In sorting through the wreckage of the past quarter’s bear market, I happened upon Comstock Resources (CRK). We own the stock, and we liked it at $30 a share-- truth be told-- although we did have the good sense to lighten up the position at those heady levels. CRK is a natural gas E&P name drilling for shale gas mainly in East and South Texas and North Louisiana. We’ve long liked natural gas as a replacement for coal in fueling America’s power plans. It is cheap, abundant, clean((er)) and here, in the U.S. But the very abundance of natural gas has depressed its price for some years now, and forced the E&P companies exploiting it to operate at successively lower costs. CRK qualifies in that it has estimated extraction costs of around $1.26 per MCF (thousand cubic feet), although that continues to fall. It also has manageable debt. The company operates in a similar area to Petrohawk, which was acquired earlier this year by BHP Billiton (BHP). We think CRK may ultimately be acquired, although today’s market environment offers much less immediate prospect of that given the difficulty of financing acquisitions.
Meanwhile, CRK’s stock price has sunk incredibly to $15, at which price-- after netting off debt-- you can buy the entire company for around the value of its proved reserves of 1.05 TCFE (trillion cubic feet equivalent). This doesn’t account for the company's reserve potential, which could be 3-5 times as much again. CRK’s problem is that the market always worried it won’t have enough cashflow to fund its drilling program and as a result will need to come to the market for additional equity. The company believes it will fund all its capex needs from internally generated cashflow, and this along with the disappearance of any imminent takeover explains the precipitous drop in the stock.
I’ve met Roland Burns and chatted with him several times over the past year. We think this stock offers an attractive risk / return at current prices, and will be looking for opportunities to add to our position.
Disclosure: Author is Long CRK