Comstock Resources, Inc.

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Comstock Resources, Inc.

5300 Town and Country Boulevard, Suite 500
Frisco, Texas 75244
U.S.A.
Telephone: (972) 668-8800
Fax: (972) 668-8812
Web site: http://www.comstockresources.com

Public Company
Incorporated: 1919 as Comstock Tunnel and Drainage Company
Employees: 48
Sales: $169.4 million (2000)
Stock Exchanges: New York
Ticker Symbol: CRK
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Comstock Resources, Inc. is a small independent energy company located in Frisco, Texas, involved in the acquisition, exploration, and development of oil and gas deposits. Comstock owns interests in some 500 producing wells, concentrated in three geographical areas: Southeast Texas, East Texas/North Louisiana, and the Gulf of Mexico. Management has opted to locate its wells close to existing means of transportation in order to improve profitability. Moreover, by narrowing its operations to specific areas, the company has enhanced its engineering expertise, leading to greater success in its drilling program. Because of these and other conservative practices, Comstock is one of the most cost-effective producers of oil and gas in the industry.

Company Origins in the Comstock Lode Discovery: 19th Century

Comstock Resources was originally named the Comstock Tunnel and Drainage Company, a Virginia City, Nevada, business that resulted from the famous Comstock Lode. The area first drew attention in 1859 when gold was discovered, leading to boomtowns such as Virginia City and other long-since-forgotten mining communities. Prospectors Pat McLaughlin and Peter O’Reilly were the first to find gold in an area called Six-Mile Canyon, but they were persuaded by Henry Comstock that they had been working part of his claim. This bold piece of deception ensured that Comstock’s name would be forever linked to the history of the U.S. West. While working these original gold deposits, miners were hindered by a blue mud that caked to their picks and shovels. Once assayed, the mud turned out to be high quality silver ore. What became known as the Comstock Lode was so rich in gold and silver that President Lincoln made Nevada a state, despite the area’s sparse population, in order to tap into the region’s immense wealth to help finance the Civil War. It was also instrumental in the growth of San Francisco, as well as the career of Samuel Clemens, better known by his pen name of Mark Twain. Efforts to work the Comstock Lode peaked in the mid-1870s, after which production fell off significantly. Although mining operations of the Comstock Tunnel and Drainage Company date back to 1863, it was not until 1919 that the business was officially incorporated in Delaware. By the 1980s, the mining operation was reduced to inactive gold and silver claims and the company’s other assets limited to some historic buildings, 25 income-producing office projects, and 1,800 acres of undeveloped real estate. Its stock was only sold on a regional exchange “by appointment only,” priced below $1. For 1986, the company generated less than $400,000 in revenues while posting a loss of $167,000.

In 1987, the Comstock Tunnel and Drainage Company was purchased by a group of Texas investors with plans to use the corporation in oil and gas exploration and production. The group included Miles Jay Allison, Comstock Resources’ current chairman, president, and chief executive officer. He became involved in oil and gas immediately upon the completion of his studies from Baylor University in 1981. In addition to an undergraduate degree in business administration, he earned a master’s degree in economics and a law degree from the school. He then spent six years as an oil and gas attorney for the Midland, Texas, firm of Lynch, Chappell, Allday and Alsup. In 1983, he cofounded Midwood Petroleum and gained experience acquiring and developing oil and gas properties. Before quitting the law firm he also became part of an investment group that in 1987 purchased the rights to Ewing Oil. Although better known as a fictional company in the long-running “Dallas” television series, Ewing Oil was actually founded in the mid-1970s by Dallas oilman Bobby Ewing.

Because of a slump in the oil and gas industry, Allison and other investors sought help in developing a revised business plan, turning to the real estate banking group of New York investment firm Donaldson, Lufkin & Jenrette (DLJ), where they worked with a vice-president named Timothy Bell. Deciding to search for an existing public company that controlled some valuable assets, they eventually settled on Comstock Tunnel and Drainage. In February 1987, Ewing purchased its first stake in the company, spending $1.7 million to acquire 1.2 million shares. In April, Bell left DLJ to become Ewing’s chief executive officer, with Allison serving as president, then in July the company increased its stake in Comstock by buying an additional 2.2 million shares with $2.7 million worth of oil and gas properties in west Texas and Oklahoma. The company was renamed Comstock Resources, its shares were listed on the NASDAQ, and its headquarters were moved to the Dallas area.

