Comstock Resources (CRK): May Generate ~$1 Billion In Positive Cash Flow In 2023

Comstock Resources (NYSE:CRK) now looks capable of generating over $1 billion in positive cash flow in 2023 before dividends at current strip. This is an improvement from when I looked at Comstock in October. Natural gas strip prices have improved a bit despite inventory levels reaching around the five-year average now. The potential restart of the Freeport LNG export terminal (now expected at the end of December) is expected to help draw down inventories after the June fire basically knocked out close to 2% of US natural gas demand.

Based on 2023 natural gas strip at $5.50 and $4 long-term gas after that, I’d estimate Comstock’s value at $18 to $19 per share.

Preferred Stock Conversion And Dividends

Jerry Jones converted his 175,000 shares of Comstock’s Series B Convertible Preferred Stock ($175 million face value) into 43.75 million shares of Comstock’s common stock. This move makes sense from Jones’s perspective now that Comstock reinstated its common dividend (at a rate of $0.50 per year). The preferred dividends added up to $17.5 million per year, while the 43.75 million common shares now get $21.9 million per year in dividends. From Comstock’s perspective, it is now paying out slightly more ($4.4 million per year in dividends).

Comstock now has 277.5 million outstanding common shares and the Jerry Jones family owns 66% of these shares.

Haynesville Takeaway

Citi recently downgraded Comstock to sell based on its belief that Haynesville production growth will slow due to takeaway issues. While the takeaway situation in the Haynesville is fairly tight overall, Comstock has been managing its drilling plans with its transportation portfolio in mind. It also noted that it currently has around 0.2 Bcf per day in excess takeaway capacity that it is currently using to purchase and resell third-party gas. This has contributed to a modest amount of additional revenue as Comstock’s gas services segment delivered $11 million in profit margins in Q3 2022 and $17 million year-to-date.

I’ve only assumed 3% production growth in 2023 for Comstock in my modeling, so Comstock’s current spare capacity should be easily able to accommodate that. The smaller private producers in the Haynesville may face the most challenges with takeaway issues due to their higher percentage production growth rates and fewer long-term transportation agreements in place.

Updated 2023 Outlook

The current 2023 strip for Henry Hub natural gas is now around $5.50. Comstock’s 2023 hedges have neutral value at that price, while I’ve assumed that it can generate $15 million in net gas services revenue from utilizing its excess takeaway capacity.

This leads to a projection that Comstock can generate $2.772 billion in revenue in 2023.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	80,000	$73.50	$6
Natural Gas [MCF]	534,245,000	$5.15	$2,751
Net Gas Services			$15
Hedge Value			$0
Total			$2,772

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Comstock is thus now projected to generate $1.044 billion in positive cash flow before dividends in 2023. This includes the impact of $100 million in cash income taxes, although I am uncertain about what Comstock’s effective cash tax rate will be in 2023.

Comstock’s $0.50 per share dividend adds up to $139 million per year currently. This would leave Comstock with $905 million to put towards debt reduction after dividends.

	$ Million
Lease Operating Expense	$123
Production and Other Taxes	$75
Gathering and Transportation	$160
Cash G&A	$30
Cash Interest	$140
Dividends	$139
CapEx and Leasing	$1,100
Cash Taxes	$100
Total Expenses	$1,867

Click to enlarge

Notes On Valuation

I would now estimate Comstock’s value as around $18 to $19 per share in a long-term (after 2023) $4.00 NYMEX gas environment. This is an improvement compared to when I looked at Comstock a couple months ago due to the rebound in natural strip prices since then (with 2023 strip improving by close to 50 cents).

One thing to note is that the improvement in strip prices comes despite natural gas inventory levels hovering around the five-year average now. The natural gas strip is pricing in a near-term restart of Freeport LNG, which will help significantly in drawing down inventory levels. However, if the Freeport LNG reopening gets delayed further, that would have a negative impact on near-term prices.

At long-term $4.50 NYMEX gas scenario, I’d estimate Comstock’s value at close to $23 per share.

Conclusion

Jerry Jones converted his preferred stock in Comstock into common shares in order to take advantage of Comstock’s new $0.50 per share annualized dividend. This leaves Comstock with around 277.5 million outstanding shares.

Comstock now looks capable of generating over $1 billion in positive cash flow (about $3.75 per share) before dividends in 2023 at current strip. Comstock appears well positioned with its diverse transportation portfolio to continue delivering modest production growth despite a tight takeaway situation overall in the Haynesville Shale.

I’d estimate Comstock’s value as being in the high-teens in a long-term $4.00 NYMEX gas environment.