Comstock Resources (CRK) Valuation Update - Aug 2

[dan_s]

At the time of this post CRK was trading at $15.99. TipRanks average price target is $16.44 that includes a lot of old analysts' reports that are clearly based on natural gas prices that are much lower than we have today.

I have updated my forecast/valuation model and my current valuation increases by $3 to $38/share.

Why is my valuation so high?

> CRK's Q2 results soundly beat my forecast and First Call's EPS and CFPS estimates for the quarter. My valuation multiple has been increased from 5.0 to 5.5 X annualized operating cash flow per share. That is still a low multiple for a company with a strong balance sheet and lots of running room.

> CRK provides detailed guidance that is usually conservative, so I have a HIGH level of confidence in my forecast model. I have been following and modeling Comstock for over ten years.

> CRK is now on pace to generate over $1.8 Billion of operating cash flow in 2022 that compares to $908 million 2021. < 2022 Free Cash Flow from Operations should exceed $775 million; that compares to their FCF goal of $500 million heading into the year.

> The Company is adding two more operated drilling rigs this quarter, which will take them up to 8.5 operated rigs (one rig will split time drilling some wells for another operator).

> They expect to complete 14 new HZ wells in Q3 and 19 new HZ wells in Q4. Most of the new wells will be long laterals that should be coming online at more than an average rate of 25 million cubic feet per day. < At $7 ngas these well pay out in less than 5 months!

> The Company's production should ramp up sharply in Q3 and Q4; from 1,364,391 mcfepd in Q2 to ~1,423,500 mcfepd in Q3 and ~1,575,500 mcfepd in Q4.

> Q1 2023 production s/b close to 1.7 Bcfepd and all of it should sell at more than $7.00/mcfe since all of the Swaps expire at year-end 2022. < That should push Comstock's FCF to over $500 million for just the first quarter! Keep in mind that was their full-year goal for 2022.

> CRK now has a ROCK SOLID balance sheet. By year-end they will have paid off all of the draws against their revolving credit facility.

> They announced on the conference call that they will start paying quarterly dividends later this year.

> VERY IMPORTANT TO MY VALUATION: CRK has a lot of "Running Room": over 2,000 low-risk HZ drilling locations in an area where they have direct access to deliver gas to all of the Louisiana LNG export facilities.

There were a lot of energy sector analysts on the Q2 conference call, so I expect several of them to update their price targets this week. The Wall Street Gang has been slow to accept the success that Comstock has achieved this year. Just remember that "The Gang" is like a herd of sheep. All it takes is one Alpha Sheep Dog to change their view of a company.

My updated forecast/valuation model for CRK will be posted to the EPG website late today.

[dan_s]

Note from Stifel

Comstock Resources, Inc. (CRK, $15.72, Buy; Target $22.00)
- Delivers solid Q222 results and remains best-positioned to capitalize on bullish LNG exports outlook - Derrick Whitfield
- We view this release as slightly positive. The positives include: i)
an adjusted EBITDAX beat (6.2% above consensus) driven by higher than expected
gas volumes (1.5% above consensus) and gas realizations (5.3% above Stifel), and
lower than expected cash costs (4.5% below Stifel), ii) achieving a 1.2x leverage ratio
after retiring $270mm in senior notes during the quarter, and iii) plans to initiative a
dividend in Q422, and iii) disclosure of an impressive Western Haynesville well (~57%
higher IP90/ft than Core LA well). The negatives include: i) D&C capex increased
by 5.6% (3.6% above consensus, assuming $20mm for leasing) for 2 additional rigs
to support higher production growth in 2023, and ii) lumpy Q322/Q422 production
(4.8% below/7.2% above consensus). Net-net, Comstock delivered a strong quarter,
is rapidly deleveraging, is poised to initiative a dividend next quarter, and remains the
best stock to express a bullish view on U.S. LNG exports.

MY TAKE: I do not view the addition of two more operated drilling rigs as a negative. Comstock is going to ramp up well completions into a market where their new high-rate gas wells payout in a few months. It is good business to take advantage of these incredible gas prices. Comstock has direct access to the Louisiana LNG export facilities. I expect that relationship to get some very high spot market gas prices this coming winter.