Comstock Resources: May Reduce Its Net Debt To Under $300 Million By End Of 2023

May 20, 2022 11:22 PM ETComstock Resources, Inc. (CRK)6 Comments

Summary

  • Comstock is projected to generate over $1 billion in positive cash flow in 2022 at current strip.
  • This may increase to $1.3+ billion in positive cash flow 2023 at current strip due to a relative lack of hedges.
  • Comstock is dealing with cost inflation, but the impact of higher natural gas prices easily outweighs cost inflation's impact on cash flow.
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Oil Pumps And Rig At Sunset By The Sea

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Comstock Resources (NYSE:CRK) may be able to reduce its net debt to under $300 million by the end of 2023 at current strip prices. Comstock's cash flow for 2023 could be particularly strong if strip prices hold up as it is barely hedged next year.

Comstock is dealing with some cost inflation, but despite that cost inflation (and its 2022 hedges) it is benefiting substantially from higher near-term gas prices.

I estimate Comstock's value at $18.45 per share in a long-term (after 2023) $3.75 NYMEX gas scenario, assuming that actual prices end up matching current strip ($7.10 in 2022 and $5.65 in 2023) for the next couple years.

Cost Inflation

Comstock is dealing with some cost inflation as its capital expenditure budget for 2022 has been increased from approximately $785 million to $900 million. This is equivalent to an approximately $0.22 per Mcfe increase in capex. As well, some of Comstock's other costs (such as lease operating expense) have gone up since I looked at it in February. When including the impact of higher production taxes (due to stronger commodity prices), Comstock's 2022 expenditures are estimated at around $0.35 to $0.40 per Mcfe higher now than in February 2022.

Comstock is still benefiting a large amount from the rise in natural gas prices though. Natural gas prices have gone up $2.60 (for the full year strip) since February. Comstock is roughly 50% hedged on natural gas, but net of that its margins (including capex) are still up around $0.90 to $0.95 per Mcfe from three months ago.

2022 Outlook

With the strip for NYMEX gas prices in 2022 now averaging $7.10, Comstock may be able to generate $3.555 billion in oil and gas revenues before hedges.

Comstock realized a loss of $117 million on derivative settlements in Q1 2022 and is on track to end up with a realized hedging loss of $1.008 billion on the full year based on strip prices.

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

80,000

$98.00

$8

Natural Gas [MCF]

517,820,000

$6.85

$3,547

Hedge Value

-$1,008

Total

$2,547

Source: Author's Work

Comstock is now projected to end up with $1.068 billion in positive cash flow in 2022 at current strip prices.

$ Million

Lease Operating Expense

$130

Production and Other Taxes

$100

Gathering and Transportation

$145

Cash G&A

$30

Cash Interest

$156

Series B Preferred Dividends

$18

CapEx and Leasing

$900

Total Expenses

$1,479

Source: Author's Work

Comstock is now projected to end 2022 with approximately $1.6 billion in net debt or leverage of approximately 0.75x.

Potential 2023 Outlook

The 2023 strip for NYMEX gas prices in now approximately $5.65, and Comstock has few hedges (only some wide collars). Thus it may be able to generate over $1.3 billion in positive cash flow at that gas price. This would leave Comstock with a modest (less than $300 million) amount of net debt.

Valuation

I now estimate that Comstock's value is approximately $16.70 per share at long-term (after 2023) $3.50 NYMEX gas. This assumes that natural gas prices end up around current strip ($7.10 for 2022 and $5.65 for 2023) before retreating to $3.50 after that. Comstock's estimated value would increase to approximately $18.45 per share at long-term $3.75 NYMEX gas instead.

Strong natural gas prices are helping Comstock pay down its debt relatively quickly, and it should be able to eliminate its net debt during 2024 if it focuses on debt reduction.

Conclusion

Comstock may be able to reduce its net debt to under $300 million by the end of 2023 based on strip prices. Cost inflation is reducing its projected cash flow a bit, but strong natural gas prices easily has more impact on its cash flow.

Assuming that natural gas prices average $7.10 in 2022 and $5.65 in 2023, Comstock appears roughly fairly priced for $3.35 to $3.40 long-term (after 2023) natural gas prices. It should have a bit of upside with higher long-term natural gas prices, with its estimated value at $18.45 per share with long-term $3.75 NYMEX gas.

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