Comstock Pumps Up Production

Not to be outdone by large independents such as Anadarko Petroleum (NYSE: APC  ) and Chesapeake Energy (NYSE: CHK  ) , several smaller exploration-and-production companies have reported eye-popping production numbers this quarter. With 32% growth over last year's second quarter, Comstock  Resources (NYSE: CRK  ) is no exception. As a result of an increase in production, Comstock's net income rose from $15.6 million in Q2 2006 to $18.2 million this quarter.

When we talk about Comstock, we're really talking about two companies. Bois d'Arc (NYSE: BDE  ) is the company's offshore subsidiary. (Offshore as in the Gulf of Mexico continental shelf, not a Bermuda tax haven.) This will likely soon change, however -- Bois d'Arc has announced its intention to put itself up for sale. This action comes just a few years after Bois became a standalone entity. As part of the sale process, Bois re-estimated its proved reserves and found them to be 17% higher than just five months prior. If this figure is reasonably accurate, it looks as though management is doing the right thing by seeking strategic alternatives. Mr. Market has neglected this fast-growing company for too long.

Excluding its subsidiary, Comstock drills solely on land, primarily in Texas and Louisiana. It's done well this year, boosting production by 18% overall, and by 34% in its core operating area through the first half of the year. That's come largely through the drill bit, thanks to an 88% success rate.

Bois d'Arc's offshore results have provided both bigger gains and bigger pains. Production was up 47% for the quarter, but exploration expense also ran high because of a lot of dry holes. Not all costs are out of control, though. Per-foot lease operating expenses (LOEs) have actually fallen since last year, thanks to a post-Katrina easing of well completion costs.

Looking at the future of Comstock as an onshore pure-play, the most critical factor is its leverage to the Cotton Valley in Louisiana. Forest Oil (NYSE: FST  ) has had some promising results from its first horizontal well in the region. So has Devon Energy (NYSE: DVN  ) . Devon has even estimated that reserves may be more than five times larger for every well that's drilled horizontally rather than vertically. Devon has encouraged Comstock to adopt this technique, and the two firms are partnering on some joint acreage.

If these Cotton Valley wells end up flowing more gas in absolute terms, rather than just front-loading the same quantity, then the higher cost of directional drilling will be well worth it, and Comstock may be sitting on some very prime real estate.


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Fool contributor Toby Shute doesn't own any land in East Texas or shares in any company mentioned. Chesapeake Energy is a Motley Fool Inside Value recommendation. The Motley Fool has a prime disclosure policy.


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