Energy Prospectus

Comstock Resources, Inc. (NYSE: CRK) today reported financial and operating results for the quarter ended June 30, 2021.

Highlights of 2021's Second Quarter

Adjusted net income to common stockholders was $55 million for the quarter or $0.22 per diluted share. < Compares to my forecast of $67.9 million, net of $4.3 million dividends on their preferred stock.

Production averaged 1,387 MMcfe per day, comprised of 98% natural gas, and was 8% higher than the first quarter of 2021 and 6% higher than the second quarter of 2020. < Compares to my forecast of 1,341 MMcfe per day.

Average realized price, including hedging, was $2.57 per Mcfe compared to $1.96 per Mcfe in 2020's second quarter. < Compares to my forecast gas price of $2.75 and oil price of $54.00.

Revenues, including realized hedging losses, were $325 million, 40% higher than 2020's second quarter. < Compares to my revenue forecast of $347.5 million.

Adjusted EBITDAX was $251 million, 55% higher than 2020's second quarter.

Operating cash flow (excluding working capital changes) was $196 million or $0.71 per diluted share. < Compares to my forecast of $214.1 million operating cash flow.

Second quarter capital spending was $172 million, including $8 million for leasing activities.

Generated free cash flow of $20 million, bringing free cash flow for the first six months of 2021 to $53 million.

Refinanced 9.75% notes with new 8.5 year 5.875% senior notes, reducing annual interest payments by $28 million and extending senior note maturities to 7.6 years from 6.3 years. Combined with the March 2021 refinancing transaction, future annual interest payments have now been reduced by $48 million.
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Not quite as good as I forecast, but definitely good enough to justify a much higher share price than $6.00 as Comstock is on pace to generate over $3.50 operating cash flow per share this year. Most of their "Bad Hedges" expire at year-end. The miss on Net Income was all because of about a 20 cent/mcfe gas price. That's going be fixed this winter.

They are saying on call FCF for 2021 is only 200 m. They did about 50 m 1st half

Im disappointed with the crap hedges, they locked in slightly better than break even. Debt is higher from year end levels and equity is down from year end with record rates. Equity has 300 m plus from "goodwill"

Just remember that hedging programs are designed to make sure upstream companies have a certain level of revenues they can count on. Comstock's hedges paid them $134.5 million in cash during 2020 that helped the Company survive the pandemic. Yes, they suck this year but the Company is still going to generate FCF this year and be set up for much higher FCF in 2022.

Stifel's take

Comstock Resources, Inc. (CRK, $5.94, Buy; Target $8.10)
Comstock delivers solid quarter and reaffirms its commitment to debt reduction - Derrick Whitfield
We view this release as slightly positive. The positives include: i) an equivalent and gas production beat (2.5% and 2.4% above consensus, respectively), ii) an adjusted EBITDA beat (4.6% above consensus) on higher production and lower than expected unit costs (5.9% below Stifel) and iii) well performance is stronger than expected as production guidance was reiterated on less wells to sales. The negatives include: i) higher than expected capex (11.3% above consensus) and ii) increased full year 2021 capex guidance (1.3% above consensus). We caution investors to note management was messaging an upwards pressure on capex in advance of earnings. Additionally, ~42% of the capex increase is associated with the leasing program, which we would argue is the most accretive capital the company will spend. Net-net, Comstock delivered a strong quarter and management remains focused on return of capital (debt reduction).

I have updated my forecast/valuation model for Comstock and posted it to the EPG website. I urge all of you to listen to the replay of their Q2 conference call while you are looking at the slides that they speak from. The Q&A with several analysts on the call shows me that the Wall Street Gang is gaining interest in Comstock.

> Comstock is going to generate a significant increase in operating cash flow in Q3 and Q4 and a BIG INCREASE in Q1 2022 when most of their "Bad Hedges" are gone. I expect them to use more collars with high ceilings to hedge more gas in 2022 and 2023.
> Their D&C program was front end loaded, so they will have a lot of high rate wells jacking up production in 2H 2021.
> They have lots of undedicated gas that can take advantage of marketing "opportunities" this coming winter as I expect some regions to see spot prices over $10/mcf if we have a cold winter.
> The Haynesville has access to some very good gas markets, including the Gulf Coast LNG export market where I see a "Bidding War" already starting to materialize for gas supply.
> The Company has made improvement in the balance sheet and they should be able to pay off another $500 million of debt over the next three quarters.
> My valuation of $17.50 is just 4X annualized operating cash flow for 2021+2022.

My rough estimate of where Comstock's net asset value based on just their P1 reserves discounted at 10% will be at year-end is approximately $12/share. SEC rules for calculating year-end P1 reserves are very conservative. Comstock has several decades of low-risk / high-return development drilling inventory.

Vincent Lovaglio from Mizuho Securities maintained a Buy rating on Comstock Resources, with a price target of $10.00.