Comstock Resources (CRK) Update - June 29

[dan_s]

At the time of this post CRK is trading at $6.54
I have updated my forecast/valuation model for CRK and it will be posted to the EPG website this afternoon.

My valuation increases by $1 to $17. CRK has very little analysts coverage and I cannot find another analyst's report dated more recently than April 20. The outlook for U.S. natural gas prices have improved significantly since April. FWIW (not much) First Call's price target is $7.67 based on the average of 12 outdated price targets in the Reuters database.

CRK is a Haynesville "dry gas" company that produces very little NGLs or oil. Only 1.5% of their production is liquids.

Haynesville gas wells come on strong and have outstanding well level economics with natural gas over $3.00. The wells pay out in less than six months at today's gas prices. CRK has several hundred low-risk / high-return development drilling locations in the Haynesville. Spend 30 minutes going over the Company's most recent presentation on their website and I think you will agree with my valuation.

CRK should generate over $400 million of FCF from operations this year and they have no near-term debt problems. It deserves to trade at a higher multiple of operating cash flow. I am valuing it at just 4X 2021+2022 annualized operating CFPS.

[uberCOAT]

I agree,

As you stated, they are getting valued at a multiple less than two because of their debt load. However, they are on track to accomplish this which should drive the price higher.

I would like to see them pursue some M&A transaction that can help accelerate the de-leveraging process as well.

[yves@groupelm.ca]

On June 28, 2021, Comstock Resources, Inc. (the "Company") issued $965 million aggregate principal amount of its 5.875% senior notes due 2030 (the "Notes") in a private placement offering (the "Offering") pursuant to an Indenture, dated as of June 28, 2021 (the "Indenture"), by and among the Company, all of the subsidiaries of the Company and American Stock Transfer & Trust Company, LLC ("AST"), as trustee. All of the Company's subsidiaries agreed to unconditionally guarantee the Company's obligations under the Indenture and Notes.
The Notes will mature on January 15, 2030 and accrue interest at a rate of 5.875% per annum, payable semi-annually on January 15 and on July 15 of each year, commencing on January 15, 2022.

On June 29, 2021 (the "Redemption Date"), the Company completed the previously announced redemption of all $872.9 million outstanding aggregate principal amount of its 9.75% senior notes due 2026 (the "2026 Notes").

[Fraser921]

They got this done just in time (for Q2) to record another "one time loss" associated with the refinancing:

From Q1 Pursuant to the tender offer, Comstock repurchased $375.0 million principal amount of its 7.50% senior notes due
2025 and $777.1 million principal amount of its 9.75% senior notes due 2026 for and aggregate amount of $1.26 billion, which
included premiums paid over face value of $97.9 million, accrued interest of $12.5 million and $1.1 million of costs related to
the tender offer. As a result of the early retirement of the senior notes repurchased in the tender offer, the Company recognized
a $238.5 million loss on early retirement of debt in the three months ended March 31, 2021

I havent calculated the exact impact to Q2 but its about 80 % of what they did in q1 so 150 m ish impact.

It's front loading interest expense for lower interest expense in the future. I'm also perplexed how these companies talk about their bullish view of the future then hedge away 70 % of the benefit of higher prices.

[dan_s]

Hedging programs always look bad when commodity prices are moving higher, but the do provide some certainty of operating cash flow. A lot of the "Bad Hedges" expire on 12/31/2021.
My valuation does include the impact of their hedges.

[KGardiner]

Hi Dan,
Just reviewing Comstock's 2022 1Q hedges.

Am I understanding this correctly that their hedges will drop from 70% Q1 this year to 20% Q1 2022, and then 12% and 8% for the next two quarters?

Kevin

[Fraser921]

It's not the 70 % that bothers me, it's the price recd which is 2.50 when current prices are 3.75+
They gave away 70 % of the upside in 2021! Revenue could of been 50 % higher!

[Fraser921]

hedges can be found here..page 25

https://investors.comstockresources.com ... ecfe0179c0

[KGardiner]

Thanks Fraser,
That matches up with the hedges Dan has listed in the forecast model spreadsheet.

I agree they over hedged and gave a lot away.
However, at this point, perhaps that is what keeps the stock a bargain.
Once the hedges start coming off next year, I expect significant stock price upside.

Kevin