Comstock collars

[sl6886]

Comstock has collars associated with some of their production in 2023. What does a collar do, what benefit does it confer and what are the intrinsic and out of pocket $ exchanges ?

I’m pretty sure I like collars better than swaps but I think your going to tell me the upside is capped for little remuneration

Thanks

[dan_s]

Most collars are "costless".
> The Company sells Calls that give the buyer the right to buy their production at a higher than current cost and
> the Company sells Puts for the same amount that give them the right to sell ("put to") their production at a fixed price.

For Q1 2023 Comstock has collars in place for 750,000 mcf per day (~47% of estimated ngas production) that have floors at $2.97 and ceiling at $9.56. None of Comstock's oil is hedged. Their Q2 2023 ngas collars (~40% of estimated production) have floors at $3.00 and ceilings at $10.17.

So, if the ngas prices for each month in Q1 are between the collars floor and the ceiling, Comstock's realized ngas prices in Q1 will not be impacted by their hedges. Since they report natural gas and NGLs on a combined basis, their realized gas price should be slightly higher than the average HH gas price during the quarter.

In Q1 2022 Comstock generated $292.2 million of Operating Cash Flow with a realized ngas price of $3.03/mcf that included the cash settlements on their hedges. If Comstock's realized natural gas price is $8.00/mcf in Q1, they should should generate approximately $900 million of operating cash flow during the quarter.

PS: Since Comstock has paid off all of draws on their credit facility, I don't think they have any other debt covenants that require them to hedge production. However, I do think they will keep using collars to hedge about 50% of their production going forward, setting the floors high enough to fully fund their drilling program.

[allen46]

Thanks Dan Very helpful!