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Comstock Resources: 3.8% Dividend Yield And 7-10% Growth

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LNG tanker ship

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Investment Thesis

Comstock Resources (NYSE:CRK) is simply a Haynesville Basin pure-play earthy state shaper intimately located to nan Gulf Coast corridor and adjacent respective ample LNG (Liquified Natural Gas) terminals. CRK operates 1,600 wells crossed 372,000 acres pinch an mean lateral magnitude of 9,989 feet.

For each of FY22 CRK generated $673 cardinal successful free rate travel from operations. CRK additionally operates nan industry’s lowest operating costs structure, which drives its very precocious 83% EBITDAX margin. CRK intends to clasp nan existent dividend magnitude of $0.50 per twelvemonth successful nan existent pricing environment.

Due to its precocious FCF generation, and debased costs, we judge that CRK is simply a bully prime for dividends. We expect nan slump successful earthy state prices to beryllium temporary, and frankincense besides deliberation CRK would beryllium a bully prime for superior appreciation.

Estimated Fair Value

EFV (Estimated Fair Value) = E24 EPS (Earnings Per Share) times P/E (Price/EPS)

EFV = E24 EPS X P/E = $4.25 X 5.0 = $17.60

We person utilized a low-end P/E wrong nan 4-10x scope that lipid and state exploration companies usually fall. With its growth, CRK could easy waste and acquisition astatine nan precocious end.

Comstock Resources

E2023

E2024

E2025

Price-to-Sales

1.3

1.2

1.2

Price-to-Earnings

2.3

3.3

2.7

Operations

Production was astatine 1,445 MMcfe/d (millions of cubic ft balanced per day) of earthy state successful 4Q22, pinch accumulation increasing astatine a 21% 3-year-CAGR. Year complete year, location was a 9% summation successful regular production, pinch a acold much favorable pricing situation allowing for amended financial results.

FY23 quarterly accumulation is expected to beryllium astatine slightest nan aforesaid arsenic successful 4Q22 but could spell arsenic precocious arsenic 1,550MMcfe/d.

CRK is an advantageous geographic location, pinch nonstop entree to gulf seashore markets, trading astir 71% of earthy state successful nan section geographic area. This includes 17% of accumulation straight sold to LNG shippers. In 4Q22, nan mean realized value was $5.57/Mcf astatine 47% of accumulation hedged. The $5.57/Mcf number is disappointing fixed nan 3Q22 value realization of $7.72/Mcf, but it is still a 6.5% summation yearly. Hedging is little successful FY23, pinch only 30% of accumulation hedged frankincense acold astatine $3.00/Mcf.

For FY22, nan mean lateral magnitude of wells was 9,989 feet. Total D&C costs (drilling and completion) averaged $1,425 per lateral ft drilled complete nan aforesaid period. This translates to conscionable complete $1 cardinal successful D&C costs. 4Q22 guidance is expected to beryllium higher than nan yearly mean of 1,400 MMcf/d, astatine astir 1,470 MMcf/d. All successful costs are expected to beryllium balanced to FY22, which were $1.63 per Mcf (thousands of cubic feet). Well-level rate operating costs are $0.82 per Mcf.

We don't expect a block-busting drilling description to return spot successful FY23. However, it is surely worthy noting that nan Western Haynesville description into Robertson County had an IP (initial production) of 42 MMcf/d. While IP numbers way disconnected erstwhile nan good reaches afloat production, this is still overmuch higher than nan mean IP of 25 MMcf/d CRK usually sees successful nan different fields. On nan 4Q22 net call, guidance said it was excessively early to estimate connected imaginable output aliases costs for nan area.

CRK 2022 Drilling Results Map

CRK 2022 Drilling Results Map (4Q22 CRK report)

Natural Gas Prices

Historical Spot prices for NG

BuildingBenjamins, EIA

Freeport LNG terminal being closed aft an detonation damaged it complete nan summertime has wounded export measurement and US home earthy state pricing. The Freeport terminal accounts for astir 20% of US LNG Exports. Re-opening was expected to restart successful early February, and nan first tankers arrived successful early February. Freeport's usability hopes to velocity up regulatory support for restarting commercialized operations, astatine 1/4 capacity. The prevailing sentiment now is that Freeport will beryllium fresh for afloat export capacity again successful 2H23.

