# To Our Stockholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/NYSE_CRK_2017/NYSE_CRK_2017.mmd` · pages 2-8_

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To Our Stockholders:

Over three years ago we redirected our focus away from growing our oil production back to our Haynesville/Bossier shale properties in North Louisiana. Our plan was to bring the enhanced completion procedures that had evolved in the oil shale plays and in the Northeast natural gas plays back to the Haynesville shale. We believed that longer lateral lengths and high intensity hydraulic fracturing techniques could more than double the production rates and ultimate recoveries of Haynesville shale wells. During the last three years we have drilled 50 Haynesville/Bossier wells, expanded our acreage footprint in the play and substantially increased our prospect inventory. The results achieved by our Haynesville drilling program have exceeded our expectations and we have continued to get stronger each year with higher production and cash flow generated by our Haynesville drilling program.

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Against a backdrop of a challenging industry we accomplished many of our goals in 2017. Our primary goal was to grow our EBITDAX or earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other noncash expenses to support our debt level. We made great progress toward this goal in 2017. It all starts with production. The Haynesville shale wells we drilled were up to the challenge as they drove a 46% growth in our natural gas production, pro forma for divestitures we made in 2016. We finished strong in the fourth quarter where natural gas production was up 90% over the fourth quarter of 2016. The higher natural gas production caused our 2017 sales to increase by 49% and our EBITDAX increased by 103% over 2016. Cash flow from operations for the year grew to $112 million from a deficit of $8 million in 2016.

Our Haynesville drilling program turned in consistently strong results as we enhanced our completion design and achieved 36% higher initial production rates. In 2017 we drilled 30 successful wells which had an average per well IP rate of 25 MMcf per day. The drilling program allowed us to grow our proved reserve base by 27% and achieve a very low finding cost of 54 cents per Mcfe.

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The joint venture we have with USG has allowed us to continue to grow our inventory of Haynesville and Bossier shale locations in 2017 which sit at over 800 today. The first two wells we put on line on some of the new acreage generated by the joint venture look to be outstanding wells with initial production rates of 27 MMcf per day.

We are very focused on improving our balance sheet and are working hard to position the Company to be able to refinance our expensive debt in 2018. Our plans are still to refinance all of our secured notes with a combination of proceeds from the sale of our Eagle Ford properties, a new credit facility, new bonds and some equity.

## 2017 Financial Results

We reported a net loss of \(111 million, or \)7.61 per share, for 2017 primarily due to the interest expense on our debt. Resumption of our drilling program in late 2016 allowed us to grow our natural gas production by 37% over 2016 (46% pro forma for properties sold in 2016). Our overall production on an Mcf equivalent basis increased by 28% from 2016. In 2017 our realized natural gas price increased by 25% to \(2.84 per Mcf and our oil price of \)49.02 per barrel increased by 28% from 2016. Oil and gas sales increased 45% to \(255 million and EBITDAX improved to \)184 million. Our costs were also lower in 2017. Our lifting costs were down 11% and our depreciation, depletion, and amortization ("DD&A") expense improved by 13%. The lower producing costs reflect our continued shift toward drilling our lower cost Haynesville shale properties versus our higher cost oil projects. Over the last three years, the growth in our Haynesville production caused our lifting costs to improve to \(0.77 per Mcfe as compared to \)1.48 per Mcfe in 2014. Our DD&A per Mcfe produced has come down dramatically to \(1.55 per Mcfe as compared to \)5.74 in 2014.

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## 2017 Drilling Program

The highlight of 2017 was the successful results from our Haynesville shale drilling program and the growth we had in proved oil and natural gas reserves. In 2017 we replaced our production by 387% and grew proved reserves by 27%. We added 292 Bcfe of new proved oil and natural gas reserves primarily related to our Haynesville shale properties. In addition, we experienced 41 Bcfe in upward revisions primarily related to improved prices and the performance of our Haynesville shale wells which were drilled in 2016 and 2017. Our drilling activities in 2017 allowed us to grow our proved oil and natural gas reserves from 916 Bcfe at the end of 2015 to 1.2 Tcfe at the end of 2017. We divested of 8 Bcfe in 2017 with the sale of some of our conventional natural gas properties. The 2017 proved reserves include 60.7 net proved undeveloped locations reflecting our increased drilling budget for 2018 and
future years. With an inventory of over 800 operated drilling locations, we still have many more to include in the future.

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We spent $178.8 million on development activities in 2017. The substantial growth in proved oil and natural gas reserves combined with our capital spending in 2017 resulted in achieved finding costs of approximately 54¢ per Mcfe in 2017. We drilled 30 wells (15.7 net) in 2017; 22 (14.4 net) of the wells were Haynesville shale wells and seven wells (1.3 net) were Bossier shale wells. Sixteen (12.8 net) of the wells drilled in 2017 have been completed and we completed six (3.0 net) Haynesville shale wells that were drilled in 2016. The average initial production rate of the wells we completed in 2017 was 25 MMcf per day.

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## Outlook for 2018

Our high return Haynesville shale assets continue to provide us the means to profitably grow our production and cash flow in 2018. Our enhanced completion design has transformed the Haynesville shale into one of North America's highest return natural gas basins and our acreage position gives us over 800 future drilling locations. We expect our 2018 natural gas production to grow 30% based on our planned drilling activity. Our
already low cost structure should continue to improve with further growth in our Haynesville shale production. In 2017 we were able to reduce our lifting costs per Mcfe by 31% and our DD&A per Mcfe has improved by 32% as compared to 2016. Our Balance sheet will continue to improve as we grow our cash flow and EBITDAX. The potential sale of our Eagle Ford shale assets combined with growth in EBITDAX should support our efforts to refinance our secured debt in 2018.

The directors and management of Comstock want to thank the stockholders for their continued support.

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M. Jay Allison
Chairman and Chief Executive Officer

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