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Sup fellow value investing hombres, today I will be analyzing Comstock Resources. The company is a shale oil & gas company. The stock closed at $4.74 per share on Tuesday, which is around the average price I paid for this stock. In 2014, the company primarily drilled wells in the Eagle Ford formation in Texas. Have I ever mentioned that I would really love to live in Texas for a while? If I was a billionaire, I think I would be there right now buying up Eagle Ford acreage, eating barbecue and hopefully dating a nice southern girl. Anyway, let’s get back to business. The following excerpt from the company’s 2014 annual report details its 2015 drilling plans: “As a result of the improved economic returns expected for Haynesville shale natural gas wells, and the fall in oil prices in late 2014 and early 2015, our drilling activity in 2015 will primarily target natural gas in the Haynesville shale.” At current well costs and service costs, the company believes that it can achieve internal rates of return of 27% to 47% on new wells and 40% to 69% on refracs at natural gas prices of $3.00 to $3.50/Mcf. You can refer to slide 10 of the company’s presentation dated 04/06/15 to get a better idea of the economics of the company’s Haynesville wells. The company also has 82,500 net acres prospective for the Tuscaloosa Marine shale play, but drilling has been suspended until oil prices recovers.
Update on the Greedy Dragon portfolio: I recently took a position in Cloud Peak Energy and LRR Energy. I also increased my stake in Natural Resource Partners. Please do your own research before investing in anything.
Comstock Resources’ cost of production was $1.97 per natural gas equivalent (Mcfe) in 2014. I calculated cost of production as the sum of lease operating expenses, gathering & transportation expenses, production taxes and general & administrative expenses. As the company is planning to shift its focus from the Eagle Ford shale to the Haynesville shale for the time being, I won’t be covering the finding and development costs. The lower end of the company’s 2015 production estimates is for 9.5 thousand barrels of oil a day and 145,000 mcf of natural gas a day. According to Comstock’s Q2 2014 earnings call transcript on Seeking Alpha, the company’s realized oil prices averaged 97% of the average WTI price; the company’s realized natural gas prices was 94% of the average NYMEX Henry Hub gas price. The company could realize $4.248 per mcfe based on the lower end production estimates and assuming Monday’s closing price of WTI crude oil of $52.03 and NYMEX natural gas of $2.51 remains constant (assuming also that the company realizes 97% of the WTI price and 94% of the NYMEX natural gas price).
As at December 31, 2014, Comstock Resources had long-term debt of $1.07 billion. This is indeed a significant amount of debt. However, the company has some breathing room as the debt only starts to mature from November, 2018 onwards. It’s unfortunate that the company had no outstanding commodity derivatives as at December 31, 2014.
I was mainly interested in Comstock Resources for its presence in the Eagle Ford as I read some good things about the play. However, if the company’s new Haynesville wells turn out to be as profitable as it believes it to be, it would be like getting Snapchat photos from not one but two girls that you want to get between the sheets with. Thank you for reading. Take care and stay rational.