CRK - Comstock Resources: Betting On Jerry Jones

2024-01-01 07:19:32 ET

Summary

• Jerry Jones owns enough stock to control Comstock Resources.
• Demand for natural gas is still growing, as indicated by bullish forecasts from gas handling equipment suppliers.
• Supply growth is moderating and storage levels are comfortably below peak levels, suggesting a potential adjustment in natural gas prices.
• Days of usage compared in storage is not out of line with the past because demand has grown while investments in storage have not been made.
• This company is well placed for the coming recovery of natural gas prices.

Major shareholder Jerry Jones controls Comstock Resources ( CRK ). As has been noted in the past, Mr. Jones has invested roughly $1 billion of his own money in the company. There is a fair amount of export capacity being built currently. Therefore, the current weak natural gas pricing situation is unlikely to last as long as many think it will. Decent natural gas stocks should be purchased when they are "left for dead". Jerry Jones followed that principal by investing in Comstock Resources and then consolidating natural gas properties back beginning back in fiscal year 2020 before the market saw the great prices of fiscal year 2022. Long-term, he has an ideal location for darn good returns from the current price.

Demand Growth

Right now, demand is still growing. I follow companies like Chart Industries ( GTLS ) that supply gas handling equipment to various industries including oil and gas. Most of the suppliers like Chart Industries are very bullish on the coming fiscal year. That should imply at least some demand growth to agree with the chart shown below.

Natural gas producer Antero Resources ( AR ) management sees some healthy demand growth over the next few fiscal years. Evidently that growth will be in excess of the supply growth due to the currently low natural gas pricing.

Supply Growth

Many have pointed to increasing natural gas supplies despite a decline in rig count. However, the increase appears to be moderating or flattening (to say the least) through October. It is not a question of simply whether the supply increases. Rather it is more about the rate of increase of supply compared to the rate of demand growth because generally the demand for natural gas keeps growing (especially during times of low prices).

As shown above, storage levels as of the end of October 2023, (give or take) are comfortably below the peak levels of a few months back. Spot prices are clearly responding to that. Note that storage levels will vary with the weather. Therefore, storage levels can be quite volatile.

The rig count has already sharply declined. It will continue to decline until a pricing recovery justifies more drilling. Therefore, it is very unlikely that the supply increases shown above will increase faster. Instead, the "leveling off" will continue and eventually decline.

It is not unusual for the natural gas production to keep increasing for quite some time after the rig count begins to drop. What is certain is that the rig count will drop until the natural gas prices begin to recover.

Aiding this (demand growth) is the construction of more export facilities in the Gulf Coast area. The other consideration is that while much of the market is focused upon the amount of storage of natural gas, there is little to no focus upon days of usage in storage which is really not that far out of line with the past. Demand has grown but there has not been an investment in a material amount of more storage. Therefore, it would make sense that the storage available would fill up long before there is a high amount of days usage in storage.

That means that when supply has fallen sufficiently, there is likely to be a fast adjustment in the natural gas price because storage is not unusually higher when looked at through days of demand in storage.

Cost Structure

The Haynesville, where Comstock is located has some of the lowest producing costs in North America.

As shown above, as a dry gas producer, this company has a considerable cost advantage over several rich gas producers in the comparison. The cost is low enough to produce a darn good margin.

The weakness to the Haynesville is that the drilling and completion costs (shown later in the same presentation) are sky high. Even with a good margin and low production costs there are other basins with lower overall costs. That makes Haynesville the swing producer (and usually the first to idle rigs). Hence the mentioning of Haynesville in an earlier slide.

The Future

The cost structure of the company is very likely to be profitable in the long run because the construction of export facilities will likely enable the United States gas market to join the far stronger world market in the long-term. Given some of the growth ideas shown above, that long-term may not be all that long.

There are also some worries about an El Nino winter. Certainly, a warm winter does not help the situation. But the fact remains that the rig count will continue to drop until natural gas prices respond. Therefore, if the warm winter continues, then the rig count simply drops more to still bring about a recovery in natural gas prices.

The focus on the warm winter has appeared to lessen the fact that the Polar Vortex is in a weakened condition . That is much more typical of a La Nina than the current El Nino. Nonetheless, one of the possibilities of this would be a brief brutal cold period as happened a few years back when a lot of companies made several years of profit within a few weeks. Such events often take care of a storage issue very fast.

Summary

The industry is noted for its low visibility and high volatility. But much of the market appears to believe that low natural gas prices will be around for the foreseeable future. That limits the downside of the stock price while allowing for a lot of upside surprises in the future (like a Polar Vortex leak).

Another thing that is likely to limit the downside is the fact that Jerry Jones owns more than a majority of the outstanding shares. Therefore, that short position shown above represents roughly one-half of the shares available for trading purposes. Even though that short interest looks relatively low, it would take some time for that interest to be covered because less than half of the outstanding shares are in public hands.

The time to purchase natural gas stocks are when "natural gas is left for dead" meaning that all the market sees is currently low prices followed by lower prices. The current stock price takes that view into account. Therefore, there is far more upside potential than downside potential at the current time.

The demand outlook for natural gas is positive. Therefore, at some point, the declining rig count will have an effect on the climbing supply. That would enable demand to catch up to supply and likely surpass it for a little bit. As long as demand grows, then investors should expect that management will find a way to profitably grow supply even given the cyclical nature of natural gas.

Right now, this stock remains a strong buy consideration with the idea that the company is healthy and will participate in the coming natural gas price recovery. Management is very likely to grow production over the long-term to allow for a higher peak profit year than in the past.

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