Along with three other Ewing nominations, Allison and Bell were named to Comstock’s seven-member board of directors, with Bell taking on the additional responsibilities as the company’s chief executive officer. Originally, the plan was for Comstock to more aggressively exploit the company’s mining and real estate assets. Its real estate was appraised and mining interests subjected to engineering studies as well as historical analysis by the University of Nevada, which indicated that a considerable amount of residual gold and silver was present in the company’s mining claims on the old Comstock Lode. Bell hoped to find buyers for some of the real estate as well as joint venture partners to develop other sites that Comstock owned. On the mining side, he expected to either lease claims to third parties or work the claims directly. To help fund its activities the company was able to arrange a $14 million loan with Union Bank, a branch of Bank of Toyko.

New Leadership: Miles Jay Allison, 1988

Bell and Comstock’s board of directors soon disagreed on the company’s direction, however, and by the end of the first full year of operation in 1988, Bell resigned as both an officer of the company and member of the board. Allison was named acting president and CEO, responsibilities that would become permanent. Under his leadership, Comstock changed its focus to the oil and gas industry with which he was more familiar. Gradually all of the Nevada assets were sold off, so that eventually all that remained of the company’s heritage was an old safe originally used to store silver mined from the Comstock Lode, which was now put on display in Comstock’s new corporate headquarters in Texas.

Comstock looked to buy oil and gas-producing properties with significant remaining potential at distressed prices (generally in the $10 million range) resulting from the severe slumps of the 1980s. Allison and his management team targeted private oil and gas companies which owned desirable properties that fell between the cracks, either too small to attract large companies or too large to attract the interest of small companies. Allison’s acquisition team, which featured both seasoned oilmen and finance people, followed a general script. “What we’ve got is a good broker chain,” Allison explained to the Dallas Business Journal in 1994. “Companies know that we’re serious buyers of oil and gas properties. When we evaluate a property, we make the first pass to see if we want to get serious, and then boom, boom, boom: It goes through the chain.” As a result of such fast action, Comstock was able to lock up sizable reserves before they hit the radar screens of larger competitors.

From 1988 to 1990, Comstock acquired a considerable number of undeveloped reserves, located primarily in the Texas panhandle field. Despite posting net profits of over $1 million on revenues of $7.4 million in 1989, the company lacked the capital to drill as aggressively as it would have preferred. As a result, a large portion of its properties were leased to third parties. To improve its financial position, Comstock staged a public offering of stock in 1990, netting $13.3 million. After paying off its bank debt, the company was still left with $3.5 million to make further acquisitions and launch a three-year program that called for the drilling of 400 wells. As these wells began producing, revenues were to be used in the drilling of new ones. Moreover, in 1990 Ewing Oil was liquidated and its shareholders received the privately held company’s 25 percent stake in Comstock.

During the early 1990s, Comstock was especially aggressive in pursuing acquisitions. In 1991, it acquired Tidemark Exploration in a cash and stock deal, which included interests in 190 Oklahoma and Arkansas wells. Also during that year, Comstock paid nearly $17.5 million to the Goodrich Oil Co. for 66 producing wells located in Louisiana, Texas, Oklahoma, and Arkansas. In 1992, the company acquired 120 producing wells in Oklahoma and Arkansas from Liberty Life Insurance Company. (During the course of that year, its stock also moved from the NASDAQ to the New York Stock Exchange.) Comstock was extremely active in 1993, completing several deals. Early in the year, it purchased a number of smaller properties located in Nebraska, south Louisiana, and along the Texas Gulf Coast. A more significant transaction occurred late in 1993 when Comstock acquired Stanford Offshore Energy, Inc. in a $6.2 million stock deal. Stanford owned interests in oil and gas wells located in offshore Louisiana, Texas, Mississippi, Oklahoma, and Kansas. Allison indicated to the press that the addition of the Stanford properties would likely double Comstock’s revenues the following year. Interests in some of Stanford’s properties were also held by Tierra Mineral Development, L.C., which Comstock purchased in a subsequent cash and stock deal. Other interests in Stanford held by MG Trade Finance Corp. were purchased in 1994. In that same year, Comstock acquired five gas wells located near the Texas Gulf Coast as well as oil and gas properties in the El Campo field in Texas and a gas processing plant located in the Texas Gulf Coast area. In addition to some smaller purchases in 1995, Comstock acquired 319 wells located in East Texas and North Louisiana from Sonat Exploration Company at a cost of $49.1 million.

Company Perspectives:

Our business strategy is to continue to build shareholder value by exploiting our existing reserve base, pursuing exploration and acquisition opportunities in our core operating regions, maintaining a low cost structure, and having substantial financial flexibility.

