Reevaluating Comstock Resources Post Decline In Near-Term Gas Prices

Comstock Resources (NYSE:CRK) is essentially unhedged (due to very wide collars) on natural gas in 2023, so its projected cash flow for next year varies significantly with swings in natural gas prices. The current strip for 2023 is down to around $5, compared to around $6.50 when I looked at Comstock in late August. This results in a reduction of $700 million to $750 million in projected 2023 cash flow compared to late August estimates. Comstock still appears capable of generating $750 million to $800 million in positive cash flow 2023 with current strip around $5. This also assumes that Comstock spends to drive some production growth in 2023 with a $1.1 billion capex budget.

The reduction in projected near-term cash flow reduces Comstock’s value to around $17 to $18 per share in a long-term (after 2023) $4.00 NYMEX gas scenario and around $22 per share in a long-term $4.50 NYMEX gas scenario. Despite the significant decline in 2023 strip, the futures beyond 2023 have changed less and are averaging approximately $4.45 for 2024 to 2026.

2023 Outlook

Comstock has collars with a very wide range (a roughly $3 floor to a ceiling near $10) for 1H 2023, so for practical purposes it is unhedged unless natural gas prices move a very large amount in either direction.

At current 2023 strip of roughly $5.00 Henry Hub natural gas, I now project that Comstock can generate around $2.49 billion in revenues. I’ve also assumed that Comstock averages around 1.465 Bcfe per day in production, which is approximately 3% production growth versus the midpoint of its 2022 guidance.

Type	Barrels/Mcf	Realized $ Per Barrel/Mcf	Revenue ($ Million)
Oil (Barrels)	80,000	$73.50	$6
Natural Gas [MCF]	534,245,000	$4.65	$2,484
Hedge Value			$0
Total			$2,490

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This would result in it generating around $851 million in positive cash flow in 2023 at current strip prices, not including the potential impact of cash taxes (which may reduce its positive cash flow to the $750 million to $800 million range). Comstock is projected to have a $1.1 billion capital expenditure budget for 2023 if it attempts to grow production in the low-single digits from 2022 levels.

	$ Million
Lease Operating Expense	$123
Production and Other Taxes	$68
Gathering and Transportation	$160
Cash G&A	$30
Cash Interest	$140
Series B Preferred Dividends	$18
CapEx and Leasing	$1,100
Total Expenses	$1,639

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Compared to when I looked at Comstock in late August, this is a $700 million to $750 million reduction in projected 2023 cash flow, due to the 2023 strip declining from around $6.50 to $5.00 since then.

Notes On Valuation

My long-term (after 2023) NYMEX natural gas price estimates remaining unchanged at around $4.00 to $4.50. However, the lowered projections for Comstock’s cash flow in 2H 2022 and 2023 reduces my estimate of Comstock’s value to approximately $17 to $18 in a long-term (after 2023) $4.00 NYMEX gas scenario.

In a long-term $4.50 NYMEX gas scenario, Comstock’s value is now estimated at around $22 per share.

Although natural gas strip prices have also shifted downward further out, the effect isn’t as great. For example, 2023 natural gas prices are down around -23% since late August. The strip for 2024 is down around -11% over the same period and now sits at around $4.56.

Conclusion

The projected cash flow for Comstock (over the 2H 2022 and 2023 period) has been reduced by close to $1 billion due to the decline in strip prices. This reduces Comstock’s value by around $3 to $4 compared to late August. My view on longer-term (after 2023) natural gas prices remains unchanged at $4.00 to $4.50 though, and Comstock has an estimated value of approximately $17 to $22 at those long-term prices.

These long-term natural prices remain consistent with strip prices, with the 2024 strip around $4.56, 2025 strip around $4.40 and 2026 strip around $4.35 currently.