Description
Comstock Resources (CRK) is a producer of oil and natural gas in the United States. 72% of estimated 2015 production is natural gas – primarily in the Haynesville – with the remainder in oil – primarily in the Eagle Ford.
Like most E&P companies, CRK’s equity and debt has been crushed by falling energy prices. The stock is down to $6.82 from the mid 20s and the bonds have fallen from 105 to 72.
The Company has been led by Jay Allison, CEO and Roland Burns, CFO who have proven to be capable stewards of capital over several market cycles. Notably, they own significant shareholdings (3.4% and 1.7% of shares outstanding, respectively), have reasonable compensation and have not issued equity since 2005. They have demonstrated their ability to manage the business to maximize returns on investment as opposed to production growth and have directed capital towards the most attractive investment opportunities as well as monetized investments realizing attractive rates of return.
In the last natural gas downturn, they pivoted towards oil by developing their Eagle Ford acreage. They are now halting Eagle Ford development in 2015 in response to declining oil prices and redirecting their attention towards the Haynesville natural gas play. They believe that since those natural gas wells were drilled and completed using early shale technology, that they can be economically refracked at a cost of roughly $1MM - $2MM per well increasing both production and recovery rates and earning an attractive return on investment.
The Company pays a $0.50 annual dividend, which uses $24MM of cash per year. Given Allison & Burns modest compensation and strong stock holdings, plus the relatively small absolute cost of the dividend, I expect that they will try and maintain the dividend as long as feasible. The 7% yield is an attractive return to receive while energy prices stabilize.
Market cap is $335MM and net debt at 9/30 is $994MM, for an enterprise value of $1,329MM. However, using market prices for the $700MM in bonds outstanding and enterprise value falls to $1,125MM.
Production guidance for 2015 (released on 12/18) is 3.5 - 3.9 MMBBls of oil and 55 – 60 BCF of natural gas. EBITDA at $3.50/mcf gas and $55/bbl oil should be around $260MM and $300MM excluding corporate g&a.
Debt/EBITDA is 3.9x at these suppressed energy prices levels. Interest cost is roughly $70MM/yr and no maturites until 2018 (revolver) and 2019 ($400MM bonds) and 2020 ($300MM bonds). Capex guidance for 2015 (released on 12/18) is $307MM. Liquidity is $350MM as of 9/30/14.
The company is unhedged for 2015 and I believe offers an interesting way to gain exposure to a rebound in energy prices while retaining the security of a proven management team with aligned interests. Comstock could be an attractive acquisition target once energy prices stabilize with 585 Bcfe in reserves (77% gas). A takeout valuation based on 2015 production alone at current energy prices could occur at a 6x – 8x EBITDA multiple (to take into account the value of the reserves). This would equate to $16.75 - $29.25 in equity value. A prudent acquirer could lower their acquisition cost by purchasing the outstanding bonds at a 30% discount prior to bidding for the equity.
My near-term price target is $11.75 – 6x 2015E EBITDA inclusive of corporate costs.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
proven management team to weather the downturn in energy prices, support by 7% dividend yield, unhedged - leverage to upturn in energy prices and/or market sentiment. potential takeout candidate, potential divestitures.