Acquisition of Black Stone Oil: 1996

Comstock’s investment in oil and gas properties resulted in significant gains in annual revenues, which grew from $2.7 million in 1991 to more than $22 million in 1995. The cost of expansion, however, held back profits, and, more importantly, Comstock’s drilling program was not as successful as management had hoped. The company was forced to take significant write-downs on reserves during the first half of the 1990s. Nevertheless, Allison and his team stayed the course and were able in early 1996 to complete one of the company’s most important acquisitions, the $103 million purchase of privately owned Black Stone Oil Co. Again, they were able to quickly spot an attractive target, which in the case of Black Stone boasted a newly discovered gas field in the Houston area, and make a preemptive bid before much larger competitors were able to act. In addition to adding gas-bearing fields capable of producing 100 million cubic feet of natural gas per day, Comstock also gained Black Stone properties that could produce nearly 6,000 barrels of oil per day. The company now owned an asset and reserve base that put it on a par with mid-cap-size independents. Black Stone also marked a turning point in Com-stock’s strategy, the company electing now to focus on growth through exploration and drilling rather than acquisitions. Moreover, Comstock began to narrow its focus to three primary geographical areas of activity. In 1996, it sold off a number of non-strategic oil and gas properties for $9 million. For the year, Comstock posted significant gains over the previous year, due mainly to Black Stone. Revenues grew by more than 200 percent, totaling almost $70 million, and net income exceeded $24 million.

Despite its publicly stated shift in emphasis to exploration, by the end of 1997 Comstock again grew significantly through acquisitions. This time it paid Bois d’Arc Resources and its partners $205 million in cash for offshore oil and gas interests. In addition to gaining a stake in 37 wells and eight Gulf of Mexico production facilities, Comstock also acquired interests in six properties that had not yet been drilled but had already been explored using 3-D seismic technology. Altogether engineers estimated that the Bois d’Arc deal added 14.7 million barrels of oil and 30.4 billion cubic feet of natural gas to Comstock’s reserves. In addition, the company entered into an exploration joint venture with the principals of Bois d’Arc that proved highly lucrative. Of the 39 wells drilled under this agreement in the next two years, 26 would prove successful.

Comstock posted more strong results in 1997, reporting $88.6 million in revenues and $21.7 million in net profits. Growth was now almost entirely the result of exploration efforts. Comstock’s only significant acquisition in 1998 was the purchase of some working interests in offshore Louisiana oil and gas properties. Despite a drop in oil and gas prices in 1998, Comstock continued to show modest growth for the year, reporting revenues of $93 million and net earnings of $17.2 million. A decrease in oil and natural gas production in 1999, although offset somewhat by a rebound in oil prices, resulted in a loss of revenue. Total sales for the year fell to $90.1 million, and the company posted a $4.7 million net loss. The stage was set, however, for a significant increase in oil and gas prices in 2000 that would lead to a record year for Comstock. Revenues grew by 88 percent, totaling $169.4 million, and net earnings of $38.9 million more than made up for the previous year’s shortfall.

Coming off a strong performance in 2000, Comstock was able to complete another major acquisition in 2001—the $93 million purchase of DevX Energy. The company picked up oil properties in East and South Texas, Kentucky, Oklahoma, and Kansas. More significantly, Comstock added to its natural gas reserves, which management believed was important because virtually every new power plant in the United States relied on natural gas to generate electricity. Although natural gas prices would weaken in 2001, prompting Comstock to cut back on its gas drilling program, the company was pleased with its long-term position and elected to simply wait for prices to improve. Price swings were a given in the industry, but Comstock had demonstrated an ability to operate in all conditions. Moreover, when rivals faltered, Comstock was ready and able to pick up additional properties at reasonable prices.

Principal Subsidiaries

Comstock Oil & Gas, Inc.; Comstock Offshore, LLC; DevXEnergy, Inc.

Principal Competitors

Apache Corporation; BP Amoco plc; Royal Dutch Petroleum Company.

Key Dates:

1859:: The Comstock Lode is discovered in Nevada.
1963:: The operations of The Comstock Tunnel and Drainage Company commence.
1919:: The company incorporates in Delaware.
1987:: Ewing Oil buys the company, changes its name to Comstock Resources, and moves the company’s headquarters to Texas.
1988:: M. Jay Allison becomes chief executive officer.
1996:: Black Stone Oil Co. is acquired.
1997:: Key assets from Bois d’Arc Resources are acquired.
2001:: DevX Energy Inc. is acquired.