Comstock Resources

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

A leading independent natural gas producer, operating primarily in the Haynesville and Bossier shales in North Louisiana and East Texas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Comstock Resources (CRK) is an independent energy company focused on the exploration, development, and production of oil and natural gas primarily in the Haynesville and Bossier shale plays of North Louisiana and East Texas. The company’s operations are concentrated in the onshore areas of the United States, and its production primarily consists of natural gas, with a smaller component of oil.

CRK’s strategic location in these prolific shale basins provides access to considerable reserves and infrastructure, though it also exposes them to volatility in commodity prices.

Revenue Distribution

CRK’s revenues are primarily derived from the sale of natural gas, along with a smaller portion coming from oil sales. While both commodities are sold, the company’s heavy reliance on natural gas makes them highly sensitive to the dynamics of the natural gas market.

Most of their natural gas is sold under long-term contracts with different terms, a lot of it is indexed. These contracts provide some revenue stability, but they can also limit exposure to upside from higher prices.

The oil and natural gas industry is characterized by intense competition, volatility in commodity prices, and fluctuating regulatory environments. In the specific case of gas market, prices has been down on oversupply and warmer than expected weather (mild winters).

While a significant portion of CRK’s production is underpinned by long-term contracts, the remainder is exposed to the spot market and price volatility. They compete with other large oil and gas producers as well as smaller independents, all of whom are striving to lower costs and improve efficiency.

A significant portion of their peers in the public energy market use hedging strategies to stabilize revenues and cash flows, but CRK does not use hedges.

Their reliance on spot market can expose them to major revenue volatility during periods of extreme market fluctuations.

What Makes CRK Different?

  • Geographic Focus: CRK’s focus on the Haynesville and Bossier shales gives it expertise in those particular plays.
  • Emphasis on Technology: The company emphasizes utilizing advanced drilling and completion technologies and horizontal drilling to boost production and cut costs.
  • Aggressive Expansion: CRK has been an aggressive acquirer of land and assets to expand its production base.

Financial Analysis

Here’s an in-depth look at Comstock Resources’ finances:

Balance Sheet Health: 3 / 5

  • Debt: CRK carries a significant amount of debt, with a high ratio of debt to total capitalization. While debt is common in capital intensive industries such as energy production, high debt levels increase the risk of financial distress.
  • Liquidity: The current assets are a multiple of current liabilities, so short-term financial risk from an inability to pay immediate bills is low.
  • Intangible Assets: Goodwill and other intangibles account for 25% of the net assets of the company, and these are written-off slowly using amortization. This practice could be a way to increase long-term profitability, and needs to be monitored.
  • Working Capital: Working capital and cash reserves are limited, and the company is mostly dependent on ongoing credit facilities to maintain liquidity.

Their current liabilities are at around $4.8 billion versus their cash and marketable securities of 124 million, which makes their working capital management important.

Earnings Calls Analysis

Looking at the latest earnings call (August 1, 2023), several key points emerge:

  • Production Growth: CRK continues to see increases in natural gas and oil production. They expect a 19% increase in production in the full year, compared to 2022.
  • Improved Cost Structure: They’ve been able to implement more efficient drilling techniques, resulting in better production at similar capital expenditures.
  • Positive Cash Flow: Management emphasized a commitment to positive free cash flow, even with volatile market conditions. Management also claimed that they had reduced cost per well by using a better drilling process and that has given positive results.
  • Haynesville Position: There is a renewed focus in Haynesville region, where they see significant advantages from infrastructure and long-term contracts. They also see a big increase in productivity there.
  • Share Repurchase: In second quarter, company had bought back $100 million of its stock, which was 10% of its market capitalization in that time, and there is still an authorized stock buyback of over $300 million. Management has also announced that they may do more buybacks in the next year if the price remains undervalued.
  • Limited Hedging: CRK does not use many hedges, since they believe they can manage risk without hedging. This can provide upside if prices increase, but also downside if prices fall.

Recent issues:

  • The price of natural gas has been volatile and low.
  • They had lower operating expenses in the first half of 2023, however, had higher interest rate expenses.

Moat Rating: 3 / 5

  • Reasonable Economic Moat: CRK possesses a narrow economic moat stemming from its expertise in the Haynesville and Bossier shale plays and its extensive network of natural gas pipelines. They also possess some advantage from owning land with high quality resources (that is easily extractable).
  • Scale-Based Advantages: They also have some scale based advantages, due to them having the land, processing capability and transportation infrastructure.
  • No Strong Branding: CRK does not have any brand recognition and operates in the commodity market which makes margins hard to maintain.
  • Lack of Switching Costs: Customers do not have high switching costs, they can easily switch to another provider. Rating Justification The company has some competitive advantages stemming from their geographical niche, extensive pipeline networks, and relatively low cost structures, however, commodity industries don’t have a strong moat on average. Their lack of hedges also puts them more at the mercy of the market.

Moat Risks and Business Resilience

  • Commodity Price Volatility: A significant drop in natural gas and oil prices could directly hurt revenue and profitability.
  • Operational Risks: Drilling, production and extraction of natural resources has the risks of accidents, miscalculation in drilling sites, overestimation of reserves, and overspending on capital projects.
  • Regulatory Changes: Regulations can be a large risk to companies operating in the energy sector. Changes in regulation can cause delays in projects, increased costs or lower profits.
  • Environmental Risks: New laws on drilling could have a huge impact on their future operations. In addition, they need to adhere to specific laws on waste disposal, methane emissions, and environmental damage prevention.
  • Execution Risks: They also need to continue building on their experience, and acquire companies that can create value and add to their infrastructure. If they fail to execute properly, they will be outcompeted by companies that do, and that can make them unprofitable. Business Resilience:
  • Diversified Asset Base: CRK’s diverse portfolio of wells and drilling assets, spread over two key geographical areas, reduces the risk associated with relying on a small number of properties.
  • Experienced Management: Management have decades of experience operating in this field.
  • Cost Cutting Efforts: The company is trying to implement new strategies to reduce costs and increase productivity.

Understandability: 2 / 5

  • The business model is quite complex and requires in-depth understanding of the oil and gas sector, including complex accounting standards, financial instruments like derivatives, production cycles, commodity markets, geopolitical risks and regulatory aspects.

Summary

CRK is a company that is attempting to grow by increasing production, however, it also has some challenges with commodity prices, and capital allocation. They are in a good area for drilling, and have established an extensive pipeline network, but the oil and gas industry is inherently cyclical and is susceptible to many external factors.