Comstock Resources (CRK): Could reduce its net debt to less than $300 million by the end of 2023

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Comstock Resources (NYSE: CRK) may be able to reduce its net debt to less than $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 on as it’s barely covered next year.

Comstock faces some cost inflation, but despite that cost inflation (and its 2022 hedges), it benefits significantly from rising near-term gas prices.

I estimate the value of Comstock at $18.45 per share in a long-term NYMEX gas scenario (post 2023) at $3.75, assuming actual prices eventually match the current strip ($7.10 in 2022 and $5.65 in 2023) for the next two years.

Cost inflation

Comstock faces some cost inflation, with its 2022 capital expenditure budget dropping from around $785 million to $900 million. This equates to an increase of approximately $0.22 per Mcfe in capital expenditure. Additionally, some of Comstock’s other costs (such as rental operating costs) have increased since I reviewed it in February. Including the impact of higher production taxes (due to higher raw material prices), Comstock’s 2022 expenses are estimated to be approximately $0.35-0.40 per Mcfe more than in February 2022.

Comstock is still largely benefiting from higher natural gas prices. Natural gas prices are up $2.60 (for the whole year) since February. Comstock is about 50% hedged on natural gas, but net of that its margins (including capex) are still up about $0.90 to $0.95 per Mcfe from three months ago.

Outlook 2022

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

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

Type

Barrels/Mcf

Realized $ per barrel/Mcf

Revenue (millions of dollars)

Oil (Barrels)

80,000

$98.00

$8

Natural gas [MCF]

517,820,000

$6.85

$3,547

Coverage value

-$1,008

Total

$2,547

Source: Author’s work

Comstock should now end up with $1.068 billion in cash flow positive in 2022 at current tape prices.

millions of dollars

Rental operating expenses

$130

Taxes on production and others

$100

Gathering and Transportation

$145

G&A in cash

$30

Cash interest

$156

Series B Preferred Dividends

$18

CapEx and leasing

$900

Total expenses

$1,479

Source: Author’s work

Comstock is now expected to end 2022 with around $1.6 billion in net debt or around 0.75x leverage.

Potential outlook for 2023

The 2023 band for NYMEX gas prices is now around $5.65, and Comstock has little cover (only a few wide collars). So it might be able to generate over $1.3 billion in positive cash flow at that gas price. This would leave Comstock with a modest amount (less than $300 million) of net debt.

Evaluation

I now estimate the value of Comstock to be around $16.70 per share in the long term (after 2023) $3.50 of NYMEX gas. This assumes that natural gas prices end up around the current band ($7.10 for 2022 and $5.65 for 2023) before receding to $3.50 thereafter. Comstock’s estimated value would rise to around $18.45 per share at $3.75 long-term NYMEX gas instead.

High natural gas prices are helping Comstock pay off its debt relatively quickly, and it should be able to eliminate its net debt in 2024 if it focuses on reducing its debt.

Conclusion

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

Assuming natural gas prices average $7.10 in 2022 and $5.65 in 2023, Comstock looks about fair priced for long-term (post-2023) natural gas prices of $3.35 to $3.40. It should have a bit of an edge with higher long-term natural gas prices, with its value estimated at $18.45 per share with NYMEX gas at $3.75 long-term.

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