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Haynesville producer looks to take advantage of pipeline extension project

Highlights

Acadian extension slated to enter service in Q4

Provides direct link to LNG, industrial demand

Throughout the remainder of 2021, Comstock Resources plans to grow production in the Haynesville, the dry gas play with the highest returns in the US, as the company looks to take advantage of regional prices supported by LNG and industrial demand.

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Comstock looks to take advantage of Enterprise Pipeline's Acadian Extension project, which is expected to enter service during the fourth quarter, the company reported during its Q1 earnings call May 5. Comstock entered into an agreement to be a major shipper on the extension for 1 Bcf/d. It redirects gas from Perryville hub to gain direct access to high-growth Gulf Coast demand, including industrial, refining, chemical, and LNG.

Comstock production for the quarter averaged 1.3 Bcf/d.

Volumes produced were down 8% from Q1 2020 but up 6% from Q4 2020.

During Q1, "6.4% of natural production was shut in ... due in part to the winter storm in February," said CFO Roland Burns. "It would have only been 4% shut-in during the quarter for maintenance issues if there had been no weather impacts."

"Our outlook for the remainder of 2021 provides for modest production growth," CEO Jay Allison added.

"We are currently running six operated rigs, but we plan to drop one of those rigs later in the month," Burns said. "We plan to turn about 55 net wells to sales in 2021. We are focused on generating free-cash-flow this year."

The internal rates of return in dry gas basins have improved in May as the average 12-month forward curve for Henry Hub settled at $2.92/MMBtu, up 18 cents over April. IRR's in Haynesville climbed three percentage points to 17%, according to S&P Global Platts Analytics. In comparison, Marcellus' and Utica's IRRs are 15%. Platts Analytics IRRs are based on a half-cycle, after-federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, as well as seismic and appraisal drilling.

Haynesville rig counts rose by five the week ended April 30, making it the largest week-on-week increase since March 2011, according to the latest Enverus data. The 10% week-on-week increase breaks the basin out of a flat line for rig counts, which have sat at 47 since early February. In total, rigs in the core acreage of the Haynesville play currently sit at 53, the highest level observed since November 2019.

Three rigs were added to the Arkansas/Louisiana portion of the basin, bringing the total to 34, while the remaining two were added in East Texas, bringing the total to 19. Although weekly rig increases will not immediately impact production levels, it does provide support for the basin's future growth, which is forecast to increase 1.4 Bcf/d from the April average to 14 Bcf/d by October.

To do that, Platts Analytics estimates rig counts need to be closer to 60 by the middle of the year. With breakeven in the basin at roughly $2.50/MMBtu, the current Henry Hub forward strip of $3.03/MMBtu for the balance of the year supports this level of growth. However, the main growth constraint for the basin remains to be the producer's capital-spending discipline.

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