in the Southern Delaware Basin in Reeves County that has potential for development in the Bone Spring and Wolfcamp shales. The deal is largely of leaseholds but also includes a proved reserve of an estimated 23.2 million barrels of oil equivalent, with a daily production capacity of approximately 1,400 barrels of oil equivalent per day. The acreage also holds 29 producing wells and five wells that are in various stages of completion.
Comstock will fund the acquisition from borrowings under its bank credit facility. The transaction, pending customary approvals and conditions, is expected to close by the year-end.
Comstock also updated its capital budget forecast for 2012, reflecting the drilling activities in the newly purchased West Texas properties. The company intends to expend approximately $545.0 million on drilling and completion operations in 2012 (up from $396 million announced during its third-quarter results), with $170.0 million targeted toward new Delaware Basin assets in West Texas.
About $88.2 million has been allocated for the East Texas/North Louisiana operating region, while South Texas region will see a budget of $207.3 million.
Management believes that this deal will enhance Comstock’s portfolio of resource-rich assets that will enable it to derive more than 20% of 2012 production from crude oil. The company enjoys strong acreage position in the prolific Haynesville Shale play (79,000 net acres with a resource potential of 4.4 trillion cubic feet equivalent) that provides attractive reserve-add and production growth prospects.
However, Comstock’s high natural gas exposure makes it sensitive to gas price fluctuations as compared to its more-diversified independent players with a balanced oil/gas production profile. The company, which derives more than 90% of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters due to a sharp drop in gas prices.
As such, we expect Comstock to perform in line with its peers Apache Corporation (APA) and Chesapeake Energy Corporation (CHK) and maintain our Neutral recommendation on the shares. Comstock currently retains a Zacks #3 Rank (short-term Hold rating).
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