We expect earthy state prices to retrieve by nan extremity of this year, 2023. We estimate a value astatine aliases supra $5.00/MMBtu pinch seasonal surges arsenic nan upwind gets colder successful nan second portion of nan year. With request surging, world maturation successful LNG carrier capacity will beryllium constricted compared to previous years. FY23 description to nan world LNG concatenation is expected to beryllium nan lowest since 2013, adding only 1 Bcf/d successful capacity. At nan aforesaid time, home depletion of LNGs is expected to surge to grounds highs successful January 2024. The EIA estimates a home earthy state request of 86 Bcf/d, pinch earthy state remaining astir 40% of US electrical procreation into 2024. Thus, it is improbable to america that nan 70% value illness of earthy state successful nan past 6 months will past for very long.

US LNG is successful request arsenic a consequence of nan European Energy Crisis. LNG exports person reached world highs, pinch an mean of 11.8 Bcf/d (billion cubic feet per day). This is simply a 10% summation from 2021 and a 70% summation from 2019. In January of FY23 Europe knowledgeable historically precocious wintertime temperatures, which importantly dampened nan request for earthy gas. This dampening pushed state prices backmost down to what they were earlier nan penetration of Ukraine. However, earthy state exports are nevertheless expected to summation yet again arsenic nan warfare successful Ukraine drags connected and arsenic an further 8-10 Bcf/d successful expected US LNG capacity comes online by 2026. This request should beryllium creating a beardown backmost for earthy state prices.

Financials

CRK's precocious free rate travel procreation allowed nan status of $506 cardinal of semipermanent debt, to 1.1x debt-to-EBITDA. The remaining indebtedness connected nan books matures successful 2029.

Operating Costs Per Mcfe / EBITDAX Margin

Operating Costs Per Mcfe / EBITDAX Margin (CRK 4Q22 Report)

Limited hedging of only 47% of accumulation and favorable pricing allowed CRK to participate successful nan earthy state value surge midyear. 4Q22 Year complete year, FCF accrued by 22% to 129 cardinal and EPS by 184% to $1.05. Pricing is overmuch little than successful nan mediate of FY22, and FCF will astir apt diminution successful early 2023. But, arsenic we person said previously, this is apt to beryllium a impermanent slump.

Risk and Conclusion

Price is nan astir glaring consequence arsenic nan earthy state value per MCF has fallen to an unfavorable level beneath $3. If nan value were to enactment astatine these levels arsenic hedges rotation off, FCF would get crushed resulting successful slow aliases nary further indebtedness repayment. However, indebtedness is not really a problem fixed really overmuch was repaid successful FY22. Currently, CRK has plans to clasp nan dividend moreover successful a little value environment.

Historically erstwhile companies had precocious prices and tons of rate flow, they invested heavy and pinch leverage. The past mates of down cycles bankrupted galore companies and made nan survivors much conservative. Hence successful nan aggregate, location is not capable superior going to improvement meaning proviso will not overshoot request and precocious prices are much sustainable. An adverse regulatory situation has besides starved nan manufacture of capital. Higher prices are nan consequence and will make nan manufacture little roar and bust. Dividend payments alternatively of Capex are drafting nan ire of Washington but are favorable to shareholders arsenic nan usage of superior for dividends makes precocious prices much sustainable and frankincense nan dividends much sustainable than past cycles.

CRK is immensely cheap, apt because of nan 70% slump successful earthy state prices complete nan past 6 months. CRK generates a immense magnitude of free cash, has a geographically advantageous position, and has a beardown equilibrium expanse and sector-best costs structure.

This article was written by

Building Benjamins floor plan picture

BuildingBenjamins.com is simply a free banal picking and marketplace commentary finance newsletter. We besides supply video reports connected YouTube. https://www.youtube.com/@BuildingBenjamins ------ Ben Halliburton founded BuildingBenjamins.com and besides founded Tradition Capital Management successful 2000 wherever he was named “PSN Manager of nan Decade” for All-Cap successful nan 2000s and “PSN Manager of nan Decade” for Dividend Value successful nan 2010s. We are focused connected investing successful stocks arsenic a business. The Qualitative attributes for illustration products, brands, patents, distribution, resources, networking effect, R&D, and guidance thrust quantitative financials for illustration ROE, free cashflow, net power, dividend payout ratio, and growth. Once we person nan quantitative, we tin estimate nan adjacent worth of nan stock. Since starting his finance profession astatine Merrill Lynch successful 1986, Ben has been continuously progressive successful investing. As a partner and portfolio head astatine Brundage Story and Rose successful nan 1990s, he was nan apical performing portfolio head astatine nan patient and his “Disciplined Growth Strategy” outperformed nan S&P500 successful nan 1990’s bull market. Ben is now moving a family office, Tradition Investment Management, and publishing his individual portfolio connected https://buildingbenjamins.com

Disclosure: I/we person a beneficial agelong position successful nan shares of CRK either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it. I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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