Comstock Resources: A Speculative Play On The Western Haynesville

Core Viewpoint - Comstock Resources, Inc. is facing significant challenges due to weak natural gas prices, impacting its financial performance and cash flows, despite a slight increase in production [2][4]. Financial Performance - Q2 2024 earnings revealed a 4% YoY increase in production, but natural gas sales decreased by 5.4% YoY, with unhedged realized prices dropping to $1.65 per million cubic feet (Mcf) from $1.81 per Mcf a year ago [4]. - After hedging, realized prices increased to $2.12 per Mcf, down from $2.25 per Mcf a year ago, indicating the importance of hedging in mitigating revenue losses [4]. - Revenues from the gas services segment halved to $29.2 million due to lower natural gas prices [4]. - Operating expenses per Mcf remained stable or decreased, allowing the company to maintain an unhedged margin above 50% and a hedged EDITDAX margin above 61% [4]. - Capital expenditures decreased to $477.2 million in H1 2024 from $647.0 million in H1 2023, raising concerns about future production capabilities [4]. Debt and Liquidity - Comstock has a solid liquidity position with a $1.5 billion revolving credit facility, of which $325 million is utilized [4]. - The company has two rounds of senior notes totaling $2.91 billion, with maturity dates in 2029 and 2030, which do not pose an immediate threat [4]. - Interest payments increased from $77.5 million in H1 2023 to $101.5 million in H1 2024, impacting cash flow [5]. Hedging Strategy - The company's hedging coverage was low, with only 26% of production hedged in Q1 2024 and 28% in Q2 2023, leading to inadequate protection against price declines [6]. - Comstock is shifting towards a more aggressive hedging strategy, targeting 50% of expected production to mitigate risks from potential price downturns [7]. Production and Operations - Quarterly production in Q2 2024 was 130.9 billion cubic feet (Bcf), with a total of 270.3 Bcf for the year, reflecting a 3.6% YoY increase [8]. - The company has successfully drilled 27 wells and turned 30 wells to sale in its Haynesville drilling program, indicating operational efficiency [8]. - Comstock added 189,000 net acres in the Western Haynesville region for $50 million, with early drilling results showing promising production rates [9]. Peer Comparison - Comstock is considered a speculative play in the natural gas exploration and production space, having suspended its dividend to focus on capital efficiency [12]. - The company has a gross profit margin of 54.63%, which is competitive compared to peers, but struggles to generate cash at lower spot prices [12]. - Piper Sandler downgraded Comstock and other smaller players to Underweight, citing macro volatility and persistent oversupply as challenges [13].