Comstock Resources CRK
December 26, 2014 - 10:47pm EST by
aquicap
2014 2015
Price: 6.82 EPS 0 0
Shares Out. (in M): 48 P/E 0 0
Market Cap (in $M): 335 P/FCF 0 0
Net Debt (in $M): 994 EBIT 0 0
TEV ($): 1,328 TEV/EBIT 0 0

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  • Commodity exposure
  • Oil and Gas
  • E&P
 

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.

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    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.

    Messages


    SubjectRelative valuation analysis
    Entry12/27/2014 10:29 AM
    Memberaagold

    Any particular reason why this E&P is a better idea than the hundreds of alternatives in the US and Canada?  When an entire sector has crashed due to severe price dislocations, I think a detailed relative valuation analysis is required.

     


    SubjectValuation Method
    Entry12/28/2014 10:25 PM
    Memberyellowhouse

    I think ebitda multiples are irrelevant for e&ps in this environment. Could you talk about their assets and why you think you are buying them at a discount? Comstock may have some good assets. But you don't address them. 


    SubjectRe: Re: Nat gas outlook for 2015?
    Entry12/29/2014 12:12 PM
    Membersnarfy

    Forget declines in associated gas.  There is some merit to the idea in isolation, but the Marcellus is just too prolific and the Utica is coming on.  Range just had the best IP rate of any well drilled to date in the Utica.  Sure, IP rates can be gamed, but add together the other data points and the only way gas is going up is if the weather gods allow it.  That, or LNG exports.  I'm growing skeptical of exports' ability to make a big dent.  I used to think they would but I'm not so sure any more.  What's a few BCF per day when you've got acreage like Cabot's?  They and their gas-levered peers in PA an OH are chomping at the bit to deploy more capital into higher prices.


    SubjectRe: Re: Re: Nat gas outlook for 2015?
    Entry12/29/2014 01:45 PM
    MemberBiffins

    The reason EV/EBITDA for valuation is no longer very relevant is that these are now credit situations. What is more important is Debt/EBITDA and EBITDA/Interest and other credit metrics. With continuing cash burn (and with oil and gas still falling this will accelerate), at what point do the banks ammend the revolver citing low oil prices and this goes under. The question isn't whether oil bounces back, the question is will CRK be around to see it. I think the most likely scenario is a restructuring.


    SubjectRe: Re: Re: Re: Nat gas outlook for 2015?
    Entry12/29/2014 02:07 PM
    Membersnarfy

    I think the other reason EV/EBITDA is flawed is because it ignores the massive capital intensity of the business.  If you're not spending you're dying.  The real credit metric is debt per boe of proved developed reserves. 


    SubjectRe: Re: Valuation Method
    Entry12/29/2014 03:07 PM
    Memberyellowhouse

    Snarfy and Biffins pretty much gave my reasoning.

     

    Irrelevant was not the right word. What I meant to convey is that I think EV/EBITDA, in isolation, is a really poor metric to focus on when you're considering an investment in a company that has naturally declining cash flows and may not be able to reinvest in positive NPV projects. 


    SubjectRe: Snarfy/Biffins - debt per boe
    Entry01/08/2015 06:04 PM
    Membersnarfy

    ROSE is at ~$15/boe of PDP reserves.  That is on the upper end of what is acceptable, and only because their assets are so good and their debt is termed out at <6% coupons. 
    SM Energy's assets are not as good but their debt/boe of PDP is ~$7.  Very good.
    I'd say anything less than $7 and you're not going to get an attractive opportunity.  Anything more than $15 and you're asking for trouble.  I loaded up on ROSE's 2021 bonds at ~$85-89 and bought a little bit of SM's 2019 bonds at ~$96.  In addition to how low cost a company's assets may or may not be, pay attention to how much they have hedged. 

    I have also been buying CIE's 2019 converts with a YTM of 12-13% but that is a slightly different animal because they are not producing yet and haven't technically proved their reserves. 

     

     

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