We are maintaining a long-term Neutral rating on Comstock Resources (CRK), owing to its array of low-risk development drilling opportunities and strong balance sheet, partially offset by weak macro conditions and a challenging operating environment.
Frisco, Texas-based Comstock Resources, Inc. is an independent oil and gas exploration and production company engaged in 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.
Comstock posted better-than-expected second quarter 2011 results with a narrower loss of 4 cents as against the Zacks Consensus Estimate loss of 8 cents and prior-year loss of 12 cents. Quarterly revenue of $112.5 million surpassed the Zacks Consensus Estimate of $100.0 million and improved 24.0% from $90.7 million in the prior-year quarter, aided by strong oil and gas sales.
Comstock exhibits strong acreage position in the prolific Haynesville Shale play (79,000 net acres with a resource potential of 4.4 trillion cubic feet equivalent) that provides attractive reserve-add and production growth prospects. More than 65% of the total 2011 drilling program has been earmarked for East Texas and North Louisiana, of which the major portion will go toward the development of the Haynesville play.
As of year-end 2010, Comstock had 1,050.9 billion cubic feet equivalent (Bcfe) in proved reserves –– 45% above the 2009 level –– of which approximately 98% was natural gas and 50% was developed. Production totaled 73,262 million cubic feet equivalent (MMcfe) during 2010, comprising 94% gas and 6% crude oil.
However, our optimism is dampened by the Comstock’s susceptibility to volatile oil and gas fundamentals. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
Comstock’s high natural gas exposure makes it sensitive to gas price fluctuations as compared to its more-diversified independent players with a balanced oil/gas production profile. The company, which derives more than 90% 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.
We believe that a significant portion of Comstock’s production growth in the last few years has come from asset acquisitions, exposing it to acquisition-related risks. Hence, any failure on the part of the company to complete accretive transactions in the future, will likely thwart its growth rate.
Hence, we expect Comstock to perform in line with its peers Apache Corporation (APA) and Chesapeake Energy Corporation (CHK).
