Natural gas producer Comstock Resources Inc. announced Monday that it agreed to purchase Denham Capital-backed Covey Park for $2.2 billion, making it the leader in the Haynesville Shale, and three Texas law firms played a part.
Covey Park’s equity owners will receive $700 million in cash, $210 million of a newly issued perpetual convertible preferred stock and 28.83 million shares of newly issued Comstock common stock at $6 per share.
At closing, Comstock will assume Covey Park’s $625 million in 7.5% senior notes, retire amounts outstanding under Covey Park’s credit facility and redeem all outstanding previously issued Covey Park preferred units.
Dallas Cowboys owner/billionaire Jerry Jones, who invested in Comstock last year, will sink another $475 million into the company in exchange for 50 million newly issued Comstock shares worth $300 million and newly issued shares of perpetual convertible preferred stock worth $175 million. That brings his investment in the company to $1.1 billion and his stake to 75%.
Frisco-based Comstock tapped longtime counsel Locke Lord for outside legal advice while Vinson & Elkins assisted Dallas-based Covey Park.
Locke Lord partners Jack Jacobsen of Dallas and Michael Blankenship of Houston led the deal team, which included Phil Bush, Paul Nason, Jason Schumacher, Jerry Higdon, Van Jolas, Will Becker, Ben Smolij, Matt McKenna, Katy Skattum, AJ Davitt, Stephanie McDermott, Enrique Santiago and Henry Benton.
Other Locke Lord lawyers who pitched in were Mark Backofen, Sean Kilian, Kelsey French, Emily Self and Stefano Wach.
Vinson & Elkins partners Doug McWilliams and Shamus Crosby and senior associate Robert Hughes in Houston led their group with assistance from associates Kathryn Hastings, Maggie Webber and Farah Chranya.
V&E’s specialists included partner Bryan Loocke and associate Cesar Leyva on energy transactions/projects; partner David D’Alessandro and senior associate Missy Spohn on executive compensation/benefits; partner Sean Becker and senior associate Christie Alcalá on labor/employment; partner John Lynch and associate Miron Klimkowski on tax; and senior associate Matt Dobbins on environmental.
Gibson, Dunn & Crutcher assisted Jerry Jones, including Dallas and Houston partner Doug Rayburn and Dallas partner Jonathan Whalen and associate Eric Pacifici. Houston partner James Chenoweth advised on the tax aspects of the deal.
The firm aided Jones last year when he swapped North Dakota oil and gas properties out of his companies Arkoma Drilling and Williston Drilling for $620 million in Comstock stock.
The financial advisors included Wells Fargo Securities and BMO Capital Markets for Comstock and BofA Merrill Lynch, Barclays and Goldman Sachs for Covey Park.
Dallas Cowboys’ general counsel is Jason Cohen.
The transaction has to clear regulators but is expected to close by July 31.
The deal will boost Comstock’s net production to more than 1.1 billion cubic feet equivalent per day and give it 2,000 net drilling locations across 293,000 net acres in the Haynesville, making it the leader in the east Texas and northern Louisiana basin. The deal also includes 500 miles of gas gathering infrastructure.
According to Drillinginfo, Covey Park is the 10th largest private exploration and production company in the U.S. based on gross production and is the third largest private operator in the Haynesville.
“With the acquisition of Covey Park, Comstock is making good on plans to be a driving force for consolidation in the Haynesville laid out last year when Jerry Jones took control of the company,” Drillinginfo M&A analyst Andrew Dittmar said in a note.
Drillinginfo said that like other resource plays, the Haynesville can benefit from fragmented operators consolidating and allowing more efficient development.
However, the firm said that exit opportunities have been hard to come by as publicly traded exploration and production companies have scaled back acquisitions, legacy gas producers like Chesapeake Energy have been shifting their focus toward oil and natural gas liquids and the market has been “slammed shut for E&P IPOs.”
Analysts at Tudor, Pickering, Holt said they continue to see the need for additional industry consolidation of the basin to gain meaningful scale. They noted Chesapeake, which produced around 760 million cubic feet equivalent per day in the Haynesville in the first quarter.
Simmons Energy analyst Kashy Harrison said time will tell if the deal represents a unique transaction – given Jerry Jones’ participation – or a trend of more consolidation to come.
Drillinginfo said even though core inventory in the Marcellus/Utica has a slight edge on the Haynesville in terms of breakeven costs, Comstock was sitting on good leasehold before the deal with break-evens of around $2.20 per thousand cubic feet equivalent for its top-tier acreage.
The firm added that the Haynesville stands to benefit long-term due to closer proximity to growing demand centers along the U.S. Gulf Coast, including liquefied natural gas export facilities and petrochemical companies.
“Comstock is positioning itself well to benefit from these trends and become a dominate player in the Haynesville,” the firm said.
Denham, Covey Park’s backer, will end up as Comstock’s largest shareholder after Jerry Jones with a 16% stake. The private equity firm has $9.7 billion in invested and committed capital.
Comstock’s board will be expanded to include Covey Park Co-CEO’s John Jacobi and Jordan Marye, a managing partner at Denham. The company will continue to be led by CEO M. Jay Allison but will include representation from Covey Park’s management team.
Comstock said the acquisition accelerates its progress toward its strategic and financial goals of sustainable free cash flow generation and reduced leverage. It said it will have the “best-in-class” natural gas unit cost structure with industry-leading an EBITDAX margin of 76% and EBITDAX of $935 million based on pro forma annualized first quarter results.
The company’s leverage ratio is expected to be 2.9 times once the deal closes but it’s targeting a reduction to under 2 times by 2021. It expects the deal to provide more than $25 million in annual corporate general and administrative savings.
Jones said the combination “is another step toward completing my vision to create an industry leading natural gas company.” Allison said the deal came after a year of evaluating several potential targets in the Haynesville.
In connection with the transaction, Comstock said it appointed BMO Capital Markets to arrange an amended and restated $2.5 billion bank credit facility with an initial borrowing base of $1.575 billion and a maturity of five years from closing.
The company plans to set the borrowing base at $1.5 billion at closing. The cash consideration payable in the transaction will be funded through Jones’ equity contribution and borrowings under its bank credit facility.
The $385 million in newly issued preferred stock will have a quarterly cash dividend of 10% per year and can be converted into shares of common stock at a conversion price of $4 per share one year from the issue date. The company will have the right to redeem the preferred stock at any time at face value plus accrued dividends.
Comstock has been expanding in the basin recently. Last year, it paid $34 million for natural gas properties in the area from bankrupt Enduro Resource Partners, which had been backed by Riverstone Holdings. Locke Lord advised Comstock on that transaction as well.