Comstock Resources (CRK) Valuation Update - Oct 31

[dan_s]

At the time of this post, CRK was trading at $12.48, up $0.43 on the day. Most of today's gain is due to rising natural gas prices and they also provided some very bullish information on their Western Haynesville prospect during this morning's conference call. The Western Haynesville is much more than a "prospect" as they have now completed 7 outstanding wells in the large core area AND they have a acquired a very large acreage position.

They also announced a significant midstream joint venture yesterday, suggesting that over the next five years the gross production in the Western Haynesville could increase to 2 Bcfpd. Comstock's total production in Q3 was 1.42 Bcfpd; primarily from their legacy Haynesville core area.

My current valuation adjusts down $0.25 to $15.00/share just because their Q3 results came in lower than expected. Looking beyond 2023, there is a lot more upside for this stock. They are "Building a New Business" that should be a MAJOR source of natural gas for the Gulf Coast LNG exporters.

They have incredible running within the leasehold they hold today; 1,491 low-risk / high-return horizontal drilling locations split 756 in their legacy Haynesville core area and 734 in the rapidly developing Western Haynesville area.

They plan on running 7 operated rigs in 2024 and might add an 8th rig in 2H 2024 depending on natural gas prices.

They've started layering on some hedges for 2024, with a $3.55 Swap on 350,000 mcfpd for the full year so far (~21.6% of my WAG at what their gas production should be next year).

CRK is for those of you who are looking beyond this year and who believe U.S. natural gas prices are going higher. For example, Raymond James' current forecast is that U.S. natural gas prices will be $5.00/MMBtu after 2024. If CRK ramps production up to 2 Bcfepd in 2025 at that price, their operating cash flow should be approximately $2.7 billion ($9.75/share). < 4X operating cash flow would be a reasonable stock valuation at that time.

Conclusion: Valuing an upstream company based solely on current free cash flow is only justified if they have no "Running Room". Another plus for CRK is that they have incredibly strong financial backers (including Jerry Jones). Today, they have $1.175 billion of liquidity. Access to that much capital is a BIG DEAL because of the quality of their drilling inventory. Operating cash flow should more than cover their 2024 capex program; especially since their midstream partner will cover the $300 million expansion of their Western Haynesville gathering system and 2 Bcfpd processing facilities.

[uberCOAT]

Dan, CRK Up over $13 after you released your update report

[dan_s]

The Western Haynesville looks like a "World Class" natural gas resource play. If so, there is a lot more upside for this puppy.

The reason "The Rich get Richer" (ie. Jerry Jones) is that they think long-term.

[ChuckGeb]

Buyer beware: they declined to answer the question on how much they were spending on the wells in the W Haynesville. Further t get are shifting from drilling Bossier wells there to Haynesville wells that is still new territory for them. I am optimistic but skeptical on this one.

[dan_s]

Keep in mind that Comstock's partner on the Western Haynesville midstream JV is an extremely knowledgeable company. I doubt they would commit to a $300 million investment if they did not have a high level of confidence in the potential of the area.