Oil and natural gas firm Comstock Resources Inc. (CRK) posted better-than-expected third quarter 2011 results buoyed by volume growth plus lower lease operating and exploration costs.
The company reported adjusted loss per share of one cent in the quarter, narrower than the Zacks Consensus Estimate of a loss of 8 cents. Comstock’s performance also improved from the year ago loss of 10 cents.
The company generated revenue of $119.4 million in the quarter, failing to meet the Zacks Consensus Estimate of $121.0 million. However, comparing year over year, revenue improved 49.8% from $79.7 million, aided by strong oil and gas sales.
Production
Comstock’s oil and gas production shot up 52.3% year over year to 26.2 billion cubic feet equivalent (Bcfe), of which 95% was natural gas. The improvement was driven by strong contributions from the company’s Haynesville shale operations.
Natural gas production in the East Texas/North Louisiana operating region leaped 79.3% to 21.7 billion cubic feet (Bcf) while production from the South Texas properties dropped 20.6% from the year-earlier level to 2.7 Bcf.
Price Realizations Analysis
Average price realization per thousand cubic feet equivalent (Mcfe), before hedging, was $4.55 in the quarter, down 1.9% year over year. Average oil price realization was $87.55 per barrel (versus $64.97 per barrel in third quarter 2010) and average natural gas realization (before hedging) was $4.09 per Mcf (compared with $4.24 per Mcf in the year-earlier quarter).
Costs & Expenses
Gathering and transportation cost averaged 31 cents per Mcfe in the quarter, up 29.2% from the prior-year quarter, while total operating expenses increased 38.3% year over year to $107.3 million.
Cash Flow & EBITDAX
Comstock generated operating cash flow from continuing operations of $85.5 million, reflecting an increase of 80.8% from the year-earlier quarter. Quarterly EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses) increased 72.5% year over year to $94.2 million.
Balance Sheet & Capital Expenditure
As of September 30, 2011, Comstock had approximately $4.5 million in cash and cash equivalents and $746.8 million in long-term debt. Debt-to-capitalization was 41.3%.
During the quarter, Comstock incurred $130.3 million in exploration and development expenditure and $16.6 million on acquiring exploration fields.
Guidance
For 2012, Comstock expects to expend approximately $396.0 million on drilling and completion activities, with approximately 52% targeted toward the South Texas region. The company also aims to lower the number of natural gas rigs drilling in the Haynesville shale program to one from the current three.
Management stated that the 2012 drilling operations will concentrate on expanding the company’s oil production. In case of an improvement in natural gas prices, the company will likely boost its activity either in the Eagle Ford or Haynesville shales depending on the rate of return.
Our Recommendation
We believe that Frisco, Texas-based Comstock enjoys a large acreage position in the prolific Haynesville Shale play that renders a multi-year inventory of low-risk development drilling opportunities. Complemented with a robust balance sheet, the company remains well positioned to maintain a strong growth trajectory in the near to medium term.
However, the company’s highly gas-weighted reserves/production profile, along with its exposure to the inherently cyclical and volatile energy sector remains key areas of our concern. Additionally, Comstock faces strong competition from its peers such as Cabot Oil and Gas (COG) and Apache Corporation (APA). Hence, we see a limited upside from the current level and maintain our Neutral recommendation on the stock.
