The US natural gas production reached a new record in 2019 at 92.1bcfd despite low prices for the commodity in practically every region of the country. Appalachia Basin, Permian Basin, and Haynesville remain the major contributors to the domestic output.
Due to pipeline constraints and high gathering, transportation, and processing cost, many gas operators are facing prohibitive operating expenditure levels and struggling to break-even with the current gas price environment.
Major gas producers specifically in Appalachia Basin, such as EQT, CNX, Range Resources, and Cabot O&G are planning to decrease their capital spending in 2020 in order to increase free cash flow. Chesapeake Energy (Chesapeake) was one of the pioneers in Louisiana, developing Haynesville shale since 2008, but the company has recently tried to realign its strategy focusing more on oil regions such as Power River Basin and Eagle Ford and moving away from natural gas areas. In contrast, Comstock places a significant value on acquiring Chesapeake’s acreage in Haynesville given that new wells are close in proximity to Comstock’s existing acreage. The acquisition will give Comstock a major market share of Haynesville’s production.
Comstock’s position in Haynesville is currently evaluated at approximately $4 billion when discounted at 10%. In June 2019, Comstock acquired Covey Park for $2.2 billion, which added 250,000 acres and approximately 1,200 drilling locations to the company’s portfolio. If Comstock acquires Chesapeake acreage in Haynesville, the deal would add an additional 301,000 acres for a total of 675,000 acres, of which 34.5% will be undeveloped acreage. The acquisition of Chesapeake’s existing production would also help increase Comstock natural gas production up to 2bcfd in 2020.
Over the past few years, Comstock has been focusing its efforts on lowering operating cost. A key driver in improving the cash margins is the company’s midstream infrastructure advantages. In 2019, Comstock is averaging an operating cost of $0.67/mcf, which is half of Chesapeake’s operating cost of $1.32/mcf. Comstock has secured an agreement with Enterprise Products Partners who plan to expand their Haynesville Acadian Pipeline, which will help to market Comstock’s gas production to Gillis Hub. If Comstock manages to integrate Chesapeake’s assets with reduced operating cost, the combined NPV will significantly improve to approximately $5.8 billion. Comstock’s strategy is to acquire Chesapeake during the downturn cycle and maximise cost efficiencies through operational synergies.