Comstock to use bank debt, convertible preferreds for Covey Park buy

By Devika Patel

Knoxville, Tenn., June 10 – Comstock Resources, Inc. plans to use a new bank credit facility, cash and newly issued common stock and convertible preferred stock to fund its planned acquisition of Covey Park Energy LLC in a cash and stock transaction valued at about $2.2 billion.

The company plans to assume Covey Park's existing $625 million 7½% senior notes, retire debt under Covey Park's credit facility and redeem all outstanding Covey Park preferred units.

The company has appointed BMO Capital Markets Corp. to arrange an amended and restated $2.5 billion five-year bank credit facility with an initial borrowing base of $1,575,000,000.

The company plans to set the borrowing base at $1.5 billion at closing.

“We will borrow $798 million under a new $1.5 billion bank credit facility to refinance their bank debt and redeem their preferred units and fund part of the purchase price,” chairman and chief executive officer Jay Allison said on the company’s conference call announcing the acquisition on Monday.

“The new five-year bank credit facility that we’re putting in place will have a borrowing base of $1,575,000,000 but we’ll elect to use $1.5 billion of that borrowing base,” president and chief financial officer Roland O. Burns said on the call.

“There’ll be $1,268,000,000 outstanding when the merger closes.

“Our liquidity will remain relatively similar to where we have our current level.

“We’ll still maintain $261 million of liquidity,” Burns said.

Covey Park's equity owners will receive $700 million in cash, $210 million of a newly issued perpetual convertible preferred stock and 28,833,000 shares of newly issued Comstock common stock at an issue price of $6.00 per share.

The total $385 million in convertible preferred stock will have a quarterly cash dividend of 10% per annum and can be converted into common shares after one year at $4.00 per share.

The company may redeem the preferreds at any time at par plus accrued dividends.

Principal stockholder Jerry Jones will invest an additional $475 million in cash for 50 million of newly issued Comstock common shares, to be issued at $6.00 per share, and $175 million of newly issued perpetual convertible preferred shares.

The additional equity investment brings Jerry Jones' total investment in Comstock to about $1.1 billion.

The cash consideration for the transaction will be funded through a combination of the equity contribution from Jerry Jones and borrowings under the company's bank credit facility.

“Part of the acquisition is being financed by this new perpetual convertible preferred stock, which is being issued to our two major stockholders,” Burns said.

“The rationale for the preferred was to provide a very balance sheet friendly acquisition-type financing.

“The preferred is being issued in two series.

“Series A is for $210 million and it will be held by Denim Capital and the other Covey Park equity holders and series B, for $175 million, will be held by Mr. Jones.

“Both have a 10% dividend, which we’ll pay in cash on a quarterly basis.

“Both of the series of preferred can be redeemed at any time by the company at face or liquidation value plus any unpaid accrued dividends.

“The preferreds are not convertible for the first year that they’re outstanding.

“If they’re outstanding after a year, the holders can elect to convert them into common stock at $4.00 per share,” Burns said.

The company’s plan is to reduce its leverage ratio to below 2x by 2021.

“The combined companies create industry-leading margins and free cash flow to drive leverage under 2x by 2021,” Allison said.

“We understand that we need to reduce our debt leverage. We hear you very loud and clear.

“We think we have all the tools to grow both our production and reduce our financial leverage.

“Our plan is to fully fund our drilling program with operating cash flow and target the capital budget that would generate free cash flow which can be used to reduce our debt.

“Our plan is to run Comstock to generate free cash flow and continue to position our balance sheet to reach our goal of reducing our debt leverage to under 2x by 2021,” Allison said.

“We’re targeting to generate a significant amount of free cash flow that’s available to pay down our debt,” Burns added.

“We think this plan that we have for 2020 will generate about $75 million to $100 million of free cash flow,” Burns said.

The company will have $2.1 billion of total debt after the merger and no bonds maturing until 2025.

“We will have $4.1 billion of total debt and equity capitalization when the merger closes,” Burns said.

“Our total debt will be $2.7 billion, which will be comprised of Covey’s 7½% senior notes and our 9½% senior notes and outstanding bank debt.

“We’ll have no bond maturities until 2025,” Burns said.

Settlement is expected by July 31.

Comstock is a Frisco, Tex., oil and natural gas exploration and production company.

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