Comstock Resources Inc.
/ (CRK-NYSE)/ Equity Research / CRK | Page 2
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 12/04/2014
Current Price (12/03/14) / $7.64
Target Price / $7.00
SUMMARY
We are concerned over Comstock Resources’ declining production levels. The company is facing several operational issues, which if persistent, could dampen volumes further. The weak commodity prices also add to the woes. Comstock’s gas-dominated reserves/production profile and its geographically concentrated asset base increases the risk level. The rise in net debt/reduction of liquidity associated with the Delaware Basin acquisition also weighs on the valuation. Taking these factors into consideration, we are downgrading Comstock Resources to Underperform from Neutral with a target price of $7.00./ Equity Research / CRK | Page 2
SUMMARY DATA
52-Week High / $29.1952-Week Low / $7.64
One-Year Return (%) / -47.24
Beta / 1.44
Average Daily Volume (sh) / 2,651,347
Shares Outstanding (mil) / 48
Market Capitalization ($mil) / $366
Short Interest Ratio (days) / 3.27
Institutional Ownership (%) / 48
Insider Ownership (%) / 7
Annual Cash Dividend / $0.50
Dividend Yield (%) / 6.54
5-Yr. Historical Growth Rates
Sales (%) / 10.4
Earnings Per Share (%) / N/A
Dividend (%) / N/A
P/E using TTM EPS / N/A
P/E using 2014 Estimate / 191.0
P/E using 2015 Estimate / N/A
Zacks Rank *: Short Term
1 – 3 months outlook / 5 - Strong Sell
* Definition / Disclosure on last page
Risk Level * / High,
Type of Stock / Small-Value
Industry / Oil-Us Exp&Prod
Zacks Industry Rank * / 223 out of 267
OVERVIEW
Frisco, TX-based Comstock Resources, Inc. is an independent oil and gas exploration and production company engaged in the acquisition, exploration, and development of oil and gas properties. The company’s operations are concentrated primarily in two regions in the U.S.: East Texas/North Louisiana and South Texas.
In August 2008 Comstock sold its 49% owned subsidiary, Bois d’Arc Energy, to Louisiana-based energy firm Stone Energy Corp. for about $1.8 billion. Bois d’Arc conducted offshore operations in the outer continental shelf of the Gulf of Mexico (GoM). Following the sale, Comstock has emerged as a pure-play onshore operator.
As of year-end 2013, Comstock had 584.5 billion cubic feet equivalent (Bcfe) in proved reserves of which approximately 77% was natural gas and 73% was developed. Production totaled 69.6 Bcfe during 2013, comprising 80% gas.
REASONS TO SELL
Ø Similar to other independent exploration and production companies, the results of Comstock Resources are directly exposed to oil and gas prices. Continued weakness in commodity prices could significantly affect the company’s revenues, earnings and cash flows.
Ø 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, which derives the bulk of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters on the back of a sharp drop in gas prices.
Ø Production growth, which depends on continued drilling and development of acreage, has become a challenge for the company as is evident from the declining volume trend. Comstock Resources faces several operational and execution issues, especially in East Texas. The company’s exposure to the geologically complex Tuscaloosa Marine Shale (TMS) play further raises concerns amid these operational issues.
Ø Following Comstock’s debt-financed acquisition of producing properties and acreage in the Delaware Basin, we remain worried about its increased leverage and reduction of liquidity.
Ø Being a relatively small player, Comstock lacks the financial resources of larger industry giants. Consistent increases in the capital budget (full-year guidance was increased to $580 million from $565 million during the third quarter) and lower profits could land the company in troubled waters.
RISKS
Ø Comstock’s move to the liquids-rich Eagle Ford shale assets in South Texas and the Wolfbone properties in West Texas is a major shift from dry natural gas development, bringing the much needed oil-linked growth. Success at these ventures could improve the company's financials.
