Comstock’s latest attempt at a recapitalization hinges on investor confidence in the growth potential of its existing assets amidst a volatile market, with management expecting a decline in production from its newly pledged Bakken properties, said six buyside sources following the deal.

After a failed recap attempt earlier this year, the new structure offers the promise of improved cash flow and liquidity, which could help an USD 850m unsecured bond deal squeak through syndication, said three of the sources and three additional sources.

Whispers on the BofA Merrill Lynch-led eight-year non-call three notes have drifted to the 9.5% area from the initial 9%, sources said. The company held an investor call on Monday (16 July) and expects to wrap up the roadshow by the end of the week.

“If you don’t like natural gas, then this deal isn’t for you,” said one buysider. “But if you believe that the company has a prime location and the assets will continue to grow, regardless of management, then you should consider investing.”

The natural gas producer is offering the B/Caa1 rated unsecured notes alongside a new USD 700m revolving credit facility and a contribution agreement from Dallas Cowboys owner Jerry Jones for the company’s Bakken Shale Properties. The company is also running an all-cash tender offer for its existing notes.

Along with cash on hand, pre-closing net cash flow from the Bakken assets and USD 300m of drawings under the new USD 700m revolver, the notes are intended to effectively retire all existing debt.

Comstock’s USD 697m 10% first lien notes traded yesterday at 105, up from 102 before the 26 April recap announcement, according to MarketAxess. Its second lien convertible notes – USD 438m across two tranches – now trade in the par area compared to the mid-80s over the same time period.

The deal would boost Comstock’s pro forma liquidity to USD 456m, comprising USD 56m in cash and USD 400m of revolver availability, from USD 195m previously.

The company states PV-10 of USD 1.3bn for the Comstock assets and USD 435m for the Bakken assets, according to deal documents. Based on these figures, the USD 1.15bn in pro forma debt would be covered by about 1.5x.

Buying time

Comstock announced a partial recap package in April, consisting of a cash and stock tender offer, the unsecured notes, a revolver and a strategic partnership with Jones. The deal met with skepticism from second lien bondholders, partly because the tender offer for their bonds was tied to the price of the stock, which plummeted after the transaction was announced.

To appease investors, the company renegotiated terms with Jones, who is now contributing the Bakken assets in exchange for an 84.5% equity stake in Comstock, including 88.5m new shares at USD 7.00 per share.

“The new Jerry Jones deal is a game-changer,” said a buysider previously negative on the name.

However, the Bakken assets are declining—so the main benefit of their inclusion in the deal is to offer a cash flow cushion while the company ramps up production from its growth assets, sources said.

For 2018, production from the Bakken assets is expected to decline 2%-5% year-over-year, followed by a 25%-30% YoY decline in 2019, according to deal documents. But to balance that decline, operating production from the Haynesville assets is expected to grow by 35% YoY in 2018 and 50% YoY in 2019.

“Once they get [the Bakken asset], that’s the best it’s going to be and then it will decline from there,” said a buysider. “It’s a plus because the debt is backed by something, but the company literally said that the asset will decline and they have until the end of the cash flow from that asset to ramp up production in its Hayneville and Eagle Ford areas. That’s a lot of pressure.”

As of now, there is around 10 years of drilling inventory in the Haynesville and Eagle Ford assets and around 3 years net remaining in the Bakken asset, a source familiar with the company noted.

Comstock should generate around USD 43m (3.7% of total debt) of free cash flow in 2018, given annualized EBITDAX of USD 375m as of the first quarter, less USD 237.4m in capex and an assumed USD 95m in interest expense, sources estimated. That could drop to USD 29.6m in 2019, assuming flat EBITDAX from the Haynesville and Eagle Ford assets and decreased production from the Bakken asset.

For relative value, buysiders pointed to Haynesville operators Covey Park, Vine Oil & Gas and Indigo Natural Resources.

Comstock could price inside of Vine, three of the sources said. Vine’s unsecured bondholders sit below more secured debt than with Comstock, but the company has promising growth potential, one of the sources added.

Vine’s CCC+/Caa2 USD 530m 8.75% unsecured notes due 2023 last traded on 13 July at 92.75 yielding 10.732%, according to MarketAxess.

However, Comstock will need to offer a premium to Covey Park and Indigo, which are higher quality credits, buysiders noted. Moody’s calculates better PV-10 coverage at the two issuers – 1.6x and 1.3x respectively – compared to its pro forma PV-10 coverage analysis of Comstock at 1x.

Covey Park’s USD 625m 7.5% unsecured notes due 2025, rated B/B3, changed hands on 10 July at 102.25 to yield 6.941%, according to MarketAxess. Indigo’s B+/B3 USD 650m unsecured notes due 2026 traded yesterday at 97.5 yielding 7.31%.

Comstock did not respond to request for comment and BofA declined to comment.

2018 Debtwire