Comstock Resources Inc

Comstock Resources Inc.

SUMMARY

SUMMARY DATA

OVERVIEW

Frisco, TX-based Comstock Resources, Inc. is an independent oil and gas exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties. The company’s operations are concentrated primarily in two regions in the U.S.: East Texas/North Louisiana and South Texas.

In August 2008 Comstock sold its 49% owned subsidiary, Bois d’Arc Energy, to Louisiana-based energy firm Stone Energy Corp. for about $1.8 billion. Bois d’Arc conducted offshore operations in the outer continental shelf of the Gulf of Mexico (GoM). Following the sale, Comstock has emerged as a pure-play onshore operator.

As of year-end 2014, Comstock had 620.4 billion cubic feet equivalent (Bcfe) in proved reserves of which approximately 80% was natural gas and 68% was developed. Production totaled 65.6 Bcfe during 2014, comprising 61% gas.

REASONS TO SELL

 Similar to other independent exploration and production companies, the results of Comstock Resources are directly exposed to oil and gas prices. Continued weakness in commodity prices could significantly affect the company’s revenues, earnings and cash flows.

 Comstock’s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with a balanced oil/gas production profile. The company, which derives the bulk of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters on the back of a sharp drop in gas prices.

 Production growth, which depends on continued drilling and development of acreage, has become a challenge for the company as is evident from the declining volume trend. Comstock Resources faces several operational and execution issues, especially in East Texas. The company’s exposure to the geologically complex Tuscaloosa Marine Shale (TMS) play further raises concerns amid these operational issues.

 Following Comstock’s debt-financed acquisition of producing properties and acreage in the Delaware Basin, we remain worried about its increased leverage and reduction of liquidity.

 Being a relatively small player, Comstock lacks the financial resources of larger industry giants. As such, during periods of prolonged credit crunch, the company is forced to spend within its internal cash generation. This may prove detrimental to its growth plans.

RISKS

 Comstock’s move to the liquids-rich Eagle Ford shale assets in South Texas and the Wolfbone properties in West Texas is a major shift from dry natural gas development, bringing the much needed oil-linked growth. Success at these ventures could improve the company's financials.

 The overall picture for natural gas remains gloomy, with production setting monthly records on a regular basis, while the commodity’s demand has failed to keep pace with this rapid supply surge. This growing demand supply imbalance pressurizes price. However, a quicker-than-expected rebound in gas prices will adversely affect our recommendation.

 The company’s strong acreage position in the prolific Haynesville/Bossier Shale play (70,000 net acres with a resource potential of 6 trillion cubic feet equivalent) in the East Texas and North Louisiana region continues to provide attractive reserve and production growth prospects. An increase in gas prices should give the company an opportunity to exploit this inexpensive play.

RECENT NEWS

Fourth Quarter 2014 Results

On Feb 9, 2015, Comstock Resources reported fourth-quarter 2014 adjusted loss of $0.19 per share (excluding one-time items), which was narrower than the Zacks Consensus Estimate of a loss of $0.21. The bottom line also showed improvement from the year-ago quarter level of a loss of $0.31. Higher oil production and increased natural gas realizations supported the results.

Quarterly revenues increased 6.3% year over year to $112.6 million but lagged the Zacks Consensus Estimate of $128 million. A decline in volumes affected the result.

Volume Analysis

Comstock’s quarterly volume fell 3.3% year over year to 15.9 billion cubic feet equivalent (Bcfe), of which nearly 57% was natural gas. The downtrend reflects output shrinkage from its East Texas/North Louisiana operations that comprised a significant part of the total volume.

Production in the East Texas/North Louisiana operating region decreased 31% year over year to 7 Bcfe (about 98% gas). Output from South Texas and Other properties came in at approximately 8.4 Bcfe and 0.4 Bcfe, respectively.

Price Realizations

Average oil price realization (before hedging) was $70.54 per barrel (compared with $92.64 per barrel in the fourth quarter of 2013) and average natural gas realization was $3.55 per thousand cubic feet/Mcf (compared with $3.36 per Mcf in the year-earlier quarter).

Costs & Expenses

Gathering and transportation costs came in at $2.9 million, representing a decline of over 32% from the year-ago quarter. Meanwhile, lease operating cost of $15.4 million marked a 12.1% year-over-year rise. Total operating expenses increased over 48% from the fourth quarter of 2013 to $192.9 million.

Cash Flow & EBITDAX

Comstock generated operating cash flow from continuing operations of $85.7 million in the reported quarter against $64.1 million in the year-earlier quarter. Earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses (EBITDAX) from continuing operations was $100.5 million, up 27.4% year over year.

