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Comstock Hurt by Natural Gas Price

Zacks Equity Research

Oil and natural gas firm Comstock Resources Inc. (CRK) posted weak second quarter results due to lower natural gas prices.

The predominantly natural gas-focused exploration and production company reported adjusted loss per share of 43 cents in the quarter, wider than the Zacks Consensus Estimate of a loss of 34 cents. Comstock’s performance also deteriorated considerably from the year-ago adjusted loss of 4 cents per share.

Total revenues – aided by strong production – were up 11.2% year over year to $125.0 million, in the process outperforming the Zacks Consensus Estimate of $107.0 million.


Comstock’s quarterly oil and gas production was up 6.0 % year over year to 25.4 billion cubic feet equivalent (Bcfe), of which 86.0 % was natural gas. The improvement was driven by a whopping 266.7% jump in oil volumes. On the other hand, Natural gas production decreased 4.8 % to 21.9 billion cubic feet (Bcf).

Price Realizations

Average price realization per thousand cubic feet equivalent (Mcfe), before hedging, was $4.02 in the quarter, down 14.3% year over year. Average oil price realization before hedging was $98.70 per barrel (versus $101.02 per barrel in second quarter of 2011) and average natural gas realization was $2.03 per Mcf (compared with $4.19 per Mcf in the year-earlier quarter).

Comstock’s high natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more-diversified independent peers with a balanced oil/gas production profile. The company saw its results suffer on the heels of a sharp drop in gas prices.

Costs & Expenses

Gathering and transportation cost averaged 29 cents per Mcfe in the quarter, up 3.6% from the prior-year quarter, while production tax averaged 13 cents per Mcfe, up 116.7% year over year. Total operating expenses increased 24.1 % year over year to $129.1 million.

Cash Flow & EBITDAX

Comstock generated operating cash flow from continuing operations of $8.7 million, reflecting a decrease of 87.0% from the year-earlier quarter. On the other hand, quarterly EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses) was down 14.3% year over year to $74.6 million.

Capital Expenditure & Balance Sheet

As of June 30, 2012, Comstock had approximately $3.5 million in cash and cash equivalents and $1,223.2 million in long-term debt. Debt-to-capitalization was 54.0%.
In second quarter of 2012, Comstock incurred $141.1 million on exploration and development drilling, while $7.9 million was spent on acquiring exploration fields.

Recommendation & Rating

Comstock’s large acreage position in the prolific Haynesville Shale play (in East Texas and North Louisiana) – where industry heavyweights like Chesapeake Energy Corp. (CHK), Encana Corp (ECA) and Royal Dutch Shell plc (RDS.A) are also leaseholders – provides a multi-year inventory of low-risk development drilling opportunities. Supplemented with a robust balance sheet, Comstock remains well positioned to maintain a strong growth trajectory in the near- to medium-term.

Management’s guidance of a 5% production growth rate for 2012 is on the conservative side, in our view. We believe that the December 2011 acquisition of a sizeable acreage in the Delaware Basin in West Texas from Eagle Oil & Gas Co. will offer Comstock a low risk oil-focused production growth opportunity and expand its overall volumes.

Despite being hampered by low natural gas prices, Comstock’s strong drilling results and the divestiture of non-strategic assets are expected to improve the company’s already high cost structure.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating). 

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