Ø Management provided an 83–91% oil production growth rate for 2014, which we believe is on the conservative end considering the company’s sizeable acreage acquisition in the Delaware Basin in West Texas from Eagle Oil & Gas Co. Successful development of the acquired properties could drive Comstock’s overall volumes.
Ø The company’s strong acreage position in the prolific Haynesville/Bossier Shale play (70,000 net acres with a resource potential of 6 trillion cubic feet equivalent) in the East Texas and North Louisiana region continues to provide attractive reserve and production growth prospects. An increase in gas prices should give the company an opportunity to exploit this inexpensive play.
RECENT NEWS
Third Quarter 2014 Results
On Nov 3, 2014, Comstock Resources reported third-quarter 2014 adjusted loss of $0.05 per share (excluding one-time items), which failed to meet the Zacks Consensus Estimate of earnings of $0.10 owing to lower volumes and weak oil realizations. A significant rise in operating expenses further dampened the results.
However, the bottom line improved substantially from the year-ago quarter loss of $0.40. Higher oil-linked sales and better natural gas realizations aided the result.
Total revenue increased 30% year over year to $145 million but lagged the Zacks Consensus Estimate $154 million.
Volume Analysis
Comstock’s quarterly volume fell 5.8% year over year to 16.4 billion cubic feet equivalent (Bcfe), of which nearly 59% was natural gas. The downtrend reflects output shrinkage from its East Texas/North Louisiana operations that comprised a significant part of the total volume.
Production in the East Texas/North Louisiana operating region decreased 36% year over year to 7.4 Bcfe (about 99% gas). Output from South Texas and other properties came in at approximately 8.7 Bcfe and 0.4 Bcfe, respectively.
Price Realizations
Average oil price realization (before hedging) was $95.92 per barrel (versus $104.83 per barrel in the third quarter of 2013) and average natural gas realization was $3.85 per thousand cubic feet/Mcf (compared with $3.33 per Mcf in the year-earlier quarter).
Costs & Expenses
Gathering and transportation costs came in at $3.1 million, representing a decline of over 30% from the year-ago quarter. However, lease operating cost of approximately $16 million marked a 22.4% year-over-year rise.
Total operating expenses increased nearly 20% from the third quarter of 2013 to $144.7 million.
Cash Flow & EBITDAX
Comstock generated operating cash flow from continuing operations of $100.5 million in the reported quarter against $62.9 million in the year-earlier quarter. Earnings before interest, taxes, depreciation, depletion, amortization, exploration expense and other non-cash expenses (EBITDAX) from continuing operations was $114.4 million, up 39.8% year over year.
Capital Expenditure & Balance Sheet
In the reported quarter, Comstock spent $103.6 million on development drilling activities. As of Sep 30, 2014, the company had approximately $6.4 million in cash and cash equivalents and $1,000.3 million in long-term debt. The debt-to-capitalization ratio at the end of the said quarter was approximately 51.6%.
VALUATION
Being a firm in the exploration and production industry, Comstock’s profitability is likely to take a beating in this weakly-priced oil and gas market. The company, which derives bulk of its reserves/production from natural gas, has seen its sales and income drop drastically in recent quarters on the back of a fall in gas prices. Moreover, operational issues continue to weigh on the company’s production levels.
These factors are reflected in our new Underperform recommendation on shares of Comstock Resources.
Comstock Resources’ trailing 12-month P/CF multiple is 1.4, compared to the 10.8 average for the peer group and 16.0 for the S&P 500. The partnership’s trailing 12-month EV/EBITDA multiple is 5.4, compared to the industry average of 5.7.
Our $7 price objective reflects a multiple of 1.3X trailing twelve-month cash flow.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CRK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1137 companies covered: Outperform - 16.3%, Neutral - 77.0%, Underperform – 6.4%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Namrata DasEditor / Priyanka Bhattacharyya
QCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / 3Q’14 Earnings Update
/ Equity Research / CRK | Page 2