Capital Expenditure & Balance Sheet

In the reported quarter, Comstock spent $427.6 million on development drilling activities. As of Dec 31, 2014, the company had approximately $2.1 million in cash and cash equivalents and $1,070.5 million in long-term debt. The debt-to-capitalization ratio at the end of the said quarter was approximately 55.1%.

Comstock Resources Declares Production, Reserves for 2014

On Jan 22, 2015, Comstock Resources provided an update on its production and proved reserves for the year ended Dec 31, 2014.

Proved Reserves

The company added that as of Dec 31, 2014, it had proved oil and gas reserves of 620.4 billion cubic feet of natural gas equivalent (Bcfe), compared with 585 Bcfe last year. The reserves comprised 20.9 million barrels of crude oil and 495 billion cubic feet (bcf) of natural gas. Comstock Resources further stated that 68% of the proved reserves are developed and the company operates 96% of these.

4Q14 and Full-Year 2014 Production

For the fourth-quarter, production was 15.9 Bcfe or 173 million cubic feet equivalent (MMcfe) per day – 57% gas and 43% oil. It comprised 12,403 barrels of oil and 98 MMcf of natural gas.

Production for full year was 65.6 Bcfe or 180 MMcfe per day. It comprised of 39% oil, up from 20% last year. The company added that 2014 saw oil production growth of 86%, whereas natural gas production fell 29%.

Drilling Statistics

Comstock Resources stated that Eagle Ford drilling has added 5.9 million barrels of oil equivalent to its total proved reserves. On the other hand, reserves addition from Haynesville Shale and other regions totaled 74 Bcf of natural gas. The company further added that it intends to commence development activities in the Haynesville Shale in 2015.

The company said that it has spent $486.4 million on drilling activities and $94.9 million on acquisitions. Also, considering the current weak crude price, it plans to focus its 2015 spending on natural gas development projects in the Haynesville Shale play.

Comstock Announces '15 Budget, Oil-Linked Drilling to Reduce

On Dec 18, 2014, Comstock Resources announced its 2015 exploration and development budget and stated that it would suspend its drilling operations in Eagle Ford and Tuscaloosa Marine Shale (TMS) plays owing to low crude prices. Shares of Comstock plunged nearly 14% on the NYSE but improved about 3% in the after-hours trading session.

Comstock said that it plans to invest $307 million in drilling and completion operations in 2015.

In sync with the company’s decision to suspend oil-related drilling, the rig operating in TMS has already been released with plans of a further delay in operations until oil prices show improvement.

Comstock currently has 4 rigs operating in Eagle Ford, 2 of which will be released early next year. The remaining 2 would be moved to North Louisiana to commence operations in the natural gas acreage of Haynesville Shale. Comstock believes that advanced completion technology and longer laterals make natural gas drilling more profitable than oil amid the current price scenario of the commodities.

Comstock mentioned that it intends to drill 19 wells in 2015 – 14 of which will be in Haynesville/Bossier (expected investment of about $161 million) and the remaining in East Texas and South Texas Eagle Ford shale properties (expected investment of $34 million). A total of $49 million is expected to be invested toward the completion of 13 Eagle Ford wells that were drilled this year and about $63 million will be spent on related infrastructure. The company also plans to refrac 10 Haynesville producing wells in 2015.

Comstock anticipates the 2015 drilling program to generate oil production of 3.5–3.9 million barrels and natural gas output of 55–60 billion cubic feet. Further, the company projected that 2015 will see an increase in natural gas production after 3 years of decline.

VALUATION

Being in the exploration and production industry, Comstock’s profitability is set to take a beating in this weakly-priced oil and gas market. The company, which derives the bulk of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters due to the drop in gas prices. Moreover, operational issues continue to weigh on the company’s production levels.

These factors are reflected in our continued Underperform recommendation on shares of Comstock Resources.

Comstock Resources’ trailing 12-month P/CF multiple is 1.0, compared to the 10.4 average for the peer group and 15.1 for the S&P 500. The partnership’s trailing 12-month EV/EBITDA multiple is 5.0, compared to the industry average of 4.5.

Our $4.50 price objective reflects a multiple of 0.9X trailing twelve-month cash flow.

Key Indicators

Earnings Surprise and Estimate Revision History

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of CRK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.3%, Neutral - 76.8%, Underperform – 7.1%. Data is as of midnight on the business day immediately prior to this publication.

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